UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266-5997
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(Address of principal executive offices) (Zip Code)
(515) 225-5400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 30,573,795 shares of Class A
common stock and 1,192,990 shares of Class B common stock as of November 2,
1999.
ITEM 1. FINANCIAL STATEMENTS
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 1999 - $357,936; 1998 -
$516,729) ............................................................... $ 355,404 $ 492,288
Available for sale, at market (amortized cost: 1999 - $2,043,001; 1998 -
$1,862,861) ............................................................. 2,011,892 1,950,044
Equity securities, at market (cost: 1999 - $40,248; 1998 - $39,589) .......... 35,877 35,287
Mortgage loans on real estate ................................................ 314,559 299,372
Investment real estate, less allowances for depreciation of $4,702 in 1999
and $4,223 in 1998 ........................................................ 34,413 40,679
Policy loans ................................................................. 123,405 123,328
Other long-term investments .................................................. 8,483 10,210
Short-term investments ....................................................... 76,092 80,228
------------- -------------
Total investments ............................................................... 2,960,125 3,031,436
Cash and cash equivalents ....................................................... 5,553 4,516
Securities and indebtedness of related parties .................................. 64,134 65,291
Accrued investment income ....................................................... 34,950 34,318
Accounts and notes receivable ................................................... 1,174 833
Amounts receivable from affiliates .............................................. 1,714 4,020
Reinsurance recoverable ......................................................... 3,808 4,711
Deferred policy acquisition costs ............................................... 226,800 203,581
Value of insurance in force acquired ............................................ 15,528 14,533
Property and equipment, less allowances for depreciation of $40,280 in 1999
and $37,100 in 1998 ....................................................... 58,362 55,250
Current income taxes recoverable ................................................ 774 13,185
Goodwill, less accumulated amortization of $4,007 in 1999 and $3,484 in
1998 ...................................................................... 9,425 9,948
Other assets .................................................................... 18,020 19,227
Assets held in separate accounts ................................................ 231,367 190,111
------------- -------------
Total assets ......................................................... $ 3,631,734 $ 3,650,960
============= =============
1
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products ........................................ $ 1,617,237 $ 1,596,471
Traditional life insurance and accident and health products ........ 746,730 731,873
Unearned revenue reserve ........................................... 27,048 25,373
Other policy claims and benefits ........................................ 10,766 10,625
------------- -------------
2,401,781 2,364,342
Other policyholders' funds:
Supplementary contracts without life contingencies ...................... 159,316 147,755
Advance premiums and other deposits ..................................... 83,380 84,206
Accrued dividends ....................................................... 12,359 13,797
------------- -------------
255,055 245,758
Short-term debt ............................................................ -- 24,500
Short-term debt payable to affiliate ....................................... 11,694 8,626
Amounts payable to affiliates .............................................. 221 511
Long-term debt ............................................................. 40,000 71
Deferred income taxes ...................................................... 9,499 46,497
Other liabilities .......................................................... 60,324 85,453
Liabilities related to separate accounts ................................... 231,367 190,111
------------- -------------
Total liabilities .................................................. 3,009,941 2,965,869
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock
of subsidiary trust .................................................... 97,000 97,000
Other ..................................................................... 91 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 30,569,723 shares in 1999 and 31,512,113 shares
in 1998 ................................................................ 42,319 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) .............................. (23,210) 50,050
Retained earnings .......................................................... 495,035 480,946
------------- -------------
Total stockholders' equity .............................................. 524,702 583,588
------------- -------------
Total liabilities and stockholders' equity ......................... $ 3,631,734 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues:
Interest sensitive product charges ................... $ 13,835 $ 12,847 $ 41,208 $ 38,600
Traditional life insurance and accident and health
premiums ........................................ 22,498 22,272 73,465 71,563
Net investment income ................................ 54,870 56,587 169,700 171,260
Realized gains (losses) on investments ............... (68) 475 (796) (2,382)
Other income ......................................... 5,072 5,058 14,911 15,366
------------ ------------ ------------ ------------
Total revenues .................................. 96,207 97,239 298,488 294,407
Benefits and expenses:
Interest sensitive product benefits .................. 31,160 30,477 91,380 91,858
Traditional life insurance and accident and health
benefits ........................................ 15,049 13,910 44,844 43,077
Increase in traditional life and accident and health
future policy benefits .......................... 4,191 5,498 14,420 17,908
Distributions to participating policyholders ......... 5,827 6,032 19,039 19,340
Underwriting, acquisition and insurance expenses ..... 16,742 15,295 53,584 47,335
Interest expense ..................................... 676 471 1,737 1,239
Other expenses ....................................... 3,661 3,888 11,370 11,262
------------ ------------ ------------ ------------
Total benefits and expenses ..................... 77,306 75,571 236,374 232,019
------------ ------------ ------------ ------------
18,901 21,668 62,114 62,388
Income taxes .............................................. (6,209) (6,747) (20,274) (19,576)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily
redeemable preferred stock of subsidiary trust .. (1,213) (1,213) (3,638) (3,638)
Other ................................................ 7 (83) (53) (251)
Equity income, net of related income taxes ................ 1,123 573 3,013 1,221
------------ ------------ ------------ ------------
Income from continuing operations ......................... 12,609 14,198 41,162 40,144
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 ................................................ 12,609 14,198 41,162 40,610
Dividends on Series B preferred stock ..................... (38) (38) (113) (113)
------------ ------------ ------------ ------------
Net income applicable to common stock ..................... $ 12,571 $ 14,160 $ 41,049 $ 40,497
============ ============ ============ ============
Earnings per common share:
Income from continuing operations .................... $ 0.39 $ 0.43 $ 1.27 $ 1.19
Income from discontinued operations .................. -- -- -- 0.01
------------ ------------ ------------ ------------
Earnings per common share ............................ $ 0.39 $ 0.43 $ 1.27 $ 1.20
============ ============ ============ ============
Earnings per common share - assuming dilution:
Income from continuing operations .................... $ 0.38 $ 0.42 $ 1.24 $ 1.16
Income from discontinued operations .................. -- -- -- 0.01
------------ ------------ ------------ ------------
Earnings per common share - assuming dilution ........ $ 0.38 $ 0.42 $ 1.24 $ 1.17
============ ============ ============ ============
Cash dividends per common share .......................... $ 0.083 $ 0.075 $ 0.248 $ 0.225
============ ============ ============ ============
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 nine months ended
September 30, 1998 ................ -- -- -- -- 40,610 40,610
Change in net unrealized investment
gains/losses ...................... -- -- -- 13,727 -- 13,727
----------
Total comprehensive income ............. 54,337
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 158,302 shares of common
stock under stock option plan,
including related income tax benefit . -- 2,156 -- -- -- 2,156
Dividends on preferred stock ............ -- -- -- -- (113) (113)
Dividends on common stock ............... -- -- -- -- (7,584) (7,584)
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1998 .............. $ 3,000 $ 40,499 $ 7,567 $ 62,286 $ 470,101 $ 583,453
========== ========== ========== ========== ========== ==========
Balance at January 1, 1999 ................. $ 3,000 $ 42,034 $ 7,558 $ 50,050 $ 480,946 $ 583,588
Comprehensive income (loss):
Net income for nine months ended
September 30, 1999 ................ -- -- -- -- 41,162 41,162
Change in net unrealized investment
gains/losses ...................... -- -- -- (73,260) -- (73,260)
----------
Total comprehensive loss ............... (32,098)
Purchase of 1,038,641 shares of common
stock ...... ......................... -- (1,417) -- -- (18,953) (20,370)
Issuance of 96,251 shares of common
stock under employee benefit and
stock option plans, including
related income tax benefit ........... -- 1,702 -- -- -- 1,702
Dividends on preferred stock ............ -- -- -- -- (113) (113)
Dividends on common stock ............... -- -- -- -- (8,007) (8,007)
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1999 .............. $ 3,000 $ 42,319 $ 7,558 $ (23,210) $ 495,035 $ 524,702
========== ========== ========== ========== ========== ==========
During the three months ended September 30, 1999 and 1998, comprehensive income
(loss) totaled ($4.3) million and $24.1 million, respectively.
See accompanying notes.
4
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------- -------------
OPERATING ACTIVITIES
Continuing operations:
Net income .................................................................. $ 41,162 $ 40,144
Adjustments to reconcile net income to net cash provided by continuing
operations:
Adjustments related to interest sensitive products:
Interest credited to account balances ............................ 78,158 79,229
Charges for mortality and administration ......................... (40,404) (38,646)
Deferral of unearned revenues .................................... 1,783 1,968
Amortization of unearned revenue reserve ......................... (914) (579)
Provision for depreciation and amortization ............................ 11,414 7,014
Net gains related to investments held by broker-dealer subsidiaries .... 108 286
Realized losses on investments ......................................... 796 2,382
Increase in traditional life and accident and health benefit accruals .. 15,417 17,840
Policy acquisition costs deferred ...................................... (24,731) (23,054)
Amortization of deferred policy acquisition costs ...................... 9,251 6,499
Provision for deferred income taxes .................................... 2,450 (1,864)
Other .................................................................. (14,179) (14,159)
------------ ------------
Net cash provided by continuing operations ....................................... 80,311 77,060
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 ........................................ 80,311 79,532
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment ...................................... 138,678 103,552
Fixed maturities - available for sale ....................................... 171,084 216,634
Equity securities ........................................................... 6,297 23,861
Mortgage loans on real estate ............................................... 47,482 53,506
Investment real estate ...................................................... 5,535 1,339
Policy loans ................................................................ 21,785 21,899
Other long-term investments ................................................. 1,168 2,121
Short-term investments - net ................................................ 4,136 --
------------ ------------
396,165 422,912
5
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------- -------------
INVESTING ACTIVITIES (CONTINUED):
Acquisition of investments:
Fixed maturities - available for sale ....................................... $ (354,139) $ (318,065)
Equity securities ........................................................... (6,260) (1,618)
Mortgage loans on real estate ............................................... (62,906) (39,087)
Investment real estate ...................................................... (564) (2,884)
Policy loans ................................................................ (21,862) (23,291)
Other long-term investments ................................................. (519) (1,714)
Short-term investments - net ................................................ -- (48,441)
------------ ------------
(446,250) (435,100)
Proceeds from disposal, repayments of advances and other distributions from
equity investees ............................................................ 8,732 3,953
Investments in and advances to equity investees .................................. (5,944) (3,964)
Net proceeds from sale of discontinued operations ................................ 1,229 24,844
Net purchases of property and equipment and other ................................ (11,104) (7,488)
Investing activities of discontinued operations .................................. -- (2,474)
------------ ------------
Net cash provided by (used in) investing activities .............................. (57,172) 2,683
FINANCING ACTIVITIES
Receipts from interest sensitive and variable products credited to policyholder
account balances ............................................................ 195,779 184,941
Return of policyholder account balances on interest sensitive and variable
products .................................................................... (201,206) (233,163)
Proceeds from short-term debt with affiliate ..................................... 3,068 5,771
Repayments of short-term debt .................................................... (24,500) --
Proceeds from long-term debt ..................................................... 40,000 --
Repayments of long-term debt ..................................................... (71) (5)
Distributions on company-obligated mandatorily redeemable preferred stock of
subsidiary trust ............................................................ (3,638) (3,638)
Other distributions to minority interests - net .................................. (4,614) (335)
Purchase of common stock ......................................................... (20,370) (25,008)
Issuance of common stock ......................................................... 1,570 1,404
Dividends paid ................................................................... (8,120) (7,697)
------------ ------------
Net cash used in financing activities ............................................ (22,102) (77,730)
------------ ------------
Increase in cash and cash equivalents ............................................ 1,037 4,485
Cash and cash equivalents at beginning of period ................................. 4,516 2,397
------------ ------------
Cash and cash equivalents at end of period ....................................... $ 5,553 $ 6,882
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest .................................................................... $ 1,626 $ 1,206
Income taxes ................................................................ 6,897 16,451
See accompanying notes.
6
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 nine-month periods ended
September 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
nine-month periods ended September 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 or loss. The unrealized
gains and losses included in accumulated other comprehensive income or loss are
reduced by a provision for deferred income taxes and adjustments to deferred
policy acquisition costs, value of insurance in force acquired and unearned
revenue reserve that would have been required as a charge or credit to income
had such amounts been realized. Equity securities, comprised of common and
non-redeemable preferred stocks, are reported at market value. The change in
unrealized appreciation and depreciation of equity securities is included
directly in stockholders' equity, net of any related deferred income taxes, as a
component of accumulated other comprehensive income or loss.
7
Net unrealized investment gains (losses) as reported were comprised of the
following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS)
Unrealized appreciation (depreciation) on fixed maturity and equity securities
available for sale ........................................................ $ (35,480) $ 82,881
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs ......................................... 2,475 (5,264)
Value of insurance in force acquired ...................................... 381 (1,306)
Unearned revenue reserve .................................................. (221) 585
Provision for deferred income taxes ............................................ 11,496 (26,914)
------------- -------------
(21,349) 49,982
Proportionate share of net unrealized investment gains (losses)
of equity investees ....................................................... (1,861) 68
------------- -------------
Net unrealized investment gains (losses) ....................................... $ (23,210) $ 50,050
============= =============
4. CREDIT ARRANGEMENTS
The Company has a note payable to the Federal Home Loan Bank (FHLB) totaling
$40.0 million at September 30, 1999. Proceeds from the note, which was issued
during the third quarter of 1999, were used to fund the maturity of the
Company's $24.5 million short-term debt. The note is due September 17, 2003, and
interest on the note is charged at a variable rate equal to the London Interbank
Offered Rate less 0.0475% (5.35% at September 30, 1999). Fixed maturity
securities with a carrying value of $42.0 million are on deposit with the FHLB
as collateral for the note. As an investor in the FHLB, the Company has the
ability to borrow an additional $15.8 million from the FHLB at September 30,
1999. No debt was outstanding under this credit agreement as of 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 $11.7 million at September 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 (8.25% at September 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 September 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 September 30,
1999 are as follows: 1999 - $0.5 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 September 30, 1999
and December 31, 1998, the Company maintained a reserve totaling $0.4 million
and $0.3 million, respectively, 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- ------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Income from continuing operations ............. $ 12,609 $ 14,198 $ 41,162 $ 40,144
Income from discontinued operations ........... -- -- -- 466
------------- ------------- ------------- -------------
Net income .................................... 12,609 14,198 41,162 40,610
Dividends on Series B preferred stock ......... (38) (38) (113) (113)
------------- ------------- ------------- -------------
Numerator for earnings per common
share-income available to common
stockholders ......................... $ 12,571 $ 14,160 $ 41,049 $ 40,497
============= ============= ============= =============
Denominator:
Denominator for earnings per common share
- weighted-average shares ................ 32,077,313 32,573,076 32,399,535 33,887,349
Effect of dilutive securities - employee stock
options .................................. 621,745 832,951 639,962 847,441
------------- ------------- ------------- -------------
Denominator for diluted earnings per
common share - adjusted weighted-
average shares ....................... 32,699,058 33,406,027 33,039,497 34,734,790
============= ============= ============= =============
Earnings per common share:
Income from continuing operations ............. $ 0.39 $ 0.43 $ 1.27 $ 1.19
Income from discontinued operations ........... -- -- -- 0.01
------------- ------------- ------------- -------------
Earnings per common share ..................... $ 0.39 $ 0.43 $ 1.27 $ 1.20
============= ============= ============= =============
Earnings per common share - assuming dilution:
Income from continuing operations ............. $ 0.38 $ 0.42 $ 1.24 $ 1.16
Income from discontinued operations ........... -- -- -- 0.01
------------- ------------- ------------- -------------
Earnings per common share - assuming
dilution ................................. $ 0.38 $ 0.42 $ 1.24 $ 1.17
============= ============= ============= =============
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------- -------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Revenues from external customers:
Life insurance .......................... $ 91,458 $ 92,724 $ 284,192 $ 281,208
All other ............................... 9,830 8,685 29,128 27,478
------------ ------------ ------------ ------------
Subtotal ................................ 101,288 101,409 313,320 308,686
Eliminations ............................ (5,081) (4,170) (14,832) (14,279)
------------ ------------ ------------ ------------
Consolidated ............................ $ 96,207 $ 97,239 $ 298,488 $ 294,407
============ ============ ============ ============
Intersegment revenues:
Life insurance .......................... $ 368 $ 186 $ 821 $ 727
All other ............................... 4,713 3,984 14,011 13,552
------------ ------------ ------------ ------------
Subtotal ................................ 5,081 4,170 14,832 14,279
Eliminations ............................ (5,081) (4,170) (14,832) (14,279)
------------ ------------ ------------ ------------
Consolidated ............................ $ -- $ -- $ -- $ --
============ ============ ============ ============
Income (loss) from continuing operations:
Life insurance .......................... $ 12,705 $ 14,758 $ 41,713 $ 41,231
All other ............................... (96) (560) (551) (1,087)
------------ ------------ ------------ ------------
Consolidated ............................ $ 12,609 $ 14,198 $ 41,162 $ 40,144
============ ============ ============ ============
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 September 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 closed an administrative service center and merged two life
insurance subsidiaries during the nine-month period ended September 30, 1999. As
a result of the closing of the service center, a leased property was vacated, 22
job positions were eliminated and moving costs were incurred. During 1999, the
Company charged to expense costs totaling $1.3 million, $0.6 million of which
remains accrued at September 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 expense line of the 1999 Consolidated Statement of Income.
Restructuring expenses were reduced $0.3 million in the third quarter of 1999 as
a result of actual restructuring expenses being less than that anticipated at
June 30, 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) AND EQUITRUST LIFE
INSURANCE COMPANY (EQUITRUST) (COLLECTIVELY, THE LIFE COMPANIES). EFFECTIVE JULY
1, 1999, WESTERN FARM BUREAU LIFE INSURANCE COMPANY (WESTERN FARM BUREAU LIFE),
A FORMER DIRECT SUBSIDIARY OF FBL FINANCIAL GROUP, INC., 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NET INCOME APPLICABLE TO COMMON STOCK decreased 11.2% in the third quarter of
1999 to $12.6 million and increased 1.4% in the nine months ended September 30,
1999 to $41.0 million. 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,
decreased 9.4% in the third quarter of 1999 to $12.6 million and 0.9% in the
nine months ended September 30, 1999 to $41.5 million. The decreases are
primarily attributable to a decrease in investment prepayment and bond call fee
income during the 1999 periods. The following is a reconciliation of net income
to adjusted operating income.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income applicable to common stock ........ $ 12,571 $ 14,160 $ 41,049 $ 40,497
Adjustments:
Net realized losses (gains) on
investments ........................ 23 (258) 413 1,536
Gain on disposal of property-casualty
operations ......................... -- -- -- (179)
------------- ------------- ------------- -------------
Adjusted operating income applicable to
common stock ............................ $ 12,594 $ 13,902 $ 41,462 $ 41,854
------------- ------------- ------------- -------------
Earnings per common share - assuming
dilution ................................ $ 0.38 $ 0.42 $ 1.24 $ 1.17
============= ============= ============= =============
Adjusted operating income per common
share - assuming dilution ............... $ 0.39 $ 0.42 $ 1.25 $ 1.20
============= ============= ============= =============
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 twenty-one-month period ended September 30, 1999. Weighted average common
shares outstanding, assuming dilution, decreased 2.1% in the third quarter of
1999 to 32.7 million and decreased 4.9% in the nine months ended September 30,
1999 to 33.0 million. These decreases are primarily 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- ------------- --------------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Interest sensitive product charges ......... $ 13,835 $ 12,847 $ 41,208 $ 38,600
Traditional life insurance and accident and
health premiums ....................... 22,498 22,272 73,465 71,563
------------- ------------- ------------- -------------
Total ................................. $ 36,333 $ 35,119 $ 114,673 $ 110,163
============= ============= ============= =============
INTEREST SENSITIVE PRODUCT CHARGES increased 7.7% in the third quarter of 1999
to $13.8 million and 6.8% in the nine months ended September 30, 1999 to $41.2
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 has increased as
a result of growth in variable product account balances.
TRADITIONAL LIFE AND ACCIDENT AND HEALTH PREMIUMS increased 1.0% in the third
quarter of 1999 to $22.5 million and 2.7% in the nine months ended September 30,
1999 to $73.5 million. During the nine-month period, traditional life premiums
increased 1.1% to $63.6 million and accident and health premiums increased 13.8%
to $9.9 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 9.3% to $30.9 million in
the nine months ended September 30, 1999. The increase in accident and health
premiums is primarily the result of the recapture of certain reinsurance ceded
business, which is not expected to be a recurring item in 2000.
NET INVESTMENT INCOME decreased 3.0% in the third quarter of 1999 to $54.9
million and 0.9% in the nine months ended September 30, 1999 to $169.7 million.
The decreases are due to a decrease in the annualized yield earned on average
invested assets, excluding the impact of recording certain fixed maturity
securities to market value, to 7.69% in the nine months ended September 30, 1999
compared to 8.00% in the comparable 1998 period. The yields during the 1999
periods declined due to the impact of changing market interest rates and a
reduction in the amount of prepayment and bond call fee income. Fee income from
mortgage loan prepayments and bond calls in the third quarter of 1999 and 1998
totaled $0.2 million and $1.9 million, respectively. Revenue from these sources
during the nine-month periods totaled $4.7 million in 1999 and $7.7 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. The revenues earned from these sources during the
nine-month periods are not expected to be consistently recurring at these
levels. Average invested assets, excluding the impact of recording certain fixed
maturity securities to market value, increased 3.1% to $2,970.0 million for the
nine-month period.
REALIZED GAINS (LOSSES) ON INVESTMENTS decreased 114.3% in the third quarter of
1999 to a loss of $0.1 million and increased 66.6% in the nine months ended
September 30, 1999 to a loss of $0.8 million. Included in realized gains
(losses) during the third quarter of 1999 and 1998 were $1.1 million and $0.4
million, respectively, in realized losses resulting from writedowns of
investments that became other-than-temporarily impaired. For the nine-month
periods, impairment losses totaled $3.9 million in 1999 and $8.5 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 increased 0.3% in the third quarter of 1999 to $5.1 million and
decreased 3.0% in the nine months ended September 30, 1999 to $14.9 million. The
decrease in the nine-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.
12
A summary of the Company's policy benefits is as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------- -------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Policy benefits:
Interest sensitive product benefits ............ $ 31,160 $ 30,477 $ 91,380 $ 91,858
Traditional life insurance and accident and
health benefits ............................ 15,049 13,910 44,844 43,077
Increase in traditional and accident and health
future policy benefits ..................... 4,191 5,498 14,420 17,908
Distributions to participating policyholders ... 5,827 6,032 19,039 19,340
------------- ------------- ------------- -------------
Total ..................................... $ 56,227 $ 55,917 $ 169,683 $ 172,183
============= ============= ============= =============
INTEREST SENSITIVE PRODUCT BENEFITS increased 2.2% in the third quarter of 1999
to $31.2 million and decreased 0.5% in the nine months ended September 30, 1999
to $91.4 million. The components of interest sensitive product benefits, along
with selected average contractual interest crediting rates are as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------- -------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Interest credited to account balances ............... $ 26,074 $ 26,011 $ 77,878 $ 79,229
Death benefits in excess of related account
balances ........................................ 5,086 4,466 13,502 12,629
Weighted average contractual crediting rates:
Universal life liabilities ..................... 6.01% 6.13% 6.01% 6.13%
Individual annuity liabilities ................. 5.68% 5.97% 5.68% 6.03%
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. For the third quarter of 1999, the
impact of the decreases in rates was more than offset by an increase in the
average account balance outstanding. 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 0.9% in the third quarter of 1999 to
$19.2 million and 2.8% in the nine months ended September 30, 1999 to $59.3
million. Death and surrender benefits on traditional life products increased
$1.1 million for the third quarter and $2.3 million for the nine-month period.
These increases were more than offset by decreases during the 1999 period in the
change in reserves on life and accident and health policies. 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 decreased 3.4% in the third quarter
of 1999 to $5.8 million and 1.6% in the nine months ended September 30, 1999 to
$19.0 million. The decreases are primarily attributable to a decrease in the
average interest rate used in the dividend formula for these policies. The
average interest rate was 5.72% at September 30, 1999 and 5.84% at September 30,
1998.
13
A summary of the Company's underwriting, acquisition and insurance expenses is
as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals ............. $ 2,411 $ 2,282 $ 7,481 $ 6,968
Amortization of deferred policy acquisition costs 3,213 2,044 9,251 6,499
Other underwriting, acquisition and insurance
expenses, net of deferrals ................... 11,118 10,969 36,852 33,868
------------- ------------- ------------- -------------
Total ....................................... $ 16,742 $ 15,295 $ 53,584 $ 47,335
============= ============= ============= =============
COMMISSION EXPENSE increased 5.7% in the third quarter of 1999 to $2.4 million
and 7.4% in the nine months ended September 30, 1999 to $7.5 million. Commission
expense increased during the periods due primarily to an increase in direct life
insurance premiums collected.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS increased 57.2% in the third
quarter of 1999 to $3.2 million and 42.3% in the nine months ended September 30,
1999 to $9.3 million. The increases in amortization are partially attributable
to an increase in the unamortized acquisition cost asset due to growth in the
volume of business in force. In addition, during 1999, there was 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. Furthermore,
amortization was decreased during 1998 as a result of a change in the interest
rate and other assumptions used to calculate deferred acquisition costs.
OTHER UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 1.4% in the
third quarter of 1999 to $11.1 million and increased 8.8% in the nine months
ended September 30, 1999 to $36.9 million. The increases are generally
attributable to an increase in the level of operations to support the promotion
and administration of variable products sold by the Company's variable alliance
partners. In addition, included in insurance expenses for the nine months ended
September 30, 1999 are restructuring charges totaling $1.3 million relating to
the closing of an administrative service center. See "Restructuring". In the
nine-month periods, these increases 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 nine-month periods
totaled $0.7 million in 1999 and $1.6 million in 1998.
INTEREST EXPENSE increased 43.5% in the third quarter of 1999 to $0.7 million
and 40.2% in the nine months ended September 30, 1999 to $1.7 million due
primarily to an increase in the average debt outstanding.
OTHER EXPENSES decreased 5.8% in the third quarter of 1999 to $3.7 million and
increased 1.0% in the nine months ended September 30, 1999 to $11.4 million. The
increase for the nine-month period is due principally to an increase in the
level of leasing services provided to affiliates and third parties. Other
expenses for the third quarter were relatively consistent during the third
quarter as the level of financial services provided to affiliates and third
parties were comparable.
INCOME TAXES decreased 8.0% in the third quarter of 1999 to $6.2 million and
increased 3.6% in the nine months ended September 30, 1999 to $20.3 million. The
effective tax rate for the nine months ended September 30, 1999 was 32.6%
compared to 31.4% 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 96.0% in the third quarter
of 1999 to $1.1 million and 146.8% in the nine months ended September 30, 1999
to $3.0 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 closed an administrative service center during July 1999 and merged
two life insurance subsidiaries effective July 1, 1999. As a result of the
closing of the service center, a leased property was vacated, 22 job
14
positions were eliminated and moving costs were incurred. During the nine months
ended September 30, 1999, the Company charged to expense costs totaling $1.3
million, $0.6 million of which remains accrued at September 30, 1999, for
related severance benefits, lease costs and other costs primarily associated
with closing the service center. Operations during the third quarter of 1999
reflect a $0.3 million decrease in the restructuring accrual recorded as of June
30, 1999, due to lease-exit costs being less than originally expected.
Pre-tax cost savings from these two transactions are estimated to be $0.3
million for remainder of 1999 and $1.4 million annually beginning in 2000.
Approximately $0.2 million in pre-tax cost savings were earned during the third
quarter of 1999 as a result of the restructuring.
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 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 $0.1 million and $0.7 million for the quarters ended
September 30, 1999 and 1998, respectively, and $0.7 million and $1.6 million for
the nine-month periods ended September 30, 1999 and 1998, respectively. It is
anticipated the project costs to be charged to expense will total $0.1 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 $2,960.1 million at
September 30, 1999 compared to $3,031.4 million at December 31, 1998. This
decrease is primarily the result of a $118.3 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 September 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:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------------------- -------------------------------
CARRYING VALUE PERCENT CARRYING VALUE PERCENT
-------------- ------------- -------------- -------------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Public ......................... $ 1,746,000 59.0% $ 1,852,291 61.1%
144A private placement ......... 420,762 14.2 347,499 11.5
Private placement .............. 200,534 6.8 242,542 8.0
------------- ------------- ------------- -------------
Total fixed maturities ......... 2,367,296 80.0 2,442,332 80.6
Equity securities .................. 35,877 1.2 35,287 1.2
Mortgage loans on real estate ...... 314,559 10.6 299,372 9.9
Investment real estate:
Acquired for debt .............. 521 -- 867 --
Investment ..................... 33,892 1.1 39,812 1.3
Policy loans ....................... 123,405 4.2 123,328 4.1
Other long-term investments ........ 8,483 0.3 10,210 0.3
Short-term investments ............. 76,092 2.6 80,228 2.6
------------- ------------- ------------- -------------
Total investments .......... $ 2,960,125 100.0% $ 3,031,436 100.0%
============= ============= ============= =============
As of September 30, 1999, 94.2% (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 September 30, 1999, the investment in non-investment grade debt was
5.8% 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
SEPTEMBER 30, 1999
------------------------------
NAIC DESIGNATION EQUIVALENT S&P RATINGS (1) CARRYING VALUE PERCENT
- ---------------- --------------------------------------------------------------- -------------- -------------
(DOLLARS IN THOUSANDS)
1 (AAA, AA, A) .................................................. $ 1,413,438 59.7%
2 (BBB) ......................................................... 816,803 34.5
------------- -------------
Total investment grade ........................................ 2,230,241 94.2
3 (BB) .......................................................... 99,352 4.2
4 (B) ........................................................... 29,687 1.3
5 (CCC, CC, C) .................................................. 8,016 0.3
6 In or near default ............................................ -- --
------------- -------------
Total below investment grade .................................. 137,055 5.8
------------- -------------
Total fixed maturities ........................................ $ 2,367,296 100.0%
============= =============
- ------------------
(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 September 30, 1999:
HELD FOR INVESTMENT
---------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Fixed maturities - mortgage-backed
securities ............................. $ 355,404 $ 5,911 $ (3,379) $ 357,936
============== ============== ============== ==============
AVAILABLE FOR SALE
---------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies .. $ 61,611 $ 253 $ (450) $ 61,414
State, municipal and other governments . 59,431 236 (1,804) 57,863
Public utilities ....................... 129,831 2,518 (2,777) 129,572
Corporate securities ................... 1,050,470 23,389 (39,980) 1,033,879
Mortgage and asset-backed securities ... 696,876 5,331 (14,603) 687,604
Redeemable preferred stock .................. 44,782 620 (3,842) 41,560
-------------- -------------- -------------- --------------
Total fixed maturities ...................... $ 2,043,001 $ 32,347 $ (63,456) $ 2,011,892
============== ============== ============== ==============
Equity securities ........................... $ 40,248 $ 1,702 $ (6,073) $ 35,877
============== ============== ============== ==============
17
The carrying value and estimated market value of the Company's portfolio of
fixed maturity securities at September 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 .................. $ -- $ -- $ 39,644 $ 39,916
Due after one year through five years .... -- -- 230,790 231,809
Due after five years through ten years ... -- -- 404,639 398,161
Due after ten years ...................... -- -- 626,270 612,842
-------------- -------------- -------------- --------------
-- -- 1,301,343 1,282,728
Mortgage and asset-backed securities ..... 355,404 357,936 696,876 687,604
Redeemable preferred stocks .............. -- -- 44,782 41,560
-------------- -------------- -------------- --------------
$ 355,404 $ 357,936 $ 2,043,001 $ 2,011,892
============== ============== ============== ==============
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 September 30, 1999,
summarized by type of security.
PERCENT OF
AMORTIZED FIXED
COST PAR VALUE CARRYING VALUE MATURITIES
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Residential mortgage-backed securities:
Sequential .................................... $ 390,753 $ 394,744 $ 390,200 16.5%
Pass through .................................. 77,150 76,618 74,716 3.1
Planned and targeted amortization class ....... 41,741 41,772 41,665 1.8
Other ......................................... 11,446 11,712 11,437 0.5
-------------- -------------- -------------- --------------
Total residential mortgage-backed securities ...... 521,090 524,846 518,018 21.9
Commercial mortgage-backed securities ............. 201,450 200,581 198,524 8.4
Other asset-backed securities ..................... 329,740 331,069 326,466 13.8
-------------- -------------- -------------- --------------
Total mortgage and asset-backed securities ........ $ 1,052,280 $ 1,056,496 $ 1,043,008 44.1%
============== ============== ============== ==============
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 September 30, 1999, the Company held $314.6 million or 10.6% of invested
assets in mortgage loans. These mortgage loans are diversified as to property
type, location and loan size, and are collateralized by the related properties.
At September 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 September
30, 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 (43%)
and retail facilities (35%) representing the largest holdings at September 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 September 30,
1999, the weighted average life of the fixed maturity portfolio, based on market
values and excluding convertible bonds, was approximately 8.7 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 4.8 as of September 30, 1999.
OTHER ASSETS
Deferred policy acquisition costs increased 11.4% in the 1999 period to $226.8
million due principally to the capitalization of costs incurred with new sales.
Assets held in separate accounts increased $41.3 million, or 21.7%, to $231.4
million at September 30, 1999 due primarily to net transfers to the separate
accounts resulting from sales of the Company's variable products. 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 $3,631.7 million at September 30, 1999.
LIABILITIES
Policy liabilities and accruals increased 1.6% to $2,401.8 million at September
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.
During the third quarter of 1999, the Company issued $40.0 million in long-term
debt and used the proceeds to fund the maturity of the Company's $24.5 million
short-term note payable. Deferred income taxes decreased 79.6% to $9.5 million
at September 30, 1999 due principally to the decrease in unrealized appreciation
on fixed maturity securities classified as available for sale. At September 30,
1999, the Company had total liabilities of $3,009.9 million, a 1.5% increase
from total liabilities at December 31, 1998.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased 10.1% to $524.7 million at September 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 and stock repurchases, partially offset by net income
during the nine months ended September 30, 1999.
19
At September 30, 1999, common stockholders' equity was $521.7 million, or $16.42
per share, compared to $580.6 million, or $17.75 per share at December 31, 1998.
Included in stockholders' equity per common share is ($0.65) at September 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 $73.3 million during the nine months ended
September 30, 1999, after related adjustments to deferred policy acquisition
costs, value of insurance in force acquired, unearned revenue reserve and
deferred income taxes.
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 nine months ended September 30, 1999, the Company repurchased
1,038,641 shares of Class A common stock for $20.4 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 nine months ended September 30, 1999, the parent company paid common
and preferred stock dividends totaling $8.1 million. Common and preferred stock
dividends totaling $7.7 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 $2.6 million. In addition, interest payments on holding
company debt are estimated to be $1.3 million for the remainder of 1999.
FBL Financial Group, Inc. expects to rely on available cash resources and
dividends from Farm Bureau Life to make any dividend payments to its
stockholders and interest payments on its 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.
20
On September 22, 1999, Farm Bureau Life paid an extraordinary dividend totaling
$75.0 million, consisting of cash and fixed maturity securities, to FBL
Financial Group, Inc. Because of this dividend, Farm Bureau Life would need
further regulatory approval to pay any additional dividends to FBL Financial
Group, Inc. during the remainder of 1999. In addition, the Company expects that
further regulatory approval will be required for any dividends prior to the
expiration of the aforementioned 12 month measurement period ending September
22, 2000. However, management believes that, due to the financial strength of
Farm Bureau Life, such regulatory approval would be granted to fund FBL
Financial Group's regular quarterly interest and dividend (subject to Board
approval) requirements.
Primarily as a result of the $75.0 million dividend, FBL Financial Group, Inc.
has cash and investments totaling $80.2 million at September 30, 1999. Except
for the potential acquisition of approximately $4.6 million worth of the
Company's common stock to complete the current stock repurchase plan, management
does not have any immediate plans to deploy this capital and is currently
evaluating capital management and investment options.
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 nine-month period ended September 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 $60.5 million and $27.8 million in the nine months
ended September 30, 1999 and 1998, respectively. These funds were primarily used
to increase the Life Companies' fixed maturity and mortgage loan 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 at September 30,
1999. During the third quarter of 1999, the Company established a line of credit
and borrowed $40.0 million under this arrangement, leaving a borrowing capacity
of $15.8 million at September 30, 1999. The outstanding debt is due September
17, 2003, and interest on the debt is charged at a variable rate equal to the
London Interbank Offered Rate less 0.0475% (5.35% at September 30, 1999). Fixed
maturity securities with a carrying value of $42.0 million are on deposit with
the FHLB as collateral for the note.
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 $11.7
million at September 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 (8.25% at September 30, 1999).
21
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 September 30, 1999, included $76.1 million of short-term
investments and $255.6 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.
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 September 30,
1999, the Company had no material commitments for capital expenditures.
22
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.
23
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 September 30, 1999:
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 8, 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)
25