UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: 31,080,126 shares of Class A
common stock and 1,192,990 shares of Class B common stock as of August 2, 1999.
ITEM 1. FINANCIAL STATEMENTS
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 1999 - $402,047; 1998 -
$516,729) ................................................................ $ 391,556 $ 492,288
Available for sale, at market (amortized cost: 1999 - $1,984,054; 1998 -
$1,862,861) .............................................................. 1,979,006 1,950,044
Equity securities, at market (cost: 1999 - $40,520; 1998 - $39,589) ............ 36,654 35,287
Mortgage loans on real estate .................................................. 306,421 299,372
Investment real estate, less allowances for depreciation of $4,376 in 1999
and $4,223 in 1998 .......................................................... 34,336 40,679
Policy loans ................................................................... 123,757 123,328
Other long-term investments .................................................... 10,071 10,210
Short-term investments ......................................................... 76,207 80,228
------------ ------------
Total investments ................................................................. 2,958,008 3,031,436
Cash and cash equivalents ......................................................... 11,269 4,516
Securities and indebtedness of related parties .................................... 63,118 65,291
Accrued investment income ......................................................... 34,313 34,318
Accounts and notes receivable ..................................................... 838 833
Amounts receivable from affiliates ................................................ 1,703 4,020
Reinsurance recoverable ........................................................... 3,494 4,711
Deferred policy acquisition costs ................................................. 220,725 203,581
Value of insurance in force acquired .............................................. 15,734 14,533
Property and equipment, less allowances for depreciation of $39,248 in 1999
and $37,100 in 1998 ........................................................... 59,867 55,250
Current income taxes recoverable .................................................. 3,374 13,185
Goodwill, less accumulated amortization of $3,832 in 1999 and $3,484 in
1998 .......................................................................... 9,600 9,948
Other assets ...................................................................... 21,320 19,227
Assets held in separate accounts .................................................. 230,348 190,111
------------ ------------
Total assets .............................................................. $ 3,633,711 $ 3,650,960
============ ============
1
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products ......................................... $ 1,609,595 $ 1,596,471
Traditional life insurance and accident and health products ......... 742,564 731,873
Unearned revenue reserve ............................................ 26,535 25,373
Other policy claims and benefits ....................................... 10,988 10,625
------------ ------------
2,389,682 2,364,342
Other policyholders' funds:
Supplementary contracts without life contingencies ..................... 158,449 147,755
Advance premiums and other deposits .................................... 83,920 84,206
Accrued dividends ...................................................... 12,491 13,797
------------ ------------
254,860 245,758
Short-term debt ........................................................... 24,500 24,500
Short-term debt payable to affiliate ...................................... 10,801 8,626
Amounts payable to affiliates ............................................. 300 511
Long-term debt ............................................................ -- 71
Deferred income taxes ..................................................... 17,267 46,497
Other liabilities ......................................................... 66,336 85,453
Liabilities related to separate accounts .................................. 230,348 190,111
------------ ------------
Total liabilities ................................................... 2,994,094 2,965,869
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock of subsidiary
trust .................................................................. 97,000 97,000
Other ..................................................................... 67 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 31,105,719 shares in 1999 and 31,512,113 shares
in 1998 ................................................................ 42,437 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 (loss) ............................. (6,266) 50,050
Retained earnings ......................................................... 495,821 480,946
------------ ------------
Total stockholders' equity ............................................. 542,550 583,588
------------ ------------
Total liabilities and stockholders' equity .......................... $ 3,633,711 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues:
Interest sensitive product charges ..................... $ 13,941 $ 13,275 $ 27,373 $ 25,753
Traditional life insurance and accident and health
premiums .......................................... 27,556 26,273 50,967 49,291
Net investment income .................................. 58,843 58,603 114,830 114,673
Realized gains (losses) on investments ................. 1,512 (4,169) (728) (2,857)
Other income ........................................... 4,910 5,024 9,839 10,308
------------ ------------ ------------ ------------
Total revenues .................................... 106,762 99,006 202,281 197,168
Benefits and expenses:
Interest sensitive product benefits .................... 30,903 29,508 60,220 61,381
Traditional life insurance and accident and health
benefits .......................................... 14,042 16,019 29,795 29,167
Increase in traditional life and accident and health
future policy benefits ............................ 6,032 7,065 10,229 12,410
Distributions to participating policyholders ........... 6,773 6,723 13,212 13,308
Underwriting, acquisition and insurance expenses ....... 20,233 16,470 36,842 32,040
Interest expense ....................................... 514 398 1,061 768
Other expenses ......................................... 3,707 3,803 7,709 7,374
------------ ------------ ------------ ------------
Total benefits and expenses ....................... 82,204 79,986 159,068 156,448
------------ ------------ ------------ ------------
24,558 19,020 43,213 40,720
Income taxes ................................................ (8,030) (5,804) (14,065) (12,829)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily
redeemable preferred stock of subsidiary trust .... (1,212) (1,212) (2,425) (2,425)
Other .................................................. (74) (84) (60) (168)
Equity income, net of related income taxes .................. 1,686 950 1,890 648
------------ ------------ ------------ ------------
Income from continuing operations ........................... 16,928 12,870 28,553 25,946
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 .................................................. 16,928 12,870 28,553 26,412
Dividends on Series B preferred stock ....................... (38) (38) (75) (75)
------------ ------------ ------------ ------------
Net income applicable to common stock ....................... $ 16,890 $ 12,832 $ 28,478 $ 26,337
============ ============ ============ ============
Earnings per common share:
Income from continuing operations ...................... $ 0.52 $ 0.39 $ 0.87 $ 0.75
Income from discontinued operations .................... -- -- -- 0.01
------------ ------------ ------------ ------------
Earnings per common share .............................. $ 0.52 $ 0.39 $ 0.87 $ 0.76
============ ============ ============ ============
Earnings per common share - assuming dilution:
Income from continuing operations ...................... $ 0.51 $ 0.38 $ 0.86 $ 0.73
Income from discontinued operations .................... -- -- -- 0.01
------------ ------------ ------------ ------------
Earnings per common share - assuming dilution .......... $ 0.51 $ 0.38 $ 0.86 $ 0.74
============ ============ ============ ============
Cash dividends per common share ............................ $ 0.083 $ 0.075 $ 0.165 $ 0.150
============ ============ ============ ============
See accompanying notes.
3
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
ACCUMULATED
CLASS A CLASS B OTHER TOTAL
PREFERRED COMMON COMMON COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK STOCK INCOME (LOSS) EARNINGS EQUITY
----------- ----------- ----------- ------------ ----------- -------------
Balance at January 1, 1998 ................ $ 3,000 $ 42,907 $ 7,567 $ 48,559 $ 503,282 $ 605,315
Comprehensive income:
Net income for six months ended
June 30, 1998 .................... -- -- -- -- 26,412 26,412
Change in net unrealized investment
gains/losses ..................... -- -- -- 3,785 -- 3,785
-----------
Total comprehensive income ............. 30,197
Acquisition of 2,536,112 shares of
common stock in exchange for
properties .......................... -- (3,340) -- -- (42,310) (45,650)
Purchase of 961,536 shares of common
stock ............................... -- (1,224) -- -- (23,784) (25,008)
Issuance of 121,936 shares of common
stock under stock option plan,
including related income tax benefit -- 1,669 -- -- -- 1,669
Dividends on preferred stock ........... -- -- -- -- (75) (75)
Dividends on common stock .............. -- -- -- -- (5,141) (5,141)
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 .................. $ 3,000 $ 40,012 $ 7,567 $ 52,344 $ 458,384 $ 561,307
=========== =========== =========== =========== =========== ===========
Balance at January 1, 1999 ................ $ 3,000 $ 42,034 $ 7,558 $ 50,050 $ 480,946 $ 583,588
Comprehensive income (loss):
Net income for six months ended
June 30, 1999 .................... -- -- -- -- 28,553 28,553
Change in net unrealized investment
gains/losses ..................... -- -- -- (56,316) -- (56,316)
-----------
Total comprehensive loss ............... (27,763)
Purchase of 461,945 shares of common
stock ............................... -- (624) -- -- (8,230) (8,854)
Issuance of 55,551 shares of common
stock under employee benefit and
stock option plans, including
related income tax benefit .......... -- 1,027 -- -- -- 1,027
Dividends on preferred stock ........... -- -- -- -- (75) (75)
Dividends on common stock .............. -- -- -- -- (5,373) (5,373)
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 .................. $ 3,000 $ 42,437 $ 7,558 $ (6,266) $ 495,821 $ 542,550
=========== =========== =========== =========== =========== ===========
During the three months ended June 30, 1999 and 1998, comprehensive income
(loss) totaled ($13.8) million and $14.4 million, respectively.
See accompanying notes.
4
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 1998
------------ ------------
OPERATING ACTIVITIES
Continuing operations:
Net income .................................................................... $ 28,553 $ 25,946
Adjustments to reconcile net income to net cash provided by continuing
operations:
Adjustments related to interest sensitive products:
Interest credited to account balances .............................. 51,805 53,217
Charges for mortality and administration ........................... (26,908) (25,772)
Deferral of unearned revenues ...................................... 1,217 1,309
Amortization of unearned revenue reserve ........................... (614) (426)
Provision for depreciation and amortization .............................. 7,549 4,158
Net gains and losses related to investments held by broker-dealer
subsidiaries ....................................................... (9) 77
Realized losses on investments ........................................... 728 2,857
Increase in traditional life and accident and health benefit accruals .... 11,256 12,348
Policy acquisition costs deferred ........................................ (17,340) (16,927)
Amortization of deferred policy acquisition costs ........................ 6,038 4,455
Provision for deferred income taxes ...................................... 1,093 (2,379)
Other .................................................................... (11,327) (915)
------------ ------------
Net cash provided by continuing operations ......................................... 52,041 57,948
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 .......................................... 52,041 60,420
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment ........................................ 102,009 48,071
Fixed maturities - available for sale ......................................... 124,424 177,597
Equity securities ............................................................. 4,621 16,819
Mortgage loans on real estate ................................................. 33,361 33,242
Investment real estate ........................................................ 5,535 150
Policy loans .................................................................. 14,656 14,467
Other long-term investments ................................................... 667 914
Short-term investments - net .................................................. 4,021 --
------------ ------------
289,294 291,260
5
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 1998
------------ ------------
INVESTING ACTIVITIES (CONTINUED):
Acquisition of investments:
Fixed maturities - available for sale ....................................... $ (248,374) $ (219,439)
Equity securities ........................................................... (5,112) (1,381)
Mortgage loans on real estate ............................................... (40,596) (15,460)
Investment real estate ...................................................... (161) (2,624)
Policy loans ................................................................ (15,085) (15,493)
Other long-term investments ................................................. (519) (1,714)
Short-term investments - net ................................................ -- (45,313)
------------ ------------
(309,847) (301,424)
Proceeds from disposal, repayments of advances and other distributions from
equity investees ............................................................ 5,888 2,436
Investments in and advances to equity investees .................................. (2,653) (2,797)
Net proceeds from sale of discontinued operations ................................ 1,229 24,844
Net purchases of property and equipment and other ................................ (9,817) (4,438)
Investing activities of discontinued operations .................................. -- (2,474)
------------ ------------
Net cash provided by (used in) investing activities .............................. (25,906) 7,407
FINANCING ACTIVITIES
Receipts from interest sensitive and variable products credited to policyholder
account balances ............................................................ 136,378 133,978
Return of policyholder account balances on interest sensitive and variable
products .................................................................... (137,457) (173,138)
Proceeds from short-term debt with affiliate ..................................... 2,175 4,171
Repayments of long-term debt ..................................................... (71) (3)
Distributions on company-obligated mandatorily redeemable preferred stock of
subsidiary trust ............................................................ (2,425) (2,425)
Other distributions to minority interests ........................................ (4,646) (268)
Purchase of common stock ......................................................... (8,854) (25,008)
Issuance of common stock ......................................................... 966 1,103
Dividends paid ................................................................... (5,448) (5,216)
------------ ------------
Net cash used in financing activities ............................................ (19,382) (66,806)
------------ ------------
Increase in cash and cash equivalents ............................................ 6,753 1,021
Cash and cash equivalents at beginning of period ................................. 4,516 2,397
------------ ------------
Cash and cash equivalents at end of period ....................................... $ 11,269 $ 3,418
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest .................................................................... $ 1,015 $ 744
Income taxes ................................................................ 4,108 13,059
See accompanying notes.
6
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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- and six-month periods ended June
30, 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 three- and
six-month periods ended June 30, 1999 by $0.1 million and $0.2 million,
respectively.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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's effective date for the Company has been extended to the fiscal year
beginning January 1, 2001, 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 (losses) as reported were comprised of the
following:
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Unrealized appreciation (depreciation) on fixed maturity and equity securities
available for sale .......................................................... $ (8,914) $ 82,881
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs ........................................... 578 (5,264)
Value of insurance in force acquired ........................................ 374 (1,306)
Unearned revenue reserve .................................................... 26 585
Provision for deferred income taxes .............................................. 2,778 (26,914)
------------ ------------
(5,158) 49,982
Proportionate share of net unrealized investment gains (losses)
of equity investees ......................................................... (1,108) 68
------------ ------------
Net unrealized investment gains (losses) ......................................... $ (6,266) $ 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 June 30, 1999. The Company had
no outstanding debt under this credit arrangement as of June 30, 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 $10.8 million at June 30, 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 (8.00% at June 30, 1999). Rental income from the related leases
includes a provision for interest on the carrying value of the assets.
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 June 30, 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 June 30, 1999 are
as follows: 1999 - $0.9 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 June 30, 1999 and
December 31, 1998, the Company maintained a $0.3 million reserve for expected
future cash flow deficiencies. The limited partnership has a $5.3 million
mortgage loan, secured by the shopping center, with Farm Bureau Mutual.
8
6. EARNINGS PER SHARE
The following table sets forth the computation of earnings per common share and
earnings per common share - assuming dilution:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Income from continuing operations ...................... $ 16,928 $ 12,870 $ 28,553 $ 25,946
Income from discontinued operations .................... -- -- -- 466
------------ ------------ ------------ ------------
Net income ............................................. 16,928 12,870 28,553 26,412
Dividends on Series B preferred stock .................. (38) (38) (75) (75)
------------ ------------ ------------ ------------
Numerator for earnings per common
share-income available to common
stockholders .................................. $ 16,890 $ 12,832 $ 28,478 $ 26,337
============ ============ ============ ============
Denominator:
Denominator for earnings per common share
- weighted-average shares ......................... 32,431,403 33,180,824 32,563,316 34,555,377
Effect of dilutive securities - employee stock
options ........................................... 637,608 896,091 649,158 854,646
------------ ------------ ------------ ------------
Denominator for diluted earnings per
common share - adjusted weighted-
average shares ................................ 33,069,011 34,076,915 33,212,474 35,410,023
============ ============ ============ ============
Earnings per common share:
Income from continuing operations ...................... $ 0.52 $ 0.39 $ 0.87 $ 0.75
Income from discontinued operations .................... -- -- -- 0.01
------------ ------------ ------------ ------------
Earnings per common share .............................. $ 0.52 $ 0.39 $ 0.87 $ 0.76
============ ============ ============ ============
Earnings per common share - assuming dilution:
Income from continuing operations ...................... $ 0.51 $ 0.38 $ 0.86 $ 0.73
Income from discontinued operations .................... -- -- -- 0.01
------------ ------------ ------------ ------------
Earnings per common share - assuming
dilution .......................................... $ 0.51 $ 0.38 $ 0.86 $ 0.74
============ ============ ============ ============
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
9
Financial information concerning the Company's operating segments is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Revenues from external customers:
Life insurance ........................ $ 101,822 $ 94,197 $ 192,734 $ 188,484
All other ............................. 10,116 10,191 19,298 18,793
------------ ------------ ------------ ------------
Subtotal .............................. 111,938 104,388 212,032 207,277
Eliminations .......................... (5,176) (5,382) (9,751) (10,109)
------------ ------------ ------------ ------------
Consolidated .......................... $ 106,762 $ 99,006 $ 202,281 $ 197,168
============ ============ ============ ============
Intersegment revenues:
Life insurance ........................ $ 233 $ 118 $ 453 $ 541
All other ............................. 4,943 5,264 9,298 9,568
------------ ------------ ------------ ------------
Subtotal .............................. 5,176 5,382 9,751 10,109
Eliminations .......................... (5,176) (5,382) (9,751) (10,109)
------------ ------------ ------------ ------------
Consolidated .......................... $ -- $ -- $ -- $ --
============ ============ ============ ============
Income (loss) from continuing operations:
Life insurance ........................ $ 16,935 $ 13,004 $ 29,008 $ 26,473
All other ............................. (7) (134) (455) (527)
------------ ------------ ------------ ------------
Consolidated .......................... $ 16,928 $ 12,870 $ 28,553 $ 25,946
============ ============ ============ ============
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 AND RESTRUCTURING
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, consisting of $25.0 million in the
first quarter of 1998 and $1.2 million in the first quarter of 1999 (accrued at
December 31, 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 June 30, 1999.
Receipts as a result of the earn-out provision are recorded as an adjustment to
the gain on the disposal of the discontinued segment.
Revenues from the discontinued property-casualty operations for the three months
ended March 31, 1998 (period prior to disposal) totaled $12.9 million.
The Company committed to the closing of an administrative service center and the
merger of two life insurance subsidiaries during the second quarter of 1999. As
a result of the closing of the service center, a leased property will be
vacated, approximately 26 job positions will be eliminated and moving costs will
be incurred. During 1999, the Company incurred expenses totaling $1.6 million
($1.5 million of which was accrued at June 30, 1999) for related severance
benefits, lease costs and other costs primarily associated with closing the
service center. The restructuring expenses are recorded in the underwriting,
acquisition and insurance expenses line of the 1999 Consolidated Statement of
Income. The administrative service center is expected to be closed during the
third quarter of 1999. The life insurance subsidiaries were merged effective
July 1, 1999.
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). EFFECTIVE JULY 1, 1999, WESTERN
LIFE WAS MERGED INTO FARM BUREAU LIFE.
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 (pages 9
and 10) for additional information regarding segment information.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
NET INCOME APPLICABLE TO COMMON STOCK increased 31.6% in the second quarter of
1999 to $16.9 million and 8.1% in the six months ended June 30, 1999 to $28.5
million. The increase in net income is primarily attributable 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, increased 3.5% in the second quarter of 1999 to $16.0 million
and 3.3% in the six months ended June 30, 1999 to $28.9 million. The following
is a reconciliation of net income to adjusted operating income.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income applicable to common stock ........ $ 16,890 $ 12,832 $ 28,478 $ 26,337
Adjustments:
Net realized losses (gains) on
investments .......................... (913) 2,608 390 1,794
Gain on disposal of property-casualty
operations ........................... -- -- -- (179)
------------ ------------ ------------ ------------
Adjusted operating income applicable to
common stock ......................... $ 15,977 $ 15,440 $ 28,868 $ 27,952
------------ ------------ ------------ ------------
Earnings per common share - assuming
dilution ............................. $ 0.51 $ 0.38 $ 0.86 $ 0.74
============ ============ ============ ============
Adjusted operating income per common
share - assuming dilution ............ $ 0.48 $ 0.45 $ 0.87 $ 0.79
============ ============ ============ ============
The adjustment for realized gains and losses on investments noted in the table
above is net of adjustments for that portion of amortization of deferred policy
acquisition costs, unearned revenue reserve, value of insurance in force
acquired and income taxes attributable to such gains and losses.
The change in earnings per common share from period to period is positively
impacted by a decrease in the weighted average common shares outstanding during
the eighteen-month period ended June 30, 1999. Weighted average common shares
outstanding, assuming dilution, decreased 3.0% in the second quarter of 1999 to
33.1 million and decreased 6.2% in the six months ended June 30, 1999 to 33.2
million. These decreases are the result of acquisitions of common stock by the
Company.
11
A summary of the Company's premiums and product charges is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Interest sensitive product charges .................... $ 13,941 $ 13,275 $ 27,373 $ 25,753
Traditional life insurance and accident and health
premiums ......................................... 27,556 26,273 50,967 49,291
------------ ------------ ------------ ------------
Total ............................................ $ 41,497 $ 39,548 $ 78,340 $ 75,044
============ ============ ============ ============
INTEREST SENSITIVE PRODUCT CHARGES increased 5.0% in the second quarter of 1999
to $13.9 million and 6.3% in the six months ended June 30, 1999 to $27.4
million. These increases are due primarily to increased cost of insurance
charges resulting from an increase in the volume and age of business in force.
In addition, income attributable to mortality and expense fees have increased as
a result of growth in variable product account balances.
TRADITIONAL LIFE AND ACCIDENT AND HEALTH PREMIUMS increased 4.9% in the second
quarter of 1999 to $27.6 million and 3.4% in the six months ended June 30, 1999
to $51.0 million. During the six-month period, traditional life premiums
increased 1.9% to $44.2 million and accident and health premiums increased 14.7%
to $6.8 million. Management believes the modest increase in the sale of
traditional life insurance products is due to a marketing emphasis placed on the
sale of variable universal life insurance contracts. Premiums collected on
variable universal life insurance products increased 11.7% to $20.9 million in
the six months ended June 30, 1999. The increase in accident and health premiums
is primarily the result of the recapture of certain reinsurance ceded business.
NET INVESTMENT INCOME increased 0.4% in the second quarter of 1999 to $58.8
million and 0.1% in the six months ended June 30, 1999 to $114.8 million. The
increases are principally due to an increase in average invested assets. For the
six-month period, average invested assets, excluding the impact of recording
certain fixed maturity securities to market value, increased 2.7% to $2,961.2
million. The annualized yield earned on average invested assets decreased to
7.91% in the six months ended June 30, 1999 compared to 8.11% in the respective
1998 period due to a general decline in market interest rates during 1998. Fee
income from mortgage loan prepayments and bond calls in the second quarter of
1999 and 1998 totaled $3.0 million and $4.0 million, respectively. Revenue from
these sources during the six-month periods totaled $4.6 million in 1999 and $5.8
million in 1998. In addition, the Company recorded $1.7 million in interest
income during the second quarter of 1999 relating to settlement of a fixed
maturity security that had been in default. The Company had discontinued the
accrual of interest on this security during 1996. This revenue is not expected
to be a consistently recurring source of income for the Company at these levels.
REALIZED GAINS (LOSSES) ON INVESTMENTS increased 136.3% in the second quarter of
1999 to a gain of $1.5 million and increased 74.5% in the six months ended June
30, 1999 to a loss of $0.7 million. Included in realized gains (losses) during
the second quarter of 1999 and 1998 were $0.5 million and $6.5 million,
respectively, in realized losses resulting from writedowns of investments that
became other-than-temporarily impaired. For the six-month periods, impairment
losses totaled $2.7 million in 1999 and $8.1 million in 1998. 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 2.3% in the second quarter of 1999 to $4.9 million and
4.5% in the six months ended June 30, 1999 to $9.8 million. The decrease in the
six-month period 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 in the second quarter is due primarily to a
decrease in the level of marketing services related to the sale of mutual funds
and variable products.
12
A summary of the Company's policy benefits is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Policy benefits:
Interest sensitive product benefits .................. $ 30,903 $ 29,508 $ 60,220 $ 61,381
Traditional life insurance and accident and health
benefits ......................................... 14,042 16,019 29,795 29,167
Increase in traditional and accident and health
future policy benefits ........................... 6,032 7,065 10,229 12,410
Distributions to participating policyholders ......... 6,773 6,723 13,212 13,308
------------ ------------ ------------ ------------
Total ........................................... $ 57,750 $ 59,315 $ 113,456 $ 116,266
============ ============ ============ ============
INTEREST SENSITIVE PRODUCT BENEFITS increased 4.7% in the second quarter of 1999
to $30.9 million and decreased 1.9% in the six months ended June 30, 1999 to
$60.2 million. The components of interest sensitive product benefits, along with
selected average interest crediting rates are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Interest credited to account balances .................... $ 25,901 $ 26,391 $ 51,804 $ 53,218
Death benefits in excess of related account balances ..... 5,002 3,117 8,416 8,163
Average crediting rate for universal life liabilities .... 5.96% 6.07% 5.92% 6.04%
Average crediting rate for annuity liabilities ........... 5.50% 5.85% 5.56% 5.83%
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. Universal life and variable
universal life insurance death benefits can tend to fluctuate from period to
period as a result of changes in mortality experience.
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH BENEFITS, INCLUDING THE
RELATED CHANGES IN RESERVES, decreased 13.0% in the second quarter of 1999 to
$20.1 million and 3.7% in the six months ended June 30, 1999 to $40.0 million.
The decrease in the second quarter is partly due to a $1.6 million decrease in
the change in accident and health reserves resulting from favorable disability
income claim experience. Death and surrender benefits on traditional life
products decreased $2.2 million for the second quarter and increased $1.2
million for the six-month period. Traditional life insurance and accident and
health benefits can tend to fluctuate from period to period as a result of
changes in mortality and morbidity experience.
DISTRIBUTIONS TO PARTICIPATING POLICYHOLDERS increased 0.7% in the second
quarter of 1999 to $6.8 million and decreased 0.7% in the six months ended June
30, 1999 to $13.2 million. The decrease in the six-month period is primarily
attributable to a decrease in the average interest rate used in the dividend
formula for these policies. The interest rate was 5.84% at June 30, 1999 and
5.97% at June 30, 1998. For the second quarter, this was offset by the impact of
an increase in the age of the participating business in force.
A summary of the Company's underwriting, acquisition and insurance expenses is
as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals .............. $ 2,661 $ 2,475 $ 5,070 $ 4,686
Amortization of deferred policy acquisition costs . 3,517 2,760 6,038 4,455
Other underwriting, acquisition and insurance
expenses, net of deferrals .................... 14,055 11,235 25,734 22,899
------------ ------------ ------------ ------------
Total ......................................... $ 20,233 $ 16,470 $ 36,842 $ 32,040
============ ============ ============ ============
13
COMMISSION EXPENSE increased 7.5% in the second quarter of 1999 to $2.7 million
and increased 8.2% in the six months ended June 30, 1999 to $5.1 million.
Commission expense increased due primarily to an increase in direct life
insurance premiums collected.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS increased 27.4% in the second
quarter of 1999 to $3.5 million and increased 35.5% in the six months ended June
30, 1999 to $6.0 million. The increases in amortization are 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 was decreased during 1998 by the
impact of a change in the interest rate assumption used to calculate deferred
acquisition costs. For the second quarter of 1999, amortization also increased
due to the impact of realized gains and losses on investments backing the
related policyholder liabilities.
OTHER UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 25.1% in the
second quarter of 1999 to $14.1 million and increased 12.4% in the six months
ended June 30, 1999 to $25.7 million. In the six-month periods, increases in
salaries, benefits and other operating expenses were partially offset by a $0.9
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 during the six-month
periods totaled $0.6 million in 1999 and $1.0 million in 1998. Included in
insurance expenses for the second quarter of 1999 are restructuring charges
totaling $1.6 million relating to the closing of an administrative service
center. See "Restructuring".
INTEREST EXPENSE increased 29.1% in the second quarter of 1999 to $0.5 million
and 38.2% in the six months ended June 30, 1999 to $1.1 million due primarily to
an increase in the average debt outstanding.
OTHER EXPENSES decreased 2.5% in the second quarter of 1999 to $3.7 million and
increased 4.5% in the six months ended June 30, 1999 to $7.7 million. The
increase for the six-month period is due principally to an increase in the level
of leasing services provided to affiliates and third parties. For the second
quarter, the increase in leasing services was offset by a decrease in the level
of marketing services.
INCOME TAXES increased 38.4% in the second quarter of 1999 to $8.0 million and
9.6% in the six months ended June 30, 1999 to $14.1 million. The effective tax
rate for the six months ended June 30, 1999 was 32.5% compared to 31.5% for the
respective period in 1998. 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, NET OF RELATED INCOME TAXES, increased 77.5% in the second
quarter of 1999 to $1.7 million and 191.7% in the six months ended June 30, 1999
to $1.9 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.
RESTRUCTURING
The Company committed to the closing of an administrative service center and the
merger of two life insurance subsidiaries during the second quarter of 1999. As
a result of the closing of the service center, a leased property will be
vacated, approximately 26 job positions will be eliminated and moving costs will
be incurred. During the second quarter of 1999, the Company incurred expenses
totaling $1.6 million ($1.5 million of which was accrued at June 30, 1999) for
related severance benefits, lease costs and other costs primarily associated
with closing the service center. The administrative service center is expected
to be closed during the third quarter of 1999. The life insurance subsidiaries
were merged effective July 1, 1999.
Pre-tax cost savings from these two transactions are estimated to be $0.5
million for the second half of 1999 and $1.4 million annually beginning in 2000.
14
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 utilized both internal and external resources to reprogram, or
replace, and test the software for Year 2000 modifications. All Year 2000
modifications have been completed and, with the exception of one third-party
software package for which the Year 2000 compliant version was not available
until the first quarter of 1999, testing has also been completed. In addition,
ongoing compliance testing is being performed to help ensure that all
programming changes currently being made to the systems are Year 2000 compliant.
It is anticipated that the Company will complete its 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 and $0.4 million for the quarters ended June 30,
1999 and 1998, respectively, and $0.6 million and $1.0 million for the six-month
periods ending June 30, 1999 and 1998, respectively. It is anticipated the
project costs to be charged to expense will total $0.2 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 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.
15
FINANCIAL CONDITION
INVESTMENTS
The Company's total investment portfolio decreased 2.4% to $2,958.0 million at
June 30, 1999 compared to $3,031.4 million at December 31, 1998. This decrease
is primarily the result of a $92.2 million decrease in unrealized appreciation
on fixed maturity securities classified as available for sale, partially offset
by positive cash flows from operations. The decrease in unrealized appreciation
on fixed maturity securities is the result of an increase in market interest
rates at June 30, 1999 compared to December 31, 1998.
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:
JUNE 30, 1999 DECEMBER 31, 1998
----------------------------- -----------------------------
CARRYING VALUE PERCENT CARRYING VALUE PERCENT
-------------- ------------ -------------- ------------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Public ....................... $ 1,764,005 59.6% $ 1,852,291 61.1%
144A private placement ....... 408,526 13.8 347,499 11.5
Private placement ............ 198,031 6.7 242,542 8.0
------------ ------------ ------------ ------------
Total fixed maturities ....... 2,370,562 80.1 2,442,332 80.6
Equity securities ............... 36,654 1.3 35,287 1.2
Mortgage loans on real estate ... 306,421 10.4 299,372 9.9
Investment real estate:
Acquired for debt ............ 526 -- 867 --
Investment ................... 33,810 1.1 39,812 1.3
Policy loans .................... 123,757 4.2 123,328 4.1
Other long-term investments ..... 10,071 0.3 10,210 0.3
Short-term investments .......... 76,207 2.6 80,228 2.6
------------ ------------ ------------ ------------
Total investments ........ $ 2,958,008 100.0% $ 3,031,436 100.0%
============ ============ ============ ============
As of June 30, 1999, 93.8% (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 June 30, 1999, the investment in non-investment grade debt was 6.2% of
fixed maturity securities. At that time no single non-investment grade holding
exceeded 0.3% of total investments.
16
The following table sets forth the credit quality, by NAIC designation and
Standard & Poors (S & P) rating equivalents, of fixed maturity securities:
FIXED MATURITY SECURITIES BY NAIC DESIGNATION
JUNE 30, 1999
-------------------------------
NAIC DESIGNATION EQUIVALENT S&P RATINGS(1) CARRYING VALUE PERCENT
- ---------------- ---------------------------------------------------------- -------------- -------------
(DOLLARS IN THOUSANDS)
1 (AAA, AA, A) .............................................. $ 1,430,111 60.3%
2 (BBB) ..................................................... 792,198 33.5
-------------- -------------
Total investment grade .................................... 2,222,309 93.8
3 (BB) ...................................................... 111,936 4.7
4 (B) ....................................................... 28,705 1.2
5 (CCC, CC, C) .............................................. 7,612 0.3
6 In or near default ........................................ -- --
-------------- -------------
Total below investment grade .............................. 148,253 6.2
-------------- -------------
Total fixed maturities .................................... $ 2,370,562 100.0%
============== =============
- ---------------
(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 June 30, 1999:
HELD FOR INVESTMENT
---------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Fixed maturities - mortgage-backed
securities ............................... $ 391,556 $ 11,565 $ (1,074) $ 402,047
============== ============== ============== ==============
AVAILABLE FOR SALE
---------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies .... $ 75,072 $ 805 $ (214) $ 75,663
State, municipal and other governments ... 57,525 793 (360) 57,958
Public utilities ......................... 127,683 3,194 (1,832) 129,045
Corporate securities ..................... 1,031,124 26,418 (29,913) 1,027,629
Mortgage and asset-backed securities ..... 650,431 7,335 (10,523) 647,243
Redeemable preferred stock .................... 42,219 782 (1,533) 41,468
-------------- -------------- -------------- --------------
Total fixed maturities ........................ $ 1,984,054 $ 39,327 $ (44,375) $ 1,979,006
============== ============== ============== ==============
Equity securities ............................. $ 40,520 $ 1,265 $ (5,131) $ 36,654
============== ============== ============== ==============
17
The carrying value and estimated market value of the Company's portfolio of
fixed maturity securities at June 30, 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 ....................... $ -- $ -- $ 27,087 $ 27,312
Due after one year through five years ......... -- -- 220,895 221,648
Due after five years through ten years ........ -- -- 387,816 386,305
Due after ten years ........................... -- -- 655,606 655,030
-------------- -------------- -------------- --------------
-- -- 1,291,404 1,290,295
Mortgage and asset-backed securities .......... 391,556 402,047 650,431 647,243
Redeemable preferred stocks ................... -- -- 42,219 41,468
-------------- -------------- -------------- --------------
$ 391,556 $ 402,047 $ 1,984,054 $ 1,979,006
============== ============== ============== ==============
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 cannot 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, 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 June 30, 1999,
summarized by type of security.
PERCENT OF
AMORTIZED CARRYING FIXED
COST PAR VALUE VALUE MATURITIES
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Residential mortgage-backed securities:
Sequential ............................................. $ 391,703 $ 395,306 $ 393,373 16.6%
Pass through ........................................... 80,711 80,169 78,725 3.3
Planned and targeted amortization class ................ 44,136 44,209 44,071 1.9
Other .................................................. 12,497 12,736 12,487 0.5
---------- ---------- ---------- ----------
Total residential mortgage-backed securities ............... 529,047 532,420 528,656 22.3
Commercial mortgage-backed securities ...................... 205,663 205,335 204,381 8.6
Other asset-backed securities .............................. 307,277 308,288 305,762 12.9
---------- ---------- ---------- ----------
Total mortgage and asset-backed securities ................. $1,041,987 $1,046,043 $1,038,799 43.8%
========== ========== ========== ==========
18
The commercial and other asset-backed securities are primarily sequential
securities. Commercial mortgage-backed securities typically have cash flows that
are less sensitive to interest rate changes than residential securities of
similar types due principally to prepayment restrictions on many of the
underlying commercial mortgage loans. Other asset-backed securities are
principally mortgage related (manufactured housing and home equity loans) which
historically have also demonstrated relatively less cash flow volatility than
residential securities of similar types.
At June 30, 1999, the Company held $306.4 million or 10.4% of invested assets in
mortgage loans. These mortgage loans are diversified as to property type,
location and loan size, and are collateralized by the related properties. At
June 30, 1999, mortgages more than 60 days delinquent accounted for 0.1% 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 June 30,
1999 include: Pacific (27%) which includes California and Washington; and West
South Central (25%) which includes Oklahoma and Texas. Mortgage loans on real
estate are also diversified by collateral types with office buildings (44%) and
retail facilities (35%) representing the largest holdings at June 30, 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 June 30, 1999,
the weighted average life of the fixed maturity portfolio, based on market
values and excluding convertible bonds, was approximately 8.8 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 4.7 as of June 30, 1999.
OTHER ASSETS
Deferred policy acquisition costs increased 8.4% in the 1999 period to $220.7
million due principally to the capitalization of costs incurred with new sales.
Assets held in separate accounts increased $40.2 million, or 21.2%, to $230.3
million at June 30, 1999 due primarily to net transfers to the separate accounts
resulting from sales of the Company's variable products and unrealized
appreciation on the underlying investments. Driven by the decrease in unrealized
appreciation on fixed maturity securities classified as available for sale,
total assets decreased 0.5% from $3,651.0 million at December 31, 1998 to
$3,633.7 million at June 30, 1999.
LIABILITIES
Policy liabilities and accruals increased 1.1% to $2,389.7 million at June 30,
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 62.9% to $17.3 million at June 30, 1999 due to
the decrease in unrealized appreciation on fixed maturity securities classified
as available for sale. At June 30, 1999, the Company had total liabilities of
$2,994.1 million, a 1.0% increase from total liabilities at December 31, 1998.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased 7.0% to $542.6 million at June 30, 1999, compared
to $583.6 million at December 31, 1998. This decrease is principally
attributable to the decrease in unrealized appreciation on securities classified
as available for sale, partially offset by net income during the six months
ended June 30, 1999.
At June 30, 1999, common stockholders' equity was $539.6 million, or $16.71 per
share, compared to $580.6 million, or $17.75 per share at December 31, 1998.
Included in stockholders' equity per common share is ($0.11) at June 30, 1999
and $1.61 at December 31, 1998 attributable to unrealized investment gains
(losses) resulting from marking the Company's fixed maturity securities
classified as available for sale to market value. The change in unrealized
appreciation on fixed maturity and equity securities classified as available for
sale decreased stockholders' equity $56.3 million during the six months ended
June 30, 1999, after related adjustments to deferred policy acquisition costs,
value of insurance in force acquired, unearned revenue reserve and deferred
income taxes.
19
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 (accrued at December 31,
1998) 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 six months ended June 30, 1999, the Company repurchased 461,945
shares of Class A common stock for $8.9 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.
During the six months ended June 30, 1999, the parent company paid common and
preferred stock dividends totaling $5.4 million. Common and preferred stock
dividends totaling $5.2 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 $5.3 million. In addition, interest payments on holding
company debt are estimated to be $2.5 million for the remainder of 1999.
FBL Financial Group, Inc. expects to rely primarily on dividends from Farm
Bureau Life to make any dividend payments to its stockholders and interest
payments on its debt. 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. For the remainder of 1999, the
maximum amount legally available for distribution to FBL Financial Group, Inc.
without further regulatory approval is approximately $11.2 million from Farm
Bureau Life. The aforementioned threshold is computed without giving effect to
the merger of Western Life into Farm Bureau Life. The maximum amount legally
available for distribution by Western Life prior to the merger was approximately
$14.2 million.
20
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 six-month period ended June 30, 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 $36.1 million and $21.1 million in the six months
ended June 30, 1999 and 1998, respectively. These funds were primarily used to
increase the Life 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 June 30, 1999.
Interest is payable at the current market rate on the date of issuance. As of
June 30, 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 $10.8
million at June 30, 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 (8.00% at June 30, 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 June 30, 1999, included $76.2 million of short-term
investments and $262.9 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 June 30, 1999,
the Company had no material commitments for capital expenditures.
21
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.
22
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual shareholders meeting was held on May 18,
1999.
(b) and (c)(i) Election of the following Class A directors to the Company's
Board of Directors:
AGAINST OR
FOR WITHHELD
---------- ----------
Jerry L. Chicoine........ 38,426,166 84,592
John W. Creer ........... 38,424,966 85,792
John E. Walker .......... 38,426,266 84,492
(ii) Election of the following Class B directors to the Company's
Board of Directors:
AGAINST OR
FOR WITHHELD
--------- ----------
Kenneth R. Ashby ........ 1,192,990 --
Al Christopherson ....... 1,192,990 --
Kenny J. Evans .......... 1,192,990 --
Thomas R. Gibson ........ 1,192,990 --
Jack M. Givens .......... 1,192,990 --
Gary L. Hall ............ 1,192,990 --
James K. Harmon ......... 1,192,990 --
Richard D. Harris ....... 1,192,990 --
Karen J. Henry .......... 1,192,990 --
Richard G. Kjerstad ..... 1,192,990 --
David L. McClure ........ 1,192,990 --
Roger Bill Mitchell ..... 1,192,990 --
Stephen M. Morain ....... 1,192,990 --
Bryce P. Neidig ......... 1,192,990 --
Howard D. Poulson ....... 1,192,990 --
Frank S. Priestley ...... 1,192,990 --
John J. Van Sweden ...... 1,192,990 --
Edward M. Wiederstein.... 1,192,990 --
(iii) Approval of the amendment of Bylaw Section 3.6(c). Shareholders
cast 38,475,079 votes for and 24,451 against the amendment to
Section 3.6(c) of Bylaws. There were 11,354 abstentions and no
broker non-votes.
(iv) Approval of the appointment of Ernst & Young LLP as independent
auditors for the Company for the year 1999. Shareholders cast
38,457,324 votes for and 52,291 votes against the appointment of
Ernst & Young LLP. There were 1,269 abstentions and no broker
non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30, 1999:
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 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)
24