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, 1999
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
FBL Financial Group, Inc.
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(Exact name of registrant as specified in its charter)
Iowa 42-1411715
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266-5997
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(Address of principal executive offices) (Zip Code)
(515) 225-5400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 31,248,886 shares of Class A
common stock and 1,192,990 shares of Class B common stock as of April 30, 1999.
ITEM 1. FINANCIAL STATEMENTS
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 1999 - $458,994; 1998 -
$516,729) .............................................................. $ 440,331 $ 492,288
Available for sale, at market (amortized cost: 1999 - $1,946,077; 1998 -
$1,862,861) ............................................................ 1,991,888 1,950,044
Equity securities, at market (cost: 1999 - $39,680; 1998 - $39,589) ......... 35,307 35,287
Mortgage loans on real estate ............................................... 294,896 299,372
Investment real estate, less allowances for depreciation of $4,051 in 1999
and $4,223 in 1998 ........................................................ 34,647 40,679
Policy loans ................................................................ 123,003 123,328
Other long-term investments ................................................. 10,022 10,210
Short-term investments ...................................................... 75,809 80,228
------------ ------------
Total investments .............................................................. 3,005,903 3,031,436
Cash and cash equivalents ...................................................... 4,490 4,516
Securities and indebtedness of related parties ................................. 62,558 65,291
Accrued investment income ...................................................... 34,403 34,318
Accounts and notes receivable .................................................. 1,106 833
Amounts receivable from affiliates ............................................. 4,853 4,020
Reinsurance recoverable ........................................................ 4,527 4,711
Deferred policy acquisition costs .............................................. 211,828 203,581
Value of insurance in force acquired ........................................... 15,121 14,533
Property and equipment, less allowances for depreciation of $37,988 in 1999
and $37,100 in 1998 ......................................................... 57,556 55,250
Current income taxes recoverable ............................................... 7,346 13,185
Goodwill, less accumulated amortization of $3,658 in 1999 and $3,484 in
1998 ........................................................................ 9,774 9,948
Other assets ................................................................... 16,123 19,227
Assets held in separate accounts ............................................... 203,044 190,111
------------ ------------
Total assets ........................................................... $ 3,638,632 $ 3,650,960
============ ============
1
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products ............................................ $ 1,599,810 $ 1,596,471
Traditional life insurance and accident and health products ............ 736,616 731,873
Unearned revenue reserve ............................................... 25,999 25,373
Other policy claims and benefits .......................................... 10,579 10,625
------------ ------------
2,373,004 2,364,342
Other policyholders' funds:
Supplementary contracts without life contingencies ........................ 154,816 147,755
Advance premiums and other deposits ....................................... 84,159 84,206
Accrued dividends ......................................................... 14,070 13,797
------------ ------------
253,045 245,758
Short-term debt ............................................................. 24,500 24,500
Short-term debt payable to affiliate ........................................ 9,586 8,626
Amounts payable to affiliates ............................................... 369 511
Long-term debt .............................................................. -- 71
Deferred income taxes ....................................................... 33,103 46,497
Other liabilities ........................................................... 75,919 85,453
Liabilities related to separate accounts .................................... 203,044 190,111
------------ ------------
Total liabilities ...................................................... 2,972,570 2,965,869
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock of subsidiary
trust ..................................................................... 97,000 97,000
Other ....................................................................... 4,503 4,503
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 31,392,075 shares in 1999 and 31,512,113 shares
in 1998 ................................................................... 42,306 42,034
Class B common stock, without par value - authorized 1,500,000 shares,
issued and outstanding 1,192,990 shares ................................... 7,558 7,558
Accumulated other comprehensive income ...................................... 24,472 50,050
Retained earnings ........................................................... 487,223 480,946
------------ ------------
Total stockholders' equity ................................................ 564,559 583,588
------------ ------------
Total liabilities and stockholders' equity ............................. $ 3,638,632 $ 3,650,960
============ ============
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,
------------------------------
1999 1998
------------ ------------
Revenues:
Interest sensitive product charges ........................................... $ 13,432 $ 12,478
Traditional life insurance and accident and health premiums .................. 23,411 23,018
Net investment income ........................................................ 55,987 56,070
Realized gains (losses) on investments ....................................... (2,240) 1,312
Other income ................................................................. 4,929 5,284
------------ ------------
Total revenues ............................................................ 95,519 98,162
Benefits and expenses:
Interest sensitive product benefits .......................................... 29,317 31,873
Traditional life insurance and accident and health benefits .................. 15,753 13,148
Increase in traditional life and accident and health future policy benefits .. 4,197 5,345
Distributions to participating policyholders ................................. 6,439 6,585
Underwriting, acquisition and insurance expenses ............................. 16,609 15,570
Interest expense ............................................................. 547 370
Other expenses ............................................................... 4,002 3,571
------------ ------------
Total benefits and expenses ............................................... 76,864 76,462
------------ ------------
18,655 21,700
Income taxes ..................................................................... (6,035) (7,025)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily redeemable preferred stock of
subsidiary trust .......................................................... (1,213) (1,213)
Other ........................................................................ 14 (84)
Equity income (loss), net of related income taxes ................................ 204 (302)
------------ ------------
Income from continuing operations ................................................ 11,625 13,076
Discontinued operations:
Income from property-casualty operations, net of related income taxes ........ -- 287
Gain on disposal of property-casualty operations, net of related income
taxes ..................................................................... -- 179
------------ ------------
Net income ....................................................................... 11,625 13,542
Dividends on Series B preferred stock ............................................ (37) (37)
------------ ------------
Net income applicable to common stock ............................................ $ 11,588 $ 13,505
============ ============
Earnings per common share:
Income from continuing operations ............................................ $ 0.35 $ 0.36
Income from discontinued operations .......................................... -- 0.02
------------ ------------
Earnings per common share .................................................... $ 0.35 $ 0.38
============ ============
Earnings per common share - assuming dilution:
Income from continuing operations ............................................ $ 0.35 $ 0.35
Income from discontinued operations .......................................... -- .02
------------ ------------
Earnings per common share - assuming dilution ................................ $ 0.35 $ 0.37
============ ============
Cash dividends per common share ................................................. $ 0.083 $ 0.075
============ ============
See accompanying notes.
3
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
ACCUMULATED
CLASS A CLASS B OTHER TOTAL
PREFERRED COMMON COMMON COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK STOCK INCOME EARNINGS EQUITY
----------- ----------- ----------- ------------- ----------- ------------
Balance at January 1, 1998 .......... $ 3,000 $ 42,907 $ 7,567 $ 48,559 $ 503,282 $ 605,315
Comprehensive income:
Net income for three months
ended March 31, 1998 .......... -- -- -- -- 13,542 13,542
Change in net unrealized
investment gains/losses ....... -- -- -- 2,255 -- 2,255
-----------
Total comprehensive income ....... 15,797
Acquisition of 2,536,112 shares of
common stock in exchange for
properties ...................... -- (3,340) -- -- (42,310) (45,650)
Issuance of 105,384 shares of
common stock under stock
option plan, including related
income tax benefit .............. -- 1,403 -- -- -- 1,403
Dividends on preferred stock ...... -- -- -- -- (37) (37)
Dividends on common stock ......... -- -- -- -- (2,700) (2,700)
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1998 ........... $ 3,000 $ 40,970 $ 7,567 $ 50,814 $ 471,777 $ 574,128
=========== =========== =========== =========== =========== ===========
Balance at January 1, 1999 .......... $ 3,000 $ 42,034 $ 7,558 $ 50,050 $ 480,946 $ 583,588
Comprehensive loss:
Net income for three months
ended March 31, 1999 .......... -- -- -- -- 11,625 11,625
Change in net unrealized
investment gains/losses ....... -- -- -- (25,578) -- (25,578)
-----------
Total comprehensive loss ......... (13,953)
Purchase of 146,200 shares of
common stock .................... -- (196) -- -- (2,614) (2,810)
Issuance of 26,162 shares of
common stock under employee
benefit and stock option plans,
including related income tax
benefit ......................... -- 468 -- -- -- 468
Dividends on preferred stock ...... -- -- -- -- (37) (37)
Dividends on common stock ......... -- -- -- -- (2,697) (2,697)
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1999 ........... $ 3,000 $ 42,306 $ 7,558 $ 24,472 $ 487,223 $ 564,559
=========== =========== =========== =========== =========== ===========
See accompanying notes.
4
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------ ------------
OPERATING ACTIVITIES
Continuing operations:
Net income ................................................................. $ 11,625 $ 13,076
Adjustments to reconcile net income to net cash provided by continuing
operations:
Adjustments related to interest sensitive products:
Interest credited to account balances .............................. 25,903 26,827
Charges for mortality and administration ........................... (13,274) (12,580)
Deferral of unearned revenues ...................................... 630 640
Amortization of unearned revenue reserve ........................... (281) (147)
Provision for depreciation and amortization ............................. 3,493 2,171
Net gains and losses related to investments held by broker-dealer
subsidiaries ........................................................ 44 (77)
Realized losses (gains) on investments .................................. 2,240 (1,312)
Increase in traditional life and accident and health benefit accruals ... 4,760 5,343
Policy acquisition costs deferred ....................................... (8,216) (6,860)
Amortization of deferred policy acquisition costs ....................... 2,521 1,695
Provision for deferred income taxes ..................................... 379 (1,039)
Other ................................................................... (1,712) 6,201
------------ ------------
Net cash provided by continuing operations ..................................... 28,112 33,938
Discontinued operations:
Net income ................................................................. -- 466
Adjustments to reconcile net income to net cash provided by discontinued
operations .............................................................. -- 2,006
------------ ------------
Net cash provided by discontinued operations ................................... -- 2,472
------------ ------------
Net cash provided by operating activities ...................................... 28,112 36,410
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment ..................................... 52,729 20,613
Fixed maturities - available for sale ...................................... 33,891 81,310
Equity securities .......................................................... 1,714 8,030
Mortgage loans on real estate .............................................. 18,006 10,626
Investment real estate ..................................................... 5,535 89
Policy loans ............................................................... 7,200 6,840
Other long-term investments ................................................ 663 253
Short-term investments - net ............................................... 4,419 --
------------ ------------
124,157 127,761
5
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------ ------------
INVESTING ACTIVITIES (CONTINUED):
Acquisition of investments:
Fixed maturities - available for sale ...................................... $ (120,072) $ (151,636)
Equity securities .......................................................... (1,734) (688)
Mortgage loans on real estate .............................................. (13,596) (4,815)
Investment real estate ..................................................... (146) (1,390)
Policy loans ............................................................... (6,875) (7,207)
Other long-term investments ................................................ (519) --
Short-term investments - net ............................................... -- (4,864)
------------ ------------
(142,942) (170,600)
Proceeds from disposal, repayments of advances and other distributions from
equity investees ........................................................... 2,538 1,381
Investments in and advances to equity investees ................................ (460) (936)
Net proceeds from sale of discontinued operations .............................. 1,229 24,844
Net purchases of property and equipment and other .............................. (4,825) (3,556)
Investing activities of discontinued operations ................................ -- (2,474)
------------ ------------
Net cash used in investing activities .......................................... (20,303) (23,580)
FINANCING ACTIVITIES
Receipts from interest sensitive and variable products credited to policyholder
account balances ........................................................... 69,026 70,648
Return of policyholder account balances on interest sensitive and variable
products ................................................................... (71,255) (77,220)
Proceeds from short-term debt with affiliate ................................... 960 --
Repayments of long-term debt ................................................... (71) (2)
Distributions on company-obligated mandatorily redeemable preferred stock of
subsidiary trust ........................................................... (1,213) (1,213)
Other distributions to minority interests ...................................... (168) (268)
Purchase of common stock ....................................................... (2,810) --
Issuance of common stock ....................................................... 430 928
Dividends paid ................................................................. (2,734) (2,737)
------------ ------------
Net cash used in financing activities .......................................... (7,835) (9,864)
------------ ------------
Increase (decrease) in cash and cash equivalents ............................... (26) 2,966
Cash and cash equivalents at beginning of period ............................... 4,516 2,397
------------ ------------
Cash and cash equivalents at end of period ..................................... $ 4,490 $ 5,363
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest ................................................................... $ 503 $ 363
Income taxes ............................................................... (133) (210)
See accompanying notes.
6
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and notes thereto for the year ended December 31, 1998
included in the Company's annual report on Form 10-K.
2. ACCOUNTING CHANGES
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP, which has been adopted prospectively as of January 1,
1999, requires the capitalization of certain costs incurred in connection with
developing or obtaining internal use software. Prior to the adoption of SOP
98-1, the Company capitalized external software development costs and charged
internal costs, primarily payroll and related items, to expense as they were
incurred. Pursuant to the SOP, these internal costs are now capitalized. The
effect of adopting the SOP was to increase net income for the quarter ended
March 31, 1999 by $0.1 million.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and 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. The Statement is effective for the Company in the
year 2000, with earlier adoption encouraged. Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
3. INVESTMENT OPERATIONS
Fixed maturity securities, comprised of bonds and redeemable preferred stocks
that the Company has the positive intent and ability to hold to maturity, are
designated as "held for investment". Held for investment securities are reported
at cost adjusted for amortization of premiums and discounts. Changes in the
market value of these securities, except for declines that are other than
temporary, are not reflected in the Company's financial statements. Fixed
maturity securities which may be sold are designated as "available for sale".
Available for sale securities are reported at market value and unrealized gains
and losses on these securities are included directly in stockholders' equity as
a component of accumulated other comprehensive income. The unrealized gains and
losses included in accumulated other comprehensive income are reduced by a
provision for deferred income taxes and adjustments to deferred policy
acquisition costs, value of insurance in force acquired and unearned revenue
reserve that would have been required as a charge or credit to income had such
amounts been realized. Equity securities, comprised of common and non-redeemable
preferred stocks, are reported at market value. The change in unrealized
appreciation and depreciation of equity securities is included directly in
stockholders' equity, net of any related deferred income taxes, as a component
of accumulated other comprehensive income.
7
Net unrealized investment gains as reported were comprised of the following:
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Unrealized appreciation on fixed maturity and equity securities available for
sale ....................................................................... $ 41,438 $ 82,881
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs .......................................... (2,712) (5,264)
Value of insurance in force acquired ....................................... (519) (1,306)
Unearned revenue reserve ................................................... 308 585
Provision for deferred income taxes ............................................ (13,480) (26,914)
------------ ------------
25,035 49,982
Proportionate share of net unrealized investment gains (losses)
of equity investees ........................................................ (563) 68
------------ ------------
Net unrealized investment gains ................................................ $ 24,472 $ 50,050
============ ============
4. CREDIT ARRANGEMENTS
As an investor in the Federal Home Loan Bank (FHLB), the Company has the right
to borrow up to $55.8 million from the FHLB as of March 31, 1999. The Company
had no outstanding debt under this credit arrangement as of March 31, 1999 or
December 31, 1998.
The Company has a $12.0 million line of credit with Farm Bureau Mutual Insurance
Company (Farm Bureau Mutual), an affiliate, in the form of a revolving demand
note. Borrowings on the note, which totaled $9.6 million at March 31, 1999, are
being used to acquire assets that are leased to certain affiliates, including
Farm Bureau Mutual. Interest is payable at a rate equal to the prime rate of a
national bank (7.75% at March 31, 1999). Rental income from the related leases
includes a provision for interest on the carrying value of the assets.
The Company also has a $25.0 million short-term line of credit. The line of
credit expires on June 30, 1999 and requires the Company to maintain minimum
tangible net worth and risk-based capital ratios. The agreement also limits the
Company's ability to incur additional indebtedness. As of March 31, 1999, the
Company had no outstanding debt under this credit arrangement.
5. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company may be involved in litigation
where amounts are alleged that are substantially in excess of contractual policy
benefits or certain other agreements. At March 31, 1999, management is not aware
of any claims for which a material loss is reasonably possible.
The Company seeks to limit its exposure to loss on any single insured or event
and to recover a portion of benefits paid by ceding reinsurance to other
insurance enterprises. Reinsurance contracts do not relieve the Company of its
obligations to policyholders. To the extent that reinsuring companies are later
unable to meet obligations under reinsurance agreements, the Company's insurance
subsidiaries would be liable for these obligations, and payment of these
obligations could result in losses to the Company. To limit the possibility of
such losses, the Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk. No allowance for uncollectible amounts
has been established against the reinsurance recoverable since all amounts are
deemed to be collectible.
The Company leases its home office properties under a 15-year operating lease.
Future remaining minimum lease payments under this lease as of March 31, 1999
are as follows: 1999 - $1.3 million; 2000 - $2.1 million; 2001 - $2.1 million;
2002 - $2.1 million; 2003 - $2.3 million; 2004 - $2.4 million and thereafter,
through 2013 - $21.2 million.
In connection with an investment in a real estate limited partnership, the
Company has agreed to pay any cash flow deficiencies of a medium-sized shopping
center owned by the partnership through January 1, 2001. At March 31, 1999 and
December 31, 1998, the Company recorded a $0.3 million reserve for expected
future cash flow
8
deficiencies. The limited partnership has a $5.3 million mortgage loan, secured
by the shopping center, with Farm Bureau Mutual.
6. EARNINGS PER SHARE
The following table sets forth the computation of earnings per common share and
earnings per common share assuming dilution:
THREE MONTHS ENDED MARCH 31,
--------------------------------
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Income from continuing operations ................................... $ 11,625 $ 13,076
Income from discontinued operations ................................. -- 466
------------- -------------
Net income .......................................................... 11,625 13,542
Dividends on Series B preferred stock ............................... (37) (37)
------------- -------------
Numerator for earnings per common share-income available to
common stockholders .......................................... $ 11,588 $ 13,505
============= =============
Denominator:
Denominator for earnings per common share - weighted-average
shares ........................................................... 32,696,694 35,945,204
Effect of dilutive securities - employee stock options .............. 660,743 796,030
------------- -------------
Denominator for diluted earnings per common share - adjusted
weighted-average shares ...................................... 33,357,437 36,741,234
============= =============
Earnings per common share:
Income from continuing operations ................................... $ 0.35 $ 0.36
Income from discontinued operations ................................. -- 0.02
------------- -------------
Earnings per common share ........................................... $ 0.35 $ 0.38
============= =============
Earnings per common share - assuming dilution:
Income from continuing operations ................................... $ 0.35 $ 0.35
Income from discontinued operations ................................. -- .02
------------- -------------
Earnings per common share - assuming dilution ....................... $ 0.35 $ 0.37
============= =============
9
7. SEGMENT INFORMATION
In general, the Company is organized by the types of products and services it
offers for sale. The Company's principal and only reportable operating segment
is its life insurance segment. The life insurance segment includes activities
related to the sale of life insurance, annuities and accident and health
insurance products. Operations have been aggregated into the same segment due to
the similarity of the products, including the underlying economic
characteristics, the method of distribution and the regulatory environment. The
Company also has several other operating segments that do not meet the
quantitative threshold for separate segment reporting and, therefore, are
aggregated herein. A summary of these segments, along with the related source of
revenues, is as follows:
SEGMENT SOURCE OF REVENUES
Investment advisory........... Fee income from the management of
investments
Marketing and distribution.... Commissions and distribution fee income
from the sale of mutual funds and
insurance products not issued by the
Company
Leasing....................... Income from operating leases
Corporate..................... Fees from management and administrative
services
Financial information concerning the Company's operating segments for the three
months ended March 31, 1999 and 1998 is as follows:
LIFE
INSURANCE ALL OTHER SUBTOTAL ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
Revenues from external customers:
1999 ........................... $ 90,912 $ 9,182 $ 100,094 $ (4,575) $ 95,519
1998 ........................... 94,287 8,602 102,889 (4,727) 98,162
Intersegment revenues:
1999 ........................... 220 4,355 4,575 (4,575) --
1998 ........................... 423 4,304 4,727 (4,727) --
Income (loss) from continuing
operations:
1999 ........................... 12,073 (448) 11,625 -- 11,625
1998 ........................... 13,469 (393) 13,076 -- 13,076
Transactions between segments are recorded at negotiated rates generally
intended to be at levels commensurate with charges that would be assessed to
unaffiliated parties.
8. DISCONTINUED OPERATIONS
On March 31, 1998, the Company sold its wholly-owned property-casualty
subsidiary, Utah Farm Bureau Insurance Company (Utah Insurance), to Farm Bureau
Mutual. Consideration totaling $26.2 million, including $25.0 million in the
first quarter of 1998, has been received as a result of the sale. The Company
may earn additional consideration during each of the four years in the period
ending December 31, 2002, in accordance with an earn-out provision included in
the underlying sales agreement. Under the earn-out arrangement, the Company and
Farm Bureau Mutual will 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 will be performed and any
settlement (subject to a maximum of $2.0 million per year) will be made on a
calendar year basis. The Company has not accrued any contingent consideration as
such amounts, if any, cannot be reasonably estimated as of March 31, 1999. Any
receipts as a result of the earn-out provision will be recorded as an adjustment
to the gain on the disposal of the discontinued segment.
Revenues from the discontinued property-casualty operations for quarter ended
March 31, 1998 totaled $12.9 million.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING ANALYSIS OF THE CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE WITHIN THIS DOCUMENT.
UNLESS NOTED OTHERWISE, ALL REFERENCES TO THE COMPANY INCLUDE ALL OF ITS DIRECT
AND INDIRECT SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE SUBSIDIARIES,
FARM BUREAU LIFE INSURANCE COMPANY (FARM BUREAU LIFE), WESTERN FARM BUREAU LIFE
INSURANCE COMPANY (WESTERN LIFE) AND EQUITRUST LIFE INSURANCE COMPANY
(EQUITRUST) (COLLECTIVELY, THE LIFE COMPANIES).
The Company's revenues and income from continuing operations are primarily
derived from its life insurance segment. Revenues and expenses of the Company's
other segments, which consist of investment advisory, marketing and
distribution, leasing and management operations, are principally recorded in the
other income and other expense line items on the Consolidated Statements of
Income. See Note 7 of the Notes to Consolidated Financial Statements (page 11)
for additional information regarding segment information.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
NET INCOME APPLICABLE TO COMMON STOCK totaled $11.6 million in the 1999 period
and $13.5 million in the 1998 period. The decrease in net income is attributable
primarily to the impact of realized gains and losses on investments. Adjusted
operating income applicable to common stock, which does not include the impact
of realized gains and losses on investments and other items that management
believes are not indicative of operating trends, totaled $12.9 million in the
1999 period and $12.5 million in the 1998 period. The following is a
reconciliation of net income to adjusted operating income.
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income applicable to common stock ............................... $ 11,588 $ 13,505
Adjustments:
Net realized losses (gains) on investments ........................ 1,303 (814)
Gain on disposal of property-casualty operations .................. -- (179)
----------- -----------
Adjusted operating income applicable to common stock ................ $ 12,891 $ 12,512
=========== ===========
Earnings per common share - assuming dilution ....................... $ 0.35 $ 0.37
=========== ===========
Adjusted operating earnings per common share - assuming dilution .... $ 0.39 $ 0.34
=========== ===========
The adjustment for realized gains and losses on investments noted in the table
above is net of adjustments for that portion of amortization of deferred policy
acquisition costs, unearned revenue reserve, value of insurance in force
acquired and income taxes attributable to such gains and losses.
The change in earnings per common share from period to period is positively
impacted by a decrease in the weighted average common shares outstanding during
the fifteen-month period ended March 31, 1999. Weighted average common shares
outstanding, assuming dilution, totaled 33.4 million in the 1999 period and 36.7
million in the 1998 period. This decrease is the result of acquisitions of
common stock by the Company, primarily through the exchange of home office
properties for stock on March 30, 1998.
11
A summary of the Company's premiums and product charges is as follows:
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Interest sensitive product charges ............................. $ 13,432 $ 12,478
Traditional life insurance and accident and health premiums .... 23,411 23,018
----------- -----------
Total ....................................................... $ 36,843 $ 35,496
=========== ===========
INTEREST SENSITIVE PRODUCT CHARGES increased 7.6% in the 1999 period to $13.4
million. This increase is due primarily to increased cost of insurance charges
resulting from an increase in the volume and age of business in force. In
addition, mortality and expense charges have increased as a result of growth in
variable product account balances.
TRADITIONAL LIFE AND ACCIDENT AND HEALTH INSURANCE increased 1.7% in the 1999
period to $23.4 million. Management believes the modest increase in the sale of
traditional life insurance products is the result of a marketing emphasis placed
on the sale of variable universal life insurance contracts. Premiums collected
on variable universal life insurance products increased 16.2% to $9.9 million in
the 1999 period.
NET INVESTMENT INCOME decreased 0.1% in the 1999 period to $56.0 million. The
annualized yield earned on average invested assets decreased to 7.79% in the
1999 period from 7.99% in the 1998 period due to a general decline in market
interest rates during 1998. The impact of the decline in market interest rates
was offset by a 2.4% increase in average invested assets to $2,957.6 million in
the 1999 period. Fee income from mortgage loan prepayments and bond calls
totaled $1.6 million in the 1999 period compared to $1.8 million in the 1998
period. This revenue is not expected to be a consistently recurring source of
income for the Company.
REALIZED GAINS (LOSSES) ON INVESTMENTS decreased 270.7% in the 1999 period to
($2.2) million. Realized gains (losses) include writedowns of investments that
became other-than-temporarily impaired totaling $2.2 million in the 1999 period
and $1.6 million in the 1998 period. These writedowns are the result of
sustained operating losses and various other operational or economic factors
that became evident in the respective periods. The level of realized gains
(losses) is subject to fluctuation from period to period depending on the
prevailing interest rate and economic environment and the timing of the sale of
investments.
OTHER INCOME decreased 6.7% in the 1999 period to $4.9 million. This decrease is
primarily due to a $0.9 million decrease in rental income resulting from the
exchange of the home office properties for common stock on March 30, 1998. The
decrease was partially offset by an increase in the level of leasing, investment
advisory and financial services provided to affiliates and third parties.
A summary of the Company's policy benefits is as follows:
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
Policy benefits:
Interest sensitive product benefits ..................................... $ 29,317 $ 31,873
Traditional life insurance and accident and health benefits ............. 15,753 13,148
Increase in traditional and accident and health future policy benefits .. 4,197 5,345
Distributions to participating policyholders ............................ 6,439 6,585
----------- -----------
Total ................................................................ $ 55,706 $ 56,951
=========== ===========
12
INTEREST SENSITIVE PRODUCT BENEFITS decreased 8.0% in the 1999 period to $29.3
million. The components of interest sensitive product benefits, along with
selected average interest crediting rates are as follows:
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Interest credited to account balances ...................... $ 25,903 $ 26,826
Death benefits in excess of related account balances ....... 3,414 5,047
Average crediting rate for universal life liabilities ...... 5.97% 6.08%
Average crediting rate for annuity liabilities ............. 5.70% 6.02%
The Company decreased interest crediting rates on many of its products during
the fifteen-month period ended March 31, 1999, in response to the general
decline in market interest rates during 1998.
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH BENEFITS, INCLUDING THE
RELATED CHANGES IN RESERVES, increased 7.9% in the 1999 period to $20.0 million.
Death and surrender benefits on traditional products increased $3.4 million, or
33.7%, to $13.6 million in the 1999 period. Traditional life insurance and
accident and health benefits can tend to fluctuate from year to year as a result
of changes in mortality and morbidity experience.
DISTRIBUTIONS TO PARTICIPATING POLICYHOLDERS decreased 2.2% in the 1999 period
to $6.4 million. This decrease is primarily attributable to a decrease in the
average interest rate used in the dividend formula for these policies to 5.84%
at March 31, 1999 from 5.89% at March 31, 1998. This was partially offset by
growth in the amount and age of the participating business in force.
A summary of the Company's underwriting, acquisition and insurance expenses is
as follows:
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals ....................................... $ 2,409 $ 2,211
Amortization of deferred policy acquisition costs .......................... 2,521 1,695
Other underwriting, acquisition and insurance expenses, net of deferrals ... 11,679 11,664
----------- -----------
Total ................................................................... $ 16,609 $ 15,570
=========== ===========
COMMISSION EXPENSE increased 9.0% in the 1999 period to $2.4 million. Commission
expense increased due to an increase in direct life insurance premiums
collected.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS increased 48.7% in the 1999
period to $2.5 million. The increase in amortization is partially attributable
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 during the 1998 period was decreased by the
impact of a change in the interest rate assumption used to calculate deferred
acquisition costs.
OTHER UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 0.1% in the
1999 period to $11.7 million. Increases in salaries, benefits and other
operating expenses were partially offset by a $0.8 million decrease in home
office real estate expenses resulting from the exchange of home office
properties for common stock on March 30, 1998. In addition, incremental expenses
associated with the Year 2000 project totaled $0.3 million in the 1999 period
compared to $0.6 million in the 1998 period.
INTEREST EXPENSE increased 47.8% in the 1999 period to $0.5 million due to an
increase in the average debt outstanding.
OTHER EXPENSES increased 12.1% in the 1999 period to $4.0 million due
principally to an increase in the level of leasing, investment advisory and
financial services provided to affiliates and third parties.
13
INCOME TAXES decreased 14.1% in the 1999 period to $6.0 million. The effective
tax rate for the 1999 and 1998 periods was 32.4%. The effective tax rate was
lower than the federal statutory rate of 35% due primarily to (i) a tax benefit
associated with the payment of dividends on mandatorily redeemable preferred
stock of subsidiary trust, (ii) tax-exempt interest and (iii) tax-exempt
dividend income.
EQUITY INCOME (LOSS), NET OF RELATED INCOME TAXES, increased 167.5% in the 1999
period to income of $0.2 million. Equity income includes the Company's
proportionate share of gains and losses on investments owned by the underlying
companies, partnerships and joint ventures. The level of these gains and losses
is subject to fluctuation from period to period depending on the prevailing
economic environment and the timing of the sale of investments held by the
entities.
IMPACT OF YEAR 2000
Many of the Company's computer programs were originally written using two digits
rather than four to define a particular year. As a result, these computer
programs have time-sensitive software that may recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions to operations, including, but not limited
to, a temporary inability to process transactions, send premium notices and
calculate policy reserves and accruals. To a lesser extent, the Company is
dependent on various non-information technology systems, such as telephone
switches. The Year 2000 could also cause these systems to fail or malfunction.
During 1997, the Company completed a comprehensive assessment of the Year 2000
issue and developed a plan to address the issue in a timely manner. The plan
consists of the following four phases: (1) identification of all information
technology and non-information technology systems that have time-sensitive
software, (2) modification or replacement of the software/systems, (3) testing
the modified or new software/systems and (4) development of a contingency plan
to address any critical system that may malfunction. In addition, the Company
has ongoing formal communications with all of its significant vendors to keep
abreast of the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remediate their own Year 2000 issues.
The Company has and will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. With
only a few exceptions, the Year 2000 modifications and testing have been
completed. The exceptions are limited to a few third-party software packages for
which the Year 2000 compliant version was not available until the first quarter
of 1999. It is anticipated that the Company will complete its system
modifications and testing prior to any material impact on its operating systems.
Non-information technology systems that are not Year 2000 compliant have been
replaced or have been identified and will be replaced by December 31, 1999.
The total incremental cost of the Year 2000 project (those costs which would not
have been incurred had the Year 2000 issue not existed) attributable to
continuing operations is estimated to be $3.7 million and is being funded
through operating cash flows. Year 2000 modification costs incurred and charged
to expense totaled $0.3 million for the three months ended March 31, 1999 and
$0.6 million for the three months ended March 31, 1998. It is anticipated the
project costs to be charged to expense will total $0.4 million during the
remainder of 1999. The Company has also incurred internal costs associated with
the Year 2000 project. These costs, which are principally payroll related
expenses for information systems personnel, have not been separately accounted
for and, therefore, are not quantifiable.
Despite the Company's extensive efforts to modify or replace computer programs
and information systems that are time-sensitive, the Company could experience a
disruption to its operations as a result of the Year 2000. The Company has a
detailed contingency plan to address any critical system that may malfunction
despite the testing being performed. The contingency plan provides for the
availability of staff, defines and prioritizes tasks and outlines procedures to
fix any systems that are malfunctioning.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantees that these estimates will
be achieved and actual results could differ materially from those
14
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes and
similar uncertainties.
FINANCIAL CONDITION
INVESTMENTS
The Company's total investment portfolio decreased 0.8% to $3,005.9 million at
March 31, 1999 compared to $3,031.4 million at December 31, 1998. This decrease
is primarily the result of a $41.4 million decrease in unrealized appreciation
on fixed maturity securities classified as available for sale, partially offset
by positive cash flows from operations.
Over the last several years, the mix of the Company's life insurance business
has been shifting from traditional and interest sensitive products to variable
products. In addition, in an attempt to enhance the Company's persistency rate,
the Company has promoted an exchange program for the rollover of universal life
policies to variable universal life policies. The Company expects 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 the Company's separate accounts as opposed to the
general account investments. This trend is expected to impact the future growth
rate of the Company's investment portfolio and separate account assets.
The Company's investment portfolio is managed by its internal investment
professionals. 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. Management continually
reviews the returns on invested assets and changes the mix of invested assets as
deemed prudent under the current market environment to help maximize current
income.
The Company's investment portfolio is summarized in the table below:
MARCH 31, 1999 DECEMBER 31, 1998
--------------------------------- ---------------------------------
CARRYING VALUE PERCENT CARRYING VALUE PERCENT
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Public ........................... $ 1,831,251 60.9% $ 1,852,291 61.1%
144A private placement ........... 372,404 12.4 347,499 11.5
Private placement ................ 228,564 7.6 242,542 8.0
-------------- -------------- -------------- --------------
Total fixed maturities ........... 2,432,219 80.9 2,442,332 80.6
Equity securities .................. 35,307 1.2 35,287 1.2
Mortgage loans on real estate ...... 294,896 9.9 299,372 9.9
Investment real estate:
Acquired for debt ................ 532 -- 867 --
Investment ....................... 34,115 1.1 39,812 1.3
Policy loans ....................... 123,003 4.1 123,328 4.1
Other long-term investments ........ 10,022 0.3 10,210 0.3
Short-term investments ............. 75,809 2.5 80,228 2.6
-------------- -------------- -------------- --------------
Total investments ............. $ 3,005,903 100.0% $ 3,031,436 100.0%
============== ============== ============== ==============
As of March 31, 1999, 93.9% (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. The Company regularly reviews the percentage of its portfolio which
is invested in non-investment grade debt securities (NAIC designations 3 through
6). As of March 31, 1999, the investment in non-investment grade debt was 6.1%
of fixed maturity securities. At that time no single non-investment grade
holding exceeded 0.4% of total investments.
15
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, 1999
--------------------------------
NAIC DESIGNATION EQUIVALENT S&P RATINGS (1) CARRYING VALUE PERCENT
- --------------------------- ---------------------------------------------- -------------- --------------
(DOLLARS IN THOUSANDS)
1 (AAA, AA, A).................................. $ 1,525,215 62.7%
2 (BBB)......................................... 758,614 31.2
-------------- --------------
Total investment grade........................ 2,283,829 93.9
3 (BB).......................................... 115,394 4.8
4 (B)........................................... 24,959 1.0
5 (CCC, CC, C).................................. 4,640 0.2
6 In or near default............................ 3,397 0.1
-------------- --------------
Total below investment grade.................. 148,390 6.1
-------------- --------------
Total fixed maturities........................ $ 2,432,219 100.0%
============== ==============
- -----------
(1) Private placement securities are generally rated by the Securities
Valuation Office of the NAIC. Comparisons between NAIC designations and
S & P ratings are published by the NAIC. S & P has not rated some of
the fixed maturity securities in the Company's portfolio.
The following tables contain amortized cost and market value information on
fixed maturities and equity securities at March 31, 1999:
HELD FOR INVESTMENT
------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Fixed maturities - mortgage-backed
securities ............................ $ 440,331 $ 19,322 $ (659) $ 458,994
============== ============== ============== ==============
AVAILABLE FOR SALE
------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies .. $ 77,571 $ 2,625 $ (29) $ 80,167
State, municipal and other governments 61,035 2,131 (248) 62,918
Public utilities ....................... 137,120 6,572 (915) 142,777
Corporate securities ................... 998,001 45,018 (22,630) 1,020,389
Mortgage and asset-backed securities ... 641,802 17,823 (3,662) 655,963
Redeemable preferred stock ................. 30,548 665 (1,539) 29,674
-------------- -------------- -------------- --------------
Total fixed maturities ..................... $ 1,946,077 $ 74,834 $ (29,023) $ 1,991,888
============== ============== ============== ==============
Equity securities .......................... $ 39,680 $ 962 $ (5,335) $ 35,307
============== ============== ============== ==============
16
The carrying value and estimated market value of the Company's portfolio of
fixed maturity securities at March 31, 1999, by contractual maturity, are shown
below.
HELD FOR INVESTMENT AVAILABLE FOR SALE
--------------------------------- ---------------------------------
ESTIMATED ESTIMATED
AMORTIZED COST MARKET VALUE AMORTIZED COST MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Due in one year or less .................... $ -- $ -- $ 19,311 $ 19,564
Due after one year through five years ...... -- -- 200,913 202,761
Due after five years through ten years ..... -- -- 388,564 399,927
Due after ten years ........................ -- -- 664,939 683,999
-------------- -------------- -------------- --------------
-- -- 1,273,727 1,306,251
Mortgage and asset-backed securities ....... 440,331 458,994 641,802 655,963
Redeemable preferred stocks ................ -- -- 30,548 29,674
-------------- -------------- -------------- --------------
$ 440,331 $ 458,994 $ 1,946,077 $ 1,991,888
============== ============== ============== ==============
Mortgage and other asset-backed securities constitute a significant portion of
the Company's portfolio of securities. These securities were purchased at a time
when, management believed, these types of investments provided superior
risk-adjusted returns compared to returns of more conventional investments such
as corporate bonds and mortgage loans. These securities are diversified as to
collateral types, cash flow characteristics and maturity.
The return of principal on mortgage and other asset-backed securities occurs
more frequently and is more variable than that of more traditional fixed
maturity securities. The principal prepayment speeds (e.g., the rate of
individuals refinancing their home mortgages) can vary based on a number of
economic factors that can not be predicted with certainty. These factors include
the prevailing interest rate environment and general status of the economy.
Deviations in actual prepayment speeds from that originally expected can cause a
change in the yield earned on mortgage and asset-backed securities purchased at
a premium or discount. Increases in prepayment speeds, which typically occur in
a decreasing interest rate environment, generally increases 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 slows 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, the Company receives
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. The Company invests
in sequential tranches, which provide cash flow stability in that principal
payments do not occur until the previous tranches are paid off. In addition, to
provide call protection and more stable average lives, the Company invests 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. The Company does not purchase certain types of collateralized mortgage
obligations which it believes 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.
The following table sets forth the amortized cost, par value and carrying value
of the Company's mortgage and asset-backed securities at March 31, 1999,
summarized by type of security.
PERCENT
AMORTIZED CARRYING OF FIXED
COST PAR VALUE VALUE MATURITIES
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Residential mortgage-backed securities:
Sequential ...................................... $ 413,496 $ 417,378 $ 418,811 17.2%
Pass through .................................... 83,476 82,902 83,720 3.4
Planned and targeted amortization class ......... 47,923 47,999 47,868 2.0
Other ........................................... 12,817 13,050 12,806 0.5
------------ ------------ ------------ ------------
Total residential mortgage-backed securities ....... 557,712 561,329 563,205 23.1
Commercial mortgage-backed securities .............. 224,116 224,054 225,339 9.3
Other asset-backed securities ...................... 300,305 301,320 307,750 12.7
------------ ------------ ------------ ------------
Total mortgage and asset-backed securities ......... $ 1,082,133 $ 1,086,703 $ 1,096,294 45.1%
============ ============ ============ ============
17
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, 1999, the Company held $294.9 million or 9.9% 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, 1999, mortgages more than 60 days delinquent accounted for 0.4% of the
carrying value of the mortgage portfolio. The Company's 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 the Company's mortgage loan portfolio at March 31,
1999 include: Pacific (28%) which includes California and Washington; and West
South Central (26%) which includes Oklahoma and Texas. Mortgage loans on real
estate are also diversified by collateral types with office buildings (40%) and
retail facilities (38%) representing the largest holdings at March 31, 1999.
The Company's 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 the Company's insurance liabilities. At March 31, 1999,
the weighted average life of the fixed maturity portfolio, based on market
values and excluding convertible bonds, was approximately 8.1 years. Based on
the fixed income analytical system utilized by the Company, including its
mortgage backed prepayment assumptions, the effective duration of the fixed
income portfolio was 4.6 as of March 31, 1999.
OTHER ASSETS
Deferred policy acquisition costs increased 4.1% in the 1999 period to $211.8
million due principally to the capitalization of costs incurred with new sales.
Assets held in separate accounts increased $12.9 million, or 6.8%, to $203.0
million at March 31, 1999 due primarily to net transfers to the separate
accounts resulting from sales of the Company's variable products. At March 31,
1999, the Company had total assets of $3,638.6 million, a 0.3% decrease from
total assets at December 31, 1998.
LIABILITIES
Policy liabilities and accruals increased 0.4% to $2,373.0 million at March 31,
1999. The relatively modest increase in policy liabilities is partially
attributable to the Company's marketing emphasis on the sale of variable
products. As noted under the "Investments" section above, the shift in sales to
variable products will have an impact on the future growth rate of the Company's
policy liabilities and accruals as well as the separate account liabilities.
Deferred income taxes decreased 28.8% to $33.1 million at March 31, 1999 due to
the decrease in unrealized appreciation on fixed maturity securities classified
as available for sale. At March 31, 1999, the Company had total liabilities of
$2,972.6 million, a 0.2% increase from total liabilities at December 31, 1998.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased 3.3% to $564.6 million at March 31, 1999,
compared to $583.6 million at December 31, 1998. This decrease is principally
attributable to net unrealized depreciation of securities classified as
available for sale, partially offset by net income during three months ended
March 31, 1999.
At March 31, 1999, common stockholders' equity was $561.6 million, or $17.23 per
share, compared to $580.6 million, or $17.75 per share at December 31, 1998.
Included in stockholders' equity per common share is $0.83 at March 31, 1999 and
$1.61 at December 31, 1998 attributable to unrealized investment gains resulting
from marking the Company's fixed maturity securities classified as available for
sale to market value. The change in unrealized appreciation of fixed maturity
and equity securities classified as available for sale decreased stockholders'
equity $25.6 million during the three months ended March 31, 1999, after related
adjustments to deferred policy acquisition costs, value of insurance in force
acquired, unearned revenue reserve and deferred income taxes. The decrease in
18
unrealized appreciation on fixed maturity securities is the result of an
increase in market interest rates at March 31, 1999 compared to December 31,
1998.
LIQUIDITY
FBL FINANCIAL GROUP, INC.
Parent company cash inflows from operations consist primarily of dividends from
subsidiaries, if declared and paid, and fees which it charges the various
subsidiaries and affiliates for management of their operations and tax
settlements between the parent company and its subsidiaries. Cash outflows are
principally for salaries and other expenses related to providing such management
services, dividends on outstanding stock and interest on holding company debt
issued to a subsidiary. In addition, the parent company will on occasion enter
into capital transactions such as the acquisition of its common stock.
The Company received $25.0 million in cash on March 31, 1998 in connection with
the sale of Utah Insurance. The Company received an additional $1.2 million
(before applicable taxes) in the first quarter of 1999 and may receive
additional consideration during each of the four years in the period ending
December 31, 2003, in accordance with an earn-out provision included in the
underlying sales agreement. Under the earn-out arrangement, the Company and Farm
Bureau Mutual will 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 $25.0 million acquisition price. The earn-out calculation will be
performed and any settlement (subject to a maximum of $2.0 million per year)
will be made on a calendar year basis.
During the three months ended March 31, 1999, the Company repurchased 146,200
shares of Class A common stock for $2.8 million. The repurchases were made in
accordance with a $25.0 million stock repurchase plan approved by the Company's
Board of Directors on November 16, 1998.
The Company has a $25.0 million short-term line of credit with a bank to fund
stock repurchases. The line of credit, which expires on June 30, 1999, requires
the Company to maintain minimum tangible net worth and risk-based capital ratios
and limits the Company's ability to incur additional indebtedness. As of March
31, 1999, no related draws were made on the line of credit. It is anticipated
that any draws on the line of credit will be repaid during 1999 with dividends
from subsidiaries.
During the three months ended March 31, 1999, the parent company paid common and
preferred stock dividends totaling $2.7 million. Common and preferred stock
dividends totaling $2.7 million were also paid during the corresponding 1998
period. It is anticipated dividend requirements for the remainder of 1999 will
be $0.0825 per quarter per common share and $0.0075 per quarter per preferred
share, or approximately $7.9 million. In addition, interest payments on holding
company debt are estimated to be $3.8 million for the remainder of 1999.
FBL Financial Group, Inc. relies primarily on dividends from Farm Bureau Life
and Western Life to make any dividend payments to its stockholders and interest
payments on its debt. The ability of these companies to pay dividends to FBL
Financial Group, Inc. is limited by law to earned profits (statutory unassigned
surplus) as of the date the dividend is paid, as determined in accordance with
accounting practices prescribed by insurance regulatory authorities of the State
of Iowa for Farm Bureau Life and the State of Colorado for Western Life. In
addition, under the Iowa and Colorado Insurance Holding Company Acts, these
companies may not pay an "extraordinary" dividend without prior notice to and
approval by the respective insurance commissioner. An "extraordinary" dividend
is defined under the Iowa and Colorado Insurance Holding Company Acts 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. For the
remainder of 1999, the maximum amount legally available for distribution to FBL
Financial Group, Inc. without further regulatory approval is approximately $15.0
million from Farm Bureau Life and $14.3 million from Western Life.
19
INSURANCE OPERATIONS
The Life Companies' cash inflows consist primarily of premium income, deposits
to policyholder account balances, product charges on variable products, income
from investments, sales, maturities and calls of investments and repayments of
investment principal. The Life Companies' cash outflows are primarily related to
withdrawals of policyholder account balances, investment purchases, payment of
policy acquisition costs, policyholder benefits, income taxes, dividends and
current operating expenses. Life insurance companies generally produce a
positive cash flow which may be measured by the degree to which cash inflows are
adequate to meet benefit obligations to policyholders and normal operating
expenses as they are incurred. The remaining cash flow is generally used to
increase the asset base to provide funds 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 months ended March 31, 1999,
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 the year's 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 $21.1 million and $28.7 million in the three months
ended March 31, 1999 and 1998, respectively. These funds were primarily used to
increase the insurance companies' fixed maturity 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, Farm Bureau
Life is eligible to establish and borrow on a line of credit to provide it
additional liquidity. The line of credit available is based on the amount of
capital stock of the Federal Home Loan Bank of Des Moines owned by Farm Bureau
Life, which supported a borrowing capacity of $55.8 million as of March 31,
1999. Interest is payable at the current market rate on the date of issuance. As
of March 31, 1999, the line of credit was not established and no borrowings were
outstanding.
The Company has a $12.0 million line of credit with Farm Bureau Mutual in the
form of a revolving demand note. Borrowings on the note, which totaled $9.6
million at March 31, 1999, are being used to acquire assets that are leased to
certain affiliates, including Farm Bureau Mutual. Interest is payable at a rate
equal to the prime rate of a national bank (7.75% at March 31, 1999).
Management anticipates that funds to meet its short-term and long-term capital
expenditures, cash dividends to stockholders and operating cash needs will come
from existing capital and internally generated funds. Management believes 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 the
Company's anticipated cash obligations for the foreseeable future. The Company's
investment portfolio at March 31, 1999, included $75.8 million of short-term
investments and $268.6 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. Not withstanding the above, management currently
anticipates refinancing the Company's $24.5 million lease-backed note payable
that is due August, 1999.
The Company may from time to time review potential acquisition opportunities.
The Company anticipates that funding for any such acquisition may be provided
from available cash resources, debt or equity financing. As of March 31, 1999,
the Company had no material commitments for capital expenditures.
20
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
From time to time, the Company 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,
the Company notes that a variety of factors could cause the Company's actual
results and experiences to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements. The
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business, in addition to those identified under
"Impact of Year 2000", include but are not limited to the following:
* Changes to interest rate levels and stock market performance may impact
the Company's lapse rates, market value of investment portfolio and the
Company's ability to sell its life insurance products, notwithstanding
product features to mitigate the financial impact of such changes.
* The degree to which the Company's products are accepted by customers
and agents (including the agents of the Company's alliance partners)
will impact the Company's 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 the Company's products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There have been no material changes in the Company's market risks of financial
instruments since December 31, 1998.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended March 31,1999:
None
21
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 5, 1999
FBL FINANCIAL GROUP, INC.
By /s/ Thomas R. Gibson
--------------------------------------------------
Thomas R. Gibson
Chief Executive Officer (Principal Executive Officer)
By /s/ James W. Noyce
--------------------------------------------------
James W. Noyce
Chief Financial Officer (Principal Financial and
Accounting Officer)
22