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 March 31, 2002
--------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: 1-11917
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FBL Financial Group, Inc.
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(Exact name of registrant as specified in its charter)
Iowa 42-1411715
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266-5997
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(Address of principal executive offices) (Zip Code)
(515) 225-5400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. |X| Yes |_| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. |_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 26,382,006 shares of Class A
common stock and 1,192,990 shares of Class B common stock as of May 7, 2002.
ITEM 1. FINANCIAL STATEMENTS
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Investments:
Fixed maturities - available for sale, at market (amortized cost: 2002 -
$3,690,785; 2001 - $3,560,988) .............................................. $ 3,702,994 $ 3,636,150
Equity securities, at market (cost: 2002 - $38,020; 2001 - $39,019) ........... 37,217 39,733
Mortgage loans on real estate ................................................. 377,383 385,307
Investment real estate, less allowances for depreciation of $4,062 in 2002
and $3,862 in 2001 .......................................................... 19,768 20,056
Policy loans .................................................................. 180,519 181,054
Other long-term investments ................................................... 5,683 5,693
Short-term investments ........................................................ 59,417 32,863
------------ ------------
Total investments ................................................................ 4,382,981 4,300,856
Cash and cash equivalents ........................................................ 201,068 271,459
Securities and indebtedness of related parties ................................... 44,476 57,781
Accrued investment income ........................................................ 52,516 51,207
Accounts and notes receivable .................................................... 228 235
Amounts receivable from affiliates ............................................... 1,984 3,504
Reinsurance recoverable .......................................................... 114,262 101,287
Deferred policy acquisition costs ................................................ 399,884 360,156
Value of insurance in force acquired ............................................. 54,151 50,129
Property and equipment, less allowances for depreciation of $48,677 in 2002
and $48,413 in 2001 ............................................................ 39,337 40,385
Current income taxes recoverable ................................................. 679 --
Goodwill ......................................................................... 11,170 11,170
Other assets ..................................................................... 28,254 24,572
Assets held in separate accounts ................................................. 376,498 356,448
------------ ------------
Total assets ............................................................. $ 5,707,488 $ 5,629,189
============ ============
1
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive and equity-indexed products ....................... $ 2,906,129 $ 2,679,088
Traditional life insurance and accident and health products .......... 1,073,354 1,063,930
Unearned revenue reserve ............................................. 31,468 30,870
Other policy claims and benefits ........................................ 22,177 22,009
------------ ------------
4,033,128 3,795,897
Other policyholders' funds:
Supplementary contracts without life contingencies ...................... 279,127 261,554
Advance premiums and other deposits ..................................... 112,416 112,518
Accrued dividends ....................................................... 16,302 15,965
------------ ------------
407,845 390,037
Amounts payable to affiliates ............................................. 682 886
Long-term debt ............................................................ 40,000 40,000
Current income taxes ...................................................... -- 444
Deferred income taxes ..................................................... 37,917 59,634
Other liabilities ......................................................... 95,838 240,228
Liabilities related to separate accounts .................................. 376,498 356,448
------------ ------------
Total liabilities .................................................... 4,991,908 4,883,574
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock
of subsidiary trust ..................................................... 97,000 97,000
Other ..................................................................... 144 131
Series C redeemable preferred stock, $26.8404 par and redemption value per
share - authorized 3,752,100 shares, issued and outstanding 3,411,000
shares .................................................................... 83,384 82,691
Stockholders' equity:
Preferred stock, without par value, at liquidation value - authorized
10,000,000 shares, issued and outstanding 5,000,000 Series B shares ..... 3,000 3,000
Class A common stock, without par value - authorized 88,500,000 shares,
issued and outstanding 26,311,181 shares in 2002 and 26,215,685 shares
in 2001 ................................................................. 40,487 39,446
Class B common stock, without par value - authorized 1,500,000 shares,
issued and outstanding 1,192,990 shares ................................. 7,555 7,563
Accumulated other comprehensive income (loss) ............................. (2,134) 39,364
Retained earnings ......................................................... 486,144 476,420
------------ ------------
Total stockholders' equity .............................................. 535,052 565,793
------------ ------------
Total liabilities and stockholders' equity ........................... $ 5,707,488 $ 5,629,189
============ ============
See accompanying notes.
2
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------ ------------
Revenues:
Interest sensitive product charges ............................................. $ 18,772 $ 15,967
Traditional life insurance premiums ............................................ 29,463 27,838
Accident and health premiums ................................................... 92 1,150
Net investment income .......................................................... 79,537 66,700
Derivative income (loss) ....................................................... (782) (808)
Realized gains (losses) on investments ......................................... 2,246 (1,522)
Other income ................................................................... 4,459 4,260
------------ ------------
Total revenues .............................................................. 133,787 113,585
Benefits and expenses:
Interest sensitive product benefits ............................................ 48,268 37,854
Traditional life insurance and accident and health benefits .................... 17,382 20,519
Increase in traditional life and accident and health future policy benefits .... 7,845 4,767
Distributions to participating policyholders ................................... 7,971 6,905
Underwriting, acquisition and insurance expenses ............................... 24,691 24,196
Interest expense ............................................................... 177 637
Other expenses ................................................................. 3,276 3,916
------------ ------------
Total benefits and expenses ................................................. 109,610 98,794
------------ ------------
24,177 14,791
Income taxes ....................................................................... (7,671) (4,626)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily redeemable preferred stock of
subsidiary trust ............................................................ (1,213) (1,213)
Other .......................................................................... (33) (2)
Equity income (loss), net of related income taxes .................................. (1,715) 604
------------ ------------
Income before cumulative effect of change in accounting principle .................. 13,545 9,554
Cumulative effect of change in accounting for derivative instruments ............... -- 344
------------ ------------
Net income ......................................................................... 13,545 9,898
Dividends on Series B and C preferred stock ........................................ (1,071) (1,039)
------------ ------------
Net income applicable to common stock .............................................. $ 12,474 $ 8,859
============ ============
Earnings per common share:
Income before accounting change ................................................ $ 0.45 $ 0.31
Cumulative effect of change in accounting for derivative instruments ........... -- 0.01
------------ ------------
Earnings per common share ...................................................... $ 0.45 $ 0.32
============ ============
Earnings per common share - assuming dilution:
Income before accounting change ................................................ $ 0.45 $ 0.31
Cumulative effect of change in accounting for derivative instruments ........... -- 0.01
------------ ------------
Earnings per common share - assuming dilution .................................. $ 0.45 $ 0.32
============ ============
Cash dividends per common share .................................................... $ 0.10 $ 0.10
============ ============
See accompanying notes.
3
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
ACCUMULATED
SERIES B CLASS A CLASS B OTHER TOTAL
PREFERRED COMMON COMMON COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK STOCK INCOME (LOSS) EARNINGS EQUITY
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 2001 ............... $ 3,000 $ 37,769 $ 7,563 $ (22,445) $ 450,916 $ 476,803
Comprehensive income:
Net income for three months ended
March 31, 2001 ...................... -- -- -- -- 9,898 9,898
Cumulative effect of change in
accounting for derivative
instruments ......................... -- -- -- 2,406 -- 2,406
Change in net unrealized
investment gains/losses ............. -- -- -- 41,600 -- 41,600
------------
Total comprehensive income .............. 53,904
Issuance of 43,818 shares of
common stock under employee
benefit and stock option plans,
including related income tax benefit .. -- 459 -- -- -- 459
Adjustment resulting from capital
transactions of equity investee ....... -- (1) -- -- -- (1)
Dividends on preferred stock ............ -- -- -- -- (1,039) (1,039)
Dividends on common stock ............... -- -- -- -- (2,735) (2,735)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2001 ................ $ 3,000 $ 38,227 $ 7,563 $ 21,561 $ 457,040 $ 527,391
============ ============ ============ ============ ============ ============
Balance at January 1, 2002 ............... $ 3,000 $ 39,446 $ 7,563 $ 39,364 $ 476,420 $ 565,793
Comprehensive income (loss):
Net income for three months ended
March 31, 2002 ...................... -- -- -- -- 13,545 13,545
Change in net unrealized
investment gains/losses ............. -- -- -- (41,498) -- (41,498)
------------
Total comprehensive income (loss) ....... (27,953)
Issuance of 95,496 shares of
common stock under compensation
and stock option plans, including
related income tax benefit ............ -- 1,084 -- -- -- 1,084
Adjustment resulting from capital
transactions of equity investee ....... -- (43) (8) -- -- (51)
Dividends on preferred stock ............ -- -- -- -- (1,071) (1,071)
Dividends on common stock ............... -- -- -- -- (2,750) (2,750)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2002 ................ $ 3,000 $ 40,487 $ 7,555 $ (2,134) $ 486,144 $ 535,052
============ ============ ============ ============ ============ ============
See accompanying notes.
4
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net income .......................................................................... $ 13,545 $ 9,898
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances ........................................ 39,638 32,586
Charges for mortality and administration ..................................... (18,451) (15,399)
Deferral of unearned revenues ................................................ 640 622
Amortization of unearned revenue reserve ..................................... (289) (385)
Provision for depreciation and amortization ..................................... 1,729 5,286
Equity loss (income) ............................................................ 1,715 (604)
Realized losses (gains) on investments .......................................... (2,246) 1,522
Increase in traditional life and accident and health benefit accruals ........... 7,845 4,767
Policy acquisition costs deferred ............................................... (34,746) (10,052)
Amortization of deferred policy acquisition costs ............................... 5,080 3,891
Provision for deferred income taxes ............................................. 651 (194)
Other ........................................................................... (12,455) 10,412
------------ ------------
Net cash provided by operating activities ........................................... 2,656 42,350
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - available for sale ........................................... 257,092 136,808
Equity securities ............................................................... 1,826 3,656
Mortgage loans on real estate ................................................... 34,000 5,852
Investment real estate .......................................................... -- 1,316
Policy loans .................................................................... 10,943 9,781
Other long-term investments ..................................................... 501 85
Short-term investments - net .................................................... -- 69,083
------------ ------------
304,362 226,581
Acquisition of investments:
Fixed maturities - available for sale ........................................... (528,571) (202,758)
Equity securities ............................................................... (44) (1,766)
Mortgage loans on real estate ................................................... (26,069) (13,893)
Policy loans .................................................................... (10,408) (10,608)
Other long-term investments ..................................................... (506) (518)
Short-term investments - net .................................................... (26,554) --
------------ ------------
(592,152) (229,543)
Proceeds from disposal, repayments of advances and other distributions from
equity investees ................................................................ 586 1,511
Investments in and advances to equity investees ..................................... -- (102)
Net proceeds from sale of discontinued operations ................................... -- 2,000
Net cash received in acquisition .................................................... -- 2,863
Net sales (purchases) of property and equipment and other ........................... (1,598) 103
------------ ------------
Net cash provided by (used in) investing activities ................................. (288,802) 3,413
5
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------ ------------
FINANCING ACTIVITIES
Receipts from interest sensitive, equity-indexed and variable products credited to
policyholder account balances ................................................... $ 295,916 $ 75,459
Return of policyholder account balances on interest sensitive, equity-indexed and
variable products ............................................................... (76,743) (75,333)
Distributions on company-obligated mandatorily redeemable preferred stock of
subsidiary trust ................................................................ (1,213) (1,213)
Other distributions related to minority interests - net ............................. (20) (42)
Issuance of common stock ............................................................ 943 429
Dividends paid ...................................................................... (3,128) (3,115)
------------ ------------
Net cash provided by (used in) financing activities ................................. 215,755 (3,815)
------------ ------------
Increase (decrease) in cash and cash equivalents .................................... (70,391) 41,948
Cash and cash equivalents at beginning of period .................................... 271,459 3,099
------------ ------------
Cash and cash equivalents at end of period .......................................... $ 201,068 $ 45,047
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ........................................................................ $ 180 $ 718
Income taxes .................................................................... 7,080 7
Non-cash operating activity:
Deferral of bonus interest ...................................................... 3,937 --
See accompanying notes.
6
FBL Financial Group, Inc. March 31, 2002
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of FBL Financial
Group, Inc. (we or the Company) have been prepared in accordance with accounting
principles generally accepted in the United States (GAAP) for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. Our financial statements include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of our financial position and results of operations. Operating
results for the three-month period ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. We encourage you to refer to our consolidated financial statements and
notes for the year ended December 31, 2001 included in our annual report on Form
10-K for a complete description of our material accounting policies. Also
included in the Form 10-K is a description of areas of judgements and estimates
and other information necessary to understand our financial position and results
of operations.
2. ACCOUNTING CHANGES
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (Statement) No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets." Under the new
Statements, goodwill is no longer amortized, but is subject to annual impairment
tests in accordance with the Statements. In addition, Statement No. 142 requires
the identification and amortization of certain intangible assets that had
previously been included as a component of goodwill. We adopted the Statements
effective January 1, 2002. Based on testing performed as of January 1, 2002,
none of our goodwill is deemed to be impaired. In addition, we have no
intangible assets included as a component of goodwill that require separate
accounting.
Goodwill totaled $17.0 million at March 31, 2002 and December 31, 2001,
consisting of $11.2 million separately identified on the consolidated balance
sheets and $5.8 million in equity method goodwill included in the securities and
indebtedness of related parties line on the balance sheets. On a pro forma basis
without goodwill amortization, net income applicable to common stock for the
first quarter of 2001 would have been $9.1 million ($0.33 per share - basic and
assuming dilution).
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement No. 144 provides a
single accounting model for long lived assets to be disposed of and changes the
criteria that must be met to classify an asset as held-for-sale. Statement No.
144 also requires expected future operating losses from discontinued operations
to be displayed in discontinued operations in the period(s) in which losses are
incurred rather than as of the measurement date as presently required. Adopting
Statement No. 144 on January 1, 2002 did not have any effect on our financial
position or results of operations.
3. INVESTMENT OPERATIONS
All of our fixed maturity securities, comprised of bonds and redeemable
preferred stocks, are designated as "available for sale" and are reported at
market value. Unrealized gains and losses on these securities, with the
exception of unrealized gains and losses relating to the conversion feature
embedded in convertible fixed maturity securities, are included directly in
stockholders' equity as a component of accumulated other comprehensive income or
loss. Unrealized gains and losses relating to the conversion feature embedded in
convertible fixed maturity securities are recorded as a component of derivative
income (loss) in the consolidated statements of income. The unrealized gains and
losses are reduced by a provision for deferred income taxes and adjustments to
deferred policy acquisition costs, value of insurance in force acquired and
unearned revenue reserve that would have been required as a charge or credit to
income had such amounts been realized. Equity securities, comprised of common
and non-redeemable preferred stocks, are reported at market value. The change in
unrealized appreciation and
7
FBL Financial Group, Inc. March 31, 2002
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) on equity securities and fixed maturity
securities classified as available for sale and recorded directly to
stockholders' equity were comprised of the following:
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
Unrealized appreciation on fixed maturity and equity securities available for
sale ......................................................................... $ 11,406 $ 75,876
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs ............................................ 564 (5,561)
Value of insurance in force acquired ......................................... (4,104) (8,954)
Unearned revenue reserve ..................................................... 10 257
Provision for deferred income taxes .............................................. (2,757) (21,566)
------------ ------------
5,119 40,052
Proportionate share of net unrealized investment losses of equity investees ...... (7,253) (688)
------------ ------------
Net unrealized investment gains (losses) ......................................... $ (2,134) $ 39,364
============ ============
4. CREDIT ARRANGEMENTS
We have a note payable to the Federal Home Loan Bank (FHLB) totaling $40.0
million at March 31, 2002 and at December 31, 2001. The note is due September
17, 2003, and interest on the note is charged at a variable rate equal to the
London Interbank Offered Rate less 0.0475% (1.85% at March 31, 2002 and December
31, 2001). Fixed maturity securities with a carrying value of $40.8 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 March 31, 2002 with appropriate increased collateral deposits.
5. CONTINGENCIES
In the normal course of business, we may be involved in litigation where amounts
are alleged that are substantially more than contractual policy benefits or
certain other agreements. At March 31, 2002, management is not aware of any
claims for which a material loss is reasonably possible.
We seek to limit our exposure to loss on any single insured or event and to
recover a portion of benefits paid by ceding insurance to other insurance
enterprises. Reinsurance contracts do not relieve us of our obligations to
policyholders. To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, our insurance subsidiaries would be
liable for these obligations, and payment of these obligations could result in
losses. To limit the possibility of such losses, we evaluate the financial
condition of our reinsurers and monitor concentrations of credit risk. No
allowance for uncollectible amounts has been established against our asset for
reinsurance recoverable since none of our receivables are deemed to be
uncollectible.
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. We have a liability totaling $1.6 million at March 31, 2002
and December 31, 2001 for anticipated losses from this pool resulting from the
terrorist acts on September 11, 2001. Effective July 1, 2002, due to structural
changes including an increase in the cap on losses, we will no longer be a
participant in this pool. We are currently analyzing our options for alternative
catastrophe coverage.
We self-insure our employee health and welfare claims, however claims in excess
of self-insurance levels are fully insured. We fund insurance claims through a
self-insurance trust. Deposits to the trust are made at an amount equal to our
best estimate of claims incurred during the period. Accordingly, no accruals are
recorded on our financial
8
FBL Financial Group, Inc. March 31, 2002
statements for unpaid claims and claims incurred but not reported. Adjustments,
if any, resulting in changes in the estimate of claims incurred will be
reflected in operations in the periods in which such adjustments are known.
On March 31, 1998, we sold our wholly-owned subsidiary, Utah Farm Bureau
Insurance Company (Utah Insurance), to Farm Bureau Mutual Insurance Company
(Farm Bureau Mutual.) We may earn additional consideration during 2002 in
accordance with an earn-out provision included in the related sales agreement.
Under the earn-out arrangement, the Company and Farm Bureau Mutual share equally
in the dollar amount by which the incurred losses on direct business written in
the state of Utah, net of reinsurance ceded, is less than the incurred losses
assumed in the valuation model used to derive the initial acquisition price. The
earn-out calculation is performed and any settlement (subject to a maximum of
$2.0 million per year) is made on a calendar year basis. We have not accrued any
contingent consideration for 2002 as such amounts, if any, cannot be reasonably
estimated as of March 31, 2002. Receipts as a result of the earn-out provision
are recorded as an adjustment to the gain on the disposal of the discontinued
segment.
6. STOCK OPTION PLAN
We have a Class A Common Stock Compensation Plan (the Plan) under which
incentive stock options, nonqualified stock options, bonus stock, restricted
stock and stock appreciation rights may be granted to directors, officers and
employees. Option shares granted to directors are fully vested upon grant and
have a contractual term that varies with the length of time the director remains
on the Board, up to 10 years. Option shares granted to officers and employees
have a contractual term of 10 years and generally vest over a period up to five
years, contingent upon continued employment with us.
Information relating to stock option grants during the first quarter of 2002 is
as follows:
NUMBER OF
SECURITIES WEIGHTED-
UNDERLYING AVERAGE EXERCISE
OPTIONS GRANTED PRICE PER SHARE
--------------- ----------------
William J. Oddy, Chief Executive Officer .................... 30,078 $ 17.97
Stephen M. Morain, Senior Vice President and General
Counsel ................................................. 17,183 17.97
James W. Noyce, Chief Financial Officer ..................... 19,844 17.97
Timothy J. Hoffman, Chief Administrative Officer ............ 16,745 17.97
John M. Paule, Chief Marketing Officer ...................... 11,118 17.97
Non-employee members of the Board of Directors .............. 17,000 17.97
Officers, employees and other ............................... 312,104 17.97
--------------
Total ................................................... 424,072 17.97
==============
9
FBL Financial Group, Inc. March 31, 2002
7. EARNINGS PER SHARE
The following table sets forth the computation of earnings per common share and
earnings per common share - assuming dilution:
THREE MONTHS ENDED MARCH 31,
------------------------------------
2002 2001
-------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Income before accounting change ........................................ $ 13,545 $ 9,554
Cumulative effect of change in accounting for derivative instruments ... -- 344
-------------- --------------
Net income ............................................................. 13,545 9,898
Dividends on Series B and C preferred stock ............................ (1,071) (1,039)
-------------- --------------
Numerator for earnings per common share - income available to
common stockholders ............................................. $ 12,474 $ 8,859
============== ==============
Denominator:
Weighted average shares ................................................ 27,462,600 27,332,655
Deferred common stock units related to directors compensation plan ..... 13,471 9,736
-------------- --------------
Denominator for earnings per common share - weighted-average
shares .......................................................... 27,476,071 27,342,391
Effect of dilutive securities - employee stock options ................. 508,085 410,183
-------------- --------------
Denominator for diluted earnings per common share - adjusted
weighted-average shares ......................................... 27,984,156 27,752,574
============== ==============
Earnings per common share:
Income before accounting change ........................................ $ 0.45 $ 0.31
Cumulative effect of change in accounting for derivative instruments ... -- 0.01
-------------- --------------
Earnings per common share .............................................. $ 0.45 $ 0.32
============== ==============
Earnings per common share - assuming dilution:
Income before accounting change ........................................ $ 0.45 $ 0.31
Cumulative effect of change in accounting for derivative instruments ... -- 0.01
-------------- --------------
Earnings per common share - assuming dilution .......................... $ 0.45 $ 0.32
============== ==============
Based upon the provisions of the underlying agreement and the application of the
"two class" method to our capital structure, we have not allocated any
undistributed net income to the Class C preferred stock since the Class C
preferred stockholder's participation in dividends with the common stockholders
is limited to the amount of the annual regular dividend.
8. SEGMENT INFORMATION
Management analyzes operations by reviewing financial information regarding
products that are aggregated into three product segments. These segments are (1)
traditional annuity, (2) traditional and universal life insurance and (3)
variable. We also have various support operations and corporate capital that is
aggregated into a corporate and other segment.
The traditional annuity segment consists of traditional annuities,
equity-indexed annuities and supplementary contracts (some of which involve life
contingencies). Traditional and equity-indexed annuities provide for
tax-deferred savings and supplementary contracts provide for the systematic
repayment of funds that accumulate interest. Traditional annuities consist
primarily of flexible premium deferred annuities, but also include single
premium deferred and immediate contracts. With traditional annuities, we bear
the underlying investment risk and credit interest to the contracts at rates we
determine, subject to interest rate guarantees. With equity-indexed annuity
products, we bear the underlying investment risk and credit interest in an
amount equal to the greater of a guaranteed interest rate or a percentage of the
gain in a specified market index.
10
FBL Financial Group, Inc. March 31, 2002
The traditional and universal life insurance segment consists of whole life,
term life and universal life policies. These policies provide benefits upon the
death of the insured and may also allow the customer to build cash value on a
tax-deferred basis.
The variable segment consists of variable universal life insurance and variable
annuity contracts. These products are similar to universal life insurance and
traditional annuity contracts, except the contract holder has the option to
direct the cash value of the contract to a wide range of investment
sub-accounts, thereby passing the investment risk to the contract holder.
The corporate and other segment consists of the following corporate items and
products/services that do not meet the quantitative threshold for separate
segment reporting:
* Investments and related investment income not specifically allocated
to our product segments;
* Interest expense and minority interest pertaining to distributions on
trust preferred securities;
* Accident and health insurance products, primarily long-term disability
income insurance;
* Advisory services for the management of investments and other
companies;
* Marketing and distribution services for the sale of mutual funds and
insurance products not issued by us; and
* Leasing services, primarily with affiliates.
Financial information concerning our operating segments is as follows.
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
Operating revenues:
Traditional annuity ..................................................... $ 38,321 $ 29,754
Traditional and universal life .......................................... 76,577 67,956
Variable ................................................................ 10,939 10,053
Corporate and other ..................................................... 5,700 7,347
------------ ------------
131,537 115,110
Realized gains (losses) on investments (A) .................................. 2,250 (1,525)
------------ ------------
Consolidated revenues ................................................... $ 133,787 $ 113,585
============ ============
Pre-tax operating income (loss) from continuing operations:
Traditional annuity ..................................................... $ 5,970 $ 4,048
Traditional and universal life .......................................... 15,123 11,192
Variable ................................................................ 718 1,010
Corporate and other ..................................................... (3,120) 208
------------ ------------
18,691 16,458
Income taxes on operating income ........................................ (6,187) (5,635)
Realized gains (losses) on investments, net (A) ......................... 1,041 (1,269)
------------ ------------
Consolidated income from continuing operations ....................... $ 13,545 $ 9,554
============ ============
(A) Amounts are net of adjustments, as applicable, to amortization of unearned
revenue reserves, deferred policy acquisition costs, value of insurance in-force
acquired and income taxes attributable to gains and losses on investments.
We analyze our segment results based on pre-tax operating income. Accordingly,
income taxes are not allocated to the segments. In addition, operating results
are analyzed net of any transactions between the segments.
Our investment in equity method investees and the related equity income are
attributable to the corporate and other segment. Goodwill is allocated among the
segments as follows: traditional annuity ($3.9 million), traditional and
universal life ($6.1 million), variable ($1.2 million) and corporate and other
($5.8 million).
11
FBL Financial Group, Inc. March 31, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION INCLUDES A SUMMARY OF FBL FINANCIAL GROUP, INC.'S CONSOLIDATED
RESULTS OF OPERATIONS, FINANCIAL CONDITION AND WHERE APPROPRIATE, FACTORS THAT
MANAGEMENT BELIEVES MAY AFFECT FUTURE PERFORMANCE. UNLESS NOTED OTHERWISE, ALL
REFERENCES TO FBL FINANCIAL GROUP, INC (WE OR THE COMPANY) INCLUDE ALL OF ITS
DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE
SUBSIDIARIES, FARM BUREAU LIFE INSURANCE COMPANY (FARM BUREAU LIFE) AND
EQUITRUST LIFE INSURANCE COMPANY (EQUITRUST) (COLLECTIVELY, THE LIFE COMPANIES).
PLEASE READ THIS DISCUSSION IN CONJUNCTION WITH THE ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES. IN ADDITION, WE ENCOURAGE YOU TO REFER
TO OUR 2001 FORM 10-K FOR A COMPLETE DESCRIPTION OF OUR SIGNIFICANT ACCOUNTING
POLICIES AND ESTIMATES. FAMILIARITY WITH THIS INFORMATION IS IMPORTANT IN
UNDERSTANDING OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS.
SIGNIFICANT TRANSACTIONS IMPACTING THE COMPARABILITY OF RESULTS
During 2001, we entered into a coinsurance agreement with American Equity
Investment Life Insurance Company (American Equity) whereby we assumed 70% of
certain fixed and equity-indexed annuity business written by American Equity
from August 1, 2001 to December 31, 2001. The agreement also provides for
reinsuring 40% of certain new business written by American Equity during 2002
and 2003. This agreement was accounted for as the reinsurance of an in force
block of business as of October 1, 2001, and the regular coinsurance of the
business written thereafter. Reserves transferred to us in connection with the
assumption of the in force block of business totaled $138.7 million on October
1, 2001. Collected premiums assumed as a result of this agreement totaled $189.5
million for the first quarter of 2002 and $280.0 million for the fourth quarter
of 2001.
Effective May 1, 2001, we entered into a coinsurance agreement with National
Travelers Life Company (NTL) whereby we assumed 90% of NTL's traditional life,
universal life and annuity business in force. In addition, we agreed to assume
50% of NTL's traditional life, universal life and annuity business issued
subsequent to May 1, 2001. Assets acquired on May 1, 2001 in connection with
this transaction totaled $337.2 million. Collected premiums assumed as a result
of this agreement totaled $5.1 million for the first quarter of 2002.
Revenues and expenses for the 2002 period increased compared to the 2001 period
as a result of the American Equity and NTL transactions. Operating income
increased approximately $1.4 million, or $0.05 per common share, during the
three months ended March 31, 2002 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
acquisition of Kansas Farm Bureau Life Insurance Company (Kansas Farm Bureau
Life) on January 1, 2001. Revenues and expenses for the 2002 period decreased
compared to the 2001 period as a result of this reinsurance agreement.
RESULTS OF OPERATIONS
We use both net income and operating income to measure our performance.
Operating income represents net income excluding the impact of realized gains
and losses on investments and cumulative effect of change in accounting
principle. The impact of realized gains and losses on investments includes
adjustments for income taxes and that portion of amortization of deferred policy
acquisition costs, unearned revenue reserve and value of insurance in force
acquired attributable to such gains and losses. While operating income is
commonly used in the insurance industry as a measure of on-going earnings
performance, it is not a substitute for net income determined in accordance with
accounting principles generally accepted in the United States.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
NET INCOME applicable to common stock increased 40.8% in the 2002 period to
$12.5 million. Operating income applicable to common stock increased 16.9% in
the 2002 period to $11.4 million. Net income increased primarily due to the
positive impact of the American Equity and NTL transactions, an increase in
realized gains on the sale of
12
FBL Financial Group, Inc. March 31, 2002
investments and slightly improved mortality experience. These items were
partially offset by a $2.3 million decrease in equity income, net of related
income taxes.
The following is a reconciliation of net income to operating income.
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income applicable to common stock ..................................... $ 12,474 $ 8,859
Adjustments:
Net realized losses (gains) on investments ............................. (1,041) 1,269
Cumulative effect of change in accounting for derivative instruments ... -- (344)
------------ ------------
Operating income applicable to common stock ............................... $ 11,433 $ 9,784
============ ============
Earnings per common share - assuming dilution ............................. $ 0.45 $ 0.32
============ ============
Operating earnings per common share - assuming dilution ................... $ 0.41 $ 0.35
============ ============
A summary of our premiums and product charges is as follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Interest sensitive product charges ..................................... $ 18,772 $ 15,967
Traditional life insurance premiums .................................... 29,463 27,838
Accident and health premiums ........................................... 92 1,150
------------ ------------
Total premiums and product charges .................................. $ 48,327 $ 44,955
============ ============
PREMIUMS AND PRODUCT CHARGES increased 7.5% in the 2002 period to $48.3 million.
These increases are due primarily to the addition of the NTL and American Equity
business. Revenues from the NTL business in the 2002 period included interest
sensitive product charges of $2.6 million and traditional life insurance
premiums of $1.3 million. Revenues from the American Equity business included
interest product charges of $0.1 million. In addition, cost of insurance
charges, which are included in interest sensitive product charges, increased as
a result of an increase in the volume and age of business in force. Accident and
health premiums decreased as a result of the 100% coinsurance agreement to
reinsure our individual long-term disability income business effective September
1, 2001.
NET INVESTMENT INCOME, which excludes investment income on separate account
assets relating to variable products, increased 19.2% in the 2002 period to
$79.5 million, due to an increase in average invested assets. Average invested
assets in the 2002 period increased 25.3% to $4,428.6 million (based on
securities at amortized cost) due primarily to the cash and investments acquired
with the NTL and American Equity transactions. The annualized yield earned on
average invested assets decreased to 7.38% in the 2002 period from 7.67% in the
2001 period due principally to a decrease in market interest rates and a
decrease in fee income from bond calls and mortgage loan prepayments. Fee income
from bond calls and mortgage loan prepayments totaled $0.3 million in the 2002
period compared to $1.6 million in the 2001 period.
DERIVATIVE INCOME (LOSS) totaled ($0.8) million in the 2002 and 2001 periods.
Our derivative income (loss) consists of unrealized gains and losses on the
value of the conversion feature embedded in convertible fixed maturity
securities and on the value of call options used to fund returns on our
equity-indexed annuity contracts assumed from American Equity. Also included in
derivative income (loss) is amortization of the underlying call options.
Derivative income will fluctuate based on market conditions.
REALIZED GAINS (LOSSES) ON INVESTMENTS totaled $2.2 million in the 2002 period
compared to ($1.5) million in the 2001 period. Realized gains (losses) include
writedowns of investments that became other-than-temporarily impaired totaling
$5.1 million in the 2002 period and $4.5 million in the 2001 period. These
writedowns are the
13
FBL Financial Group, Inc. March 31, 2002
result of deteriorating operating trends, lowered debt ratings, defaults on loan
payments, unsuccessful efforts to raise capital and various other operational or
economic factors that became evident in the respective years. 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 MARCH 31,
----------------------------
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
Policy benefits:
Interest sensitive product benefits ........................................... $ 48,268 $ 37,854
Traditional life insurance and accident and health benefits ................... 17,382 20,519
Increase in traditional life and accident and health future policy benefits ... 7,845 4,767
Distributions to participating policyholders .................................. 7,971 6,905
------------ ------------
Total policy benefits ...................................................... $ 81,466 $ 70,045
============ ============
POLICY BENEFITS increased 16.3% in the 2002 period to $81.5 million. These
increases are due primarily to the addition of the NTL and American Equity
business. Benefits incurred from this additional business for 2002 included
interest sensitive product benefits of $8.5 million, traditional life insurance
benefits, including change in reserves, of $1.3 million and distributions to
participating policyholders of $0.3 million. Partially offsetting these
increases was a decrease in death benefits on our direct business and a
reduction in the interest crediting rates on many of our products. In December
2001, crediting rates were reduced 25 basis points to 5.85% on our primary
universal life product and 15 basis points to 5.60% on our primary fixed annuity
product. Other crediting rate decreases were made as of January 1, 2002 and
October 1, 2001 on products formerly issued by Kansas Farm Bureau Life. These
crediting rate changes were made in response to a declining investment portfolio
yield. Accident and health benefits decreased as a result of the 100%
coinsurance of our long-term disability income business during 2001. 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 MARCH 31,
----------------------------
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals .......................................... $ 2,958 $ 3,011
Amortization of deferred policy acquisition costs ............................. 5,080 3,891
Amortization of value of insurance in force acquired .......................... 828 1,297
Other underwriting, acquisition and insurance expenses, net of deferrals ...... 15,825 15,997
------------ ------------
Total underwriting, acquisition and insurance expenses ..................... $ 24,691 $ 24,196
============ ============
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 2.0% in the 2002
period to $24.7 million due principally to the addition of the NTL and American
Equity business. Expenses from this additional business include commission and
expense allowances totaling $0.9 million and amortization of deferred policy
acquisition costs totaling $1.7 million. Partially offsetting these increases
are (i) a $0.3 million reduction in amortization of deferred policy acquisition
costs as a result of the impact of realized gains and losses on investments,
(ii) a $0.5 million decrease in the amortization of value of insurance in force
acquired due primarily to a decrease in the profitability of the underlying
business, (iii) a $0.2 million reduction in other underwriting expenses due to
the discontinuation of the amortization of goodwill and (iv) a reduction in
expenses as a result of the 100% coinsurance of our long-term disability income
business during 2001.
14
FBL Financial Group, Inc. March 31, 2002
INTEREST EXPENSE decreased 72.2% in the 2002 period to $0.2 million primarily
due to a decrease in the average interest rate on our $40.0 million of
variable-rate debt.
INCOME TAXES increased 65.8% to $7.7 million in the 2002 period compared to $4.6
million in the 2001 period. The effective tax rate for the 2002 period was 31.7%
compared to 31.3% for the 2001 period. The effective tax rate was lower than the
federal statutory rate of 35% due primarily to the tax benefit associated with
the payment of dividends on mandatorily redeemable preferred stock of subsidiary
trust, tax-exempt interest and tax-exempt dividend income.
EQUITY INCOME (LOSS), NET OF RELATED INCOME TAXES, decreased to ($1.7) million
in the 2002 period from $0.6 million in the 2001 period. Equity income (loss)
includes our proportionate share of gains and losses attributable to our
ownership interest in partnerships, joint ventures and certain companies where
we exhibit some control but have a minority ownership interest. Given the timing
of availability of financial information from 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. 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. Approximately $1.1 million of the equity loss
in the 2002 period is attributable to one venture capital investment
partnership. As a result of our common stock investment in American Equity
Investment Life Holding Company, equity income (loss) includes ($0.8) million in
the 2002 period and $0.4 million in the 2001 period, representing our share of
its net income (loss). See the "Other Assets" section following for additional
information regarding the composition of our equity investees.
SEGMENT INFORMATION
Management utilizes financial information regarding products that are aggregated
into three product segments. These segments are (1) traditional annuity, (2)
traditional and universal life insurance and (3) variable. We also have various
support operations and corporate capital that is aggregated into a corporate and
other segment. See Note 8 of the Notes to Consolidated Financial Statements for
additional information regarding segment information. A discussion of our
operating results, by segment, follows.
TRADITIONAL ANNUITY SEGMENT
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges .................................... $ 205 $ 360
Net investment income ................................................. 39,022 29,520
Derivative loss ....................................................... (906) (126)
------------ ------------
38,321 29,754
Benefits and expenses .................................................... 32,351 25,706
------------ ------------
Pre-tax operating income ........................................... $ 5,970 $ 4,048
============ ============
OTHER DATA
Annuity premiums collected, net of reinsurance ........................... $ 237,405 $ 24,974
Policy liabilities and accruals, end of period ........................... 2,316,435 1,480,707
Pre-tax operating income for the traditional annuity segment increased 47.5% in
the 2002 period to $6.0 million. Revenues, benefits, expenses and the volume of
business in force increased primarily due to the addition of the American Equity
and NTL business. Premiums collected in the 2002 period totaled $189.5 million
from American Equity and $1.1 million from NTL. Direct premiums collected
increased 87.7% to $46.8 million in the 2002 period. Effective December 1, 2001,
the crediting rate on our primary flexible premium deferred annuity contract
decreased 15 basis points to 5.60%.
15
FBL Financial Group, Inc. March 31, 2002
TRADITIONAL AND UNIVERSAL LIFE INSURANCE SEGMENT
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges .................................... $ 10,673 $ 8,137
Traditional life insurance premiums and other income .................. 29,463 27,838
Net investment income ................................................. 36,212 32,499
Derivative income (loss) .............................................. 229 (518)
------------ ------------
76,577 67,956
Benefits and expenses .................................................... 61,454 56,764
------------ ------------
Pre-tax operating income ........................................... $ 15,123 $ 11,192
============ ============
OTHER DATA
Life premiums collected, net of reinsurance .............................. $ 42,677 $ 38,848
Policy liabilities and accruals, end of period ........................... 1,900,334 1,630,338
Pre-tax operating income for the traditional and universal life insurance
segment increased 35.1% to $15.1 million in the 2002 period. Revenues, benefits,
expenses and pre-tax operating income increased due principally to the addition
of the NTL business. In addition, death benefits, excluding the impact of NTL,
decreased 13.9% to $13.2 million in the 2002 period. Effective December 1, 2001,
the crediting rate on our primary universal life insurance contract decreased 25
basis points to 5.85%.
VARIABLE SEGMENT
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME
Operating revenues:
Interest sensitive product charges .................................... $ 7,890 $ 7,473
Net investment income ................................................. 2,848 2,385
Other income .......................................................... 201 195
------------ ------------
10,939 10,053
Benefits and expenses .................................................... 10,221 9,043
------------ ------------
Pre-tax operating income ........................................... $ 718 $ 1,010
============ ============
OTHER DATA
Variable premiums collected, net of reinsurance and internal rollovers ... $ 32,447 $ 24,592
Policy liabilities and accruals, end of period ........................... 157,137 126,757
Separate account assets, end of period ................................... 376,498 317,721
Pre-tax operating income for the variable segment decreased 28.9% in the 2002
period to $0.7 million. This decrease is attributable to an increase in death
benefits in excess of related account values on variable universal life policies
to $2.9 million in the first quarter of 2002 from $1.3 million in the 2001
period. The increase in death benefits was partially offset by an increase in
interest sensitive product charges resulting from growth in the volume of
business in force. 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.
16
FBL Financial Group, Inc. March 31, 2002
CORPORATE AND OTHER SEGMENT
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
PRE-TAX OPERATING INCOME (LOSS)
Operating revenues:
Accident and health insurance premiums ................................ $ 92 $ 1,150
Net investment income ................................................. 1,455 2,296
Derivative loss ....................................................... (105) (164)
Other income .......................................................... 4,258 4,065
------------ ------------
5,700 7,347
Benefits and expenses .................................................... 4,936 6,853
------------ ------------
764 494
Minority interest ........................................................ (1,246) (1,215)
Equity income (loss), before tax ......................................... (2,638) 929
------------ ------------
Pre-tax operating income (loss) .................................... $ (3,120) $ 208
============ ============
Pre-tax operating income (loss) totaled ($3.1) million in the 2002 period and
$0.2 million in the 2001 period. The loss in the first quarter of 2002 is due
principally to losses from equity investees. See the equity income (loss)
discussion above for additional information regarding these losses and the other
assets discussion that follows for information regarding the underlying
investments. The decrease in operating revenues and benefits and expenses is due
primarily to the 100% coinsurance agreement to reinsure our individual long-term
disability income business effective September 1, 2001.
FINANCIAL CONDITION
INVESTMENTS
Our total investment portfolio increased 1.9% to $4,383.0 million at March 31,
2002 compared to $4,300.9 million at December 31, 2001. This increase is
primarily the result of positive cash flow provided by operating activities and
net cash received from interest sensitive and equity-indexed products. The
impact of this positive cash flow is partially offset by net unrealized
depreciation on fixed maturity securities during the 2002 quarter.
The mix of our direct life insurance and direct 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.
17
FBL Financial Group, Inc. March 31, 2002
Our investment portfolio is summarized in the table below:
MARCH 31, 2002 DECEMBER 31, 2001
------------------------------- -------------------------------
CARRYING VALUE PERCENT CARRYING VALUE PERCENT
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Public .............................. $ 2,835,371 64.7% $ 2,773,290 64.5%
144A private placement .............. 595,943 13.6 590,867 13.7
Private placement ................... 271,680 6.2 271,993 6.3
-------------- -------------- -------------- --------------
Total fixed maturities .............. 3,702,994 84.5 3,636,150 84.5
Equity securities ..................... 37,217 0.8 39,733 0.9
Mortgage loans on real estate ......... 377,383 8.6 385,307 9.0
Investment real estate:
Acquired for debt ................... 2,823 0.1 2,321 0.1
Investment .......................... 16,945 0.4 17,735 0.4
Policy loans .......................... 180,519 4.1 181,054 4.2
Other long-term investments ........... 5,683 0.1 5,693 0.1
Short-term investments ................ 59,417 1.4 32,863 0.8
-------------- -------------- -------------- --------------
Total investments ................ $ 4,382,981 100.0% $ 4,300,856 100.0%
============== ============== ============== ==============
As of March 31, 2002, 94.7% (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 March 31, 2002, the investment in non-investment grade debt was 5.3%
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
MARCH 31, 2002
-------------------------------
NAIC DESIGNATION EQUIVALENT S&P RATINGS(1) CARRYING VALUE PERCENT
- ---------------- -------------------------------------------- -------------- --------------
(DOLLARS IN THOUSANDS)
1 (AAA, AA, A) ............................... $ 2,380,015 64.3%
2 (BBB) ...................................... 1,126,977 30.4
-------------- --------------
Total investment grade ..................... 3,506,992 94.7
3 (BB) ....................................... 127,722 3.4
4 (B) ........................................ 46,690 1.3
5 (CCC, CC, C) ............................... 10,847 0.3
6 In or near default ......................... 10,743 0.3
-------------- --------------
Total below investment grade ............... 196,002 5.3
-------------- --------------
Total fixed maturities ..................... $ 3,702,994 100.0%
============== ==============
- -------------
(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.
18
FBL Financial Group, Inc. March 31, 2002
The following tables contain amortized cost and market value information on
fixed maturities and equity securities at March 31, 2002:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies .. $ 107,629 $ 1,787 $ (3,689) $ 105,727
State, municipal and other governments . 95,248 2,014 (1,115) 96,147
Public utilities ....................... 144,420 3,167 (3,245) 144,342
Corporate securities ................... 1,742,058 46,473 (37,024) 1,751,507
Mortgage and asset-backed securities ... 1,543,073 22,145 (17,978) 1,547,240
Redeemable preferred stocks ................ 58,357 1,551 (1,877) 58,031
-------------- -------------- -------------- --------------
Total fixed maturities ..................... $ 3,690,785 $ 77,137 $ (64,928) $ 3,702,994
============== ============== ============== ==============
Equity securities .......................... $ 38,020 $ 674 $ (1,477) $ 37,217
============== ============== ============== ==============
The carrying value and estimated market value of our portfolio of fixed maturity
securities at March 31, 2002, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
ESTIMATED
AMORTIZED COST MARKET VALUE
-------------- --------------
(DOLLARS IN THOUSANDS)
Due in one year or less ....................... $ 43,121 $ 43,659
Due after one year through five years ......... 417,936 425,900
Due after five years through ten years ........ 606,254 610,220
Due after ten years ........................... 1,022,044 1,017,944
-------------- --------------
2,089,355 2,097,723
Mortgage and asset-backed securities .......... 1,543,073 1,547,240
Redeemable preferred stocks ................... 58,357 58,031
-------------- --------------
$ 3,690,785 $ 3,702,994
============== ==============
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
19
FBL Financial Group, Inc. March 31, 2002
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, we did acquire Z securities with a
carrying value of $32.4 million at March 31, 2002 in connection with our
acquisition of Kansas Farm Bureau Life on January 1, 2001. These securities
generally tend to have more duration risk (risk the security's price will change
significantly with a given change in market interest rates) than the other types
of mortgage-backed securities in our portfolio.
The following table sets forth the amortized cost, par value and carrying value
of our mortgage and asset-backed securities at March 31, 2002, summarized by
type of security.
PERCENT
OF FIXED
AMORTIZED COST PAR VALUE CARRYING VALUE MATURITIES
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Residential mortgage-backed securities:
Sequential ................................... $ 761,788 $ 778,474 $ 759,159 20.5%
Pass through ................................. 116,353 117,990 115,473 3.1
Planned and targeted amortization class ...... 92,430 92,058 93,451 2.5
Other ........................................ 44,812 46,115 45,774 1.3
-------------- -------------- -------------- --------------
Total residential mortgage-backed securities .... 1,015,383 1,034,637 1,013,857 27.4
Commercial mortgage-backed securities ........... 281,349 279,249 282,212 7.6
Other asset-backed securities ................... 246,341 247,219 251,171 6.8
-------------- -------------- -------------- --------------
Total mortgage and asset-backed securities ...... $ 1,543,073 $ 1,561,105 $ 1,547,240 41.8%
============== ============== ============== ==============
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 March 31, 2002, we held $377.4 million or 8.6% 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 March 31, 2002,
mortgages more than 60 days delinquent accounted for less than 0.1% of the
carrying value of the mortgage portfolio. Our mortgage lending policies
establish limits on the amount that can be loaned to one borrower and require
diversification by geographic location and collateral type. Regions with the
largest concentration of our mortgage loan portfolio at March 31, 2002 include:
Pacific (27.4%) which includes California; and West South Central (21.2%) which
includes Oklahoma and Texas. Mortgage loans on real estate are also diversified
by collateral type with office buildings (43.5%) and retail facilities (33.3%)
representing the largest holdings at March 31, 2002.
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 March 31, 2002, the weighted average life of
the fixed maturity portfolio, based on market values and excluding convertible
bonds, was approximately 8.7 years. Based on our utilization of the fixed income
analytical system, including our mortgage backed prepayment assumptions, the
effective duration of the fixed income portfolio was 5.1 as of March 31, 2002.
20
FBL Financial Group, Inc. March 31, 2002
OTHER ASSETS
Cash and cash equivalents, which includes securities with a maturity date of
three months or less when acquired, decreased 25.9% to $201.1 million at March
31, 2002. The relatively high cash and cash equivalent balance at March 31, 2002
and December 31, 2001 reflects the increased cash received in connection with
the American Equity reinsurance agreement. We have chosen to maintain a high
cash position during the first quarter of 2002 in reaction to the current low
market interest rate environment. Deferred policy acquisition costs increased
11.0% to $399.9 million at March 31, 2002 due to the capitalization of costs
incurred with new sales and to the impact of the change in unrealized
appreciation on fixed maturity securities. Assets held in separate accounts
increased 5.6%, to $376.5 million at March 31, 2002 due primarily to the
transfer of net premiums to the separate accounts. At March 31, 2002, we had
total assets of $5,707.5 million, a 1.4% increase from total assets at December
31, 2001.
The securities and indebtedness of related parties line on the balance sheet,
which includes the investments that generate our equity income (loss), is
comprised of the following:
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
American Equity Investment Life Holding Company, common and preferred
stock ........................................................................ $ 28,538 $ 29,883
Berthel Fisher and Company and affiliates ....................................... 6,177 6,177
Venture capital investment partnerships (8 in 2002 and 2001) .................... 3,574 5,553
Real estate investment partnerships (7 in 2002 and 2001) ........................ 15,805 15,556
Mortgage loans and other ........................................................ 1,517 1,648
------------ ------------
55,611 58,817
Proportionate share of net unrealized investment losses of equity investees ..... (11,135) (1,036)
------------ ------------
Securities and indebtedness of related parties .................................. $ 44,476 $ 57,781
============ ============
LIABILITIES AND REDEEMABLE PREFERRED STOCK
Policy liabilities and accruals and other policyholders' funds increased 6.1% to
$4,441.0 million at March 31, 2002 primarily due to the addition of the American
Equity business during the quarter and growth in the volume of business in force
from our core distribution system. Deferred income taxes decreased 36.4% to
$37.9 million at March 31, 2002 due primarily to a decrease in deferred taxes on
the change in unrealized appreciation/depreciation on fixed maturity securities.
Other liabilities decreased 60.1% to $95.8 million at March 31, 2002 due
principally to a $141.1 million decrease in payables for security purchases. At
March 31, 2002, we had total liabilities of $4,991.9 million, a 2.2% increase
from total liabilities at December 31, 2001.
Series C redeemable preferred stock increased 0.8% to $83.4 million at March 31,
2002 from $82.7 million at December 31, 2001. This increase represents the
accretion of the discount on these securities. The Series C redeemable preferred
stock was issued at an $11.6 million discount. The mandatory redemption is
structured so that 49.5% of the Series C preferred stock will be redeemed at par
value, or $45.3 million, on January 2, 2004 with the remaining 50.5% redeemed at
par value, or $46.3 million, on January 3, 2006.
STOCKHOLDERS' EQUITY
At March 31, 2002, common stockholders' equity was $532.1 million, or $19.34 per
share, compared to $562.8 million, or $20.53 per share at December 31, 2001.
Included in stockholders' equity per common share is ($0.08) at March 31, 2002
and $1.43 at December 31, 2001 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
decreased stockholders' equity $41.5 million during the three months ended March
31, 2002, after related adjustments to deferred policy acquisition costs, value
of insurance in force acquired, unearned revenue reserve and deferred income
taxes.
21
FBL Financial Group, Inc. March 31, 2002
LIQUIDITY
FBL FINANCIAL GROUP, INC.
Parent company cash inflows from operations consist primarily of (i) dividends
from subsidiaries, if declared and paid, (ii) fees that it charges the various
subsidiaries and affiliates for management of their operations, (iii) expense
reimbursements from subsidiaries and affiliates and (iv) tax settlements between
the parent company and its subsidiaries. Cash outflows are principally for
salaries and other expenses related to providing these management services,
dividends on outstanding stock and interest on parent company debt issued to a
subsidiary. In addition, the parent company will on occasion enter into capital
transactions such as the acquisition of our common stock.
We may receive consideration during the 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 direct
business written in the state of Utah, net of reinsurance ceded, is less than
the incurred losses assumed in the valuation model used to derive the initial
acquisition price. The earn-out calculation is performed and any settlement
(subject to a maximum of $2.0 million per year) is made on a calendar year
basis. Earn-out settlements received, on a pre-tax basis, totaled $2.0 million
in the 2001 period. We did not receive any settlements in 2002 as the loss ratio
of Utah Insurance in 2001 was higher than the threshold loss ratio in the
earn-out calculation.
We paid cash dividends on our common and preferred stock totaling $3.1 million
in the 2002 and 2001 periods. It is anticipated quarterly cash dividend
requirements for the remainder of 2002 will be $0.10 per common and Series C
redeemable preferred share and $0.0075 per Series B preferred share, or
approximately $9.4 million. In addition, interest payments on the parent company
debt issued to a subsidiary are estimated to be $3.8 million for the remainder
of 2002.
FBL Financial Group, Inc. expects to rely on available cash resources and
dividends from Farm Bureau Life to make any dividend payments to its
stockholders and interest payments on its Notes. In addition, we expect to use
these sources and borrowings, if needed, to fund the redemption of the Series C
redeemable preferred stock in 2004 and 2006.
The ability of Farm Bureau Life to pay dividends to FBL Financial Group, Inc. is
limited by law to earned profits (statutory unassigned surplus) as of the date
the dividend is paid, as determined in accordance with accounting practices
prescribed by insurance regulatory authorities of the State of Iowa. In
addition, under the Iowa Insurance Holding Company Act, Farm Bureau Life may not
pay an "extraordinary" dividend without prior notice to and approval by the Iowa
insurance commissioner. An "extraordinary" dividend is defined under the Iowa
Insurance Holding Company Act as any dividend or distribution of cash or other
property whose fair market value, together with that of other dividends or
distributions made within the preceding 12 months, exceeds the greater of (i)
10% of policyholders' surplus (total statutory capital stock and statutory
surplus) as of December 31 of the preceding year, or (ii) the statutory net gain
from operations of the insurer for the 12-month period ending December 31 of the
preceding year. During the remainder of 2002, the maximum amount legally
available for distribution to FBL Financial Group, Inc. without further
regulatory approval is approximately $32.8 million.
We may from time to time review potential acquisition opportunities. It is
anticipated that funding for any such acquisition would be provided from
available cash resources, debt or equity financing. As of March 31, 2002, we had
no material commitments for capital expenditures. The parent company had
available cash and investments totaling $18.7 million at March 31, 2002.
INSURANCE OPERATIONS
The Life Companies' cash inflows consist primarily of premium income, deposits
to policyholder account balances, product charges on variable products, income
from investments, sales, maturities and calls of investments and repayments of
investment principal. The Life Companies' cash outflows are primarily related to
withdrawals of policyholder account balances, investment purchases, payment of
policy acquisition costs, policyholder benefits,
22
FBL Financial Group, Inc. March 31, 2002
income taxes, dividends and current operating expenses. Life insurance companies
generally produce a positive cash flow which may be measured by the degree to
which cash inflows are adequate to meet benefit obligations to policyholders and
normal operating expenses as they are incurred. The remaining cash flow is
generally used to increase the asset base to provide funds to meet the need for
future policy benefit payments and for writing new business. The Life Companies'
liquidity positions continued to be favorable in the three-month period ended
March 31, 2002, with cash inflows at levels sufficient to provide the funds
necessary to meet their obligations.
For the life insurance operations, cash outflow requirements for operations are
typically met from normal premium and deposit cash inflows. This has been the
case for all reported periods as the Life Companies' continuing operations and
financing activities relating to interest sensitive products provided funds
amounting to $219.9 million in the three months ended March 31, 2002 and $46.1
million in the three months ended March 31, 2001. Positive cash flow from
operations is generally used to increase the insurance companies' fixed maturity
securities and other investment portfolios. In developing their investment
strategy, the Life Companies establish a level of cash and securities which,
combined with expected net cash inflows from operations, maturities of fixed
maturity investments and principal payments on mortgage and asset-backed
securities and mortgage loans, are believed adequate to meet anticipated
short-term and long-term benefit and expense payment obligations.
Through its membership in the Federal Home Loan Bank of Des Moines (FHLB), Farm
Bureau Life is eligible to establish and borrow on a collateralized line of
credit to provide it additional liquidity. The line of credit available is based
on the amount of capital stock of the FHLB owned by Farm Bureau Life, which
supported a borrowing capacity of $78.9 million as of March 31, 2002. At March
31, 2002, Farm Bureau Life had borrowings outstanding of $40.0 million under
this arrangement, leaving a borrowing capacity of $38.9 million. Additional
collateral would need to be deposited with the FHLB in order to access this
additional borrowing capacity. The outstanding debt is due September 17, 2003,
and interest on the debt is charged at a variable rate equal to the London
Interbank Offered Rate less 0.0475% (1.85% at March 31, 2002). Fixed maturity
securities with a carrying value of $40.8 million are on deposit with the FHLB
as collateral for the note.
In the normal course of business, we enter into financing transactions, lease
agreements, or other commitments which are necessary or beneficial to our
operations. These commitments may obligate us to certain cash flows during
future periods. As of December 31, 2001, we had contractual obligations totaling
$190.4 million with payments due as follows: less than one year - $32.9 million,
one-to-three years - $92.4 million, four-to-five years - $4.8 million and after
five years - $60.3 million. There have been no material changes to these
contractual obligations since December 31, 2001.
We anticipate that funds to meet our short-term and long-term capital
expenditures, cash dividends to stockholders and operating cash needs will come
from existing capital and internally generated funds. We believe that the
current level of cash and available-for-sale and short-term securities, combined
with expected net cash inflows from operations, maturities of fixed maturity
investments, principal payments on mortgage and asset-backed securities,
mortgage loans and its insurance products, are adequate to meet our anticipated
cash obligations for the foreseeable future. Our investment portfolio at March
31, 2002, included $59.4 million of short-term investments, $201.1 million of
cash (consisting primarily of securities purchased with a maturity of three
months or less) and $444.5 million in carrying value of U.S. Government and U.S.
Government agency backed securities that could be readily converted to cash at
or near carrying value.
23
FBL Financial Group, Inc. March 31, 2002
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
From time to time, we may publish statements relating to anticipated financial
performance, business prospects, new products, and similar matters. These
statements and others, which include words such as "expect", "anticipate",
"believe", "intend", and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
these types of statements. In order to comply with the terms of the safe harbor,
please note that a variety of factors could cause our actual results and
experiences to differ materially from the anticipated results or other
expectations expressed in our forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of our business include but are not limited to the following:
* Changes to interest rate levels and stock market performance may
impact our lapse rates, market value of our investment portfolio and
our ability to sell life insurance products, notwithstanding product
features to mitigate the financial impact of such changes.
* The degree to which customers and agents (including the agents of our
alliance partners) accept our products will influence our future
growth rate.
* Extraordinary acts of nature or man may result in higher than expected
claim activity.
* Changes in federal and state income tax laws and regulations may
affect the relative tax advantage of our products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There have been no material changes in the market risks of our financial
instruments since December 31, 2001.
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 March 31, 2002:
None
24
FBL Financial Group, Inc. March 31, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 8, 2002
FBL FINANCIAL GROUP, INC.
By /s/ William J. Oddy
--------------------------------------------------
William J. Oddy
Chief Executive Officer (Principal Executive Officer)
By /s/ James W. Noyce
--------------------------------------------------
James W. Noyce
Chief Financial Officer (Principal Financial and
Accounting Officer)
25