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, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-11917
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FBL Financial Group, Inc.
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(Exact name of registrant as specified in its charter)
Iowa 42-1411715
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266
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(Address of principal executive offices) (Zip Code)
(515) 225-5400
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(Regristrant'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. [ ] Yes [x] 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: 17,666,810 shares of Class A
Common Stock and 1,192,990 shares of Class B Common Stock as of July 30, 1996.
Item 1. FINANCIAL STATEMENTS
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1996 1995
--------------------------------
(Unaudited)
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 1996 -
$717,841; 1995 - $712,476) $ 716,132 $ 683,149
Available for sale, at market (amortized cost: 1996 -
$1,393,300; 1995 - $1,325,608) 1,400,057 1,393,060
Equity securities, at market (cost: 1996 - $86,917; 1995 -
$77,038) 98,041 83,714
Held in inventory, at estimated fair value (amortized cost:
1996 - $20,343; 1995 - $21,555) 23,311 21,913
Mortgage loans on real estate 276,828 266,623
Investment real estate, less allowances for depreciation of
$1,936 in 1996 and $1,839 in 1995 28,974 28,604
Policy loans 118,076 116,107
Other long-term investments 11,153 2,892
Short-term investments 57,532 50,061
--------------------------------
Total investments 2,730,104 2,646,123
Securities and indebtedness of related parties 56,696 74,506
Accrued investment income 33,343 32,711
Accounts and notes receivable 1,918 2,009
Amounts receivable from affiliates 9,071 2,422
Reinsurance recoverable 35,090 31,845
Deferred policy acquistion costs 156,205 135,061
Value of insurance in force acquired 19,484 14,449
Property and equipment, less allowances for depreciation of
$46,034 in 1996 and $45,417 in 1995 61,463 60,184
Current income taxes recoverable 10,713 14,114
Goodwill, less accumulated amortization of $1,862 in 1996
and $1,556 in 1995 10,036 10,342
Other assets 19,089 22,296
Assets held in separate accounts 59,406 44,789
--------------------------------
Total assets $ 3,202,618 $ 3,090,851
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--------------------------------
2
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1996 1995
--------------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Universal life and annuity products $ 1,444,455 $ 1,394,116
Traditional life insurance and accident and health products 667,327 651,827
Unearned revenue reserve 18,622 17,350
Other policy claims and benefits 9,357 8,149
Reserves and unearned premiums on property-casualty
policies 65,301 45,890
--------------------------------
2,205,062 2,117,332
Other policyholders' funds:
Supplementary contracts without life contingencies 121,504 114,471
Advance premiums and other deposits 87,116 87,093
Accrued dividends 12,474 13,678
--------------------------------
221,094 215,242
Long-term debt 11,117 12,604
Amounts payable to affiliates 13,060 10,443
Deferred income taxes 31,126 39,645
Other liabilities 90,818 81,995
Liabilities related to separate accounts 59,406 44,789
--------------------------------
Total liabilities 2,631,683 2,522,050
Commitments and contingencies
Minority interest in subsidiaries 4,803 4,503
Stockholders' equity:
Preferred Stock, without par value - authorized 10,000,000
shares, no shares issued and outstanding - -
Common Stock, par value $100.00 per share - authorized
100,000 shares, issued and outstanding 11,929.90 shares
in 1995 - 1,193
Class A Common Stock, without par value - authorized
88,500,000 shares, issued and outstanding 22,666,810
shares in 1996 143,773 -
Class B Common Stock, without par value - authorized
1,500,000 shares, issued and outstanding 1,192,990 shares
in 1996 7,567 -
Additional paid-in capital - 145,288
Net unrealized investment gains 10,318 37,807
Retained earnings 404,474 380,010
--------------------------------
Total stockholders' equity 566,132 564,298
--------------------------------
Total liabilities and stockholders' equity $ 3,202,618 $ 3,090,851
--------------------------------
--------------------------------
SEE ACCOMPANYING NOTES.
3
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
-------------------------- --------------------------
Revenues:
Universal life and annuity product charges $ 11,140 $ 11,118 $ 22,457 $ 21,750
Traditional life insurance premiums 24,515 21,025 43,646 39,252
Accident and health premiums 2,945 2,718 5,597 5,101
Property-casualty premiums 4,629 4,867 8,927 9,190
Net investment income 52,208 52,824 104,636 100,861
Realized gains (losses) on investments 1,515 988 (583) 2,838
Other income 5,988 7,301 11,580 14,439
-------------------------- --------------------------
Total revenues 102,940 100,841 196,260 193,431
Benefits and expenses:
Universal life and annuity benefits 29,678 27,418 60,031 54,489
Traditional life insurance and accident and health
benefits 13,924 13,883 26,020 26,598
Increase in traditional life and accident and health future
policy benefits 10,065 9,256 15,359 13,718
Distributions to participating policyholders 6,919 6,350 13,394 12,955
Losses and loss adjustment expenses incurred on
property-casualty policies 3,594 3,620 6,805 6,594
Underwriting, acquisition and insurance expenses 15,399 18,174 31,179 38,647
Interest expense 146 342 373 698
Other expenses 4,633 4,287 8,560 8,287
-------------------------- --------------------------
Total benefits and expenses 84,358 83,330 161,721 161,986
-------------------------- --------------------------
18,582 17,511 34,539 31,445
Income taxes (5,798) (5,813) (11,487) (10,661)
Minority interest in earnings of subsidiaries (2) (268) (278)
Equity income (loss), net of related income taxes 791 (631) 1,680 (398)
-------------------------- --------------------------
Net income $ 13,575 $ 11,065 $ 24,464 $ 20,108
-------------------------- --------------------------
-------------------------- --------------------------
Net income per common share (after giving effect
for 2,000-for-1 stock split):
Weighted average shares outstanding 23,859,800 23,453,600 23,859,800 23,453,600
-------------------------- --------------------------
-------------------------- --------------------------
Net income per common share $ 0.57 $ 0.47 $ 1.03 $ 0.86
-------------------------- --------------------------
-------------------------- --------------------------
SEE ACCOMPANYING NOTES.
4
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1996 1995
-----------------------------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period $ 146,481 $ 142,199
Recapitalization, conversion of common stock (146,481) -
-----------------------------
Balance, end of period $ - $ 142,199
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-----------------------------
CLASS A COMMON STOCK
Balance, beginning of period $ - $ -
Recapitalization, conversion of common stock 139,157 -
Adjustment resulting from capital transaction of equity investee 4,616 -
-----------------------------
Balance, end of period $ 143,773 $ -
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-----------------------------
CLASS B COMMON STOCK
Balance, beginning of period $ - $ -
Recapitalization, conversion of common stock 7,324 -
Adjustment resulting from capital transaction of equity investee 243 -
-----------------------------
Balance, end of period $ 7,567 $ -
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-----------------------------
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Balance, beginning of period $ 37,807 $ (31,838)
Change in net unrealized investment gains/losses (27,489) 52,941
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Balance, end of period $ 10,318 $ 21,103
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-----------------------------
RETAINED EARNINGS
Balance, beginning of period $ 380,010 $ 320,382
Net income 24,464 20,108
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Balance, end of period $ 404,474 $ 340,490
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SEE ACCOMPANYING NOTES.
5
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1996 1995
----------------------------
OPERATING ACTIVITIES
Net income $ 24,464 $ 20,108
Adjustments to reconcile net income to net cash provided
by operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances 50,828 47,041
Charges for mortality and administration (22,938) (22,173)
Deferral of unearned revenues 875 868
Amortization of unearned revenue reserve (394) (445)
Provision for depreciation and amortization 8,431 7,950
Net gains related to investments held in inventory (3,501) (3,254)
Realized losses (gains) on investments 583 (2,838)
Increase in traditional, accident and health and property-
casualty benefit accruals 34,760 13,643
Policy acquisition costs deferred (16,805) (12,393)
Amortization of deferred policy acquition costs 5,460 5,209
Provision for deferred income taxes 3,665 (1,549)
Other 4,553 177
----------------------------
Net cash provided by operating activities 89,981 52,344
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment 20,893 8,165
Fixed maturities - available for sale 127,152 140,066
Equity securities 14,938 18,140
Held in inventory 7,003 3,603
Mortgage loans on real estate 11,380 12,811
Investment real estate 1,389 4,042
Policy loans 13,311 13,298
Other long-term investments 428 2,774
Short-term investments-net - 64,782
----------------------------
196,494 267,681
ACQUISITION OF INVESTMENTS:
Fixed maturities - held for investment (53,643) (101,822)
Fixed maturities - available for sale (198,453) (199,265)
Equity securities (20,580) (15,924)
Held in inventory (4,900) (6,299)
Mortgage loans on real estate (18,450) (8,289)
Investment real estate (1,997) (2,767)
Policy loans (15,280) (15,210)
Other long-term investments (3) -
Short-term investments-net (7,471) -
----------------------------
(320,777) (349,576)
6
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1996 1995
----------------------------
INVESTING ACTIVITIES (CONTINUED)
Proceeds from disposal, repayments of advances and other
distributions from entities accounted for by the equity
method 17,141 19,792
Investments in and advances to entities account for by the
equity method (5,939) (15,385)
Other (4,627) (2,409)
----------------------------
Net cash used in investing activities (117,708) (79,897)
FINANCING ACTIVITIES
Receipts from interest sensitive products credited to
policyholder account balances 123,905 114,971
Return of policyholder account balances on interest
sensitive products (94,423) (82,457)
Proceeds from short-term borrowings - 8
Repayment of short-term borrowings - (6,396)
Repayments of long-term debt (1,487) (4,264)
Distributions to minority interests (268) (272)
----------------------------
Net cash provided by financing activities 27,727 21,590
----------------------------
Decrease in cash and cash equivalents - (5,963)
Cash and cash equivalents at beginning of period - 5,963
----------------------------
Cash and cash equivalents at end of period $ - $ -
----------------------------
----------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 300 $ 680
Income taxes 5,272 11,657
SEE ACCOMPANYING NOTES.
7
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
JUNE 30, 1996
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 six-month period ended June 30, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the consolidated
financial statements and notes thereto for the year ended December 31, 1995
included in the Company's initial registration statement on Form S-1.
2. RECAPITALIZATION AND PREFERRED STOCK EXCHANGE
On March 12, 1996, the Company's stockholders approved a change to the Company's
capital structure and a related revision to the Company's Articles of
Incorporation (the recapitalization). The restated Articles of Incorporation
authorize the Company to issue 88,500,000 shares of Class A Common Stock,
without par value; 1,500,000 shares of Class B Common Stock, without par value,
and 10,000,000 shares of Preferred Stock. Pursuant to the recapitalization,
each outstanding share of Common Stock prior to recapitalization was converted
on a pro rata basis to 1,900 shares of Class A Common Stock and 100 shares of
Class B Common Stock. The weighted average number of shares and amounts
reported for earnings per share have been restated to give retroactive effect to
the stock split resulting from the recapitalization.
On April 29, 1996, the Company designated 5,000,000 shares of its preferred
stock as Series A Preferred Stock and on July 18, 1996, such shares were
exchanged for 5,000,000 shares of Class A Common Stock. Each share of Series A
Preferred Stock has a liquidation preference of $20 and voting rights similar to
that of Class A Common Stock. The Series A Preferred Stock pays cumulative
annual cash dividends of $1 per share, payable quarterly in cash, and is
redeemable by the Company at $20 per share plus unpaid dividends if the stock
ceases to be beneficially owned by a Farm Bureau organization.
Holders of the Class A Common Stock and Series A Preferred Stock, together as a
group, and Class B Common Stock are entitled to vote as separate classes on all
issues, except that only holders of the Class A Common Stock and Series A
Preferred Stock vote for the election of Class A Directors (three to five) and
only holders of the Class B Common Stock vote for the election of Class B
Directors (ten to twenty). Voting for the Directors is noncumulative. In
addition, various ownership aspects of the Company's Class B Common Stock are
governed by a Class B Shareholder Agreement which results in the Iowa Farm
Bureau Federation maintaining control of the Company. Holders of Class A Common
Stock and Class B Common Stock are entitled to share ratably on a share-for-
share basis with respect to common stock dividends.
8
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. INVESTMENT OPERATIONS
Fixed maturity securities (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, net of
related adjustments to deferred policy acquisition costs, value of insurance in
force acquired, unearned revenue reserve and deferred income taxes. Equity
securities (common and non-redeemable preferred stocks) are reported at market.
The change in unrealized appreciation and depreciation of marketable equity
securities (net of related deferred income taxes, if any) is included directly
in stockholders' equity.
Net unrealized investment gains as reported were comprised of the following:
JUNE 30, DECEMBER 31,
1996 1995
-------------------------
Unrealized appreciation on fixed maturity
and equity securities available for sale $ 17,881 $ 74,128
Adjustments for assumed changes in
amortization pattern of:
Deferred policy acquisition costs (2,901) (12,700)
Value of insurance in force acquired 498 (4,451)
Unearned revenue reserve 398 1,189
Provision for deferred income taxes (5,558) (20,359)
-------------------------
Net unrealized investment gains $ 10,318 $ 37,807
-------------------------
-------------------------
In February 1996, an equity investee of the Company completed an initial public
offering which resulted in an increase of $4,859, net of $2,617 in taxes, in
the Company's share of the investee's stockholders' equity. This increase was
credited directly to common stock, allocated proportionately among Class A
Common Stock and Class B Common Stock based on shares outstanding. As a result
of the public offering, the Company's voting stock interest in the investee
declined to an amount less than 20%. Accordingly, the Company discontinued the
use of the equity method of accounting for this investment and has classified
the investment as equity securities in the balance sheet for that portion of the
investment (carrying value $13,871 at June 30, 1996) that is available for sale
and as a long-term investment in the balance sheet for that portion (carrying
value $8,725 and market value $53,050 at June 30, 1996) that the Company is
restricted from selling within one year due to trading restrictions under
applicable securities laws. At December 31, 1995, the investment had a
carrying value of $4,891 and was classified as securities and indebtedness of
related parties in the balance sheet.
9
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
4. PROPERTY-CASUALTY REINSURANCE POOL PARTICIPATION
Property-casualty business written by Utah Farm Bureau Insurance Company
(Utah Insurance), a subsidiary of the Company, is pooled with business
written by several property-casualty affiliates. Through December 31, 1995,
Utah Insurance's participation in the reinsurance pool was 8%. On June 30,
1996, Utah Insurance's share of the pool was increased to 20%, retroactive to
January 1, 1996. In accordance with retrospective accounting for reinsurance
assumed, the property-casualty operating results included in the
consolidated statement of operations for the six month period ended June 30,
1996 includes that amount applicable to 8% of the reinsurance pool and the
operating results applicable to the increase in the pooling percentage for
the period ($779 loss before income taxes) has been deferred and will be
amortized over the premium paying period of the underlying policies
(generally 6 to 12 months). Subsequent to June 30, 1996, Utah Insurance will
record 20% of the reinsurance pool results, with the exception of development
on loss and loss adjustment expense reserves relating to claims incurred
prior to January 1, 1996, of which Utah Insurance's participation will remain
at 8%. On June 30, 1996, the Company recorded additional investments
($13,475 million), deferred policy acquisition costs ($1,618), other assets
($1,381), reserves and unearned premiums on property-casualty policies
($16,845) and other liabilities ($408) as a result of the increase in the
reinsurance pool participation percentage.
5. CREDIT ARRANGEMENTS
As an investor in the Federal Home Loan Bank (FHLB), the Company has the right
to borrow up to $48,229 from the FHLB as of June 30, 1996. At June 30, 1996,
the Company had no outstanding borrowings under this credit arrangement.
6. COMMITMENTS AND CONTINGENCIES
In connection with the sale of certain real estate property, Rural Security Life
Insurance Company, a subsidiary of the Company that was liquidated in 1995,
agreed to act as guarantor of a mortgage loan between the purchaser and a bank.
Farm Bureau Life Insurance Company (Farm Bureau Life) has now taken the position
of Rural Security Life Insurance Company with respect to the guarantee.
Pursuant to the agreement, the Company, through Farm Bureau Life, is required to
deposit securities in a trust in an amount at least equal to the outstanding
balance of the mortgage loan. Should the purchaser default on the mortgage, the
bank has the ability to withdraw the securities at which time the Company would
secure a first interest in the underlying property. At June 30, 1996, the
outstanding balance of the mortgage loan is $4,839. The mortgage loan, which is
current at June 30, 1996, requires monthly payments at the lenders' prime
commercial rate through December 31, 1996, at which time a balloon payment of
$4,563 is due.
In connection with the sale of the aforementioned real estate property, a
subsidiary of the Company entered into a real estate management agreement
whereby it agreed to pay any cash flow deficiencies (as defined in the
agreement) through 1997. The agreement also provided that the subsidiary would
receive 35% of any excess cash flow generated during the same period. At June
30, 1996, the Company assessed the probability and amount of future cash
payments pursuant to the agreement and determined that an accrual of $141 was
appropriate. While such future amounts are subject to the actual experience of
the underlying retail facility, management believes that assumptions utilized in
establishing the accrual are reasonable in all material respects.
In the normal course of business, the Company may be involved in litigation
10
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
where amounts are alleged that are substantially in excess of contractual
policy benefits or certain other agreements. At June 30, 1996, management is
not aware of any claims for which a material loss is reasonably possible.
Assessments are, from time to time, levied on the insurance subsidiaries of the
Company by life and health guaranty associations in most states in which the
subsidiaries are licensed to cover losses of policyholders of insolvent or
rehabilitated companies. In some states, these assessments can be partially
recovered through a reduction in future premium taxes. Assessments have not
been material to the Company's financial statements prior to 1991. However, the
economy and other factors have caused a number of failures of substantially
larger companies since that time. The Company has not been able to reasonably
estimate potential future assessments, so no amounts have been provided for in
the accompanying financial statements.
11
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 HEREIN. UNLESS NOTED
OTHERWISE, ALL REFERENCES INCLUDED HEREIN 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 WESTERN
FARM BUREAU LIFE INSURANCE COMPANY (WESTERN LIFE) (COLLECTIVELY, THE LIFE
COMPANIES) AND ITS PROPERTY-CASUALTY INSURANCE SUBSIDIARY, UTAH FARM BUREAU
INSURANCE COMPANY (UTAH INSURANCE).
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
A summary of the Company's premiums and product charges is as follows:
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
------- -------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Universal life and annuity product charges $22,457 $21,750
Traditional life insurance premiums 43,646 39,252
Accident and health premiums 5,597 5,101
Property-casualty premiums 8,927 9,190
------- -------
Total $80,627 $75,293
------- -------
------- -------
Premiums and product charges increased $5.3 million, or 7.1%, to $80.6 million
for the 1996 period compared to $75.3 million for the 1995 period. This
increase consisted primarily of a $5.1 million, or 8.4%, increase in traditional
life insurance premiums and universal life and annuity product charges which,
management believes, is principally attributable to the introduction of a new
incentive agent compensation program effective January 1, 1996 and to more
effective and increased training of its agency force. In addition, cost of
insurance charges on universal life products increased $205,000 during the 1996
period compared to the 1995 period as a result of an increase of business
inforce, partially offset by a decrease in cost of insurance rates ranging from
4% to 12% which took effect March 14, 1996. Accident and health premiums
increased $496,000, or 9.7%, due to new sales coupled with favorable
persistency. Property-casualty premiums decreased $263,000, or 2.9%, due to the
Company's nonrenewal of certain unaffiliated reinsurance assumed contracts and
premium rate decreases on workers' compensation insurance. Although the life
and property-casualty insurance industries are competitive, the Company has not
experienced any unusual pricing pressures in its lines of business or in the
states in which it conducts operations.
Net investment income increased $3.7 million, or 3.7%, to $104.6 million for the
1996 period compared to $100.9 million for the 1995 period. The increase
resulted principally from a 10.1% increase in average invested assets,
excluding invested assets of FBL Ventures of South Dakota Inc. (FBL Ventures),
a venture capital subsidiary, to $2,689 million in the 1996 period from $2,442
million in the 1995 period, partially offset by a 50 basis point decline in the
annualized yield earned on average invested assets (excluding yield attributable
to FBL Ventures) to 7.67% in the 1996 period from 8.17% in the 1995 period. The
increase in average invested assets is attributable to net positive cash flows
from operating activities totaling $144.0 million during the period from June
30, 1995 to June 30, 1996 and to net positive cash flows from interest sensitive
products totaling $47.0 million during the same period. The decline in yield on
average invested assets is primarily the result of investing a majority of these
12
positive cash flows and cash from investing activities in lower yielding
securities due principally to market interest rates during the period from
June 30, 1995 to June 30, 1996 being lower than the average effective yield
of the investment portfolio. Also contributing to the increase in net
investment income was a $382,000 increase in the net investment income of FBL
Ventures to $3.4 million in the 1996 period from $3.0 million in the 1995
period. See "-- Adjusted Operating Income."
Realized gains (losses) on investments decreased $3.4 million, or 120.5%, to a
loss of $583,000 for the 1996 period compared to a gain of $2.8 million for the
1995 period. The decrease resulted primarily from the timing of the sale of
certain fixed maturity and equity securities. The level of realized gains 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 $2.8 million, or 19.8%, to $11.6 million for the 1996
period compared to $14.4 million for the 1995 period due primarily to a $2.1
million decrease in commission income from the sale of unaffiliated insurers'
medical products. Effective January 1, 1996, a majority of these products are
marketed through Farm Bureau Mutual Insurance Company, an affiliate. In
addition, rental and leasing income decreased approximately $382,000 due
principally to a decline in assets being leased.
A summary of the Company's policy benefits is as follows:
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Policy benefits:
Universal life and annuity benefits $60,031 $54,489
Traditional life insurance and accident
and health benefits 26,020 26,598
Increase in benefit reserves 15,359 13,718
Distributions to participating
policyholders 13,394 12,955
Property-casualty losses and loss
adjustment expenses 6,805 6,594
-------- --------
Total $121,609 $114,354
-------- --------
-------- --------
Policy benefits increased $7.2 million, or 6.3%, to $121.6 million for the 1996
period compared to $114.4 million for the 1995 period. Included in this
increase was a $5.5 million increase in universal life and annuity benefits
consisting of a $4.2 million increase in interest credited to these contracts
and a $1.3 million increase in universal life death benefits. The increase in
interest credited is principally attributable to a larger volume of business in
force as the Company's interest crediting rates were relatively consistent
during the periods. The weighted average crediting rate for the Company's
annuity liabilities decreased to 6.55% for the 1996 period from 6.58% for the
1995 period, and the weighted average crediting rate for the Company's universal
life liabilities increased to 6.66% from 6.63% for the respective periods. The
interest crediting rates changed slightly despite a 36 basis point decrease in
the annualized yield on the types of invested assets supporting universal life
and annuity liabilities due primarily to the timing of the Company's adjustments
to its interest crediting rates for fluctuations in portfolio yield.
Traditional life and accident and health policy benefits increased $1.1 million,
or 2.6%, consisting of a $1.6 million increase in the change in the reserves
on those products, a $922,000 decrease in surrender benefits and a $344,000 net
increase in other benefits. Distributions to policyholders increased to $13.4
million from $13.0 million due to an increase in the amount of participating
business in force, partially offset by a reduction in the average dividend rate
credited to these policies to 6.36% from 6.49%. Losses and loss adjustment
expenses incurred on property-casualty policies increased to $6.8 million, or
3.2%, in the 1996 period from $6.6 million in the 1995 period. The loss and
loss adjustment expense ratio increased in the 1996 period to 76.2% from 71.8%
in the 1995 period primarily due to less favorable weather conditions resulting
in property losses in the 1996 period.
13
A summary of the Company's underwriting, acquisition and insurance expenses is
as follows:
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance
expenses:
Commission expense, net of deferrals $ 5,015 $ 4,219
Amortization of deferred policy acquisition
costs 5,460 5,209
Other underwriting, acquisition and
insurance expenses, net of deferrals 20,704 29,219
-------- --------
Total $31,179 $38,647
-------- --------
-------- --------
Commission expense increased $796,000, or 18.9%, to $5.0 million for the 1996
period compared to $4.2 million for the 1995 period. This increase is primarily
attributable to a change in the Company's incentive agent compensation program
effective January 1, 1996, under which agency managers are paid overwrite
commissions on first year and renewal premiums rather than a base salary. Also
contributing to the increase in commission expense is a 5.3% increase in direct
life insurance premiums collected in the 1996 period compared to the 1995
period.
Amortization of deferred policy acquisition costs increased $251,000, or 4.8%,
to $5.5 million for the 1996 period compared to $5.2 million for the 1995 period
principally due to a greater volume of business in force, partially offset by a
$977,000 reduction in amortization due to realized gains (losses) on
investments.
Other underwriting, acquisition and insurance expenses decreased $8.5 million,
or 29.1%, to $20.7 million for the 1996 period compared to $29.2 million for the
1995 period. This decrease is primarily attributable to new marketing
agreements with Farm Bureau property-casualty insurance companies doing business
in the Company's marketing territory whereby the property-casualty insurance
companies develop and manage the Company's agency force for a fee based on first
year life insurance premiums and annuity deposits. As a result of the
agreements, various fixed marketing costs that were charged to expense in the
1995 period have been replaced by lower fees ($1.6 million for the 1996 period)
which vary based on premium volume and are deferred and amortized with other
policy acquisition costs. In addition, expense reductions were realized as a
result of discontinuing the sale of unaffiliated insurers' medical products (see
discussion regarding other income above). Also, approximately $2.4 million of
the decrease is attributable to the elimination of an agent bonus program in
1996, one-time severance benefit payments to certain employees in the 1995
period and a decrease in defined benefit plan expense allocated to the Company.
Furthermore, amortization of value of insurance in force acquired decreased
$503,000 in the 1996 period compared to the 1995 period due to the impact of
realized gains and losses on investments.
Interest expense decreased $325,000, or 46.6%, to $373,000 for the 1996 period
compared to $698,000 for the 1995 period due principally to a decline in the
average long-term debt balance outstanding to $11.8 million during the 1996
period from $16.8 million during the 1995 period.
Other expenses increased $273,000, or 3.3%, to $8.6 million for the 1996 period
compared to $8.3 million for the 1995 period due principally to an increase in
the level of investment advisory and management services provided to affiliates
and other third parties.
Pretax income before minority interest in earnings of subsidiaries and equity
income increased $3.1 million, or 9.8%, to $34.5 million for the 1996 period
compared to $31.4 million for the 1995 period. This increase was primarily the
result of improved profitability of the life insurance operations offset, in
part, by the impact of realized gains and losses on investments.
14
Income taxes increased $826,000, or 7.7%, to $11.5 million for the 1996 period
compared to $10.7 million for the 1995 period. The effective tax rate for the
1996 period was 33.3% compared to 33.9% for the 1995 period. The effective tax
rate during both periods was lower than the federal statutory rate of 35%
primarily due to tax exempt interest and dividend income offset, in part, by
state income taxes.
Net income increased $4.4 million, or 21.7%, to $24.5 million for the 1996
period compared to $20.1 million in the 1995 period. The increase was the
result of the increases in pretax income discussed above and a $2.1 million
increase in equity income. The increase in equity income resulted primarily
from one general partnership investment.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
A summary of the Company's premiums and product charges is as follows:
THREE MONTHS ENDED JUNE 30,
---------------------------
1996 1995
------- -------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Universal life and annuity product charges $11,140 $11,118
Traditional life insurance premiums 24,515 21,025
Accident and health premiums 2,945 2,718
Property-casualty premiums 4,629 4,867
------- -------
Total $43,229 $39,728
------- -------
------- -------
Premiums and product charges increased $3.5 million, or 8.8%, to $43.2 million
for the second quarter of 1996 compared to $39.7 million for the second quarter
of 1995 due to the reasons cited above for the six month periods.
Net investment income decreased $616,000, or 1.2%, to $52.2 million for the
second quarter of 1996 compared to $52.8 million for the second quarter of 1995.
The decrease resulted principally from a $1.6 million decrease in the net
investment income of FBL Ventures to $1.6 million in the second quarter of 1996
from $3.2 million in the second quarter of 1995. In addition, the Company's
annualized yield earned on average invested assets (excluding yield attributable
to FBL Ventures) declined 54 basis points to 7.70% in the second quarter of 1996
from 8.24% in the second quarter of 1995. These decreases were partially offset
by an 8.8% increase in average invested assets, excluding invested assets of FBL
Ventures, to $2,703 million in the second quarter of 1996 from $2,485 million in
the second quarter of 1995. The decline in yield on average invested assets and
the increase in average invested assets is due primarily to the factors
described above for the six month periods. See "-- Adjusted Operating Income."
Realized gains on investments increased $527,000, or 53.3%, to $1.5 million for
the second quarter of 1996 compared to $988,000 for the second quarter of 1995.
The increase resulted primarily from the timing of the sale of certain fixed
maturity and equity securities. The level of realized gains 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 $1.3 million, or 18.0%, to $6.0 million for the second
quarter of 1996 compared to $7.3 million for the second quarter of 1995 as a
result of the factors described above for the six month periods.
15
A summary of the Company's policy benefits is as follows:
THREE MONTHS ENDED JUNE 30,
-----------------------------
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
Policy benefits:
Universal life and annuity benefits $ 29,678 $ 27,418
Traditional life insurance and accident and health benefits 13,924 13,883
Increase in benefit reserves 10,065 9,256
Distributions to participating policyholders 6,919 6,350
Property-casualty losses and loss adjustment expenses 3,594 3,620
------------ ------------
Total $ 64,180 $ 60,527
------------ ------------
------------ ------------
Policy benefits increased $3.7 million, or 6.0%, to $64.2 million for the second
quarter of 1996 compared to $60.5 million for the second quarter of 1995.
Universal life and annuity benefits, traditional life insurance and accident and
health benefits and distributions to participating policyholders increased
primarily due to the same reasons cited above for the six month periods. Losses
and loss adjustment expenses incurred on property-casualty policies decreased
$26,000 in the second quarter of 1996 compared to the second quarter of 1995
despite less favorable weather conditions due to improved underwriting results
on reinsurance business assumed. Overall, the loss and loss adjustment expense
ratio increased in the second quarter of 1996 to 77.6% from 74.4% in the second
quarter of 1995.
A summary of the Company's underwriting, acquisition and insurance expenses is
as follows:
THREE MONTHS ENDED JUNE 30,
----------------------------
1996 1995
------------- -------------
(DOLLARS IN THOUSANDS)
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals $ 2,572 $ 2,330
Amortization of deferred policy acquisition costs 2,775 2,568
Other underwriting, acquisition and insurance expenses,
net of deferrals 10,052 13,276
------------- -------------
Total $ 15,399 $ 18,174
------------- -------------
------------- -------------
Commission expense increased $242,000, or 10.4%, to $2.6 million for the second
quarter of 1996 compared to $2.3 million for the second quarter of 1995
principally due to the same factors noted above for the six month periods.
Amortization of deferred policy acquisition costs increased $207,000, or 8.1%,
to $2.8 million for the second quarter of 1996 compared to $2.6 million for the
second quarter of 1995 principally due to a greater volume of business in force,
partially offset by a $447,000 reduction in amortization due to realized gains
(losses) on investments.
Other underwriting, acquisition and insurance expenses decreased $3.2 million,
or 24.3%, to $10.1 million for the second quarter of 1996 compared to $13.3
million for the second quarter of 1995 due principally to the reasons cited
above for the six month periods.
Interest expense decreased $196,000, or 57.3%, to $146,000 for the second
quarter of 1996 compared to $342,000 for the second quarter of 1995 due
principally to a decline in the average long-term debt balance outstanding
during the periods.
16
Other expenses increased $346,000, or 8.1%, to $4.6 million for the second
quarter of 1996 compared to $4.3 million for the second quarter of 1995 due
principally to the reasons cited above for the six month periods.
Pretax income before minority interest in earnings of subsidiaries and equity
income increased $1.1 million, or 6.1%, to $18.6 million for the second quarter
of 1996 compared to $17.5 million for the second quarter of 1995. This increase
was primarily the result of improved profitability of the life insurance
operations and the impact of realized gains and losses on investments.
Income taxes decreased $15,000, or 0.3%, to $5.8 million for the second quarter
of 1996. The effective tax rate for the second quarter of 1996 was 31.2%
compared to 33.2% for the second quarter of 1995. The effective tax rate during
both periods was lower than the federal statutory rate of 35% due to tax exempt
interest and dividend income offset, in part, by state income taxes.
Net income increased $2.5 million, or 22.7%, to $13.6 million for the second
quarter of 1996 compared to $11.1 million in the second quarter of 1995. The
increase was the result of the increases in pretax income and equity income
discussed above for the six month periods.
ADJUSTED OPERATING INCOME
The following table reflects net income adjusted to eliminate certain items
which management believes are not indicative of overall operating trends,
including net realized gains on investments (less that portion of amortization
of deferred policy acquisition costs and value of insurance in force acquired
and income taxes attributable to such gains) and net income (loss) from a
venture capital investment company subsidiary:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income $ 13,575 $ 11,065 $ 24,464 $ 20,108
Adjustments:
Net realized (gains) losses on
investments (1) (1,098) (464) (98) (1,270)
Net (income) loss from FBL Ventures (1,145) (1,897) (2,230) (1,830)
----------- ----------- ----------- -----------
Adjusted operating income $ 11,332 $ 8,704 $ 22,136 $ 17,008
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Adjusted operating income per
common share $ 0.47 $ 0.37 $ 0.93 $ 0.73
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
(1) Represents realized gains on investments less that portion of amortization
of deferred policy acquisition costs and value of insurance in force
acquired and income taxes attributable to such gains.
17
FBL Ventures is a wholly owned investment company subsidiary of Farm Bureau Life
which invests in start-up and mezzanine level venture capital investments in
various sectors. Operating results of FBL Ventures are recognized in accordance
with accounting principles for investment companies and, as such, unrealized and
realized gains and losses on investments are included in net investment income.
Because of the venture capital nature of the underlying investments, the results
of FBL Ventures tend to fluctuate significantly from year to year and need to be
evaluated over a much longer period of time. Therefore, the net income (loss)
is not included in adjusted operating income. As of June 30, 1996, FBL Ventures
had venture capital investments of $21.3 million, consisting of 29 private
equity securities issued by 21 companies. Of the 21 companies in which FBL
Ventures held investments on June 30, 1996, 6 are public and 15 are private. Of
the aggregate value of $21.3 million, investment in publicly traded companies
comprised $8.2 million and investment in non-publicly traded companies comprised
$13.1 million. The number and percent of companies by industry and the value of
the investment by industry was as follows:
PERCENT OF
TOTAL
CARRYING CARRYING
INDUSTRY NUMBER VALUE VALUE
------------------------------------- ---------- ------------ ------------
(DOLLARS IN
THOUSANDS)
Communications technology 5 14.5 $ 3,084
Computer hardware/software 4 15.2 3,220
Biotechnology 5 21.2 4,507
Health care/services/technology 5 36.8 7,819
Specialty retail 1 9.4 2,000
Agriculture 1 2.9 620
It is anticipated that during 1996 all or substantially all of the investments
of FBL Ventures will be sold to a venture capital subsidiary of Farm Bureau
Mutual Insurance Company at their carrying value, which management believes
approximates fair value. Accordingly, the sale will not have a significant
effect on the Company's operating results. The proceeds from the sale are
expected to be invested in fixed maturity securities and mortgage loans.
Management believes the sale of FBL Venture's investments will provide the
Company with more consistent and predictable investment returns and will
facilitate the Company's asset/liability management process.
PROPERTY-CASUALTY REINSURANCE POOL PARTICIPATION
Property-casualty business written by Utah Insurance is pooled with business
written by several property-casualty affiliates. Through December 31, 1995,
Utah Insurance's participation in the reinsurance pool was 8%. On June 30,
1996, Utah Insurance's share of the pool was increased to 20%, retroactive to
January 1, 1996. In accordance with retrospective accounting for reinsurance
assumed, the property-casualty operating results included in the consolidated
statement of operations for the six month period ended June 30, 1996 includes
that amount applicable to 8% of the reinsurance pool and the operating results
applicable to the increase in the pooling percentage for the period ($779 loss
before income taxes) has been deferred and will be amortized over the premium
paying period of the underlying policies (generally 6 to 12 months). Subsequent
to June 30, 1996, Utah Insurance will record 20% of the reinsurance pool
results, with the exception of development on loss and loss adjustment expense
reserves relating to claims incurred prior to January 1, 1996, of which Utah
Insurance's participation will remain at 8%.
18
LIQUIDITY AND CAPITAL RESOURCES
FBL FINANCIAL GROUP, INC.
FBL Financial Group, Inc.'s cash flow from operations will consist of dividends
from subsidiaries, if declared and paid, and fees which it will charge the
various operating subsidiaries and affiliates for management of their
operations, offset by the expenses incurred for salaries and other expenses
related to providing such services.
No dividends were paid in the six month periods ended June 30, 1996 or 1995 by
FBL Financial Group, Inc. to its stockholders. In the future, FBL Financial
Group, Inc. will rely primarily on dividends from the Life Companies to make any
dividend payments to its stockholders. The ability of the Life Companies to pay
dividends to FBL Financial Group, Inc. is limited by law to earned profits
(statutory unassigned surplus) as of the date the dividend is paid, as
determined in accordance with accounting practices prescribed or permitted by
insurance regulatory authorities of the State of Iowa for Farm Bureau Life and
the State of Colorado for Western Life. In addition, under the Iowa and
Colorado Insurance Holding Company Acts, the Life Companies may not pay an
"extraordinary" dividend without prior notice to and approval by the respective
insurance commissioner. An "extraordinary" dividend is defined under the Iowa
and Colorado Insurance Holding Company Acts as any dividend or distribution of
cash or other property whose fair market value, together with that of other
dividends or distributions made within the preceding 12 months, exceeds the
greater of (i) 10% of policyholders'surplus (total statutory capital stock and
statutory surplus) as of December 31 of the preceding year, or (ii) the
statutory net gain from operations of the insurer for the 12 month period ending
the December 31 of the preceding year. For the remainder of 1996, the maximum
amount legally available for distribution to FBL Financial Group, Inc. without
further regulatory approval is approximately $33.5 million from Farm Bureau Life
and $5.7 million from Western Life. Similar restrictions exist with respect to
the payments of dividends by Utah Insurance. Such restrictions are not
considered to bear significantly on the ability of the Company to meet its
obligations.
INSURANCE OPERATIONS
The Life Companies' cash inflows consist primarily of premium income, deposits
to policyholder account balances, 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 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 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, 1996, with cash inflows at levels sufficient to provide the funds
necessary to meet their obligations.
For property-casualty operations the major sources of cash inflow are premiums
and investment income. Major sources of cash outflow are losses and loss
adjustment expenses paid and other underwriting expenses. As with the Life
Companies, the liquidity position of Utah Insurance continued to be favorable in
the six month period ended June 30, 1996, with cash inflows at levels sufficient
to provide the funds necessary to meet its obligations.
For all 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 insurance companies' operations
provided funds amounting to $90.6 million and $52.4 million in the six month
periods ended June 30, 1996 and 1995, respectively. Cash inflows from financing
activities are the result of the significant growth in net deposits to
policyholder account balances for both universal life insurance and annuities
during the six month periods ended June 30, 1996 and 1995. These funds, along
with the excess operating cash inflows, were primarily used to increase the
insurance companies' fixed maturity investment portfolios.
19
Matching the investment portfolio maturities to the cash flow demands of the
type of insurance being provided is an important consideration for each type of
life insurance. The Life Companies continually monitor benefit and claim
statistics to provide projections of future cash requirements. As part of this
monitoring process, the Life Companies perform cash flow testing of their assets
and liabilities under various scenarios to evaluate the adequacy of reserves.
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-backed securities, 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 borrow on a line of credit available 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 borrowing capacity of $48.2 million as of June 30, 1996.
Interest is payable at a current rate upon issuance. As of June 30, 1996, no
line of credit agreement was open and there were no borrowings outstanding.
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-backed securities and its
insurance products, are adequate to meet the Company's anticipated short-term
cash obligations. 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, 1996, the Company had no material commitments for
capital expenditures.
INVESTMENTS
The Company's total investment portfolio increased $84.0 million, or 3.2%, to
$2,730 million at June 30, 1996 compared to $2,646 million at December 31, 1995.
This increase is primarily the result of positive cash flows from operations and
net deposits to policyholder account balances offset, in part, by a $56.2
million decrease in unrealized appreciation on fixed maturity and equity
securities available for sale. In addition, investments increased $13.5 million
as a result of cash received in connection with the increase in Utah Insurance's
reinsurance pool percentage.
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 Company's investment philosophy of
maintaining a largely investment grade portfolio and providing adequate
liquidity for expected liability durations and other requirements.
20
The Company's investment portfolio is summarized in the table below:
AS OF JUNE 30, 1996 AS OF DECEMBER 31, 1995
------------------------ ------------------------
CARRYING CARRYING
VALUE PERCENT VALUE PERCENT
------------ --------- ------------ --------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Public $1,633,340 59.8% $1,597,236 60.4%
Private placement 316,225 11.6 335,905 12.7
144A private placement 166,624 6.1 143,068 5.4
------------ --------- ------------ --------
Total fixed maturities 2,116,189 77.5 2,076,209 78.5
Equity securities 98,041 3.6 83,714 3.1
Held in inventory (1) 23,311 0.9 21,913 0.8
Mortgage loans on real estate 276,828 10.1 266,623 10.1
Investment real estate
Acquired for debt 2,292 0.1 2,220 0.1
Investment 26,682 1.0 26,384 1.0
Policy loans 118,076 4.3 116,107 4.4
Other long-term investments 11,153 0.4 2,892 0.1
Short-term investments 57,532 2.1 50,061 1.9
------------ --------- ------------ --------
Total investments $2,730,104 100.0% $2,646,123 100.0%
------------ --------- ------------ --------
------------ --------- ------------ --------
(1) Held in inventory includes equity securities owned by FBL Ventures totaling
$21.3 million and $20.1 million at June 30, 1996 and December 31, 1995,
respectively.
As of June 30, 1996, 91.7% (based on carrying value) of the fixed maturity
securities were investment grade debt securities, being in the highest two NAIC
designations. Non-investment grade debt securities generally provide higher
yields and involve greater risk 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 3 through 6).
As of June 30, 1996, the Company's investment in non-investment grade debt was
8.3% of fixed maturity securities. At that time no single non-investment grade
holding exceeded .5% of total investments.
21
The following table sets forth the credit quality, by NAIC designation and S&P
rating equivalents, of fixed maturity securities:
FIXED MATURITY SECURITIES BY NAIC DESIGNATION
AS OF JUNE 30, 1996
----------------------------
NAIC CARRYING
DESIGNATION EQUIVALENT S&P RATING (1) VALUE PERCENT
- --------------- --------------------------- -------------- ----------
(DOLLARS IN THOUSANDS)
1 (AAA, AA, A) $1,365,653 64.5%
2 (BBB) 576,231 27.2
-------------- ----------
Total investment grade 1,941,884 91.7
3 (BB) 101,412 4.8
4 (B) 69,747 3.3
5 (CCC, CC, C) 1,626 0.1
6 In or near default 1,520 0.1
-------------- ----------
Total below investment grade 174,305 8.3
-------------- ----------
Total fixed maturities $2,116,189 100.0%
-------------- ----------
-------------- ----------
(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 maturity and equity securities at June 30, 1996:
HELD FOR INVESTMENT
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Bonds:
United States Government and agencies --
mortgage-backed securities $218,819 $5,912 $(2,127) $222,604
Industrial and miscellaneous:
Mortgage-backed securities 492,303 8,685 (11,101) 489,887
Other 5,010 350 (10) 5,350
---------- ---------- ---------- ----------
Total fixed maturities $716,132 $14,947 $(13,238) $717,841
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
22
AVAILABLE FOR SALE
--------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
Bonds:
United States Government and agencies:
Mortgage-backed securities $83,574 $3,127 $(920) $85,781
Other 133,518 537 (2,769) 131,286
State, municipal and other governments 65,212 715 (1,929) 63,998
Public utilities 187,829 4,379 (3,634) 188,574
Industrial and miscellaneous:
Mortgage and asset-backed securities 157,101 1,975 (3,294) 155,782
Other 732,414 25,032 (17,257) 740,189
Redeemable preferred stock 33,652 1,328 (533) 34,447
----------- ----------- ----------- -----------
Total fixed maturities $1,393,300 $37,093 $(30,336) $1,400,057
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Equity securities $86,917 $23,676 $(12,552) $98,041
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The carrying value of the Company's portfolio of fixed maturity securities by
contractual maturity are shown below:
REMAINING MATURITY OF FIXED MATURITY SECURITIES
AS OF JUNE 30, 1996
--------------------------
CARRYING
MATURITY OF FIXED MATURITY SECURITIES VALUE PERCENT
- -------------------------------------------------- ------------ -----------
(DOLLARS IN THOUSANDS)
Due in one year or less $ 43,428 2.1%
Due after one year through five years 189,454 9.0
Due after five years through ten years 283,546 13.4
Due after ten years 612,629 28.9
------------ -----------
1,129,057 53.4
Mortgage and asset-backed securities 952,685 45.0
Redeemable preferred stocks 34,447 1.6
------------ -----------
Total $2,116,189 100.0%
------------ -----------
------------ -----------
Mortgage-backed securities constitute a significant portion of the Company's
portfolio of securities. These mortgage-backed securities are diversified as to
collateral types, cash flow characteristics, and maturity. At June 30, 1996,
the Company held $529.5 million (19.4% of total investments) in residential
mortgage-backed securities and $298.5 million (10.9% of total investments) in
commercial mortgage-backed securities.
At June 30, 1996, the Company held residential collateralized mortgage
obligation (CMO) investments with a market value of $471.8 million as part of
its mortgage-backed securities holdings. CMOs consist of pools of mortgages
divided into sections or "tranches" which provide sequential retirement of the
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bonds. To provide call protection and more stable average lives, the Company
invests in planned amortization classes (PACs), which provide more
predictable cash flows within a range of prepayment speeds (the rate of
individuals refinancing their home mortgages at lower rates) by shifting the
prepayment risks to support tranches. The Company also invests in sequential
tranches, which provide stability in that repayment of principal does not
occur until the previous tranches are paid off. As of June 30, 1996, 79.6%
of the Company's CMO investments are in PAC and sequential pay securities.
The Company does not purchase certain types of collateralized mortgage
obligations. These include, but are not limited to, interest only, principal
only, floater, inverse floater, PAC II, Z and support tranches.
At June 30, 1996, the Company held $276.8 million, or 10.1% 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, 1996, mortgages more than 60 days delinquent accounted for 1.2% 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, 1996 include Mountain (26%) which includes Arizona, Colorado, Idaho, New
Mexico, Nevada, Utah and Wyoming; Pacific (23%) which includes California and
Oregon; and West South Central (18%) which includes Texas and Oklahoma.
Mortgage loans on real estate have also been analyzed by collateral type with
office buildings (41%) and retail facilities (34%) representing the largest
holdings at June 30, 1996.
The Company's investment portfolio at June 30, 1996, also included $57.5 million
of short-term investments, plus $217.1 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's asset-liability management program includes (i) designing and
developing products which encourage persistency and, as a result, creating 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, 1996,
the weighted average life of the fixed maturity portfolio, based on market
values excluding convertible bonds, was approximately 7.9 years. Based on the
results of the fixed income analytical system utilized by the Company, including
its mortgage backed prepayment assumptions, the effective duration of the fixed
maturity portfolio was 4.6 as of June 30, 1996.
OTHER ASSETS
Securities and indebtedness of related parties decreased $17.8 million, or
23.9%, due to the repayment of several lines of credit and the reclassification
of an equity investment resulting from a reduction in the Company's voting stock
interest in the equity investee to an amount less than 20%. Deferred policy
acquisitions costs increased $21.1 million, or 15.7%, due primarily to new sales
and an adjustment ($9.8 million increase) related to the valuation of fixed
maturity securities designated as available for sale. Value of insurance in
force acquired increased $5.0 million, or 34.8%, principally due to an
adjustment ($4.9 million increase) related to the valuation of fixed maturity
securities designated as available for sale. At June 30, 1996, the Company had
total assets of $3,203 million, a 3.6% increase from total assets at December
31, 1995.
LIABILITIES
Policy liabilities and accruals increased $87.7 million, or 4.1%, due
principally to an increase in the volume of business in force. In addition,
reserves and unearned premiums on property-casualty policies increased $16.8
million as a result of the increase in Utah Insurance's reinsurance pool
percentage. Deferred income taxes decreased $8.5 million, or 21.5%, due
primarily to an adjustment ($14.8 million decrease) related to the valuation of
fixed maturity and equity securities designated as available for sale offset, in
part, by other various temporary differences between recognition of income for
book and tax purposes. At June 30, 1996, the Company had total liabilities of
$2,632 million, a 4.3% increase from total liabilities at December 31, 1995.
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STOCKHOLDERS' EQUITY
In March 1996, the Company's stockholders approved a change to the
Company's capital structure and a related revision to the Company's Articles
of Incorporation (the recapitalization). Pursuant to the recapitalization,
each outstanding share of Common Stock prior to recapitalization was
converted on a pro rata basis to 1,900 shares of Class A Common Stock and 100
shares of Class B Common Stock.
At June 30, 1996, stockholders' equity was $566.1 million, or $23.73 per share,
compared to $564.3 million, or $23.65 per share (after giving effect to stock
split) at December 31, 1995. The decrease in unrealized appreciation of fixed
maturity and equity securities classified as available for sale reduced
stockholders' equity $27.5 million, after related adjustments to deferred policy
acquisition costs, value of insurance in force acquired, unearned revenue
reserve and deferred income taxes. During the 1996 period, a credit of $4.9
million was posted directly to stockholders' equity as a result of an initial
public offering completed by an equity investee of the Company.
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
None
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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 14, 1996 FBL FINANCIAL GROUP, INC.
By/s/ Thomas R. Gibson
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Executive Vice President, General Manager,
Chief Executive Officer and Director
By/s/ James W. Noyce
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Vice President, Chief Financial Officer
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