UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________
Commission File Number: 1-11917
FBL FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Iowa 42-1411715
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (515) 225-5400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock, Without Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment of this Form 10-K. __X__ Yes ____ No
Aggregate market value of Class A Common Stock held by non-affiliates of the
registrant (computed as of March 17, 1997): $190,934,902
Indicate the number of shares outstanding of each of the registrant'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 March 17, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
proxy statement for the annual meeting of shareholders to be held May 21, 1997
are incorporated by reference into Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
FBL Financial Group, Inc. (the Company), through its subsidiaries, underwrites,
markets and distributes life insurance, annuities, property-casualty insurance
and mutual funds to individuals and small businesses in 15 midwestern and
western states. The Company has exclusive marketing arrangements with the state
Farm Bureau Federations in its territory and targets sales to approximately
700,000 Farm Bureau member families and other rural, small town and suburban
residents through an exclusive agency force. The Company was incorporated in
Iowa in October 1993 and its principal insurance subsidiaries include Farm
Bureau Life Insurance Company (Farm Bureau Life), Western Farm Bureau Life
Insurance (Western Life) (collectively, the Life Companies) and Utah Farm Bureau
Insurance Company (Utah Insurance).
BUSINESS STRATEGY
The Company's current management team which was appointed in 1991 has initiated
a strategy focused on enhancing profitability and expanding its market
territory. The Company's strategy is designed to capitalize on the Company's
exclusive association with state Farm Bureau Federations in its operating
territory. Key components of the Company's strategy include:
ENHANCING PRODUCT PROFITABILITY. The Company is focusing on improving its
margins by analyzing its product portfolio for competitiveness and
profitability. The Company is currently reviewing its allocation of capital by
product line, challenging policyholder dividend and interest rate crediting
policies, modifying its systems to accommodate alternative product designs and
considering possible changes in product structure.
INCREASING SALES. The Company has significant opportunity to increase its sales
through cross selling life insurance products to Farm Bureau members who already
own property-casualty policies offered by the Company or other Farm Bureau
affiliated property-casualty companies. For example, in Iowa approximately 28%
of Farm Bureau members own at least one of the Company's life products, 50% own
at least one of the Company's property-casualty products, and approximately 19%
own both, providing significant opportunity for cross selling. Prior to 1996,
agents selling the Company's life insurance products in the western eight-state
marketing territory were not able to sell the Company's variable life insurance
and variable annuity products. In March 1996, the Company introduced a uniform
portfolio of life insurance and annuity products throughout its market
territory. This portfolio improves the products available to many agents and
expands the offering of variable products into all states in the Company's
territory. Additionally, the Company seeks to enhance agent productivity through
a restructured incentive compensation program and more effective and increased
training.
GROWING THROUGH ACQUISITIONS AND JOINT VENTURES. Since 1993, the Company has
consolidated operations with two Farm Bureau affiliated insurance companies,
resulting in a significant expansion of marketing area and revenue base. The
Company will continue to pursue growth opportunities through acquisitions and
mergers with Farm Bureau affiliates and other companies. Management believes the
Company's position as a publicly traded Farm Bureau affiliated insurance company
will increase its attractiveness as a merger partner. Additionally, the Company
seeks to leverage its position as the only Farm Bureau company with variable
product expertise by entering into joint ventures and other marketing
arrangements with Farm Bureau affiliates and other organizations.
REDUCING OPERATING EXPENSES. The Company has focused on reducing operating
expenses through reengineering projects and consolidation of operations and
systems. These efforts have resulted in significant cost savings over the last
three years. During 1997, the Company is initiating an expense benchmarking
project to identify areas where expenses may be further reduced to enhance its
competitive position relative to peers in the industry.
MARKETING
MARKET AREA
The Company's sales are conducted in the following 15 state region: multi-line
(both life and property-casualty products offered through the Company) states -
Arizona, Iowa, Minnesota, New Mexico, South Dakota and Utah; life only (only
life products offered through the Company) states - Colorado, Idaho, Montana,
Nebraska, North Dakota, Oklahoma, Wisconsin and Wyoming; and variable products
only (only variable products offered through the Company) state - Kansas.
The Company's target market consists primarily of farmers, ranchers, rural and
suburban residents and related individuals and businesses. Management believes
that this target market represents a relatively financially conservative and
stable market which is generally familiar with Farm Bureau and the benefits of
Farm Bureau membership. Many of the Company's customers are self employed
individuals who are responsible for providing for their own insurance needs.
Their financial planning needs tend to focus on security, primary insurance
needs and retirement savings.
AFFILIATION WITH FARM BUREAU
Many of the Company's customers are members of Farm Bureau organizations
affiliated with the American Farm Bureau Federation, the nation's largest grass
roots farm and ranch organization with 4.7 million member families. In order to
market insurance products in a given state using the "Farm Bureau" and "FB"
designations and related trademarks and service marks, a company must have
permission from the state's Farm Bureau Federation. Historically, these
marketing rights have only been granted to companies owned by or closely
affiliated with Farm Bureau Federations. For each of the 15 states in the
Company's market territory, the Company has the exclusive right to use the "Farm
Bureau" name and "FB" logo for marketing the products it sells in that state.
The American Farm Bureau Federation has the right to terminate the Company's
right to use the "Farm Bureau" and "FB" designations as to all states (i) in the
event of a material breach of the trademark license not cured by the Company
within 60 days, (ii) immediately in the event of termination by the American
Farm Bureau of the Iowa Farm Bureau's membership in the American Farm Bureau or
(iii) in the event of a material breach of the Iowa Farm Bureau Federation's
membership agreement with the American Farm Bureau Federation, including by
reason of the failure of the Iowa Farm Bureau Federation to cause the Company to
adhere to the American Farm Bureau Federation's policies. Each state Farm Bureau
federation in the Company's trade territory could terminate the right of the
Company to use the Farm Bureau designations in that particular state without
cause on 60 days' notice. Management believes that the occurrence of any such
termination is highly unlikely.
Management believes its relationship with Farm Bureau provides a number of
advantages. Farm Bureau organizations in the Company's territories tend to be
well known and long established, have active memberships and provide a number of
benefits other than financial services. Management believes the strength of
these organizations provides enhanced prestige and brand awareness for the
Company's products and increased access to Farm Bureau members. Additionally,
Farm Bureau members provide a financially conservative and stable target market
which has resulted in persistency for the Company's products that exceeds
industry averages.
The Company's life insurance products are currently available for sale to both
members and non-members. Most of the Company's property-casualty products are
available only for sale to Farm Bureau members. Annual Farm Bureau memberships
generally cost $30 to $140 and are available to individuals and families who are
farmers and ranchers, and to the general public as well.
To facilitate the Company's working relationship with state Farm Bureau
organizations, the President of each of the 15 state Farm Bureau federations in
the Company's market territory serves on the Company's Board of Directors.
Pursuant to a royalty agreement with the Company, each state Farm Bureau
federation or its assignee benefits from its relationship with the Company
through receipt of royalties on the sale of the Company's products in the state.
For the year ended December 31, 1996, total royalties paid to Farm Bureau
organizations were approximately $1.4 million.
Beginning in 1996, the Company entered into new marketing arrangements with all
of the Farm Bureau property-casualty companies in its marketing area, both
affiliated and non-affiliated, pursuant to which the property-casualty companies
develop and manage their common agency force for a fee in the nature of an
overwrite commission based on first year life insurance premiums and annuity
deposits. The overwrite commissions are generally equal to one-third of the
first year commissions paid to the agent by the Company. Overwrite commissions
paid by Farm Bureau Life for 1996 were approximately $2.8 million and for
Western Life approximately $1.5 million.
The Company is assisted in its relationships with the property-casualty
organizations by an Advisory Committee, consisting of the general manager of
each Farm Bureau property-casualty insurance company in the Company's market
territory. The Advisory Committee meets on a regular basis to coordinate efforts
and concerns relating to the agency force and other related matters. Management
views the Advisory Committee as an important contributor to the Company's
success in marketing its products through the Farm Bureau system.
All of the state Farm Bureau federations in the Company's marketing area are
associated with the American Farm Bureau Federation. The primary goal of the
American Farm Bureau Federation is to improve net farm income and the quality of
life of farmers, ranchers and other rural residents through education and
representation with respect to public policy issues. There are currently Farm
Bureau federations in all 50 states and Puerto Rico. Within each state, Farm
Bureau is generally organized at the county level. Farm Bureau programs
generally include policy development, state and national lobbying activities,
leadership development, speaker corps, media relations, crime prevention,
marketing clubs, women's activities, young farmers activities, promotion and
education and commodity promotion activities. Member services provided by Farm
Bureau vary state by state but generally include newspapers and magazines, theft
and arson rewards, eye care programs, vehicle purchase and leasing programs,
accidental death insurance, credit card programs, computerized farm accounting
services, electronic information networks, feeder cattle procurement services,
health care insurance and financial planning services.
EXCLUSIVE AGENCY FORCE
The Company's life insurance, disability income insurance, property-casualty
insurance and mutual funds are marketed throughout its market territory by an
exclusive Farm Bureau force of approximately 1,814 agents and agency managers.
The Company has a written contract with each member of the agency force. The
contracts specify and limit the authority of the agents to solicit insurance
applications on behalf of the Company; describe the nature of the independent
contractor relationship between the Company and the agent; define the agent as
an exclusive agent limited to selling insurance of the types sold on behalf of
the Company, only for the Company and Farm Bureau affiliated insurance
companies; allow either party to immediately terminate the contract; specify the
compensation payable to the agents; reserve ownership of customer lists to the
Company, and set forth all other terms and conditions of the relationship.
Sales activities of the Company's agents focus on personal contact and on cross
selling the multiple lines of products available through Farm Bureau affiliated
companies. Agents' offices are generally located in or serve as the Farm Bureau
office for their community. Management believes that Farm Bureau name
recognition and access to Farm Bureau membership leads to additional customers
and cross selling of additional insurance products.
The Company's agents are independent contractors and exclusive agents of the
Company. In the multi-line states, the Company's agents are supervised by agency
managers and assistant managers employed by Farm Bureau Mutual Insurance Company
(Farm Bureau Mutual), Western Agricultural Insurance Company (Western Ag) or
Western Farm Bureau Mutual Insurance Company (Western Mutual), all of which are
under the direction of the Company. There are approximately 53 agents and
managers in Arizona, 45 in New Mexico, 388 in Iowa, 156 in Minnesota, 50 in
South Dakota and 81 in Utah, all of whom market a full range of the Company's
life insurance and property-casualty products and most of whom market the
Company sponsored mutual funds.
In the life-only states, the Company's life insurance products and its sponsored
mutual funds are marketed through agents of the property-casualty company
affiliated with the Farm Bureau Federation in each state. These agents market
the Company's life and mutual fund products (in Kansas, variable products only)
on an exclusive basis and market the property-casualty products of such
affiliated property-casualty companies. The agents are under the management of
such Farm Bureau affiliated property-casualty companies. Agents as well as
agency managers in the life-only states are independent contractors of the
Company. Average life production per agent in the life-only states has
historically been less than average life production per agent in the multi-line
states. Management believes that the introduction of variable products and more
competitive products combined with an enhanced compensation structure will
provide significant opportunities to increase life production per agent in the
life-only states.
Over 93% of the agents in the multi-line states are licensed with the National
Association of Securities Dealers (NASD) to sell the Company's variable life and
annuity products and sponsored mutual funds. Over 95% of Nebraska agents and 73%
of agents in Wisconsin are also NASD licensed. The Company has initiated a
training program for NASD licensing of the agents in the Company's western
marketing territory. Currently 53% of Western Life's agents are NASD licensed
and the Company expects a substantial additional number to become NASD licensed
during 1997.
The Company is responsible for product and sales training for all lines of
business in the multi-line states, and for training the agency force in life
insurance products and sales methods in the life-only states.
Effective January 1, 1996, the Company initiated a new compensation program for
agents and managers. The new plan focuses on increased agent production through
the reduction of the fixed portions of agent compensation and increased
incentives for writing profitable property-casualty business. The new program is
consistent for life insurance compensation in all 14 states, and provides a
competitive basis on which to price its products.
The Company structures its agents' life products compensation system to
encourage production and persistency. Agents receive commissions for new life
insurance and annuity sales and service fees on premium payments in subsequent
years. Production bonuses are paid based on the volume of new life business
written in the prior 12 months and on premium payments in the first three years
subsequent to when new business is written. Production bonuses allow agents to
increase their compensation significantly. Persistency is a common measure of
the quality of life business and is included in calculating the bonus to either
increase or decrease (or even eliminate) the production bonuses earned, because
the Company is willing to pay added incentives for higher volumes of business
only as long as the business is profitable. In 1996, approximately 41% of agent
compensation in the multi-line states was derived from the sale of life and
annuity products.
For property-casualty business written in the multi-line states, the Company's
compensation system is designed to encourage production and profitability.
Agents receive commissions and service fees which are increased or reduced
according to production level and profitability to the Company as measured by
loss ratios. An agent can earn higher property-casualty commissions for
achievement of production standards in life insurance, property insurance and
casualty insurance, tying compensation to production of all lines of business.
In the life-only states, most of the Farm Bureau property-casualty companies
also adjust property-casualty commissions according to life insurance production
levels.
The focus of agency managers is to recruit and train agents to achieve high
production levels of profitable business. Agency managers receive overwrite
commissions on each agent's life insurance commissions which vary according to
that agent's productivity level and persistency of business. During the first
three years of an agent's relationship with the Company, the agent's manager
receives additional overwrite commissions to encourage early agent development.
The Life Companies have a variety of incentives and recognitions to focus agents
on production of quality life insurance business. Some recognitions are jointly
conducted with the property-casualty companies. Management believes that these
programs provide significant incentives for the most productive agents.
Approximately 4% to 6% of the agents qualify for the Company's annual incentive
trip. In 1996, agents qualifying for the incentive trip produced approximately
13% of the Company's first year life premium.
Agent recruiting, training and financing programs are designed to develop a
productive agent for the long term. The one-year agency force retention rate for
1996 in the multi-line states was approximately 88%. Management believes
retention of agents is enhanced because of their ability to sell both life and
property-casualty insurance products, as well as mutual funds.
RATINGS
Ratings are an important factor in establishing the competitive position of
insurance companies. Farm Bureau Life is rated "A+(Superior)" by A.M. Best, A.M.
Best's second highest rating of 13 ratings assigned to solvent insurance
companies, which currently range from "A++(Superior)" to "D(Very Vulnerable)."
Farm Bureau Life has maintained its existing "A+(Superior)" rating since A.M.
Best first began using this rating methodology. Western Life is rated "A
(Excellent)" and the pool which includes Utah Insurance is rated "Ap
(Excellent)" by A.M. Best. A.M. Best ratings consider the claims paying ability
of the rated Company and are not a rating of the investment worthiness of the
rated Company.
SEGMENT INFORMATION
The Company's revenues and net income are primarily derived from its life
insurance segment. For information concerning amounts of revenue, operating
profit and loss and identifiable assets attributable to each of the Company's
segments, see Note 13 of Notes to Consolidated Financial Statements.
LIFE INSURANCE SEGMENT
PRODUCTS
The Life Companies are principally engaged in selling a varied portfolio of
insurance products including traditional permanent life insurance, universal
life, term life, annuities and disability income insurance to middle income
individuals in the rural and suburban areas of its market territory. In March
1996, the Company introduced a uniform portfolio for all new life insurance
sales, which includes the plans and products described below, throughout the
territory. As a result, variable universal life and variable annuities are now
available in the Company's entire marketing territory. Previously, these
products were only available to agents in Iowa, Kansas, Minnesota, Nebraska,
South Dakota, Utah and Wisconsin. Management believes the new uniform portfolio
has and will produce increased sales, as well as result in increased
administrative efficiencies.
VARIABLE UNIVERSAL LIFE INSURANCE. The Company is establishing variable
universal life insurance as its lead life insurance product. This product is
offered by very few multi-line companies. The variable universal life policy
provides permanent life insurance protection with a flexible premium structure
which allows the customer to pre-fund future insurance costs and accumulate
savings on a tax-deferred basis. Premiums received, less policy assessments for
administration expenses and mortality costs, are credited to the policyholder's
account balance. The policyholder has the ability to direct cash value of the
policy to an assortment of variable sub-accounts, all managed by the Company for
an additional fee, and assume the investment risk passed through by those funds.
Variable universal life policyholders can also elect a declared interest option
under which the cash values are credited with interest as declared by the
Company. For the year ended December 31, 1996, variable universal life
represented 13% of first year direct life insurance premiums collected in the
life-only states, 54% of the Company's first year direct life premiums collected
in the multi-line states and 40% of the Company's total first year direct life
insurance premiums collected. All the variable sub-accounts are managed by the
Company and offer as investment options the Company's sponsored mutual funds.
See "Variable Sub-Accounts and Mutual Funds."
UNIVERSAL LIFE INSURANCE. The Company offers a universal life policy which is
similar in design to the variable universal life policy, but without the
additional investment options for the cash value. Interest is credited to the
cash value at rates periodically set by the Company. Agents need not be
registered with the NASD to offer this product. The Company markets a last
survivor universal life policy designed especially for the estate planning
market.
TRADITIONAL LIFE INSURANCE. The Company offers traditional participating whole
life insurance products. Participating whole life insurance provides benefits
for the life of the insured. It provides level premiums and a level death
benefit and requires payments in excess of mortality charges in early years to
offset increasing mortality costs in later years. Under the terms of these
policies, policyholders have a right to participate in the surplus of the
Company to the extent determined by the board of directors, generally through
annual participating policy dividends. In the year ended December 31, 1996,
participating life policies represented 26.4% of first year life insurance
collected premiums. The Company has a substantial book of in-force participating
policies with persistency which has historically exceeded industry averages.
The Company currently markets non-participating term insurance policies that
provide life insurance protection for a specified period. Term insurance is
mortality based and generally has no accumulation values. The Company may change
the premium scales at any time but may not increase rates above guaranteed
levels. Historically, agents in the life-only states have sold more term
insurance. In the year ended December 31, 1996, sales of term insurance
represented 24% of first year direct life premiums collected in the life-only
states. With the introduction of variable products in the western marketing
territory the Company expects the relative amount of term insurance sold will
decline. In the past, the Company sold participating term insurance, but has
discontinued such sales.
ANNUITIES. The Company offers annuities which are generally marketed to
individuals in anticipation of retirement. The Company offers variable and
traditional annuities in the form of flexible premium deferred annuities which
allow policyholders to make contributions over a number of periods. For
traditional annuity products, policyholder account balances are credited
interest at rates determined by the Company. For variable annuities,
policyholders have the right to direct the cash value of the policy into an
assortment of sub-accounts managed by the Company, thereby assuming the
investment risk passed through by those sub-accounts. See "Variable Sub-Accounts
and Mutual Funds." Approximately 62% of the Company's existing individual
annuity business based on account balances is held in qualified retirement
plans. To further encourage persistency, a surrender charge against the
policyholders' account balance is imposed for early termination of the annuity
contract within a specified period after its effective date.
During 1997, the Company is introducing single premium immediate annuity (SPIA)
and single premium deferred annuity (SPDA) products. These products feature a
single premium paid when the contract is issued and interest crediting similar
to other traditional annuities. Benefit payments on SPIA contracts begin
immediately after the issuance of the contract and, for SPDA, are similar to the
Company's other traditional annuity products.
DISABILITY INCOME INSURANCE. The Company writes a number of individual
disability policies. This type of policy provides for payment of benefits in the
event of a disabling accident or illness. Disability benefits reimburse the
policyholder for a specified dollar amount payable over a specific time period
or for the duration of the disability. Disability is defined as inability to
pursue the policyholder's own occupation for the first two years after
disability, and inability to pursue any occupation thereafter. The risks insured
are similar to those insured in a medical expense policy but the claim costs are
much more predictable. Since the policies are guaranteed renewable rather than
noncancellable, the Company may change the premium scale at any time based on
claim costs incurred, subject to regulatory approval. Some disability income
products offer flexibility in coverage amounts as financial needs change.
The following table sets forth the first year and renewal premiums collected for
the Company's life, annuity and accident and health products for the periods
indicated:
COLLECTED PREMIUMS BY PRODUCT TYPE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Direct life premiums collected:
Universal life
First year $ 4,398 $ 2,452 $ 2,321 $ 4,758 $ 2,399
Renewal 46,493 47,901 49,171 24,712 20,554
--------- --------- --------- --------- ---------
Total 50,891 50,353 51,492 29,470 22,953
Variable universal life
First year 9,244 7,689 11,603 9,708 8,939
Renewal 16,715 13,625 10,054 6,914 3,303
--------- --------- --------- --------- ---------
Total 25,959 21,314 21,657 16,622 12,242
Participating whole life
First year 6,105 7,390 9,245 1,500 744
Renewal 58,818 54,743 51,058 44,362 42,823
--------- --------- --------- --------- ---------
Total 64,923 62,133 60,303 45,862 43,567
Other
First year 3,409 3,242 3,137 876 781
Renewal 14,646 13,891 13,622 7,136 4,318
--------- --------- --------- --------- ---------
Total 18,055 17,133 16,759 8,012 5,099
--------- --------- --------- --------- ---------
Total direct life 159,828 150,933 150,211 99,966 83,861
Reinsurance ceded (4,521) (4,190) (3,891) (1,513) (1,271)
--------- --------- --------- --------- ---------
Total life, net of reinsurance 155,307 146,743 146,320 98,453 82,590
Direct annuity premiums collected:
Traditional annuities 75,613 70,810 75,154 73,973 61,362
Variable annuities 16,917 5,962 13,392 - -
--------- --------- --------- --------- ---------
Total annuities 92,530 76,772 88,546 73,973 61,362
Direct accident and health premiums
collected:
Medical and disability - individual 10,616 19,551 19,832 8,583 5,625
Medical and disability - group 1,141 1,384 (4,370) 42,581 20,574
--------- --------- --------- --------- ---------
Total accident and health 11,757 20,935 15,462 51,164 26,199
Reinsurance assumed - - (52) - 1,562
Reinsurance ceded (1,199) (10,912) (19,940) (4,614) (3,649)
--------- --------- --------- --------- ---------
Total accident and health,
net of reinsurance 10,558 10,023 (4,530) 46,550 24,112
--------- --------- --------- --------- ---------
Total collected premiums,
net of reinsurance $ 258,395 $ 233,538 $ 230,336 $ 218,976 $ 168,064
========= ========= ========= ========= =========
</TABLE>
Total life insurance collected premiums, net of reinsurance, increased to $155.3
million in 1996 from $82.6 million in 1992. This growth was due to the
acquisitions of Rural Security Life Insurance Company in 1993 and of Western
Life in 1994 combined with increased production and strong persistency. Rural
Security Life Insurance Company added life collected premiums of $13.1 million
in 1993 and Western Life added life collected premiums of $45.4 million in 1994.
Total direct collected premiums for the Company's lead product, variable
universal life, increased to $26.0 million in 1996 from $12.2 million in 1992.
This growth was due to the Company's continued emphasis on this product combined
with, for most years, a high level of consumer demand for variable products.
Total collected premiums for variable life insurance, however, declined $0.4
million, or 1.6%, to $21.3 million in 1995 from $21.7 million in 1994.
Management believes sales of variable universal life in 1995 were hampered by
the rising interest rate environment and poor overall equity market returns in
1994. Industry sales of variable universal life declined an estimated 13% in
1995 compared to 1994 according to surveys performed by LIMRA International.
Total direct collected premiums on participating whole life insurance increased
to $64.9 million in 1996 from $43.6 million in 1992. First year collected
premiums, however, declined to $6.1 million in 1996 from $7.4 million in 1995
which was down from $9.2 million in 1994. Management believes these decreases
are the result of the emphasis placed on the sale of variable life insurance
products and the current popularity of variable policies. In addition,
management believes the decrease in 1995 compared to 1994 was partially caused
by disruptions to marketing efforts caused by the consolidation of the insurance
operations of Western Life, reengineering activities and changes in the agents'
compensation structure which occurred during 1995.
Total direct annuity collected premiums increased to $92.5 million in 1996 from
$61.4 million in 1992. The Company introduced variable annuities in January 1994
and collected premiums thereon of $13.4 million in that year. Collected premiums
on variable annuities for 1996 increased to $16.9 million after decreasing to
$6.0 million in 1995 due to similar reasons cited above for variable universal
life. During 1996, the Company received $9.3 million in group annuity deposits
from the Western Life pension plan.
The Western Life acquisition also resulted in additional traditional annuity
premium collections in 1994 of $25.1 million. However, this increase was offset
by a $23.9 million decline in traditional annuities sold by the Company due to a
change in marketing strategy in 1994 to emphasize the sale of variable annuity
products.
Total direct accident and health collected premiums, net of reinsurance,
decreased $13.5 million, to $10.6 million in 1996 from $24.1 million in 1992.
This decline was due primarily to the Company's exiting its medical insurance
business in 1994 partially offset by growth in disability income collected
premiums.
LIFE INSURANCE AND ANNUITIES IN FORCE
The following table sets forth information regarding life insurance and
annuities in force at the end of each period presented:
LIFE INSURANCE AND ANNUITIES IN FORCE
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT FACE AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Life insurance
Universal
Number of policies 107,817 105,256 103,623 72,224 54,302
Direct statutory premiums $ 73,335 $ 72,115 $ 74,852 $ 51,140 $ 37,805
Policyholder account balances 540,116 503,877 467,773 300,989 185,419
Direct face amounts 8,476 8,096 7,841 5,907 4,112
Traditional
Number of policies 266,599 267,452 267,590 207,674 186,560
Direct statutory premiums $ 87,214 $ 80,467 $ 76,973 $ 48,973 $ 46,123
Future policy benefits 645,684 617,376 597,961 488,533 423,947
Direct face amounts 8,719 8,113 7,380 4,056 3,258
Total life
Number of policies 374,416 372,708 371,213 279,898 240,862
Direct statutory premiums $160,549 $152,582 $151,825 $100,113 $ 83,928
Direct face amounts 17,195 16,209 15,221 9,963 7,370
Annuities
Number of policies 50,255 49,575 48,409 33,194 30,153
Direct statutory premiums $103,884 $ 87,655 $ 99,381 $ 86,418 $ 75,455
Policyholder account balances 808,221 779,827 731,254 508,447 454,221
Future policy benefits 123,646 110,412 108,115 87,244 66,080
</TABLE>
The Company has experienced low lapse rates compared to the life insurance
industry, as indicated in the following table:
<TABLE>
<CAPTION>
LAPSE RATES FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Company life insurance lapse rates 7.5% 7.9% 7.2%(1) 5.9% 6.0%
Industry life insurance lapse rates (2) 8.8 8.9 9.7 10.5
</TABLE>
- -----------
(1) The increase in the Company's lapse rate from 1993 to 1994 was largely
because of the acquisition of the business of Western Life in 1994.
(2) The industry lapse rate for the year ended December 31, 1996 is not
available as of the filing date of this Form 10-K.
UNDERWRITING
The Company has adopted and follows detailed, uniform underwriting standards and
procedures designed to properly assess and quantify life insurance risks before
issuing policies to individuals. To implement these procedures, the Company
employs a professional underwriting staff of eleven underwriters who have an
average of 20 years of experience in the insurance industry. The Company's
underwriters review each applicant's written application, which is prepared
under the supervision of the Company's agents, and any required medical records.
The Company employs blood and urine testing to provide additional information on
applications of over $100,000 face amount. Based on the results of these tests,
the Company may adjust the mortality charge or decline coverage completely. Any
nicotine use by a life insurance applicant within the preceding one year results
in a substantially higher mortality charge. In accordance with industry
practice, material misrepresentation on a policy application can result in the
cancellation by the Company of the policy upon the return of any premiums paid.
The increasing incidence of Acquired Immune Deficiency Syndrome (AIDS) has not
adversely affected the Company's mortality experience. The Company considers
AIDS information and testing results in its underwriting and pricing decisions.
For all individual life insurance applications of over $100,000 face amount, the
applicant must submit to a blood test which includes HIV antibody testing. The
Company has incurred negligible death benefits due to known AIDS-related deaths.
REINSURANCE
In keeping with industry practices, the Company reinsures portions of its life
insurance and disability income exposure with unaffiliated insurance companies
under traditional indemnity reinsurance agreements. New insurance sales are
reinsured above prescribed limits and do not require the reinsurer's prior
approval within certain guidelines. These treaties are automatically renewed and
nonterminable for the first 10 years with regard to cessions already made and
are terminable after 90 days with regard to future cessions. After 10 years the
Company has the right to terminate and can generally discontinue the reinsurance
on a block of business. This is normally done to increase the Company's
retention on older business to the same level as current cessions.
Generally, the Company enters into indemnity reinsurance arrangements to assist
in diversifying its risks and to limit its maximum loss on risks that exceed the
Company's policy retention limits. The retention limits for Farm Bureau Life are
$500,000 and for Western Life are $250,000 per life. Indemnity reinsurance does
not fully discharge the Company's obligation to pay claims on the reinsured
business. The Company as the ceding insurer remains responsible for policy
claims to the extent the reinsurer fails to pay such claims. No reinsurer of
business ceded by the Company has failed to pay any material policy claims
(either individually or in the aggregate) with respect to such ceded business.
There is currently no life reinsurance with affiliated insurance companies, and
all reinsurance entered into is in the ordinary course of business. The Company
continually monitors the financial strength of its reinsurers. If for any reason
such reinsurance coverages would need to be replaced, the Company believes that
replacement coverages from financially responsible reinsurers would be
available. A summary of the Company's primary reinsurers as of December 31, 1996
is as follows:
A.M. BEST AMOUNT OF
REINSURER RATING IN FORCE CEDED
--------- ------ --------------
(DOLLARS IN
MILLIONS)
Lincoln National Life Insurance Company A+ $ 407.2
Business Men's Assurance Company A 201.1
ERC Life Reinsurance Corporation A 149.4
All other 324.6
--------
Total $1,082.3
========
POLICY RESERVES
The policy liabilities reflected in the consolidated financial statements are
calculated in accordance with generally accepted accounting principles (GAAP).
Liabilities for universal life and annuity policies consist of the premiums and
considerations received plus accumulated credited interest, less accumulated
policyholder assessments and benefits. For traditional policies, liabilities for
future policy benefits have been provided based on the net level premium method,
including assumptions as to interest, mortality and other assumptions underlying
the guaranteed policy cash values. See Note 1 of Notes to Consolidated Financial
Statements for additional information regarding policy liability assumptions
under GAAP.
INTEREST CREDITING AND PARTICIPATING DIVIDEND POLICY
The Company's asset/liability management committee meets monthly, or more
frequently if required, to review and establish current period interest rates
based upon existing and anticipated investment opportunities. This applies to
new sales and to universal life insurance and annuity products after any initial
guaranteed period. Earnings on assets are examined by portfolio. Interest rates
are then established based on each product's required interest spread and
competitive market conditions at the time.
Farm Bureau Life and Western Life pay dividends, credit interest and determine
other nonguaranteed elements on their individual insurance policies depending on
the type of product. Some elements, such as dividends, are generally declared
for a year at a time. Interest rates and other nonguaranteed elements are
determined based on experience as it emerges and with regard to competitive
factors.
Policyholder dividends are currently being paid and will continue to be paid as
declared on traditional participating whole life business, some term business,
and the participating annuity policies. Policyholder dividend scales are
generally established annually and are based on the performance of assets
supporting these policies, the mortality experience of the policies, and expense
levels. Other factors, such as changes in tax law, may be considered as well.
Average credited rates on the Company's universal life contracts were 6.39%,
6.68% and 6.71% and average credited rates on annuity contracts were 6.35%,
6.57% and 6.37% for the years ended December 31, 1996, 1995 and 1994,
respectively.
VARIABLE SUB-ACCOUNTS AND MUTUAL FUNDS
The Company sponsors the FBL Series Fund, Inc. (the Series Fund) and FBL
Variable Insurance Series Fund (the Insurance Series Fund) which are open-end,
diversified series management investment companies. The Series Fund is available
to the general public. The Insurance Series Fund offers its shares, without a
sales charge, only to the separate accounts of participating insurance companies
as the investment medium for variable annuity contracts or variable life
insurance policies issued by the participating insurance companies. Currently,
the Company is the only participating company with its variable annuity and
variable universal life separate accounts investing in the Insurance Series
Fund. The Company uses only the Insurance Series Fund to provide variable
annuity and variable universal life insurance sub-accounts to its customers.
These Funds each currently issue shares in six investment series (a Portfolio or
collectively the Portfolios) with distinct investment objectives: (1) long-term
capital appreciation by investing in equity securities which have a potential to
earn a high return on capital or are undervalued by the market place; (2) as
high a level of current income as is consistent with investment in a portfolio
of debt securities deemed to be of high grade; (3) as high a level of current
income as is consistent with investment in a portfolio of fixed-income
securities rated in the lower categories of established rating services; (4)
high total investment return of income and capital appreciation by investing in
growth common stocks, high grade debt securities and preferred stocks and high
quality short-term money market instruments; (5) high current income consistent
with liquidity and stability of principal, and (6) an unmanaged index fund,
which seeks growth of capital and income by investing primarily in common stocks
of designated well-capitalized, established companies. The net assets of the
equity, the managed and the money market portfolios at December 31, 1996
aggregated $225.6 million and the net assets of the bond portfolios on that date
were $27.2 million.
FBL Investment Advisory Services, Inc. (the Advisor), a subsidiary of the
Company, receives an annual fee based on the average daily net assets of each
Portfolio that ranges from 0.25% to 0.60% for the Series Fund and from 0.20% to
0.55% for the Insurance Series Fund. The Advisor also serves as distributor and
principal underwriter for the Funds. The Advisor receives from the Series Fund a
0.50% annual distribution services fee, a 0.25% annual administration services
fee and a 0.05% accounting fee, and receives directly any contingent deferred
sales charge paid on the early redemption of shares. FBL Marketing Services,
Inc., another subsidiary of the Company, serves as the principal dealer for the
Series Fund and receives commissions and service fees.
The Company also sponsors a money market fund, FBL Money Market Fund, Inc.
(Money Market Fund) which is a no-load open-end diversified management
investment company with an investment objective of maximum current income
consistent with liquidity and stability of principal. The Advisor acts as the
investment advisor, manager and principal underwriter of the Money Market Fund
and receives an annual management fee, accrued daily and payable monthly, on a
graduated basis commencing at 0.25% of the first $200 million of average daily
assets, and certain other fees. The net assets of the Money Market Fund were
$26.7 million at December 31, 1996.
PROPERTY-CASUALTY SEGMENT
PRODUCTS
The Company underwrites the following major lines of property-casualty
insurance: automobile, homeowners, farm and ranch owners, workers' compensation,
crop, and other.
PERSONAL AND COMMERCIAL AUTOMOBILE coverage insures individuals and businesses,
respectively, against losses incurred from personal bodily injury, bodily injury
to third parties, property damage to an insured's vehicle, and property damage
to other vehicles and other property.
HOMEOWNERS INSURANCE insures individuals for losses to their residences and
personal property, such as those caused by fire, wind, hail, water damage, theft
and vandalism, and against third-party liability claims.
FARM AND RANCH OWNERS insurance expands the personal liability and property
protection of a homeowners policy to include farm and ranch liabilities, as well
as farm and ranch property protection.
WORKERS' COMPENSATION coverage insures employers against employee medical and
indemnity claims resulting from injuries related to work. Workers' compensation
policies are often written in conjunction with other commercial policies.
CROP INSURANCE includes crop hail and multi-peril crop insurance. Crop hail
provides protection from financial loss to an insured's crop investments from
hail. Multi-peril crop insurance protects from perils including drought, frost,
flood and insect damage.
The Company also offers a variety of other products, such as umbrella policies,
personal inland marine endorsements, business owner/commercial package, garage
liability, general liability and home venture coverages.
The Company also participates in reinsurance arrangements. See "Reinsurance
Arrangements."
FARM BUREAU MUTUAL POOL
Utah Insurance participates in a reinsurance pooling agreement (the Farm Bureau
Mutual pool) with Farm Bureau Mutual and South Dakota Farm Bureau Mutual
Insurance Company (South Dakota Mutual), with all three companies operating
under the common management of the Company. All retained insurance business of
Utah Insurance and South Dakota Mutual is assumed by Farm Bureau Mutual. The
combined business is then assumed by the three property-casualty companies, in
specified proportions, not in excess of an amount that would create a net
written premium to surplus ratio that exceeds acceptable industry standards.
This allows each property-casualty company, which may write premiums directly in
only one or two states, to obtain better geographic and business diversification
of risk, and therefore tends to create greater stability in the underwriting
results.
In the pool, all premiums, losses, loss adjustment expenses, acquisition and
other underwriting and administrative expenses are combined and distributed
proportionately to each property-casualty company, thus providing the three
companies with substantially the same underwriting results for any given
accident year. The overall operating results of the three companies differ based
on their respective investment income, changes in the companies' level of
participation in the pool and other miscellaneous items.
In addition, effective January 1, 1996, Farm Bureau Mutual entered into a loss
pooling agreement with Western Ag, which in turn quota share reinsured business
of Western Mutual. Western Ag and Western Mutual are Farm Bureau affiliated
companies in Arizona and New Mexico, respectively, that are also managed by the
Company. Under the loss pooling agreement all direct and assumed premiums,
losses and allocated loss adjustment expenses (but not acquisition and other
general underwriting expenses) of Farm Bureau Mutual, Utah Insurance and South
Dakota Mutual were pooled with these same items for Western Ag and Western
Mutual. Thus, further geographic and business diversification of risk for Utah
Insurance was achieved without significant change in the size of the Farm Bureau
Mutual pool or its total premium volume.
The following table sets forth net premiums earned by the Farm Bureau Mutual
pool by product line for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net premiums earned
Automobile .............. $115,776 $114,468 $111,954 $104,739 $ 99,022
Homeowners .............. 16,658 14,954 13,476 11,658 10,270
Farm and ranch owners ... 28,192 26,033 24,577 23,189 21,796
Workers' compensation ... 13,475 15,153 14,261 11,363 9,343
Crop .................... 16,370 16,457 10,063 12,785 8,130
Reinsurance ............. 30,490 35,325 37,564 38,675 24,266
Other ................... 10,865 11,466 10,328 9,303 9,305
-------- -------- -------- -------- --------
Total net premiums earned $231,826 $233,856 $222,223 $211,712 $182,132
======== ======== ======== ======== ========
</TABLE>
Utah Insurance was an 8% participant in the Farm Bureau Mutual pool through
December 31, 1995. On June 30, 1996, Utah Insurance's share of the pool was
increased to 20%, retroactive to January 1, 1996. Accordingly, the Company's
property-casualty results for the first six months of 1996 were equal to 8% of
the reinsurance pool results. The operating results applicable to the increase
in the pooling percentage for that period was deferred and is being amortized
over the premium paying period of the underlying policies (generally 6 to 12
months). For the six months ended December 31, 1996, Utah Insurance recorded 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 remains at 8%.
Effective January 1, 1997, Western Ag and Western Mutual became full
participants in the Farm Bureau Mutual pool and Utah Insurance's reinsurance
pool participation percentage decreased from 20% to 18%. Utah Insurance's
premium volume in 1997 is not expected to be significantly impacted by the
decrease in pool participation due to the increase in the size of the pool with
the addition of Western Ag and Western Mutual.
The following table sets forth Utah Insurance's share of the Farm Bureau Mutual
pool for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Net premiums earned
Automobile .............. $16,318 $ 9,158 $ 8,957 $ 8,379 $ 7,921
Homeowners .............. 2,358 1,196 1,078 933 822
Farm and ranch owners ... 3,976 2,083 1,966 1,855 1,744
Workers' compensation ... 1,882 1,212 1,141 909 747
Crop .................... 2,695 1,317 805 1,023 651
Reinsurance ............. 4,217 2,826 3,005 3,094 1,941
Other ................... 1,529 917 826 744 744
------- ------- ------- ------- -------
Total net premiums earned $32,975 $18,709 $17,778 $16,937 $14,570
======= ======= ======= ======= =======
The following table sets forth net premiums earned by the Farm Bureau Mutual
pool by state for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Iowa .......... $116,670 $116,069 $105,890 $102,670 $ 94,711
Minnesota ..... 46,670 46,035 43,512 39,595 36,185
South Dakota .. 11,860 10,951 10,710 9,373 8,235
Utah .......... 26,136 25,476 24,547 21,399 18,735
Other (assumed) 30,490 35,325 37,564 38,675 24,266
-------- -------- -------- -------- --------
$231,826 $233,856 $222,223 $211,712 $182,132
======== ======== ======== ======== ========
The following table sets forth the statutory loss and loss adjustment expense
(LAE), expense and combined ratios of Utah Insurance for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Loss and LAE ratios:
Automobile ............. 86.3% 76.7% 80.0% 84.9% 82.1%
Homeowners ............. 101.0 76.0 89.4 85.0 82.8
Farm and ranch owners .. 93.8 75.5 84.4 83.5 71.7
Workers' compensation .. 65.2 56.5 59.1 56.5 70.4
Crop ................... 54.6 81.2 88.3 116.3 88.3
Reinsurance ............ 81.0 62.3 62.1 71.3 130.7
Other .................. 83.7 65.5 48.8 78.2 65.5
Total Loss and LAE ratio 84.0 72.8 75.6 82.4 86.2
Expense ratio ............. 25.1 25.1 25.9 26.2 25.4
Combined ratio ............ 109.1 97.9 101.5 108.6 111.6
UNDERWRITING AND PRICING
Rating and classification plans for non-commercial lines are independently
developed and maintained by experienced casualty actuaries. Commercial lines
rates are developed from Insurance Services Office and National Council of
Compensation Insurers industry data. Rates are reviewed regularly for adequacy.
Auto rates are reviewed at least annually.
Underwriting of new automobile business utilizes Claims Loss Underwriting
Exchange, Motor Vehicle Record, and Credit Bureau Report data. Most of this data
is available to agents in the field. Renewal business is monitored on an
exception basis for claim frequency and severity characteristics that trigger
reunderwriting activities. Because the Company stresses "total" accounts, most
individual lines of business have loss-sensitive premium structures that provide
multiple levels of rates by means of surcharges or discounts in order to
accommodate and retain various levels of risks. Risks that cannot be directly
accommodated are placed with non-affiliated sub-standard auto markets and other
niche writers through a brokerage subsidiary of the Company.
The Company's multi-line exclusive agents are being increasingly involved in the
underwriting process with the availability of underwriting information in the
field and the Company's growing emphasis upon agent entry and electronic
submission of policy applications and changes (currently available for personal
auto insurance only). Profitability is tracked by individual agent loss ratios.
An agent's loss ratio can affect commission levels by up to plus or minus 20%.
Agent profitability and compliance with underwriting rules also impact an
agent's binding authority.
OPERATIONS AND CLAIMS
The management of insurance operations from the West Des Moines, Iowa home
office facilitates uniform procedures and introduction of new technology and
allows for reduced supervisory and managerial personnel. The Company is in the
process of converting its multiple administration and processing systems to one
common system which will substantially reduce information technology maintenance
costs while improving service and turnaround times.
Field claim activities are decentralized to ensure prompt handling of local
claims. However, some claim functions are being centralized to realize
processing efficiencies and expense savings. For example, first notices of loss
are being directed to a centralized home office "800" phone service unit which
electronically distributes loss assignments to the appropriate staff in the
field.
Information technology is a key component in enhancing the Company's claim
service and in controlling claims costs. The Company was among the first in the
United States to implement an expert system that evaluates the value of bodily
injury claims. The Company also uses computerized building replacement cost and
automobile physical damage cost estimators and auto glass networks. Among the
innovative claim practices utilized by the Company are alternative dispute
resolution to reduce litigation costs, preferred provider organizations to
control auto and workers' compensation medical costs, and specialized
subrogation and property loss units.
REINSURANCE ARRANGEMENTS
Utah Insurance participates with Farm Bureau Mutual and South Dakota Mutual,
both of which are under common management with the Company, in several
reinsurance agreements with American Agricultural Insurance Company (American
Ag). American Ag is a reinsurance company which is owned by, and which
reinsures, many of the Farm Bureau property-casualty insurance companies
throughout the United States. Under these reinsurance agreements, Utah
Insurance, Farm Bureau Mutual and South Dakota Mutual retain $0.3 million of
exposure for property risks, with the excess being ceded to American Ag (up to
$19.8 million of exposure). The property-casualty companies have a property
catastrophe occurrence cover for $28.0 million excess of a $4.2 million loss.
They retain $0.4 million for casualty exposures with the excess being ceded to
American Ag up to $11.5 million. The property-casualty companies maintain an
excess treaty for workers' compensation to a total limit of $15.0 million. Crop
hail proportional treaties exist that cede approximately 40% of the Company's
crop hail premium.
Utah Insurance is exposed to certain reinsurance assumptions through the Farm
Bureau Mutual pool. Through quota share arrangements with other Farm Bureau
property-casualty companies and miscellaneous contracts and assumptions from
American Ag and various reinsurance brokers, the pool had estimated assumed
reinsurance premiums for the year ended December 31, 1996 of $39 million.
Effective January 1, 1997, such risks assumed by Farm Bureau Mutual from
reinsurance intermediaries, non-Farm Bureau companies and several American Ag
pools are no longer included in the Farm Bureau Mutual pool. As a result,
beginning January 1, 1997, Utah Insurance has eliminated its exposure to coastal
catastrophes.
LOSS AND LOSS ADJUSTMENT EXPENSE
The reserves for losses and LAE on property-casualty business are determined
using case basis evaluations and statistical analyses and represent estimates of
the ultimate net cost of all reported and unreported losses and loss adjustment
expenses that are unpaid. These reserves include estimates of future trends in
claim severity, frequency and other factors that could vary as the losses are
ultimately settled. Although considerable uncertainty is inherent in such
estimates, management believes that the reserve for losses and loss adjustment
expenses is adequate. The estimates are continually reviewed and, as adjustments
to these reserves become necessary, such adjustments are reflected in current
operations.
The following table reflects for the companies participating in the Farm Bureau
Mutual pool the development of their combined losses and LAE for the periods
indicated at the end of that year and each subsequent year. The first line shows
reserves, net of reinsurance, as originally reported at the end of the stated
year. The section under the caption "Cumulative amount paid as of" shows the
cumulative amounts paid, net of reinsurance, in respect of that reserve as of
the end of each subsequent year. The section under the caption "Reserves
reestimated as of" shows the original recorded reserve as adjusted as of the end
of each subsequent year to reflect the cumulative amounts paid and all other
facts and circumstances discovered during each such year. The line, "Net
cumulative redundancy (deficiency)" reflects the difference between the latest
reestimated reserve amount and the reserve amount as originally established. The
line "Gross cumulative redundancy" reflects the difference between the latest
reestimated reserve amount and the reserve amount as originally established,
before the effect of reinsurance ceded. The table represents development by
incurred year. Conditions and trends that have affected the development of these
reserves in the past will not necessarily recur in the future. It may not be
appropriate to use this cumulative history in the projection of future
performance.
<TABLE>
<CAPTION>
INCURRED YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for
losses and LAE $164,790 $159,672 $152,277 $145,934 $125,424 $113,108 $104,355 $90,890 $74,979 $66,652
Cumulative amount
paid as of
One year later 68,357 66,910 62,684 63,319 52,452 51,193 46,000 38,794 31,031
Two years later 93,650 92,152 87,443 77,745 72,934 67,557 55,723 46,793
Three years later 104,736 100,939 87,643 85,547 78,390 65,782 55,997
Four years later 107,375 93,656 90,527 85,278 70,958 60,351
Five years later 96,006 93,742 87,129 74,092 61,952
Six years later 94,879 88,382 75,074 63,471
Seven years later 89,054 75,757 63,951
Eight years later 76,131 64,440
Nine years later 64,740
Reserves
reestimated as of
One year later 145,513 140,943 134,321 129,890 106,794 105,780 94,857 78,989 68,268
Two years later 133,338 129,791 124,502 109,354 99,967 95,964 78,885 68,796
Three years later 124,213 120,672 104,988 100,975 91,938 78,564 67,403
Four years later 116,543 102,790 99,302 92,757 77,513 66,721
Five years later 101,408 98,837 92,078 78,729 65,533
Six years later 98,400 91,821 78,167 66,417
Seven years later 91,623 78,069 66,173
Eight years later 78,086 66,176
Nine years later 66,306
Net cumulative
redundancy
(deficiency) 14,159 18,939 21,721 8,881 11,700 5,955 (733) (3,107) 346
Net reserve $164,790 $159,672 $152,277 $145,934
Reinsurance
recoverable 31,684 16,078 15,975 20,898
-------- -------- -------- --------
Gross reserve $196,474 $175,750 $168,252 $166,832
======== ======== ======== ========
Net reestimated
reserve $145,513 $133,338 $124,213
Reestimated reinsurance
recoverable 10,418 10,755 20,542
-------- -------- --------
Gross reestimated
reserve $155,931 $144,093 $144,755
======== ======== ========
Gross cumulative
redundancy $ 19,819 $ 24,159 $ 22,077
======== ======== ========
</TABLE>
Utah Insurance was an 8% participant in the Farm Bureau Mutual pool from January
1, 1990, the date the Farm Bureau Mutual pool was formed, to December 31, 1995.
During this period, the Company has recorded approximately 8% of the
above-stated reserves for losses and LAE, amounts paid, reinsurance recoverables
and resulting cumulative redundancies during the respective years. The Company's
share of such amounts relating to claims incurred subsequent to January 1, 1996,
the date of the pooling change, increased to 20%. The Company's share of
development on claims incurred prior to the effective date of the pooling change
remains at 8%.
The net cumulative deficiencies of $0.7 million and $3.1 million for 1989 and
1988, respectively, were the result of general adverse claim development not
anticipated when initially establishing the reserves. Since the inception of the
Farm Bureau Mutual pool in 1990, management has implemented more sophisticated
and frequent methodologies for establishing reserves as is evidenced by the net
cumulative redundancies during 1990 through 1994.
Although the Farm Bureau Mutual pool was not formed until January 1, 1990, all
three companies participating in the pool have been managed by the Company
during the entire period presented in the above table.
COMPETITION
The Company operates in a highly competitive industry. The operating results of
companies in the insurance industry have been historically subject to
significant fluctuations due to competition, economic conditions, interest
rates, investment performance, maintenance of its insurance ratings from rating
agencies such as A.M. Best and other factors. Management believes the Company's
ability to compete with other insurance companies is dependent upon, among other
things, its ability to attract and retain agents to market its insurance
products, particularly to Farm Bureau members, its ability to develop
competitive and profitable products and its maintenance of high ratings from
A.M. Best. A.M. Best ratings consider the claims paying ability of the rated
Company and are not a rating of the investment worthiness of the rated Company.
In connection with the development and sale of its products, the Company
encounters significant competition from other insurance companies, many of whom
have financial resources substantially greater than those of the Company, as
well as from other investment alternatives available to its customers.
In addition, several proposals to repeal or modify the Glass-Steagall Act of
1933, as amended, and the Bank Holding Company Act of 1956, as amended, have
been made by members of Congress and the Clinton administration. Generally, the
Bank Holding Company Act restricts banks from being affiliated with insurance
companies. Certain of the proposals would repeal or modify these restrictions
and permit banks to become affiliated with insurance companies. None of these
proposals has yet been enacted, and it is not possible to predict whether any of
these proposals will be enacted or, if enacted, their potential effect on the
Company.
REGULATION
The Company's insurance subsidiaries are subject to government regulation in
each of the states in which they conduct business. Such regulatory authority is
vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including rates, policy forms and capital
adequacy, and is concerned primarily with the protection of policyholders rather
than stockholders. The Company's variable insurance products, mutual funds,
investment advisor and certain licensed broker-dealers and agents are also
subject to regulation by the Securities and Exchange Commission, the NASD, and
state agencies.
During the past several years, increased scrutiny has been placed upon the
insurance regulatory framework, and certain state legislatures have considered
or enacted laws that alter, and in many cases increase, state authority to
regulate insurance companies and insurance holding company systems. In light of
recent legislative developments, the National Association of Insurance
Commissioners (NAIC) and state insurance regulators are reexamining existing
laws and regulations, specifically focusing on insurance company investments and
solvency issues, risk-adjusted capital guidelines, interpretations of existing
laws, the development of new laws, the implementation of nonstatutory guidelines
and the circumstances under which dividends may be paid. The NAIC has approved
one version and is considering another version of a model investment law that
defines and sets guidelines for investment policies and activities for insurance
companies. Management does not believe the adoption in any of its states of
operation of any of the current NAIC initiatives will have a material adverse
impact on the Company; however, the Company cannot predict the form of any
future proposals or regulation.
Assessments are, from time to time, levied on the insurance subsidiaries of the
Company by 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. Because the Company is not able to
reasonably estimate the potential amounts of future assessments, the Company
recognizes its obligation for guaranty fund assessments when it receives notice
that an amount is payable to a guaranty fund. Expenses incurred for guaranty
fund assessments were $0.6 million, $1.3 million and $1.6 million during the
years ended December 31, 1996, 1995 and 1994, respectively.
Congress has from time to time considered possible legislation that would
eliminate the deferral of taxation on the accretion of value within certain
annuities and life insurance products. The United States Supreme Court recently
held in NATIONSBANK OF NORTH CAROLINA V. VARIABLE ANNUITY LIFE INSURANCE COMPANY
that annuities are not insurance for purposes of the National Bank Act. This
factor or others may cause Congress to consider legislation that would eliminate
such tax deferral, at least for certain annuities. Other possible legislation,
including a simplified "flat tax" income tax structure with an exemption from
taxation for investment income, could also adversely affect the sale of life
insurance compared with other financial products if such legislation were to be
enacted. There can be no assurance as to whether such legislation will be
enacted or, if enacted, whether such legislation would contain provisions with
possible adverse effects on the Company's annuity and life insurance products.
EMPLOYEES
At March 17, 1997 the Company had approximately 1,100 employees. Many employees
and the executive officers of the Company also provide services to Farm Bureau
Mutual and other affiliates of the Company pursuant to management agreements.
None of the employees are members of a collective bargaining unit. Management
believes that relations with its employees are good.
ITEM 2. PROPERTIES
The principal operations of the Company and its subsidiaries are conducted from
owned property consisting of approximately 430,000 square feet of space on a 45
acre site located at 5400 University Avenue, West Des Moines, Iowa 50266.
Approximately 59,000 square feet of this property are leased to an unaffiliated
company under a lease expiring in 1998 and approximately 24,000 square feet are
leased to the Iowa Farm Bureau Federation and affiliated companies under a lease
which is expected to be continued from year to year indefinitely. The Company
also leases office space of 29,000 square feet for a service center in Denver,
Colorado. This lease is for a portion of the former home office building of
Western Life and expires June 30, 1997. The service center will be relocating in
June 1997 to facilities owned by Colorado Farm Bureau Mutual Insurance Company,
a related party. Management considers the current facilities to be adequate for
the foreseeable needs of the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to lawsuits arising in the normal course of business. The
Company believes the resolution of these lawsuits will not have a material
adverse effect on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Class A Common Stock of FBL Financial Group, Inc. (trading symbol "FFG") has
been listed on the New York Stock Exchange since July 19, 1996, the Company's
first day of public trading. The following table sets forth the ranges of high
and low sales prices per share for the Class A Common Stock as reported on the
New York Stock Exchange.
Market Price
----------------------------
Period High Low
--------------------------------------------- ------------ ------------
July 19, 1996 through September 30, 1996 $ 21-3/8 $ 17-7/8
October 1, 1996 through December 31, 1996 24-7/8 21
There is no established public trading market for the Company's Class B Common
Stock and there was no established public trading market for the Company's Class
A Common Stock prior to July 19, 1996. As of March 17, 1997, there were
approximately 2,100 holders of Class A Common Stock, including participants
holding securities under the name of a broker (i.e., in "street name"), and 27
holders of Class B Common Stock.
DIVIDENDS
The Company declared and paid a $0.07 cash dividend per share on its common
stock during the fourth quarter of 1996. The Company intends to declare regular
quarterly cash dividends in the future. However, the payment of dividends in the
future will be subject to the discretion of the Board of Directors and will
depend upon general business conditions, legal restrictions on the payment of
dividends and other factors that the Board of Directors deems relevant. It is
anticipated the quarterly dividend rate during 1997 will be $0.10 per common
share.
As a holding company, FBL Financial Group, Inc. is largely dependent upon
dividends from its life insurance subsidiaries to pay dividends to its
stockholders. The Company's insurance subsidiaries are subject to state laws
that restrict their ability to distribute dividends. During 1997, the maximum
amounts legally available for distribution by Farm Bureau Life and Western Life
are $34.9 million and $8.2 million, respectively, without prior approval of
insurance regulatory authorities. Similar restrictions exist with respect to the
payment of dividends by Utah Insurance. Such restrictions are not considered to
bear significantly on the ability of the Company to meet the obligations of any
member of the consolidated group. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources," and Note 10 of Notes to Consolidated Financial Statements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial and statutory data of the
Company for the periods indicated. This information should be read in
conjunction with the consolidated financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The selected data, with the exception of
the information presented under the caption "Other Data", are derived from the
Company's consolidated financial statements which have been audited by Ernst &
Young LLP, independent auditors.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA (1):
Premiums and product charges:
Universal life and annuity product charges $ 43,654 $ 43,722 $ 42,734 $ 26,500 $ 18,967
Traditional life insurance premiums 82,198 75,450 72,222 46,050 44,831
Accident and health premiums (2) 10,582 10,161 (1,956) 46,437 23,138
Property-casualty premiums 32,975 18,709 17,778 16,937 14,570
------------ ------------ ------------ ------------ ------------
Total premiums and product charges 169,409 148,042 130,778 135,924 101,506
Net investment income 210,729 223,108 178,834 138,320 126,500
Realized gains on investments 52,793 5,883 9,448 3,967 12,162
Other income 23,936 28,952 30,825 25,251 21,183
------------ ------------ ------------ ------------ ------------
Total revenues $ 456,867 $ 405,985 $ 349,885 $ 303,462 $ 261,351
============ ============ ============ ============ ============
Income (loss) from continuing operations before
income taxes, minority interest in earnings of
subsidiaries and equity income by segment:
Life insurance $ 118,984 $ 88,500 $ 58,573 $ 38,898 $ 40,952
Property-casualty insurance (2,046) 2,083 1,288 33 280
Corporate (85) (136) 12 -- --
------------ ------------ ------------ ------------ ------------
Total 116,853 90,447 59,873 38,931 41,232
Income from continuing operations 82,884 59,628 35,587 22,705 26,367
Income from continuing operations per common share $ 3.73 $ 2.53 $ 1.52 $ 1.26 $ 1.56
Net income (3) $ 82,884 $ 59,628 $ 42,066 $ 19,803 $ 21,435
Net income applicable to common stock (3) 80,634 59,628 42,066 19,803 21,435
Net income per common share (3) $ 3.73 $ 2.53 $ 1.80 $ 1.10 $ 1.27
Cash dividends per common share $ 0.07 -- -- -- --
CONSOLIDATED BALANCE SHEET DATA (1):
Total investments $ 2,889,095 $ 2,646,123 $ 2,337,154 $ 1,757,277 $ 1,385,669
Total assets 3,368,192 3,093,582 2,795,266 2,145,580 1,731,694
Long-term debt 24,581 12,604 18,519 30,638 881
Total liabilities 2,724,867 2,524,781 2,359,945 1,816,937 1,455,297
Total stockholders' equity 638,522 564,298 430,743 312,277 262,582
Book value per common share $ 28.55 $ 23.65 $ 18.37 $ 17.07 $ 15.51
OTHER DATA (1):
Adjusted operating income (4) $ 42,495 $ 41,648 $ 29,780 $ 19,024 $ 17,067
Adjusted operating income per common share (4) $ 1.96 $ 1.77 $ 1.27 $ 1.06 $ 1.01
Life insurance statutory capital and surplus (5)(6) $ 344,965 $ 288,302 $ 250,709 $ 177,130 $ 164,600
Net statutory premiums collected by the
Company's life insurance subsidiaries (5)(7) 258,395 233,538 230,336 218,976 168,064
Life insurance in force 16,113,121 15,254,669 14,296,709 9,525,136 7,098,231
Statutory property-casualty ratios (5):
Loss & loss adjustment expense (8) 84.0% 72.8% 75.6% 82.4% 86.2%
Expense (9) 25.1 25.1 25.9 26.2 25.4
Combined (10) 109.1 97.9 101.5 108.6 111.6
</TABLE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) The comparability of selected data from year to year is impacted by the
acquisition of Rural Security Life Insurance Company in March 1993 and
the acquisition of Western Farm Bureau Life Insurance Company and the
minority interests in FBL Insurance Company and Rural Security Life
Insurance Company in January 1994.
(2) During 1994, the Company ceased writing medical insurance business. The
Company continues to sell individual disability income insurance.
(3) The Company recognized net income (loss) related to its discontinued
cable television operations of $6.5 million, or $0.28 per share, $(2.9)
million, or $(0.16) per share and $(4.9) million, or $(0.29) per share
for the years ended December 31, 1994, 1993 and 1992, respectively.
(4) Adjusted operating income equals net income adjusted to eliminate
certain items which management believes are not indicative of operating
trends because they are unusual and/or nonrecurring in nature,
including realized gains (losses) 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), discontinued operations and net income (loss) from a venture
capital investment company subsidiary. Adjusted operating income and
adjusted operating income per common share should not be considered as
necessarily being better indicators of the Company's overall operating
performance than net income or net income per common share, nor are
they better indicators of the Company's liquidity than cash flows. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Adjusted Operating Income."
(5) Statutory data has been derived from the annual statements of the
Company's insurance subsidiaries, as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting
practices.
(6) Statutory capital and surplus reflects amounts related to Farm Bureau
Life Insurance Company and Western Farm Bureau Life Insurance Company
(after 1993) only and does not include the Asset Valuation Reserve,
Interest Maintenance Reserve or Mandatory Securities Valuation Reserve
for the appropriate years.
(7) Net statutory premiums as presented for statutory reporting purposes
include premiums collected from annuities and universal life-type
products. For GAAP reporting, such premiums received are not reported
as premium revenues.
(8) Loss and loss adjustment expense ratio equals the sum of statutory
incurred losses and loss adjustment expenses divided by statutory
earned premiums.
(9) Expense ratio equals all statutory expenses, including policyholder
dividends and excluding loss and loss adjustment expenses, divided by
statutory net written premiums.
(10) Combined ratio equals the sum of the loss and loss adjustment expense
and expense ratios.
ITEM 7. 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 SELECTED
CONSOLIDATED FINANCIAL DATA AND 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).
OVERVIEW
LIFE INSURANCE OPERATIONS. The Life Companies sell universal life, variable
universal life, traditional life and disability income insurance and traditional
and variable annuity products. These products are marketed to Farm Bureau
members and other individuals and businesses in 15 midwestern and western
states. Several subsidiaries support various functional areas of Farm Bureau
Life, Western Life and other affiliates, by providing investment advisory,
marketing and distribution, and leasing services.
In accordance with generally accepted accounting principles, universal life
insurance premiums and ordinary annuity considerations received are reflected as
increases in liabilities for policyholder account balances and not as revenues.
Revenues reported for universal life and ordinary annuity products consist of
policy charges for the cost of insurance, administration charges, amortization
of policy initiation fees and surrender charges assessed against policyholder
account balances. Surrender benefits paid relating to universal life insurance
and ordinary annuity policies are reflected as decreases in liabilities for
policyholder account balances and not as expenses. Amounts for interest credited
to universal life and ordinary annuity policyholder account balances and benefit
claims in excess of policyholder account balances are reported as expenses in
the consolidated financial statements. The Life Companies receive investment
income earned from the funds deposited into account balances by universal life
and annuity policyholders, a portion of which is passed through to these
policyholders in the form of interest credited.
Premium revenues reported for traditional life and disability income insurance
products are recognized as revenues when due. Future policy benefits are
recognized as expenses over the life of the policy by means of the provision for
future policy benefits.
For variable universal life and variable annuities, premiums received are not
reported as revenues. Similar to universal life and ordinary annuities, revenues
reported consist of fee income and product charges collected from the
policyholders. Expenses related to these products include interest credited to
policyholder account balances and benefit claims incurred in excess of
policyholder account balances.
The costs related to acquiring new business, including certain costs of issuing
policies and certain other variable selling expenses (principally commissions),
defined as deferred policy acquisition costs, are capitalized and amortized into
expense in proportion to expected profits or margins. This amortization is
adjusted when the Life Companies revise their estimate of current or future
gross profits or margins. For example, deferred policy acquisition costs are
amortized earlier than originally estimated when policy terminations are higher
than originally estimated or when investments backing the related policyholder
liabilities are sold at a gain prior to their anticipated maturity. Death and
other policyholder benefits reflect exposure to mortality risk and fluctuate
from period to period based on the level of claims incurred under insurance
retention limits. The profitability of the Life Companies is primarily affected
by expense levels, investment results and fluctuations in mortality and other
policyholder benefits. The Company has the ability to mitigate adverse
experience through adjustments to credited interest rates, policyholder
dividends or cost of insurance charges.
PROPERTY-CASUALTY OPERATIONS. The Company's property-casualty product lines and
the percentage of property-casualty premiums associated with such lines for 1996
were as follows: automobile (49.5%), homeowners (7.1%), farm and ranch owners
(12.1%), workers' compensation (5.7%), crop (8.2%), reinsurance (12.8%) and
other (4.6%).
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 in the consolidated statement of operations
pertaining to the first six months of 1996 include that amount applicable to 8%
of the reinsurance pool and the operating results applicable to the increase in
the pooling percentage for that period ($0.8 million loss before income taxes)
was deferred and is being amortized over the premium paying period of the
underlying policies (generally 6 to 12 months). For the six months ended
December 31, 1996, Utah Insurance recorded 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 remains at 8%.
SEGMENT INFORMATION. The Company's revenues and net income are primarily derived
from its life insurance segment. For information concerning amounts of revenue,
operating profit and loss and identifiable assets attributable to each of the
Company's segments, see Note 13 of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
A summary of the Company's premiums and product charges is as follows:
YEAR ENDED
DECEMBER 31,
-----------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Universal life and annuity product charges $43,654 $43,722
Traditional life insurance premiums 82,198 75,450
Accident and health premiums 10,582 10,161
Property-casualty premiums 32,975 18,709
-------- --------
Total $169,409 $148,042
======== ========
Premiums and product charges increased $21.4 million, or 14.4%, to $169.4
million for 1996 compared to $148.0 million for 1995. This increase included a
$7.2 million, or 8.4%, increase in traditional life insurance and accident and
health premiums which, management believes, is principally attributable to
implementation of a new incentive agent compensation program effective January
1, 1996, introduction of a uniform portfolio of life insurance and annuity
products throughout the Company's marketing territory in March 1996 and more
effective and increased training of its agency force. Universal life and annuity
product charges decreased $0.1 million, or 0.2%, to $43.7 million for 1996
principally due to decreases in cost of insurance rates ranging from 4% to 12%
(approximately $2.7 million) which took effect March 14, 1996, and a decrease in
the amortization of unearned revenues. These decreases were partially offset by
growth in the volume of business in force and a $0.8 million increase in fees on
premium deposits as a result of an increase in receipts from interest sensitive
products. Property-casualty premiums increased $14.3 million, or 76.3%,
primarily due to the increase in Utah Insurance's reinsurance pool participation
percentage from 8% to 20%, which resulted in $14.4 million of additional
premiums during 1996. This increase was partially offset by the Company's
nonrenewal of certain unaffiliated reinsurance assumed contracts and premium
rate decreases on workers' compensation insurance which collectively totaled
approximately $0.4 million. 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 decreased $12.4 million, or 5.5%, to $210.7 million for
1996 compared to $223.1 million for 1995. The decrease was predominately the
result of the nonrecurrence in 1996 of gains recognized on two private equity
investments held by FBL Ventures of South Dakota Inc. (FBL Ventures), a venture
capital subsidiary, during 1995. During 1996, this subsidiary recognized net
investment income of $2.9 million compared to $25.4 million for 1995. See
"Adjusted Operating Income." Also contributing to the decrease was a 26 basis
point decline in the annualized yield earned on average invested assets
(excluding yield attributable to FBL Ventures) to 7.62% in 1996 from 7.88% in
1995. These decreases were partially offset by a 9.3% increase in average
invested assets (excluding invested assets of FBL Ventures) to $2,728.6 million
in 1996 from $2,496.3 million in 1995. The increase in average invested assets
is primarily attributable to net positive cash flows from operating activities
and net positive cash flows from interest sensitive products totaling $145.8
million and $32.4 million, respectively, during 1996. The decline in yield on
average invested assets is the result of investing a majority of these positive
cash flows and cash from investing activities in lower yielding securities. The
newer securities have lower yields due principally to market interest rates
during 1996 being lower than the average effective yield of the investment
portfolio and the average yield on those securities sold, maturing or repaid
during the year.
Realized gains on investments increased $46.9 million, or 797.4%, to $52.8
million for 1996 compared to $5.9 million for 1995. The increase resulted
primarily from a $50.4 million gain from sales of a portion of one equity
investment during 1996. 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 $5.1 million, or 17.3%, to $23.9 million for 1996
compared to $29.0 million for 1995 due primarily to a $4.4 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.
A summary of the Company's policy benefits is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Policy benefits:
Universal life and annuity benefits $119,186 $112,125
Traditional life insurance and accident and health benefits 53,864 49,316
Increase in traditional and accident and health future policy benefits 25,875 22,976
Distributions to participating policyholders 26,345 25,747
Property-casualty losses and loss adjustment expenses 28,365 13,621
-------- --------
Total $253,635 $223,785
======== ========
</TABLE>
Policy benefits increased $29.8 million, or 13.3%, to $253.6 million for 1996
compared to $223.8 million for 1995. Included in this increase was a $7.1
million increase in universal life and annuity benefits consisting of a $4.8
million increase in interest credited to these contracts and a $2.3 million
increase in universal life death benefits in excess of related account balances.
The increase in interest credited is principally attributable to a larger volume
of business in force as the Company's interest crediting rates decreased during
the periods. The weighted average crediting rate for the Company's universal
life liabilities decreased to 6.39% for 1996 from 6.68% for 1995, and the
weighted average crediting rate for the Company's annuity liabilities decreased
to 6.35% for 1996 from 6.57% for 1995. The decrease in interest crediting rates
was greater than the decrease (20 basis points) 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 benefits increased $7.4 million, or 10.3%, consisting of a $3.4 million
increase in death and surrender benefits, a $2.9 million increase in the change
in the reserves on these products, a $1.4 million increase in accident and
health benefits and a $0.3 million net decrease in other benefits. Distributions
to policyholders increased to $26.3 million from $25.7 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 6.12% from
6.49%. Losses and loss adjustment expenses incurred on property-casualty
policies increased $14.8 million, or 108.2%, to $28.4 million for 1996 from
$13.6 million for 1995 due primarily to the increase in Utah Insurance's
reinsurance pool participation percentage, resulting in $13.5 million of
additional losses and loss adjustment expenses. In addition, less favorable
weather conditions in 1996 caused an increase in property losses, including
approximately $0.8 million in assumed losses attributable to Hurricane Fran.
During 1997, the Company discontinued participation in assumed reinsurance with
coastal catastrophe exposures. The loss and loss adjustment expense ratio
increased in 1996 to 86.0% from 72.8% in 1995.
A summary of the Company's underwriting, acquisition and insurance expenses is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals $ 9,191 $ 8,043
Amortization of deferred policy acquisition costs 15,510 10,727
Other underwriting, acquisition and insurance expenses, net of deferrals 41,747 54,661
------- -------
Total $66,448 $73,431
======= =======
</TABLE>
Commission expense increased $1.2 million, or 14.3%, to $9.2 million for 1996
compared to $8.0 million for 1995. 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 5.9% increase in direct life insurance
premiums collected in 1996 compared to 1995.
Amortization of deferred policy acquisition costs increased $4.8 million, or
44.6%, to $15.5 million for 1996 compared to $10.7 million for 1995 principally
due to the increase in Utah Insurance's reinsurance pool participation which
resulted in $3.8 million of additional amortization during 1996. In addition,
amortization increased due to a greater volume of business in force and an
increase in the emergence of profits on the underlying business. Partially
offsetting these increases was a $1.8 million reduction in amortization due to
the impact of realized gains and losses on investments backing the related
policyholder liabilities
Other underwriting, acquisition and insurance expenses decreased $13.0 million,
or 23.6%, to $41.7 million for 1996 compared to $54.7 million for 1995. 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 commissions 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 1995 have been replaced by
lower fees ($3.6 million for 1996) 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 $1.9 million of the decrease is attributable to the elimination of
an agent bonus program in 1996 and one-time severance benefit payments to
certain employees in 1995. Furthermore, amortization of value of insurance in
force acquired decreased $0.6 million in 1996 compared to 1995 due to the impact
of realized gains and losses on investments. Partially offsetting these
decreases was a $0.9 million increase in property-casualty underwriting and
insurance expenses as a result of the increase in Utah Insurance's reinsurance
pool participation percentage. While management strives to reduce operating
expenses and increase the efficiency of operations, the Company does not
anticipate any significant changes in its cost structure in 1997. As a result,
the 1997 underwriting expense level is expected to be comparable to that in
1996, as opposed to the expense reductions experienced in 1996 compared to 1995.
Interest expense was $0.9 million for 1996 compared to $1.0 million for 1995 due
to relatively consistent average outstanding debt balances during the periods.
The average outstanding debt is expected to be approximately $10 million higher
in 1997 than in 1996 as a result of additional debt incurred during 1996.
Other expenses increased $1.7 million, or 9.8%, to $19.0 million for 1996
compared to $17.3 million for 1995 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 $26.5 million, or 29.2%, to $116.9 million for 1996 compared to
$90.4 million for 1995. This increase was primarily the result of the impact of
realized gains on investments offset, in part, by the $22.5 million decrease in
net investment income attributable to FBL Ventures.
Income taxes increased $5.7 million, or 17.8%, to $37.8 million for 1996
compared to $32.1 million for 1995. The effective tax rate for 1996 was 32.3%
compared to 35.5% for 1995. The effective tax rate during 1996 was lower than
the federal statutory rate of 35% due primarily to tax exempt interest and
dividend income and other permanent differences between book and taxable income
arising from investment transactions. During 1995, the effect of tax exempt
interest and dividend income was more than offset by state income taxes
primarily on realized gains attributable to noninsurance subsidiaries. The
Company's effective tax rate should not, over the long term, be materially
different from the effective statutory rate.
Net income applicable to common stock increased $21.0 million, or 35.2%, to
$80.6 million for 1996 compared to $59.6 million for 1995. The increase was
primarily the result of the changes in pretax income and effective tax rate
discussed above. In addition, there was a $2.7 million increase in equity income
principally arising from eight equity investments whose principal assets were
sold or liquidated during 1996. Partially offsetting the increase in net income
was $2.3 million in dividends paid during 1996 to the Company's preferred
stockholder as a result of the exchange of 5.0 million shares of Class A Common
Stock for 5.0 million shares of Series A Preferred Stock on July 18, 1996. See
"Stockholders' Equity."
1995 COMPARED TO 1994
A summary of the Company's premiums and product charges is as follows:
YEAR ENDED
DECEMBER 31,
---------------------
1995 1994
--------- ---------
(DOLLARS IN THOUSANDS)
Premiums and product charges:
Universal life and annuity product charges $ 43,722 $ 42,734
Traditional life insurance premiums 75,450 72,222
Accident and health premiums 10,161 (1,956)
Property-casualty premiums 18,709 17,778
--------- ---------
Total $ 148,042 $ 130,778
========= =========
Premiums and product charges increased $17.2 million, or 13.2%, to $148.0
million for 1995 compared to $130.8 million for 1994. Approximately $12.1
million of this increase was attributable to an increase in accident and health
premiums due primarily to the Company's exit from the medical insurance business
in 1994. In 1994, the Company recorded net negative accident and health premiums
of $2.0 million, consisting of $11.9 million in disability income premiums net
of $13.9 million in negative premiums from ceding the medical insurance business
to other carriers. In 1995, accident and health premiums totaled $10.2 million,
consisting primarily of disability income business. Life insurance premiums and
universal life and annuity product charges increased $4.2 million, or 3.7%, as a
result of new sales coupled with favorable persistency. Property-casualty
premiums increased 5.2% to $18.7 million in 1995 from $17.8 million in 1994, due
to premium rate increases and a modest growth in the number of policies in
force. 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 states of operation.
Net investment income increased $44.3 million, or 24.8%, to $223.1 million for
1995 compared to $178.8 million for 1994. The increase was predominantly the
result of gains recognized on two private equity investments held by FBL
Ventures. During 1995, this subsidiary recognized net investment income of $25.4
million compared to a loss of $0.2 million for 1994. See "Adjusted Operating
Income." In addition, the Company's average invested assets (excluding invested
assets of FBL Ventures) increased 7.8% to $2,496.3 million in 1995 from $2,327.6
million in 1994 and the yield on average invested assets (excluding yield
attributable to FBL Ventures) increased to 7.88% in 1995 from 7.69% in 1994. The
yield on average invested assets increased in 1995 despite a general decline in
market interest rates during the period primarily because fixed maturity
securities purchased in 1995 tended to have longer maturities than that of the
existing fixed maturity portfolio and the Company increased its concentration of
investments in investment grade mortgage-backed securities with higher yields.
Realized gains on investments decreased $3.5 million, or 37.7%, to $5.9 million
for 1995 compared to $9.4 million for 1994. This decrease resulted primarily
from the timing of the sale of certain private equity investments. 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.
A summary of the Company's policy benefits is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1994
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Policy benefits:
Universal life and annuity benefits $112,125 $ 97,736
Traditional life insurance and accident and health benefits 49,316 48,345
Increase in traditional and accident and health future policy benefits 22,976 12,084
Distributions to participating policyholders 25,747 24,402
Property-casualty losses and loss adjustment expenses 13,621 13,441
-------- --------
Total $223,785 $196,008
======== ========
</TABLE>
Policy benefits increased $27.8 million, or 14.2%, to $223.8 million for 1995
compared to $196.0 million for 1994. Of this increase, $14.4 million was
attributable to an increase in universal life and annuity benefits largely
resulting from an increase in interest credited amounts and growth in the amount
of business in force. During 1995 the weighted average crediting rate for the
Company's individual annuity liabilities increased to 6.49% from 6.16% in 1994,
and the weighted average crediting rate for the Company's universal life
liabilities decreased to 6.68% from 6.71% for the respective periods. It is the
Company's policy to change rates credited to policy accounts as the Company's
investment portfolio yield changes. The crediting rate for universal life
insurance products decreased despite an increase in the yield on average
invested assets due primarily to a decrease in the rate credited to a universal
life product sold by Western Life that previously had an above-market crediting
rate. In addition, there was an $11.9 million increase in traditional life and
accident and health policy benefits as a result of general growth in the amount
of business in force. This increase included a $10.9 million increase in the
change in reserves on those products, a $1.5 million increase in surrender
benefits and a $0.9 million increase in death benefits, offset, in part, by a
$1.4 million decrease in accident and health benefits. Distributions to
participating policyholders increased to $25.7 million from $24.4 million due to
increases in the face amount of policies in force and an increase in the average
dividend rate credited to these policies to 6.49% from 6.31%. Losses and loss
expenses incurred on property-casualty policies increased to $13.6 million, or
1.3%, in 1995 from $13.4 million in 1994. The loss and loss adjustment expense
ratio improved in 1995 to 72.8% from 75.6% in 1994 primarily due to more
favorable loss experience resulting from premium rate increases and
re-underwriting activities.
A summary of the Company's underwriting, acquisition and insurance expenses is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1994
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals $ 8,043 $10,340
Amortization of deferred policy acquisition costs 10,727 10,066
Other underwriting, acquisition and insurance expenses, net of deferrals 54,661 54,246
------- -------
Total $73,431 $74,652
======= =======
</TABLE>
Commission expense decreased $2.3 million, or 22.2%, to $8.0 million in 1995
from $10.3 million in 1994. This decrease includes a $2.2 million decline in
nondeferrable first year commissions and a $0.1 million decline in renewal
commissions. Nondeferrable first year commissions decreased due primarily to an
$18.7 million decline in first year premiums received in 1995 compared to 1994.
Renewal commissions decreased in 1995 compared to 1994 despite a $13.1 million
increase in renewal premiums received due primarily to multi-tiered commission
structures on certain life insurance products whereby renewal commission rates
decline over the life of the underlying policies.
Amortization of deferred policy acquisition costs increased $0.6 million, or
6.6%, to $10.7 million in 1995 from $10.1 million in 1994 principally due to an
increase in amortization resulting from realized gains on investments.
Other underwriting, acquisition and insurance expenses increased $0.5 million,
or 0.8%, to $54.7 million in 1995 from $54.2 million in 1994. Expenses were
controlled by economies of scale gained from the consolidation of Western Life
and another subsidiary's operations with Farm Bureau Life and a reengineering
effort designed to increase efficiency of operations and improve customer
service. As a result of these initiatives, over 160 job positions were
eliminated during the past two years, the benefit of which was realized in 1995.
Interest expense decreased $1.1 million, or 52.2%, to $1.0 million in 1995 from
$2.1 million in 1994 due principally to the decline in long-term debt to $12.6
million at December 31, 1995 from $18.5 million at December 31, 1994 and $30.6
million at January 1, 1994.
Other expenses increased 0.4% to $17.3 million in 1995 from $17.2 million in
1994 due primarily to general growth in the Company's non-insurance support
operations.
Pretax income before minority interest in earnings of subsidiaries, equity
income (loss) and discontinued operations increased $30.5 million, or 51.1%, to
$90.4 million compared to $59.9 million for 1994. This increase was the result
of growth in investment income from the private equity investments of FBL
Ventures to $25.4 million compared to a loss of $0.2 million for 1994, coupled
with improved profitability in the life insurance lines from lower expense
ratios and increased spreads. These increases were partially offset by a
reduction in realized capital gains.
Income taxes increased $9.6 million, or 42.8%, to $32.1 million for 1995
compared to $22.5 million for 1994. The effective tax rate in 1995 was 35.5%
compared to 37.5% in 1994. The effective tax rate in 1994 was higher than the
statutory rate of 35% primarily as a result of provisions for possible
adjustments from routine IRS examinations, offset partially by tax-exempt
interest and dividend income. The Company's effective tax rate should not, over
the long term, be materially different from the effective statutory rate.
Net income increased $17.5 million, or 41.7%, to $59.6 million for 1995 compared
to $42.1 million for 1994. The increase was the result of increases in the
pretax income discussed above, partially offset by a $6.5 million decrease in
income from discontinued operations sold in 1994. In addition, equity income
(loss) increased $3.0 million to $1.6 million in 1995 compared to a loss of $1.4
million in 1994.
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), net income from a venture capital
investment company subsidiary and discontinued operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income applicable to common stock $ 80,634 $ 59,628 $ 42,066
Adjustments:
Net realized gains on investments (34,992) (2,761) (5,734)
Net income from FBL Ventures (3,147) (15,219) (73)
Gain on discontinued operations - - (6,479)
-------- -------- --------
Adjusted operating income applicable to common stock $ 42,495 $ 41,648 $ 29,780
======== ======== ========
Adjusted operating income per common share $ 1.96 $ 1.77 $ 1.27
======== ======== ========
</TABLE>
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
attributable to FBL Ventures is not included in adjusted operating income. As of
December 31, 1996, FBL Ventures had venture capital investments of $13.8
million, consisting of 13 private equity securities issued by 10 companies. Of
the 10 companies in which FBL Ventures held investments on December 31, 1996,
five are public with an aggregate carrying value of $7.0 million and five are
private with an aggregate carrying value of $6.8 million. In addition, of the 10
companies, four with an aggregate carrying value of $8.5 million operate in the
health care industry. The balance of the companies operate in the computer
hardware/software, communication technology and biotechnology industries.
During 1996, FBL Ventures ceased making new venture capital investments and
began selling its private equity securities. During 1996, 20 securities with a
fair value of $9.7 million were sold at their carrying value, which management
believes approximated fair value. Accordingly, the sales did not have a
significant effect on the Company's operating results. Proceeds from the sales
were invested in fixed maturity securities and mortgage loans. It is anticipated
that the remaining securities will be sold to unaffiliated third parties or
transferred to Farm Bureau Life during 1997. 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.
DISCONTINUED OPERATIONS
During 1990, the Company invested in a cable television operation which provided
cable service to rural communities in the midwest. The investment consisted of a
direct investment in a partnership interest, notes and a guarantee of bank debt.
As a result of market and other factors, the cable operation suffered
substantial operating losses during each year it was owned. In December 1993, a
decision was made to sell the cable operation, and at that time the operations
were classified as discontinued operations for financial reporting purposes. On
December 23, 1994, the cable operation was sold.
LIQUIDITY AND CAPITAL RESOURCES
FBL FINANCIAL GROUP, INC.
FBL Financial Group, Inc.'s cash flow from operations consists of dividends from
subsidiaries, if declared and paid, and fees which it charges the various
operating subsidiaries and affiliates for management of their operations,
partially offset by the expenses incurred for salaries and other expenses
related to providing such services.
During 1996, the Company paid common stock dividends of $1.3 million and
preferred stock dividends of $2.3 million. No dividends were paid during 1995 or
1994. It is anticipated dividend requirements for 1997 will be $1.00 per
preferred share and $0.40 per common share, or approximately $12.5 million. FBL
Financial Group, Inc. relies 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. During 1997, the maximum
amount legally available for distribution to FBL Financial Group, Inc. without
further regulatory approval is approximately $34.9 million from Farm Bureau Life
and $8.2 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 or its anticipated dividends.
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, 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
fiscal year 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
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' continuing
operations provided funds amounting to $144.7 million in 1996, $106.5 million in
1995 and $94.0 million in 1994. Cash inflows from financing activities are
principally the result of the significant growth in net deposits to policyholder
account balances for both universal life insurance and annuities during 1996,
1995, and 1994. These funds, along with the excess operating inflows, were
primarily used to increase the insurance companies' fixed maturity investment
portfolios.
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 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 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 a borrowing capacity of $48.2 million as of December 31,
1996. Interest is payable at a current market rate upon issuance. As of December
31, 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, mortgage
loans and its insurance products, are adequate to meet the Company's anticipated
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
December 31, 1996, the Company had no material commitments for capital
expenditures.
INVESTMENTS
The Company's total investment portfolio increased $243.0 million, or 9.2%, to
$2,889.1 million at December 31, 1996 compared to $2,646.1 million at December
31, 1995. This increase is primarily the result of positive cash flows from
operations and net deposits to policyholder account balances during 1996. In
addition, $77.3 million of the increase is attributable to one equity investment
from which the Company experienced significant realized and unrealized gains
during 1996.
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. 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:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
------------------ ------------------ --------------------
CARRYING CARRYING CARRYING
VALUE PERCENT VALUE PERCENT VALUE PERCENT
---------- ----- ---------- ----- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Public $1,734,849 60.0% $1,597,236 60.4% $1,293,590 55.3%
Private placement 303,000 10.5 335,905 12.7 314,593 13.4
144A private placement 230,446 8.0 143,068 5.4 124,428 5.3
---------- ----- ---------- ----- ---------- -------
Total fixed maturities 2,268,295 78.5 2,076,209 78.5 1,732,611 74.0
Equity securities 86,991 3.O 83,714 3.1 46,701 2.0
Held in inventory (1) 15,899 0.5 21,913 0.8 18,169 0.8
Mortgage loans on real estate 293,777 10.2 266,623 10.1 272,537 11.7
Investment real estate
Acquired for debt 2,007 0.1 2,220 0.1 4,444 0.2
Investment 26,384 0.9 26,384 1.0 22,507 1.0
Policy loans 118,996 4.1 116,107 4.4 113,848 4.9
Other long-term investments 8,388 0.3 2,892 0.1 6,654 0.3
Short-term investments 68,358 2.4 50,061 1.9 119,683 5.1
---------- ----- ---------- ----- ---------- -------
Total investments $2,889,095 100.0% $2,646,123 100.0% $2,337,154 100.0%
========== ===== ========== ===== ========== =======
</TABLE>
- -----------
(1) Held in inventory includes equity securities owned by FBL Ventures
totaling $13.8 million, $20.1 million and $15.9 million at December 31,
1996, 1995 and 1994, respectively.
As of December 31, 1996, 93.1% (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 December 31, 1996, the Company's investment in non-investment grade
debt was 6.9% of fixed maturity securities. At that time no single
non-investment grade holding exceeded 0.2% of total investments.
The following table sets forth the credit quality, by NAIC designation and
Standard & Poors (S & P) rating equivalents, of fixed maturity securities:
FIXED MATURITY SECURITIES BY NAIC DESIGNATION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
NAIC EQUIVALENT CARRYING CARRYING CARRYING
DESIGNATION S & P RATINGS (1) VALUE PERCENT VALUE PERCENT VALUE PERCENT
- ----------- ----------------- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1 (AAA, AA, A) $1,488,548 65.6% $1,311,216 63.1% $1,039,787 60.0%
2 (BBB) 624,209 27.5 582,678 28.1 541,272 31.3
---------- ----- ---------- ----- ---------- -----
Total investment grade 2,112,757 93.1 1,893,894 91.2 1,581,059 91.3
3 (BB) 103,292 4.6 100,622 4.8 82,402 4.8
4 (B) 48,932 2.2 79,987 3.9 65,083 3.7
5 (CCC, CC, C) 275 -- 56 -- 1,255 --
6 In or near default 3,039 0.1 1,650 0.1 2,812 0.2
---------- ----- ---------- ----- ---------- -----
Total below investment grade 155,538 6.9 182,315 8.8 151,552 8.7
---------- ----- ---------- ----- ---------- -----
Total fixed maturities $2,268,295 100.0% $2,076,209 100.0% $1,732,611 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
- -----------
(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.
Mortgage and other asset-backed securities constitute a significant portion of
the Company's portfolio of securities. Management believes these types of
investments, in general, provided superior risk-adjusted returns during 1996
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. At December 31, 1996, the Company held $576.7
million (20.0% of total investments) in residential mortgage-backed securities,
$305.2 million (10.6% of total investments) in commercial mortgage-backed
securities and $181.7 million (6.3% of total investments) in other asset-backed
securities.
At December 31, 1996, the Company held residential collateralized mortgage
obligation (CMO) investments with a market value of $538.1 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
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 repayments of principal do not occur until the
previous tranches are paid off. As of December 31, 1996, 78.8% 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 December 31, 1996, the Company held $293.8 million or 10.2% 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 December 31, 1996, mortgages more than 60 days delinquent accounted for 1.4%
of the carrying value of the mortgage portfolio. The Company's mortgage lending
policies establish limits on the amount that can be loaned to one borrower and
require diversification by geographic location and collateral type. Regions with
the largest concentration of the Company's mortgage loan portfolio at December
31, 1996 include: Pacific (26%) which includes California, Oregon and
Washington; and Mountain (22%) which includes Arizona, Colorado, Idaho, New
Mexico, Utah and Wyoming. Mortgage loans on real estate have also been analyzed
by collateral types with office buildings (48%) and retail facilities (32%)
representing the largest holdings at December 31, 1996.
The Company's investment portfolio at December 31, 1996, also included $68.4
million of short-term investments and $238.8 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 December 31,
1996, the weighted average life of the fixed maturity portfolio, based on market
values excluding convertible bonds, was approximately 8.3 years. Based on the
fixed income analytical system utilized by the Company, including its mortgage
backed prepayment assumptions, the effective duration of the fixed income
portfolio was 4.6 as of December 31, 1996.
OTHER ASSETS
Securities and indebtedness of related parties decreased $37.3 million, or
50.1%, due to the repayment of several lines of credit and mortgage loans and
the sale or liquidation of several partnership interests. Deferred policy
acquisition costs increased $29.1 million, or 21.1%, due primarily to new sales,
the increase in Utah Insurance's reinsurance pool participation percentage and
an adjustment ($10.7 million increase) related to the valuation of fixed
maturity securities designated as available for sale. Value of insurance in
force acquired increased $5.5 million, or 37.9%, principally due to an
adjustment ($5.6 million increase) related to the valuation of fixed maturity
securities designated as available for sale. At December 31, 1996, the Company
had total assets of $3,368.2 million, an 8.9% increase from total assets at
December 31, 1995.
LIABILITIES
Policy liabilities and accruals increased $133.5 million, or 6.3%, due
principally to an increase in the volume of business in force and the increase
in Utah Insurance's reinsurance pool participation percentage. Long-term debt
increased $12.0 million to $24.6 million at December 31, 1996 principally due to
$14.0 million in additional debt incurred during 1996 to support the increase in
Utah Insurance's reinsurance pool participation percentage. At December 31,
1996, the Company had total liabilities of $2,724.9 million, a 7.9% increase
from total liabilities at December 31, 1995.
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.
On April 29, 1996, the Company designated 5.0 million shares of its preferred
stock as Series A Preferred Stock and on July 18, 1996, such shares were
exchanged for 5.0 million shares of Class A Common Stock. The preferred stock,
which pays cumulative annual cash dividends of $1.00 per share, payable
quarterly, is recorded at its liquidation value of $20.00 per share.
At December 31, 1996, stockholders' equity was $638.5 million, or $28.55 per
common share, compared to $564.3 million, or $23.65 per common share (after
giving effect to stock split) at December 31, 1995. Approximately $1.70 of the
increase in stockholders' equity per common share is attributable to the
exchange of Class A Common Stock for preferred stock. Included in stockholders'
equity per common share is $1.05 and $1.40 at December 31, 1996 and 1995,
respectively, attributable to unrealized investment gains resulting from marking
the Company's fixed maturity securities classified as available for sale to
market value. The change in unrealized appreciation of fixed maturity and equity
securities classified as available for sale reduced stockholders' equity $9.9
million in 1996, after related adjustments to deferred policy acquisition costs,
value of insurance in force acquired, unearned revenue reserve and deferred
income taxes. During 1996, 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.
EFFECTS OF INFLATION AND INTEREST RATE CHANGES
The Company does not believe that inflation has had a material effect on its
consolidated results of operations. The Company attempts to invest new funds in
securities with expected durations that match the related policyholder
obligations to reduce its exposure to interest rate fluctuations. In general,
the market value of the Company's fixed maturity portfolio increases or
decreases in inverse relationship with fluctuations in interest rates, and the
yield realized by the Company on new investments increases or decreases in
direct relationship with interest rate changes.
Also, interest rate changes may have temporary effects on the sale and
profitability of the annuity and universal life products offered by the Company.
For example, if interest rates rise, competing investments (such as annuities or
life insurance offered by the Company's competitors, certificates of deposit,
mutual funds, and similar instruments) may become more attractive to potential
purchasers of the Company's products until the Company increases the interest
rate credited to holders of its annuity and universal life products. In
contrast, as interest rates fall, the Company attempts to adjust its credited
rates to compensate for the corresponding decline in investment income. The
Company monitors interest rates and sells annuities and universal life contracts
that permit flexible responses to interest rate changes as part of the Company's
management of interest spreads.
EMERGING ACCOUNTING AND REGULATORY MATTERS
STATUTORY ACCOUNTING CODIFICATION
The NAIC currently is in the process of codifying statutory accounting
practices, the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. That project, which is expected to
be completed in the near term, will likely change certain statutory accounting
practices. The codification may result in changes to the accounting practices
that the Company's insurance subsidiaries use to prepare their statutory-basis
financial statements.
REGULATORY MATTERS
The Company's insurance subsidiaries are subject to government regulation in
each of the states in which they conduct business. Such regulatory authority is
vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including rates, policy forms and capital
adequacy, and is concerned primarily with the protection of policyholders rather
than stockholders. The Company's variable insurance products, mutual funds,
investment advisor and certain licensed broker-dealers and agents are also
subject to regulation by the Securities and Exchange Commission, the National
Association of Securities Dealers (NASD), and state agencies.
During the past several years, increased scrutiny has been placed upon the
insurance regulatory framework, and certain state legislatures have considered
or enacted laws that alter, and in many cases increase, state authority to
regulate insurance companies and insurance holding company systems. In light of
recent legislative developments, the NAIC and state insurance regulators are
reexamining existing laws and regulations, specifically focusing on insurance
company investments and solvency issues, risk-adjusted capital guidelines,
interpretations of existing laws, the development of new laws, the
implementation of nonstatutory guidelines and the circumstances under which
dividends may be paid. The NAIC has approved one version and is considering
another version of a model investment law that defines and sets guidelines for
investment policies and activities for insurance companies. Management does not
believe the adoption in any of its states of operation of any of the current
NAIC initiatives will have a material adverse impact on the Company; however,
the Company cannot predict the form of any future proposals or regulation.
Assessments are, from time to time, levied on the insurance subsidiaries of the
Company by 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. Because the Company is not able to
reasonably estimate the potential amounts of future assessments, the Company
recognizes its obligation for guaranty fund assessments when it receives notice
that an amount is payable to a guaranty fund. Expenses incurred for guaranty
fund assessments were $0.6 million, $1.3 million and $1.6 million during the
years ended December 31, 1996, 1995 and 1994, respectively.
Congress has from time to time considered possible legislation that would
eliminate the deferral of taxation on the accretion of value within certain
annuities and life insurance products. The United States Supreme Court recently
held in NATIONSBANK OF NORTH CAROLINA V. VARIABLE ANNUITY LIFE INSURANCE COMPANY
that annuities are not insurance for purposes of the National Bank Act. This
factor or others may cause Congress to consider legislation that would eliminate
such tax deferral, at least for certain annuities. Other possible legislation,
including a simplified "flat tax" income tax structure with an exemption from
taxation for investment income, could also adversely affect the sale of life
insurance compared with other financial products if such legislation were to be
enacted. There can be no assurance as to whether such legislation will be
enacted or, if enacted, whether such legislation would contain provisions with
possible adverse effects on the Company's annuity and life insurance products.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects, new
products, and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking 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
include 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.
* 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 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FBL FINANCIAL GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Report of Management 39
Report of Independent Auditors 40
Consolidated Financial Statements
Consolidated Balance Sheets 41
Consolidated Statements of Income 43
Consolidated Statements of Changes in Stockholders' Equity 44
Consolidated Statements of Cash Flows 45
Notes to Consolidated Financial Statements 47
REPORT OF MANAGEMENT
To Our Stockholders
The management of FBL Financial Group, Inc. is responsible for the integrity of
information contained in the accompanying consolidated financial statements. The
statements have been prepared in accordance with generally accepted accounting
principles appropriate in the circumstances and have been audited by Ernst &
Young LLP. A copy of their audit opinion follows this letter. The financial
information contained elsewhere in this annual report is consistent with that of
the financial statements except for information described as being in accordance
with statutory accounting practices.
Certain financial information presented depends on management's estimates and
judgments regarding the ultimate outcome of transactions which are not yet
complete. Management believes these estimates and judgements are fair and
reasonable based upon available information.
Management maintains a system of internal control designed to meet its
responsibilities for preparing reliable financial statements. The system is
designed to provide reasonable assurance that assets are safeguarded and
transactions are properly authorized and reported. Reasonable assurance is based
upon the premise that the cost of controls should not exceed the benefits
derived from them. An internal audit department is maintained to continually
monitor and challenge the adequacy of internal control. It is management's
opinion that its system of internal control during the periods covered by this
annual report was effective in providing reasonable assurance that its financial
statements are fairly stated in all material respects.
The Audit Committee of the Board of Directors, composed solely of nonmanagement
directors, meets periodically with management, internal auditors and Ernst &
Young LLP to review internal accounting control, audit activities and financial
reporting matters. The internal auditors and Ernst & Young LLP have free access
to the Audit Committee, without the presence of management, to discuss the
adequacy of internal control and to review the quality of financial reporting.
Thomas R. Gibson
CHIEF EXECUTIVE OFFICER AND DIRECTOR
James W. Noyce
CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
FBL Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of FBL Financial
Group, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FBL
Financial Group, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As described in Note 4 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for certain investments in debt
securities.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 3, 1997
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost
(market: 1996 - $709,168; 1995 - $712,476) $ 694,351 $ 683,149
Available for sale, at market
(amortized cost: 1996 - $1,542,748; 1995 - $1,325,608) 1,573,944 1,393,060
Equity securities, at market (cost: 1996 - $74,792; 1995 - $77,038) 86,991 83,714
Held in inventory, at estimated fair value
(amortized cost: 1996 - $10,621; 1995 - $21,555),
substantially all held for sale in 1996 15,899 21,913
Mortgage loans on real estate 293,777 266,623
Investment real estate, less allowances for
depreciation of $1,930 in 1996 and $1,839 in 1995 28,391 28,604
Policy loans 118,996 116,107
Other long-term investments 8,388 2,892
Short-term investments 68,358 50,061
---------- ----------
Total investments 2,889,095 2,646,123
Cash and cash equivalents 3,583 --
Securities and indebtedness of related parties 37,213 74,506
Accrued investment income 33,537 32,711
Accounts and notes receivable 2,235 2,009
Amounts receivable from affiliates 4,439 2,422
Reinsurance recoverable 38,919 31,845
Deferred policy acquisition costs 166,912 137,792
Value of insurance in force acquired 19,928 14,449
Property and equipment, less allowances
for depreciation of $46,824 in 1996 and $45,417 in 1995 62,510 60,184
Current income taxes recoverable 4,002 14,114
Goodwill, less accumulated amortization of
$2,172 in 1996 and $1,556 in 1995 9,726 10,342
Other assets 17,050 22,296
Assets held in separate accounts 79,043 44,789
---------- ----------
Total assets $3,368,192 $3,093,582
========== ==========
</TABLE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Universal life and annuity products $1,471,983 $1,394,116
Traditional life insurance and accident and health products 678,674 651,827
Unearned revenue reserve 22,215 20,081
Other policy claims and benefits 10,737 8,149
Reserves on property-casualty policies 43,189 29,984
Unearned premiums on property-casualty policies 26,774 15,906
---------- ----------
2,253,572 2,120,063
Other policyholders' funds:
Supplementary contracts without life contingencies 125,581 114,471
Advance premiums and other deposits 86,410 87,093
Accrued dividends 14,243 13,678
---------- ----------
226,234 215,242
Long-term debt 24,581 12,604
Amounts payable to affiliates 10,910 10,443
Deferred income taxes 40,612 39,645
Other liabilities 89,915 81,995
Liabilities related to separate accounts 79,043 44,789
---------- ----------
Total liabilities 2,724,867 2,524,781
Commitments and contingencies
Minority interest in subsidiaries 4,803 4,503
Stockholders' equity:
Preferred Stock, without par value, at
liquidation value - authorized 10,000,000 shares,
issued and outstanding 5,000,000 Series A shares in 1996 100,000 --
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
17,666,810 shares in 1996 43,773 --
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 27,858 37,807
Retained earnings 459,324 380,010
---------- ----------
Total stockholders' equity 638,522 564,298
---------- ----------
Total liabilities and stockholders' equity $3,368,192 $3,093,582
========== ==========
</TABLE>
See accompanying notes.
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Universal life and annuity product charges $ 43,654 $ 43,722 $ 42,734
Traditional life insurance premiums 82,198 75,450 72,222
Accident and health premiums 10,582 10,161 (1,956)
Property-casualty premiums 32,975 18,709 17,778
Net investment income 210,729 223,108 178,834
Realized gains on investments 52,793 5,883 9,448
Other income 23,936 28,952 30,825
------------ ------------ ------------
Total revenues 456,867 405,985 349,885
Benefits and expenses:
Universal life and annuity benefits 119,186 112,125 97,736
Traditional life insurance and accident and health benefits 53,864 49,316 48,345
Increase in traditional and accident and health future policy benefits 25,875 22,976 12,084
Distributions to participating policyholders 26,345 25,747 24,402
Property-casualty losses and loss adjustment expenses 28,365 13,621 13,441
Underwriting, acquisition and insurance expenses 66,448 73,431 74,652
Interest expense 912 1,007 2,108
Other expenses 19,019 17,315 17,244
------------ ------------ ------------
Total benefits and expenses 340,014 315,538 290,012
------------ ------------ ------------
116,853 90,447 59,873
Income taxes (37,778) (32,070) (22,462)
Minority interest in earnings of subsidiaries (542) (351) (376)
Equity income (loss), net of related income taxes 4,351 1,602 (1,448)
------------ ------------ ------------
Income from continuing operations 82,884 59,628 35,587
Discontinued operations - gain on disposal of
cable television operations, net of related income taxes -- -- 6,479
------------ ------------ ------------
Net income 82,884 59,628 42,066
Dividends on preferred stock (2,250) -- --
------------ ------------ ------------
Net income applicable to common stock $ 80,634 $ 59,628 $ 42,066
============ ============ ============
Net income per common share (after giving effect for
2,000-for-1 stock split):
Continuing operations $ 3.73 $ 2.53 $ 1.52
Discontinued operations -- -- 0.28
------------ ------------ ------------
Net income per common share $ 3.73 $ 2.53 $ 1.80
============ ============ ============
Weighted average common shares outstanding 21,635,196 23,591,100 23,394,260
============ ============ ============
</TABLE>
See accompanying notes.
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
STOCK AND
CLASS A CLASS B ADDITIONAL
PREFERRED COMMON COMMON PAID-IN
STOCK STOCK STOCK CAPITAL
-------- --------- ------ ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $ -- $ -- $ -- $ 28,224
Issuance of 9,146.91 shares of FBL
Financial Group, Inc. stock upon formation,
for outstanding Common Stock of Farm Bureau
Life Insurance Company as follows:
Common Stock -- -- -- (279)
Additional Paid-In Capital -- -- -- 279
Issuance of 551.89 shares of stock for
minority interest in subsidiaries -- -- -- 24,702
Issuance of 1,969.00 shares of stock for all
outstanding Common Stock of Western Farm Bureau
Life Insurance Company -- -- -- 88,130
Cumulative effect of change in method of
accounting for fixed maturity securities -- -- -- --
Net income for 1994 -- -- -- --
Change in net unrealized investment gains/losses -- -- -- --
Issuance of 59.00 shares of stock for cash -- -- -- 1,143
-------- --------- ------ ---------
Balance at December 31, 1994 -- -- -- 142,199
Net income for 1995 -- -- -- --
Change in net unrealized investment gains/losses -- -- -- --
Issuance of 200.00 shares of stock for cash -- -- -- 4,189
Issuance of 3.10 shares of stock for minority
interest in subsidiary -- -- -- 93
-------- --------- ------ ---------
Balance at December 31, 1995 -- -- -- 146,481
Recapitalization and conversion
of Common Stock -- 139,157 7,324 (146,481)
Exchange of Common Stock
for Preferred Stock 100,000 (100,000) -- --
Net income for 1996 -- -- -- --
Change in net unrealized investment
gains/losses -- -- -- --
Adjustment resulting from capital
transaction of equity investee -- 4,616 243 --
Dividends on Preferred Stock -- -- -- --
Dividends on Common Stock -- -- -- --
-------- --------- ------ ---------
Balance at December 31, 1996 $100,000 $ 43,773 $7,567 $ --
======== ========= ====== =========
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET
UNREALIZED
INVESTMENT TOTAL
GAINS RETAINED STOCKHOLDERS'
(LOSSES) EARNINGS EQUITY
-------- --------- ---------
<S> <C> <C> <C>
Balance at January 1, 1994 $ 5,737 $ 278,316 $ 312,277
Issuance of 9,146.91 shares of FBL
Financial Group, Inc. stock upon formation,
for outstanding Common Stock of Farm Bureau
Life Insurance Company as follows:
Common Stock -- -- (279)
Additional Paid-In Capital -- -- 279
Issuance of 551.89 shares of stock for
minority interest in subsidiaries -- -- 24,702
Issuance of 1,969.00 shares of stock for all
outstanding Common Stock of Western Farm Bureau
Life Insurance Company -- -- 88,130
Cumulative effect of change in method of
accounting for fixed maturity securities 38,913 -- 38,913
Net income for 1994 -- 42,066 42,066
Change in net unrealized investment gains/losses (76,488) -- (76,488)
Issuance of 59.00 shares of stock for cash -- -- 1,143
-------- --------- ---------
Balance at December 31, 1994 (31,838) 320,382 430,743
Net income for 1995 -- 59,628 59,628
Change in net unrealized investment gains/losses 69,645 -- 69,645
Issuance of 200.00 shares of stock for cash -- -- 4,189
Issuance of 3.10 shares of stock for minority
interest in subsidiary -- -- 93
-------- --------- ---------
Balance at December 31, 1995 37,807 380,010 564,298
Recapitalization and conversion
of Common Stock -- -- --
Exchange of Common Stock
for Preferred Stock -- -- --
Net income for 1996 -- 82,884 82,884
Change in net unrealized investment
gains/losses (9,949) -- (9,949)
Adjustment resulting from capital
transaction of equity investee -- -- 4,859
Dividends on Preferred Stock -- (2,250) (2,250)
Dividends on Common Stock -- (1,320) (1,320)
-------- --------- ---------
Balance at December 31, 1996 $ 27,858 $ 459,324 $ 638,522
======== ========= =========
</TABLE>
Note: Share amounts set forth in the above statement have not been restated
to reflect the 2,000-for-1 stock split approved by the Company's Board
of Directors on March 12, 1996 and effective March 19, 1996.
See accompanying notes.
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Continuing operations:
Net income $ 82,884 $ 59,628 $ 35,587
Adjustments to reconcile net income to
net cash provided by continuing operations:
Adjustments related to interest sensitive products:
Interest credited to account balances 101,590 97,244 89,899
Charges for mortality and administration (44,981) (44,462) (43,912)
Deferral of unearned revenues 1,858 1,696 2,058
Amortization of unearned revenue reserve (531) (956) (880)
Provision for depreciation and amortization 15,567 15,040 19,727
Net gains and losses related to
investments held in inventory (3,272) (25,801) 206
Realized gains on investments (52,793) (5,883) (9,448)
Increase in traditional, accident and health
and property-casualty benefit accruals 49,914 23,810 16,554
Policy acquisition costs deferred (33,951) (25,918) (24,186)
Amortization of deferred policy acquisition costs 15,510 10,727 10,066
Provision for deferred income taxes 3,707 13,914 6,287
Other 10,307 (12,646) (7,949)
--------- --------- ---------
Net cash provided by continuing operations 145,809 106,393 94,009
Discontinued operations:
Net income -- -- 6,479
Adjustments to reconcile net income to net
cash used in discontinued operations -- -- (10,293)
--------- --------- ---------
Net cash used in discontinued operations -- -- (3,814)
--------- --------- ---------
Net cash provided by operating activities 145,809 106,393 90,195
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment 43,023 20,890 43,528
Fixed maturities - available for sale 259,929 262,000 380,849
Equity securities 102,237 30,674 58,317
Held in inventory 10,232 8,045 7,106
Mortgage loans on real estate 29,086 23,774 32,816
Investment real estate 5,075 5,751 2,240
Policy loans 25,754 24,798 21,448
Other long-term investments 719 3,564 31,608
Short-term investments net -- 69,622 --
--------- --------- ---------
476,055 449,118 577,912
</TABLE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Acquisition of investments:
Fixed maturities - held for investment $ (53,690) $(170,926) $(207,060)
Fixed maturities - available for sale (481,225) (334,270) (344,866)
Equity securities (29,631) (30,742) (39,077)
Held in inventory (946) (13,618) (6,698)
Mortgage loans on real estate (56,295) (23,456) (13,705)
Investment real estate (5,001) (8,073) (710)
Policy loans (28,643) (27,057) (24,377)
Other long-term investments -- (14) (13,654)
Short-term investments - net (19,054) -- (47,261)
--------- --------- ---------
(674,485) (608,156) (697,408)
Proceeds from disposal, repayments of advances and other
distributions from equity investees 37,058 32,193 45,184
Investments in and advances to equity investees (10,396) (21,463) (39,418)
Net cash paid for acquisitions -- -- (3,065)
Net purchases of property and equipment and other (10,867) (5,579) (5,321)
Investing activities of discontinued operations -- -- 29,539
--------- --------- ---------
Net cash used in investing activities (182,635) (153,887) (92,577)
FINANCING ACTIVITIES
Receipts from interest sensitive products credited to
policyholder account balances 212,956 198,031 219,501
Return of policyholder account balances on interest
sensitive products (180,588) (148,047) (157,894)
Proceeds from short-term borrowings -- 8 8,288
Repayments of short-term borrowings -- (6,396) (10,379)
Proceeds from long-term debt 24,500 -- --
Repayments of long-term debt (12,523) (5,915) (12,119)
Distributions to minority interests (366) (339) (380)
Issuance of Common Stock for cash -- 4,189 1,143
Dividends paid (3,570) -- --
Financing activities of discontinued operations -- -- (44,000)
--------- --------- ---------
Net cash provided by financing activities 40,409 41,531 4,160
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 3,583 (5,963) 1,778
Cash and cash equivalents at beginning of year -- 5,963 4,185
--------- --------- ---------
Cash and cash equivalents at end of year $ 3,583 $ -- $ 5,963
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 836 $ 1,086 $ 2,163
Income taxes 26,302 23,032 26,451
</TABLE>
See accompanying notes
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
FBL Financial Group, Inc. (the Company) operates predominantly in the individual
life and annuity area of the life insurance industry through its principal
subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and Western
Farm Bureau Life Insurance Company (Western Life). The Company markets its
products to Farm Bureau members and other individuals and businesses in 15
midwestern and western states. Several subsidiaries support various functional
areas of Farm Bureau Life, Western Life and other affiliates, by providing
investment advisory, marketing and distribution, and leasing services. As these
functions relate directly to the primary business activities, these entities
have been included in the life insurance business segment.
The Company also owns Utah Farm Bureau Insurance Company (Utah Insurance), a
property-casualty insurance company providing individual and small business
coverages. The operations of Utah Insurance have been treated as a separate
segment for financial reporting purposes.
CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its direct and indirect subsidiaries. All significant intercompany
transactions have been eliminated.
INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
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,
net of certain adjustments (see Note 4). Premiums and discounts are
amortized/accrued using methods which result in a constant yield over the
securities' expected lives. Amortization/accrual of premiums and discounts on
mortgage and asset-backed securities incorporates a prepayment assumption to
estimate the securities' expected lives.
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.
HELD IN INVENTORY
The Company has certain subsidiaries involved as broker-dealers and another as a
venture capital investment company. In accordance with accounting practices for
these specialized industries, marketable securities are valued at market value
if readily marketable or at fair value, as determined by the Board of Directors
of the subsidiary holding the security, if not readily marketable. The resulting
difference between cost and market is included in the statements of income as
net investment income. Realized gains and losses are also reported as a
component of net investment income.
The Company's held in inventory portfolio includes securities with carrying
values of $7.0 million and $18.6 million at December 31, 1996 and 1995,
respectively, for which market quotations are not readily available and for
which fair value is determined in good faith by the Board of Directors of FBL
Ventures of South Dakota, Inc. (FBL Ventures), the venture capital investment
company subsidiary holding the securities. In determining fair value for
securities not readily marketable, investments are initially stated at cost
until significant subsequent events require a change in valuation. Among the
factors considered by the Board of Directors in determining fair value of
investments are the cost of the investment, developments since the acquisition
of the investment, the sale price of recently issued securities, the financial
condition and operating results of the issuer, the long-term business potential
of the issuer, the quoted market price of securities with similar quality and
yield that are publicly traded and other factors generally pertinent to the
valuation of investments. The Board of Directors, in making its evaluation, has
relied on financial data of investees provided by the management of the investee
companies.
During 1996, the Company ceased making new venture capital investments and began
selling the private equity investments held by FBL Ventures in an attempt to
exit most aspects of the venture capital investment business. During 1996, 20
securities with a fair value of $9.7 million were sold including $6.0 million in
securities to a subsidiary of Farm Bureau Mutual Insurance Company, an
affiliate. At December 31, 1996, FBL Ventures had 13 private equity securities
with a fair value of $13.8 million. It is anticipated that these securities will
be sold to unaffiliated third parties or transferred to Farm Bureau Life during
1997.
The Company records transfers to or from FBL Ventures at fair value at the date
of transfer, re-establishing a new cost basis for the security. Prior to 1996,
transfers typically occurred when a previously private issue went public, or
when a private equity security was purchased or otherwise received by another
member of the consolidated group. During the year ended December 31, 1995, two
securities with a total fair value of $27.6 million were transferred out of FBL
Ventures. During the year ended December 31, 1994, two securities with a fair
value of $1.4 million were transferred to FBL Ventures. A realized gain
(recognized in net investment income) of $24.6 million was recognized on the
1995 transfers, although neither transfer had an impact on net income (as
unrealized appreciation had been reported prior to the transfer), and no
realized gains or losses were recognized on the 1994 transfers.
MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate are reported at cost adjusted for amortization of
premiums and accrual of discounts. If the value of any mortgage loan is
determined to be impaired (i.e., when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement), the carrying value of the mortgage loan is reduced to its fair
value, which may be based upon the present value of expected future cash flows
from the loan (discounted at the loan's effective interest rate), or the fair
value of the underlying collateral. The carrying value of impaired loans is
reduced by the establishment of a valuation allowance, changes to which are
recognized as realized gains or losses on investments.
INVESTMENT REAL ESTATE
Investment real estate is reported at cost less allowances for depreciation.
Real estate acquired through foreclosure, which is included with investment real
estate in the consolidated balance sheet, is recorded at the lower of cost
(which includes the balance of the mortgage loan, any accrued interest and any
costs incurred to obtain title to the property) or fair value as determined at
or before the foreclosure date. The carrying value of these assets is subject to
regular review. If the fair value, less estimated sales costs, of real estate
owned decreases to an amount lower than its carrying value, a valuation
allowance is established for the difference. This valuation allowance can be
reduced or eliminated should the fair value of the property increase. Changes in
this valuation allowance are recognized as realized gains or losses on
investments. At December 31, 1996 and 1995, the Company had valuation allowances
totaling $0.3 million and $0.2 million, respectively.
OTHER INVESTMENTS
Policy loans are reported at unpaid principal. Other long-term investments and
short-term investments are reported at cost adjusted for amortization of
premiums and accrual of discounts. Investments accounted for by the equity
method include investments in, and advances to, various joint ventures and
partnerships and are reported as securities and indebtedness of related parties.
Changes in the value of the Company's investment in equity investees
attributable to capital transactions of the investee, such as a public offering
of stock, are recorded directly to stockholders' equity.
REALIZED GAINS AND LOSSES ON INVESTMENTS
The carrying values of all the Company's investments are reviewed on an ongoing
basis for credit deterioration, and if this review indicates a decline in market
value that is other than temporary, the Company's carrying value in the
investment is reduced to its estimated realizable value (the sum of the
estimated nondiscounted cash flows for securities or fair value for mortgage
loans on real estate) and a specific writedown is taken. Such reductions in
carrying value are recognized as realized losses on investments. Realized gains
and losses on sales are determined on the basis of specific identification of
investments. If the Company expects that an issuer of a security will modify its
payment pattern from contractual terms but no writedown is required, future
investment income is recognized at the rate implicit in the calculation of net
realizable value under the expected payment pattern.
MARKET VALUES
Market values of publicly traded fixed maturity securities are as reported by an
independent pricing service. Market values of conventional mortgage-backed
securities not actively traded in a liquid market are estimated using a matrix
calculation assuming a spread over U. S. Treasury bonds based upon the expected
average lives of the securities. Market values of private placement bonds are
estimated using a matrix that assumes a spread (based on interest rates and a
risk assessment of the bonds) over U. S. Treasury bonds. Market values of
redeemable preferred stock and equity securities are based on the latest quoted
market prices, or for those not readily marketable, at values which are
representative of the market values of issues of comparable yield and quality.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE ACQUIRED
To the extent recoverable from future policy revenues and gross profits, certain
costs of acquiring new insurance business, principally commissions and other
expenses related to the production of new business, have been deferred. The
value of insurance in force acquired represents the cost assigned to insurance
contracts when an insurance company is acquired. The initial value is determined
by an actuarial study using expected future gross profits as a measurement of
the net present value of the insurance acquired. Interest accrues on the
unamortized balance at rates that range from 6.50% to 6.79%.
For participating traditional life insurance and universal life insurance and
investment products, these costs are being amortized generally in proportion to
expected gross profits (after dividends to policyholders, if applicable) from
surrender charges and investment, mortality, and expense margins. That
amortization is adjusted retrospectively when estimates of current or future
gross profits/margins (including the impact of investment gains and losses) to
be realized from a group of products are revised. The deferred policy
acquisition costs for property-casualty insurance are amortized over the
effective period of the related insurance policies; deferred policy acquisition
costs for these policies are charged to expense when such costs are deemed not
to be recoverable from the related unearned premiums and any related investment
income.
PROPERTY AND EQUIPMENT
Property and equipment, comprised primarily of home office properties, furniture
and equipment, are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily using the straight-line method over
the estimated useful lives of the assets. Depreciation expense for the years
ended December 31, 1996, 1995 and 1994 was $10.0 million, $9.7 million and $9.4
million, respectively.
GOODWILL
Goodwill represents the excess of the fair value of assets exchanged over the
net assets acquired. Goodwill is generally being amortized on a straight-line
basis over a period of 20 years. The carrying value of goodwill is regularly
reviewed for indicators of impairment in value, which in the view of management
are other than temporary. If facts and circumstances suggest that goodwill is
impaired, the Company assesses the fair value of the underlying business and
reduces goodwill to an amount that results in the book value of the underlying
business approximating fair value. The Company has not recorded any such
writedowns during the years ended December 31, 1996, 1995 or 1994.
FUTURE POLICY BENEFITS
The liability for future policy benefits for participating traditional life
insurance is based on net level premium reserves, including assumptions as to
interest, mortality, and other assumptions underlying the guaranteed policy cash
values. Reserve interest assumptions are level and range from 2.5% to 6.0%. The
average rate of assumed investment yields used in estimating gross margins was
8.34% in 1996, 8.14% in 1995 and 8.10% in 1994. Accrued dividends for
participating business are established for anticipated amounts earned to date
for the period through the policy's next anniversary and are provided for as a
separate liability. The declaration of future dividends for participating
business is at the discretion of the Board of Directors. Participating business
accounted for 43% of receipts from policyholders during the year ended December
31, 1996 and represented 20% of life insurance inforce at December 31, 1996.
The liabilities for future policy benefits for accident and health insurance are
computed using a net level or two-year preliminary term method, including
assumptions as to morbidity, mortality and interest and to include provisions
for possible unfavorable deviations. Policy benefit claims are charged to
expense in the period that the claims are incurred.
Future policy benefit reserves for universal life insurance and investment
products are computed under a retrospective deposit method and represent policy
account balances before applicable surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the period in
excess of related policy account balances. Interest crediting rates for
universal life and investment products ranged from 4.00% to 7.50% in 1996 and
1995 and 4.00% to 7.25% in 1994.
The unearned revenue reserve reflects the unamortized balance of the excess of
first year administration charges over renewal period administration charges
(policy initiation fees) on universal life products. These excess charges have
been deferred and are being recognized in income over the period benefited using
the same assumptions and factors used to amortize deferred policy acquisition
costs.
RESERVES AND UNEARNED PREMIUMS ON PROPERTY-CASUALTY POLICIES
Unpaid property-casualty losses and loss adjustment expenses represent the
estimated liability for reported claims plus those incurred but not yet reported
and the related estimated adjustment expenses. The reserve for unpaid claims and
related adjustment expenses is determined using case-basis evaluations and
statistical analyses and represents estimates of the ultimate cost of all unpaid
losses incurred through December 31 of each year. Although considerable
variability is inherent in such estimates, management believes that the reserve
for unpaid losses and related loss adjustment expenses is adequate. The
estimates are continually reviewed and adjusted as necessary; such adjustments
are included in current operations and are accounted for as changes in
estimates.
Salvage and subrogation recoverables are estimated using statistical analysis.
The salvage and subrogation recoverable amounts, which have been offset against
reserves on property-casualty policies in the accompanying consolidated balance
sheets, were $1.2 million and $0.7 million at December 31, 1996 and 1995,
respectively.
Property-casualty insurance unearned premiums are calculated on a daily or
monthly pro rata basis based upon the unexpired terms of the underlying
policies.
DEFERRED INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred income tax expenses or credits are based on
the changes in the asset or liability from period to period.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying
consolidated balance sheets represent funds that are separately administered,
principally for the benefit of certain policyholders who bear the underlying
investment risk. The separate account assets and liabilities are carried at fair
value. Revenues and expenses related to the separate account assets and
liabilities, to the extent of benefits paid or provided to the separate account
policyholders, are excluded from the amounts reported in the accompanying
consolidated statements of income.
RECOGNITION OF PREMIUM REVENUES AND COSTS
Revenues for universal life and annuity products consist of policy charges for
the cost of insurance, administration charges, amortization of policy initiation
fees and surrender charges assessed against policyholder account balances during
the period. Expenses related to these products include interest credited to
policyholder account balances and benefit claims incurred in excess of
policyholder account balances.
Traditional life insurance premiums are recognized as revenues over the
premium-paying period. Future policy benefits and policy acquisition costs are
recognized as expenses over the life of the policy by means of the provision for
future policy benefits and amortization of deferred policy acquisition costs.
Property-casualty insurance premiums are recognized using a daily or monthly pro
rata method over the terms of the policies.
All insurance-related revenues, benefits, losses and expenses are reported net
of reinsurance ceded.
REINSURANCE
The Company uses reinsurance to manage certain risks associated with its
insurance operations. These reinsurance arrangements provide for greater
diversification of business, allow management to control exposure to potential
risks arising from large losses and provide additional capacity for growth.
The Company's life insurance operations cede reinsurance to various reinsurers.
The cost of reinsurance is generally amortized over the contract periods of the
reinsurance agreements.
The Company's property-casualty operations assume and cede reinsurance,
principally as a participant in a reinsurance pooling agreement with two
affiliates. The Company's contracts are generally prospective and the cost of
insurance is amortized over the contract periods in proportion to the amount of
insurance protection provided. The Company has one reinsurance contract with
both retrospective and prospective provisions. The retrospective portion of the
contract is accounted for separately and the related net loss relating to that
portion of the contract has been deferred and is being amortized over the
remaining terms of the underlying policies in proportion to the amount of
insurance protection provided.
OTHER INCOME AND OTHER EXPENSES
Other income and other expenses include revenue and expenses generated by the
Company's various non-insurance subsidiaries for services related to investment
advisory, marketing and distribution, and leasing. A portion of these activities
are performed on behalf of affiliates of the Company. In addition, certain
revenue generated by the Company's insurance subsidiaries (including Farm Bureau
Life and Western Life) have been classified as other income. During the years
ended December 31, 1996, 1995 and 1994, revenues of the insurance subsidiaries
included as other income aggregated $3.2 million, $9.8 million and $12.6
million, respectively. Lease income from leases with affiliates totaled $2.4
million for each of the years ended December 31, 1996 and 1995 and $2.3 million
for the year ended December 31, 1994.
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of common
and common equivalent shares outstanding during each year. The weighted average
number of shares and amounts reported for net income per common share for the
years ended December 31, 1995 and 1994 have been restated to give retroactive
effect to a 2,000-for-1 common stock split resulting from a recapitalization
(see Note 3), approved by the Company's Board of Directors on March 12, 1996 and
effective on March 19, 1996. There is no material difference between primary and
fully diluted per share amounts. Income available for common stockholders is net
of dividends on preferred stock.
DIVIDENDS PER COMMON SHARE
For the year ended December 31, 1996, the Company paid a cash dividend of $0.07
per common share. No dividends were paid during the years ended December 31,
1995 or 1994.
RECLASSIFICATION
Certain amounts in the 1995 and 1994 consolidated financial statements have been
reclassified to conform to the 1996 financial statement presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. For
example, significant estimates and assumptions are utilized in the calculation
of deferred policy acquisition costs, policyholder liabilities and accruals and
valuation allowances on investments. It is reasonably possible that actual
experience could differ from the estimates and assumptions utilized which could
have a material impact on the consolidated financial statements.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures About
Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheet, for which it is practicable to estimate that value.
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS No. 107 also excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements and allows companies to forego the
disclosures when those estimates can only be made at excessive cost.
Accordingly, the aggregate fair value amounts presented herein are limited by
each of these factors and do not purport to represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
FIXED MATURITY SECURITIES: Fair values for fixed maturity securities are based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting the expected future cash flows using current market
rates applicable to the coupon rate, credit, and maturity of the investments.
EQUITY SECURITIES: The fair values for equity securities are based on quoted
market prices, where available. For equity securities that are not actively
traded, estimated fair values are based on values of issues of comparable yield
and quality.
HELD IN INVENTORY: The fair values for investments held in inventory are based
on quoted market prices, where available. For holdings that are not actively
traded, fair values are determined in good faith by the Board of Directors of
the subsidiary holding the security.
MORTGAGE LOANS ON REAL ESTATE AND POLICY LOANS: Fair values are estimated by
discounting expected cash flows using interest rates currently being offered for
similar loans.
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate their fair values.
ASSETS AND LIABILITIES OF SEPARATE ACCOUNTS: Separate account assets and
liabilities are reported at estimated fair value in the Company's consolidated
balance sheet.
FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' FUNDS: Fair values of the
Company's liabilities under contracts not involving significant mortality or
morbidity risks (principally deferred annuities and supplementary contracts) are
stated at cash surrender value, the cost the Company would incur to extinguish
the liability. The Company is not required to estimate the fair value of its
liabilities under other contracts.
LONG-TERM DEBT: The fair values for long-term debt are estimated using
discounted cash flow analysis based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
DEPOSIT ADMINISTRATION FUNDS: The Company administers the funded portion of
certain employee benefit plans of its affiliates through deposit administration
funds. The fair value of the deposit administration funds attributed to the
Agent's Career Incentive Plan are stated at amounts which are estimated to be
currently vested, based on service and production criteria. Other funds are
stated at carrying value.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of SFAS No. 107:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1995
------------------------- -------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities:
Held for investment $ 694,351 $ 709,168 $ 683,149 $ 712,476
Available for sale 1,573,944 1,573,944 1,393,060 1,393,060
Equity securities 86,991 86,991 83,714 83,714
Held in inventory 15,899 15,899 21,913 21,913
Mortgage loans on real estate 293,777 308,802 266,623 281,900
Policy loans 118,996 118,996 116,107 116,107
Cash and short-term investments 71,941 71,941 50,061 50,061
Assets held in separate accounts 79,043 79,043 44,789 44,789
LIABILITIES
Future policy benefits $ 931,867 $ 907,006 $ 885,119 $ 854,928
Other policyholders' funds 211,029 211,029 200,348 200,348
Long-term debt 24,581 24,590 12,604 12,490
Deposit administration funds 46,440 43,864 38,119 35,088
Liabilities related to separate accounts 79,043 79,043 44,789 44,789
</TABLE>
3. REORGANIZATION AND RECAPITALIZATION
REORGANIZATION
In January 1994, the Boards of Directors of Farm Bureau Life and Western Life
approved an agreement, pursuant to which, effective January 1, 1994, the
acquisition of Western Life was consummated through Farm Bureau Multi-State
Services, Inc., a holding company which was incorporated in the State of Iowa on
October 13, 1993. In March 1996, Farm Bureau Multi-State Services, Inc. was
renamed FBL Financial Group, Inc. Under the agreement, 100% of the common stock
of Farm Bureau Life and Western Life was exchanged for stock in the holding
company. In addition, in 1994, the minority interests of FBL Insurance Company
and Rural Security Life Insurance Company (Rural Security Life) were exchanged
for equivalent value in the holding company and, in 1995, FBL Insurance Company
and Rural Security Life were liquidated.
At the effective date of the aforementioned affiliation agreement, Farm Bureau
Life had assets of $2,142.8 million and Western Life had assets of $550.0
million. Subsequent to the agreement, many administrative functions of Western
Life were assumed by, and consolidated with those of, Farm Bureau Life.
Additionally, the former majority owners of Farm Bureau Life continue to be
majority owners of the Company. As a result, the Company has treated the
issuance of holding company stock in exchange for the stock of Farm Bureau Life
as a reorganization for accounting purposes, thereby applying the principles of
the pooling method for business combinations. The issuance of holding company
stock in exchange for the stock of Western Life has been accounted for as a
purchase and the purchase price of $88.1 million, based upon the appraised value
of the Company's stock at the time of purchase, was allocated to the assets and
liabilities acquired. Additionally, the issuance of holding company stock in
exchange for the minority interests of FBL Insurance Company and Rural Security
Life has been accounted for as a purchase and the purchase price of $24.7
million, based upon the appraised value of the Company's stock at the time of
purchase, was allocated to the assets and liabilities acquired. These
allocations resulted in goodwill of approximately $4.4 million, which is being
amortized over 20 years. Goodwill associated with Rural Security Life remains
attributable to the still existing operations in Wisconsin which include a
license to do business in Wisconsin, an active agency force, customer lists, a
marketing relationship with the Wisconsin Farm Bureau Federation and an
exclusive use of the Farm Bureau trademark in Wisconsin in connection with the
sale of life insurance and annuity products.
RECAPITALIZATION
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 88.5 million shares of Class A Common Stock,
without par value; 1.5 million shares of Class B Common Stock, without par
value, and 10.0 million 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.
On April 29, 1996, the Company designated 5.0 million shares of its preferred
stock as Series A Preferred Stock and on July 18, 1996, such shares were
exchanged for 5.0 million shares of Class A Common Stock. Each share of Series A
Preferred Stock has a liquidation preference of $20.00 and voting rights similar
to that of Class A Common Stock. The Series A Preferred Stock pays cumulative
annual cash dividends of $1.00 per share, payable quarterly, and is redeemable
by the Company, at the option of the Company, at $20.00 per share plus unpaid
dividends if the stock ceases to be beneficially owned by a Farm Bureau
organization. Net income per common share for the year ended December 31, 1996
would have been $4.12 had the preferred stock exchange been effective January 1,
1996 and preferred dividends accrued since that date.
Holders of the Class A Common Stock and Series A Preferred Stock, together as a
group, and Class B Common Stock vote as separate classes on all issues. 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, which owns 63.9% of
the Company's voting stock as of December 31, 1996, 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.
4. INVESTMENT OPERATIONS
FIXED MATURITIES, EQUITY SECURITIES AND INVESTMENTS HELD IN INVENTORY
The following tables contain amortized cost and market value information on
fixed maturities and equity securities at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
--------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and agencies -
mortgage-backed securities $209,220 $ 7,411 $ (782) $215,849
Industrial and miscellaneous:
Mortgage-backed securities 480,122 13,266 (5,718) 487,670
Other 5,009 649 (9) 5,649
-------- ------- ------- --------
Total fixed maturities $694,351 $21,326 $(6,509) $709,168
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
--------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and agencies:
Mortgage-backed securities $ 78,964 $ 3,458 $ (652) $ 81,770
Other 158,645 688 (2,323) 157,010
State, municipal and other governments 33,059 1,180 (84) 34,155
Public utilities 188,898 5,677 (1,785) 192,790
Industrial and miscellaneous:
Mortgage and asset-backed securities 289,776 5,508 (2,765) 292,519
Other 760,233 34,019 (13,070) 781,182
Redeemable preferred stock 33,173 1,439 (94) 34,518
---------- ------- -------- ----------
Total fixed maturities $1,542,748 $51,969 $(20,773) $1,573,944
========== ======= ======== ==========
Equity securities $ 74,792 $31,061 $(18,862) $ 86,991
========== ======= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
--------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Bonds:
United States Government and agencies -
mortgage-backed securities $220,768 $11,612 $ (603) $231,777
Industrial and miscellaneous:
Mortgage-backed securities 457,381 20,336 (2,302) 475,415
Other 5,000 284 -- 5,284
-------- ------- ------- --------
Total fixed maturities $683,149 $32,232 $(2,905) $712,476
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
--------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Bonds:
United States Government and agencies:
Mortgage-backed securities $ 94,766 $ 4,510 $ (540) $ 98,736
Other 181,716 3,612 (651) 184,677
State, municipal and other governments 28,496 1,268 (332) 29,432
Public utilities 172,672 9,593 (1,252) 181,013
Industrial and miscellaneous:
Mortgage and asset-backed securities 80,821 4,922 (383) 85,360
Other 730,851 58,746 (11,821) 777,776
Redeemable preferred stock 36,286 877 (1,097) 36,066
---------- ------- -------- ----------
Total fixed maturities $1,325,608 $83,528 $(16,076) $1,393,060
========== ======= ======== ==========
Equity securities $ 77,038 $ 7,306 $ (630) $ 83,714
========== ======= ======== ==========
</TABLE>
Short-term investments have been excluded from the above schedules as amortized
cost approximates market value for these securities.
The carrying value and estimated market value of the Company's portfolio of
fixed maturity securities at December 31, 1996, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
HELD FOR INVESTMENT AVAILABLE FOR SALE
---------------------- ------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
-------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 40,359 $ 40,287
Due after one year through five years -- -- 191,306 196,580
Due after five years through ten years -- -- 275,215 283,528
Due after ten years 5,009 5,649 633,955 644,742
-------- ---------- ---------- ----------
5,009 5,649 1,140,835 1,165,137
Mortgage and asset-backed securities 689,342 703,519 368,740 374,289
Redeemable preferred stocks -- -- 33,173 34,518
-------- ---------- ---------- ----------
$694,351 $ 709,168 $1,542,748 $1,573,944
======== ========== ========== ==========
</TABLE>
The unrealized appreciation or depreciation on fixed maturity and equity
securities available for sale is reported as a separate component of
stockholders' equity, reduced by 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, and a provision for deferred income taxes. Net unrealized investment
gains as reported were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unrealized appreciation on fixed maturity and
equity securities available for sale $ 43,395 $ 74,128
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs (2,021) (12,700)
Value of insurance in force acquired 1,104 (4,451)
Unearned revenue reserve 382 1,189
Provision for deferred income taxes (15,002) (20,359)
-------- --------
Net unrealized investment gains $ 27,858 $ 37,807
======== ========
</TABLE>
Amortized cost of securities held in inventory was $10.6 million and $21.6
million at December 31, 1996 and 1995, respectively. Net unrealized appreciation
on securities held in inventory as of December 31, 1996 and 1995, included gross
unrealized gains of $5.6 million and $1.6 million and gross unrealized losses of
$0.3 million and $1.3 million, respectively.
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loan portfolio consists principally of commercial
mortgage loans. The Company's lending policies establish limits on the amount
that can be loaned to one borrower and require diversification by geographic
location and collateral type. Regions in which at least 20% of the Company's
mortgage loan portfolio is invested during the years presented include: Pacific
(26% in 1996 and 22% in 1995), which includes California, Oregon and Washington;
and Mountain (22% in 1996 and 27% in 1995), which includes Arizona, Colorado,
Idaho, New Mexico, Utah and Wyoming. Mortgage loans on real estate have also
been analyzed during the years presented by collateral types with office
buildings (48% in 1996 and 39% in 1995) and retail facilities (32% in 1996 and
34% in 1995), representing the largest holdings.
The Company has also provided an allowance for possible losses against its
mortgage loan portfolio. An analysis of this allowance for loan losses is as
follows:
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of year $ 800 $ 800 $ 600
Realized losses 2,983 10 248
Uncollectible amounts written off, net of recoveries (2,655) (10) (48)
------- ----- -----
Balance at end of year $ 1,128 $ 800 $ 800
======= ===== =====
The Company's investment in impaired loans (those loans in which the Company
does not believe it will collect all amounts due according to the contractual
terms of the respective loan agreements) totaled $4.0 million at December 31,
1996 and $3.3 million at December 31, 1995. A valuation allowance of $0.5
million was established on the impaired loans at December 31, 1996. No valuation
allowance was established for the impaired loans as of December 31, 1995.
Securities and indebtedness of related parties include mortgage loans and
similar advances to joint ventures and limited partnerships in which the Company
maintains an equity interest. Such indebtedness aggregated $11.7 million and
$34.0 million at December 31, 1996 and 1995, respectively. These loans and
advances were made at similar interest rates and under similar terms as other
mortgage loans.
NET INVESTMENT INCOME
Components of net investment income are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Fixed maturities:
Held for investment $ 56,062 $ 50,050 $ 35,065
Available for sale 113,919 108,748 101,683
Equity securities 1,367 1,163 1,971
Held in inventory 3,324 25,868 (130)
Mortgage loans on real estate 24,791 23,850 24,870
Investment real estate 5,024 4,970 6,385
Policy loans 7,314 7,189 6,894
Other long-term investments 536 381 2,668
Short-term investments 3,825 3,344 3,919
Other 3,680 5,667 4,000
--------- --------- ---------
219,842 231,230 187,325
Less investment expenses (9,113) (8,122) (8,491)
--------- --------- ---------
Net investment income $ 210,729 $ 223,108 $ 178,834
========= ========= =========
Investment income from investments held in inventory is comprised of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Dividends, interest and other income $ 215 $ 138 $ 205
Net realized gain (loss) from investment transactions (1,811) 25,810 4,026
Change in unrealized appreciation/depreciation of investments 4,920 (80) (4,361)
-------- -------- -------
$ 3,324 $ 25,868 $ (130)
======== ======== =======
</TABLE>
REALIZED AND UNREALIZED GAINS AND LOSSES
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The cumulative effect of
this change in accounting method was to increase stockholders' equity by $38.9
million, net of offsets aggregating $40.0 million.
Realized gains (losses) and the change in unrealized appreciation/depreciation
on investments, excluding amounts attributed to investments held in inventory
discussed above, are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REALIZED
Fixed maturities:
Held for investment $ -- $ -- $ (6)
Available for sale 1,079 5,524 2,279
Equity securities 56,584 (647) 8,380
Mortgage loans on real estate (2,983) (10) (248)
Investment real estate 411 (1) (415)
Other long-term investments (154) (158) (1,773)
Securities and indebtedness of related parties (1,387) 1,182 2,864
Notes receivable and other (757) (7) (1,633)
-------- --------- ---------
Realized gains on investments $ 52,793 $ 5,883 $ 9,448
======== ========= =========
UNREALIZED
Fixed maturities:
Held for investment $(14,510) $ 60,854 $ (55,973)
Available for sale (36,256) 119,406 (130,860)
Equity securities 5,523 9,960 (12,095)
-------- --------- ---------
Change in unrealized appreciation/depreciation of investments $(45,243) $ 190,220 $(198,928)
======== ========= =========
</TABLE>
An analysis of sales, maturities and principal repayments of the Company's fixed
maturities portfolio for the years ended December 31, 1996, 1995, and 1994 is as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED REALIZED REALIZED
COST GAINS LOSSES PROCEEDS
-------- ------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Scheduled principal repayments and calls:
Available for sale $159,214 $ -- $ -- $159,214
Held for investment 43,023 -- -- 43,023
Sales - available for sale 99,136 5,268 (3,689) 100,715
-------- ------ ------- --------
Total $301,373 $5,268 $(3,689) $302,952
======== ====== ======= ========
YEAR ENDED DECEMBER 31, 1995
Scheduled principal repayments and calls:
Available for sale $121,276 $ 12 $ (44) $121,244
Held for investment 20,890 -- -- 20,890
Sales - available for sale 134,986 7,371 (1,601) 140,756
-------- ------ ------- --------
Total $277,152 $7,383 $(1,645) $282,890
======== ====== ======= ========
YEAR ENDED DECEMBER 31, 1994
Scheduled principal repayments and calls:
Available for sale $158,294 $ 12 $ (167) $158,139
Held for investment 43,534 -- (6) 43,528
Sales - available for sale 220,276 9,248 (6,814) 222,710
-------- ------ ------- --------
Total $422,104 $9,260 $(6,987) $424,377
======== ====== ======= ========
</TABLE>
Realized losses totaling $0.5 million and $0.2 million were incurred during the
years ended December 31, 1996 and 1995, respectively, as a result of writedowns
for other than temporary impairment of fixed maturity securities. No such
writedowns were incurred during 1994.
Income taxes during the years ended December 31, 1996, 1995 and 1994 include a
provision of $18.5 million, $2.1 million and $3.3 million, respectively, for the
tax effect of realized gains.
OTHER
In February 1996, an equity investee of the Company completed an initial public
offering which resulted in an increase of $4.9 million, net of $2.6 million 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 (carrying value $18.0 million
at December 31, 1996) in the consolidated balance sheet. At December 31, 1995,
the investment had a carrying value of $4.9 million and was classified as
securities and indebtedness of related parties in the consolidated balance
sheet. During 1996, the Company sold approximately 77% of its holdings in this
investment and realized a gain of $50.4 million.
At December 31, 1996, affidavits of deposits covering bonds with a carrying
value of $1,578.4 million, preferred stocks with a carrying value of $20.0
million, mortgage loans (including those made to related parties) with an unpaid
balance of $262.0 million, real estate with a book value of $25.3 million and
policy loans with an unpaid balance of $88.9 million were on deposit with state
agencies to meet regulatory requirements.
At December 31, 1996, the Company had committed to provide additional funding
for mortgage loans on real estate aggregating $7.9 million. These commitments
arose in the normal course of business at terms which are comparable to similar
investments.
The carrying value of investments which have been non-income producing for the
twelve months preceding December 31, 1996, include: fixed maturities - $3.0
million; mortgage loans on real estate - $3.3 million; and other long-term
investments - $1.6 million.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States Government) exceeded 10% of stockholders' equity
at December 31, 1996.
5. REINSURANCE AND POLICY PROVISIONS
LIFE INSURANCE OPERATIONS
An analysis of the value of insurance in force acquired for the years ended
December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Excluding impact on net unrealized investment gains and losses:
Balance at beginning of year $ 18,900 $ 19,571 $ 117
Additions resulting from acquisitions -- -- 19,534
Accretion of interest during the year 1,226 1,250 1,275
Amortization of asset (1,302) (1,921) (1,355)
-------- -------- --------
Balance prior to impact on net unrealized investment gains and losses 18,824 18,900 19,571
Offset against net unrealized investment gains and losses 1,104 (4,451) 1,337
-------- -------- --------
Balance at end of year $ 19,928 $ 14,449 $ 20,908
======== ======== ========
</TABLE>
Amortization of the value of insurance in force acquired (based on expected
future gross profits/margins) for the next five years and thereafter is expected
to be as follows: 1997 - $1.0 million; 1998 - $1.1 million; 1999 - $1.2 million;
2000 - $1.3 million; 2001 - $1.2 million; and thereafter, through 2023 - $13.0
million.
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers. Reinsurance coverages
for life insurance vary according to the age and risk classification of the
insured with retention limits ranging up to $0.5 million of coverage per
individual life. The Company does not use financial or surplus relief
reinsurance. At December 31, 1996, life insurance in force ceded on a
consolidated basis totaled $1,082.3 million or approximately 6.3% of total life
insurance in force.
Reinsurance contracts do not relieve the Company of its obligations to its
policyholders. To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, the Company's life 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
Company's asset for reinsurance recoverable since none of the receivables are
deemed to be uncollectible. Insurance premiums and product charges have been
reduced by $5.7 million, $14.9 million and $23.1 million and insurance benefits
have been reduced by $5.1 million, $8.5 million and $12.0 million during the
years ended December 31, 1996, 1995 and 1994, respectively, as a result of
cession agreements. The amount of reinsurance assumed is not significant.
Unpaid claims on accident and health policies include amounts for losses and
related adjustment expense and are estimates of the ultimate net costs of all
losses, reported and unreported. These estimates are subject to the impact of
future changes in claim severity, frequency and other factors. The activity in
the liability for unpaid claims and related adjustment expense, net of
reinsurance, is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Unpaid claims liability, net of related reinsurance, at
beginning of year $ 14,964 $11,982 $ 16,116
Add:
Provision for claims occurring in the
current year 5,334 5,522 4,169
Increase (decrease) in estimated expense
for claims occurring in the prior years (485) 2,251 (2,534)
-------- ------- --------
Incurred claim expense during the current year 4,849 7,773 1,635
Unpaid claims liability of companies acquired -- -- 4,519
Deduct expense payments for claims occurring during:
Current year 1,996 2,306 2,589
Prior years 3,016 2,485 7,699
-------- ------- --------
5,012 4,791 10,288
-------- ------- --------
Unpaid claims liability, net of related reinsurance, at end
of year 14,801 14,964 11,982
Active life reserve 16,419 15,871 16,502
-------- ------- --------
Net accident and health reserves 31,220 30,835 28,484
Reinsurance ceded 2,498 1,819 7,854
-------- ------- --------
Gross accident and health reserves $ 33,718 $32,654 $ 36,338
======== ======= ========
</TABLE>
Reserves for unpaid claims are developed using industry mortality and morbidity
data. One year development on prior year reserves represents Company experience
being more or less favorable than that of the industry. Over time, the Company
expects its experience with respect to disability income business to be
comparable to that of the industry. A certain level of volatility in development
is inherent in these reserves since the underlying block of business is
relatively small.
PROPERTY-CASUALTY OPERATIONS
Risks are reinsured with other companies to permit the recovery of a portion of
losses and loss adjustment expenses incurred and are treated (to the extent of
the reinsurance) as risks for which the Company is not liable; however, the
Company remains liable to the extent that reinsuring companies cannot meet their
obligations under these reinsurance contracts.
Utah Insurance is a participant with Farm Bureau Mutual Insurance Company and
South Dakota Farm Bureau Mutual Insurance Company, another affiliate, in a
reinsurance pooling agreement (the Farm Bureau Mutual pool). Under the terms of
the agreement, Utah Insurance and South Dakota Farm Bureau Mutual Insurance
Company cede to Farm Bureau Mutual Insurance Company all of their insurance
business and assume back from Farm Bureau Mutual Insurance Company an amount
equal to their participation in the pooling agreement. Also, losses, loss
adjustment expenses, and other underwriting and administrative expenses are
prorated among the companies on the basis of their participation in the pooling
agreement. For the years ended December 31, 1995 and 1994, 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 for the first six months of 1996
attributable to the increase in the reinsurance pool percentage ($0.8 million
loss) has been deferred and is being amortized over the premium paying period of
the underlying policies (generally 6 to 12 months). As a result of the increase
in the reinsurance pool participation percentage, the Company recorded
additional investments ($13.5 million), deferred policy acquisition costs ($1.6
million), other assets ($1.3 million), reserves and unearned premiums on
property-casualty policies ($16.8 million) and other liabilities ($0.4 million).
At December 31, 1996, the deferred loss totaled $0.1 million.
Property-casualty premiums earned and losses and loss adjustment expenses
incurred, reflect the following reinsurance amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
PREMIUMS EARNED
Direct premiums written $ 27,256 $ 26,244 $ 26,427
Assumed from non-affiliates 1 5 8
Ceded to non-affiliates (670) (615) (541)
Assumed from Farm Bureau Mutual pool 32,264 18,851 18,339
Ceded to Farm Bureau Mutual pool (26,587) (25,634) (25,894)
-------- -------- --------
Net premiums written 32,264 18,851 18,339
Decrease (increase) in reserve for unearned premiums, net
of reinsurance and effect of change in reinsurance pool
participation percentage 378 (150) (582)
Increase in accrued retrospective premiums 333 8 21
-------- -------- --------
Total premiums earned $ 32,975 $ 18,709 $ 17,778
======== ======== ========
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED
Direct losses and loss adjustment expenses paid $ 18,296 $ 18,532 $ 18,033
Net ceded to non-affiliates (241) 91 (175)
Assumed from Farm Bureau Mutual pool 23,484 13,030 12,933
Ceded to Farm Bureau Mutual pool (18,055) (18,623) (17,858)
-------- -------- --------
Net losses and loss adjustment expenses paid 23,484 13,030 12,933
Increase in losses and loss adjustment expense reserves,
net of reinsurance and effect of change in reinsurance pool
participation percentage 4,881 591 508
-------- -------- --------
Total losses and loss adjustment expenses incurred $ 28,365 $ 13,621 $ 13,441
======== ======== ========
</TABLE>
The difference between premiums on a written and on an earned basis is not
significant.
The activity in the reserves on property-casualty policies, net of reinsurance
and salvage and subrogation recoverables, is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Reserves on property-casualty policies (gross), beginning of year $ 29,984 $ 28,828 $ 26,291
Less reinsurance recoverables on unpaid losses and loss
adjustment expenses, beginning of year (17,210) (16,646) (14,616)
-------- -------- --------
Reserves for losses and loss adjustment expenses,
net of related reinsurance, beginning of year 12,774 12,182 11,675
Add:
Provision for losses and loss adjustment expenses for
claims occurring in the current year 29,495 14,529 14,368
Decrease in estimated losses and loss adjustment expenses
for claims occurring in the prior years (1,130) (908) (927)
-------- -------- --------
Incurred losses and loss adjustment expenses during
the current year 28,365 13,621 13,441
Reserves assumed with increase in reinsurance pool
participation percentage 6,045 - -
Deduct loss and loss adjustment expense payments for
claims occurring during:
Current year (18,013) (7,678) (7,917)
Prior years (5,471) (5,351) (5,017)
-------- -------- --------
(23,484) (13,029) (12,934)
-------- -------- --------
Reserve for losses and loss adjustment expenses,
net of related reinsurance, end of year 23,700 12,774 12,182
Reinsurance recoverables on unpaid losses
and loss adjustment expenses, end of year 19,489 17,210 16,646
-------- -------- --------
Reserves on property-casualty policies (gross), end of year $ 43,189 $ 29,984 $ 28,828
======== ======== ========
</TABLE>
6. INCOME TAXES
The Company files a consolidated federal income tax return with Utah Insurance,
Farm Bureau Life and most of its subsidiaries and FBL Financial Services, Inc.
and its subsidiaries. The companies included in the consolidated federal income
tax return each report current income tax expense as allocated under a
consolidated tax allocation agreement. Generally, this allocation results in
profitable companies recognizing a tax provision as if the individual company
filed a separate return and loss companies recognizing benefits to the extent
their losses contribute to reduce consolidated taxes. The Company files a
separate state income tax return. Western Life files a separate federal income
tax return.
Deferred income taxes have been established based upon the temporary
differences, the reversal of which will result in taxable or deductible amounts
in future years when the related asset or liability is recovered or settled,
within each entity.
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Taxes provided in consolidated statements of income on:
Income from continuing operations
before minority interest in earnings of
subsidiaries and equity income (loss):
Current $ 34,668 $ 19,230 $ 22,205
Deferred 3,110 12,840 257
-------- -------- --------
37,778 32,070 22,462
Equity income (loss):
Current 1,746 (212) 309
Deferred 597 1,074 (1,107)
-------- -------- --------
2,343 862 (798)
Discontinued operations:
Current -- -- (3,649)
Deferred -- -- 7,137
-------- -------- --------
-- -- 3,488
Taxes provided in consolidated statement of changes in
stockholders' equity:
Cumulative effect of change in method
of accounting for fixed maturity securities - deferred -- -- 20,954
Change in net unrealized investment
gains/losses - deferred (5,357) 37,503 (41,182)
Adjustment resulting from capital
transaction of equity investee - deferred 2,617 -- --
-------- -------- --------
(2,740) 37,503 (20,228)
-------- -------- --------
$ 37,381 $ 70,435 $ 4,924
======== ======== ========
</TABLE>
The effective tax rate on income from continuing operations before income taxes,
minority interest in earnings of subsidiaries and equity income (loss) is
different from the prevailing federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income from continuing operations before income taxes,
minority interest in earnings of subsidiaries and equity
income (loss) $ 116,853 $ 90,447 $ 59,873
========= ======== ========
$ 40,899 $ 31,657 $ 20,956
Income tax at federal statutory rate (35%)
Tax effect (decrease) of:
Tax-exempt interest income (559) (586) (569)
Tax-exempt dividend income (1,257) (803) (648)
Adjustments from IRS examinations -- -- 2,766
State taxes 231 1,337 (112)
Other items (1,536) 465 69
--------- -------- --------
Income tax expense $ 37,778 $ 32,070 $ 22,462
========= ======== ========
</TABLE>
During 1994, Farm Bureau Life reached partial settlement with the Internal
Revenue Service (IRS) for tax years 1988 through 1990 and the IRS is in the
process of conducting examinations for 1991 through 1994. All tax years 1992 and
prior are settled for Western Life. During the year ended December 31, 1994, the
Company paid $2.8 million for settlement of certain items arising from the
examination of prior years. Management believes that amounts provided in the
income tax provision for IRS examinations are adequate to settle any adjustments
raised by the IRS.
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1996 and 1995, is as follows:
DECEMBER 31,
------------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
Deferred income tax liabilities:
Fixed maturity and equity securities $ 25,402 $ 35,533
Deferred policy acquisition costs 48,367 36,634
Value of insurance in force acquired 6,961 4,889
Deferred investment gains 10,177 9,521
Other 19,672 13,537
--------- ---------
110,579 100,114
Deferred income tax assets:
Future policy benefits (44,030) (39,237)
Accrued dividends (3,209) (2,593)
Accrued pension costs (13,290) (12,140)
Other (9,438) (6,499)
--------- ---------
(69,967) (60,469)
--------- ---------
Deferred income tax liability $ 40,612 $ 39,645
========= =========
Prior to 1984, a portion of current income of the Company's life insurance
subsidiaries was not subject to current income taxation, but was accumulated,
for tax purposes, in a memorandum account designated as "policyholders' surplus
account". The aggregate accumulation in this account at December 31, 1996 was
$11.1 million and $0.7 million for Farm Bureau Life and Western Life,
respectively. Should the policyholders' surplus account of Farm Bureau Life and
Western Life exceed the limitation prescribed by federal income tax law, or
should distributions be made by Farm Bureau Life and Western Life to the parent
company in excess of $374.8 million and $121.0 million, respectively, such
excess would be subject to federal income taxes at rates then effective.
Deferred income taxes of $4.2 million have not been provided on amounts included
in this memorandum account since the Company contemplates no action and can
foresee no events that would create such a tax.
Deferred income taxes were also reported on equity income (loss) and income from
discontinued operations during these periods. These taxes arise from the
recognition of income and losses differently for purposes of filing federal
income tax returns than for financial reporting purposes.
7. CREDIT ARRANGEMENTS
SHORT-TERM DEBT
As an investor in the Federal Home Loan Bank (FHLB), the Company has the right
to borrow up to $48.2 million from the FHLB as of December 31, 1996. As of
December 31, 1996, the Company had no outstanding debt under this credit
arrangement.
LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Lease-backed notes payable, secured by rentals to be
received under certain operating leases from members
of consolidated group and other affiliates:
Variable rate equal to LIBOR plus 0.31%, but in no event
greater than 14% per annum (5.81% at December 31, 1996),
due August 1999 $24,500 $ --
4.89%, due December 1996 -- 12,516
Note payable to Rural Mutual Insurance Company, an affiliate, 10%, due
through December 2000 81 88
------- -------
$24,581 $12,604
======= =======
</TABLE>
8. RETIREMENT AND COMPENSATION PLANS
The Company participates with several other affiliates in various defined
benefit plans covering substantially all employees. The benefits of these plans
are based primarily on years of service and employees' compensation. The Company
and affiliates have adopted a policy of allocating the net periodic pension cost
of the plans between themselves generally on a basis of time incurred by the
respective employees for each employer. Such allocations are reviewed annually.
Pension expense aggregated $9.6 million, $8.1 million and $6.2 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
Prior to January 1, 1996, the Company provided benefits to agents of the Company
and certain of its affiliates through the Agents' Career Incentive Plan. Company
contributions to the plan were based upon the individual agent's earned
commissions and varied based upon the overall production level and the number of
years of service. Company contributions charged to expense with respect to this
plan during the years ended December 31, 1995 and 1994 were $1.4 million and
$1.6 million, respectively. During 1996, in conjunction with a restructuring of
the agents' compensation program, contributions to this plan were discontinued.
The Company has established deferred compensation plans for certain key current
and former employees and has certain other benefit plans which provide for
retirement and other benefits. These plans have been accrued or funded as deemed
appropriate by management of the Company.
Certain of the assets related to these plans are on deposit with the Company and
amounts relating to these plans are included in the financial statements herein.
In addition, certain amounts included in the liability for deferred compensation
and other employee benefits relate to deposit administration funds maintained by
the Company on behalf of affiliates offering substantially the same benefit
programs as the Company.
In addition to benefits offered under the aforementioned benefit plans, the
Company and several other affiliates sponsor a plan that provides group term
life insurance benefits to retired full-time employees who have worked ten years
and attained age 55 while in service with the Company. Postretirement benefit
expense is allocated in a manner consistent with pension expense discussed
above. Postretirement pension expense aggregated $0.2 million for the year ended
December 31, 1996 and $0.1 million for the years ended December 31, 1995 and
1994.
9. STOCK COMPENSATION
During 1996, the Company adopted the 1996 Class A Common Stock Compensation Plan
(the Plan) under which incentive stock options, nonqualified stock options,
bonus stock, restricted stock and stock appreciation rights may be granted to
directors, officers and employees. During 1996, the Company granted 621,869
incentive stock options and 199,363 nonqualified stock options under the Plan.
Option shares granted to directors are fully vested upon grant and have a
contractual term that varies with the length of time the director remains on the
Board. Option shares granted to officers and employees generally vest over a
five year period contingent upon continued employment with the Company and have
a contractual term of 10 years. At December 31, 1996, the Company has 821,232
option shares outstanding with an exercise price range of $17.50 to $23.50, a
weighted average exercise price of $17.67 and an estimated weighted average
remaining contractual life of 9.1 years. Option shares exercisable at December
31, 1996 totaled 104,000 with a weighted average exercise price of $17.62. No
options were exercised or forfeited during 1996. The Company has 928,768 shares
of Class A Common Stock available for grant as additional awards under the Plan
as of December 31, 1996.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related Interpretations in accounting
for its stock options. Under APB 25, because the exercise price of the Company's
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Under the alternative accounting
method provided by SFAS No. 123, compensation expense is recognized in an amount
equal to the estimated fair value of stock options on the date of grant. The
Company has not adopted the accounting provisions of SFAS No. 123 because the
valuation of non traded stock options is highly subjective and, in management's
opinion, the existing pricing models do not necessarily provide a reliable
single measure of the fair value of the Company's options.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rate of 6.5%; dividend yield of 1.6%; volatility factor of the expected
market price of the Company's Class A Common Stock of 0.12; and a
weighted-average expected life of 5.1 years. With these assumptions and
amortization of the compensation expense over the options' vesting period, pro
forma net income and net income per common share for 1996 are $82.5 million and
$3.72, respectively. The weighted average grant-date fair value of options
granted during 1996 was $3.53 per share.
10. STOCKHOLDERS' EQUITY OF SUBSIDIARIES
REDEEMABLE PREFERRED STOCK OF SUBSIDIARIES
Certain of the Company's subsidiaries are authorized to issue, collectively, up
to 110,000 shares of redeemable preferred stock in series at $200.00 per share.
Dividends accrue at fixed or variable rates depending on the series and can
range from 7.5% to 15.0%. Under certain circumstances and with respect to
certain matters, the holders of redeemable preferred stock are entitled to vote
separately as a class. There were 24,017 and 22,517 preferred shares outstanding
at December 31, 1996 and 1995, respectively, all of which are currently
redeemable at the option of the respective issuing company. The redeemable
preferred stock and related dividends are reported as minority interest in
subsidiaries in the consolidated financial statements.
STATUTORY LIMITATIONS ON SUBSIDIARY DIVIDENDS
The ability of Farm Bureau Life and Western Life to pay dividends to the parent
company is restricted because prior approval of insurance regulatory authorities
is required for payment of dividends to the stockholder which exceed an annual
limitation. During 1997, Farm Bureau Life and Western Life could pay dividends
to the parent company of approximately $34.9 million and $8.2 million,
respectively, without prior approval of insurance regulatory authorities. Also,
the amount ($209.9 million and $59.9 million for Farm Bureau Life and Western
Life, respectively, at December 31, 1996) by which the stockholder's equity
stated in conformity with generally accepted accounting principles exceeds
statutory capital and surplus as reported is restricted and cannot be
distributed.
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 the obligations of any member of the consolidated
group.
STATUTORY ACCOUNTING POLICIES
The financial statements of the Company's insurance subsidiaries included herein
differ from related statutory-basis financial statements principally as follows:
(a) the bond portfolio is segregated into held-for-investment (carried at
amortized cost), available-for-sale (carried at fair value), and trading
(reported at fair value) classifications rather than generally being carried at
amortized cost; (b) acquisition costs of acquiring new business are deferred and
amortized over the life of the policies rather than charged to operations as
incurred; (c) future policy benefit reserves for participating traditional life
insurance products are based on net level premium methods and guaranteed cash
value assumptions which may differ from statutory reserves; (d) future policy
benefit reserves on certain universal life and annuity products are based on
full account values, rather than discounting methodologies utilizing statutory
interest rates; (e) deferred income taxes are provided for the difference
between the financial statement and income tax bases of assets and liabilities;
(f) net realized gains or losses attributed to changes in the level of interest
rates in the market are recognized as gains or losses in the statement of income
when the sale is completed rather than deferred and amortized over the remaining
life of the fixed maturity security or mortgage loan; (g) declines in the
estimated realizable value of investments are charged to the statement of income
when such declines are judged to be other than temporary rather than through the
establishment of a formula-determined statutory investment reserve (carried as a
liability), changes in which are charged directly to surplus; (h) agents'
balances and certain other assets designated as "non-admitted assets" for
statutory purposes are reported as assets rather than being charged to surplus;
(i) revenues for universal life and annuity products consist of policy charges
for the cost of insurance, policy administration charges, amortization of policy
initiation fees and surrender charges assessed rather than premiums received;
(j) pension income or expense is recognized in accordance with SFAS No. 87,
"Employers' Accounting for Pensions" rather than in accordance with rules and
regulations permitted by the Employee Retirement Income Security Act of 1974;
(k) adjustments to federal income taxes of prior years are reported as a
component of expense in the statement of income rather than as charges or
credits to surplus; (l) the financial statements of subsidiaries are
consolidated with those of the insurance subsidiary; and (m) assets and
liabilities are restated to fair values when a change in ownership occurs that
is accounted for as a purchase, with provisions for goodwill and other
intangible assets, rather than continuing to be presented at historical cost.
The Company's insurance subsidiaries reported the following statutory amounts to
regulatory agencies, after appropriate eliminations of intercompany accounts:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------
1996 1995 1996 1995 1994
-------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Life insurance subsidiaries $344,965 $288,302 $ 83,008 $54,441 $(14,890)
Property-casualty insurance subsidiary 21,992 9,236 (3,096) 1,454 799
-------- -------- -------- ------- --------
Total $366,957 $297,538 $ 79,912 $55,895 $(14,091)
======== ======== ======== ======= ========
</TABLE>
The National Association of Insurance Commissioners currently is in the process
of codifying statutory accounting practices, the result of which is expected to
constitute the only source of "prescribed" statutory accounting practices. That
project, which is expected to be completed in the near future, will likely
change, to some extent, statutory accounting practices. The codification may
result in changes to the accounting practices that the Company's insurance
subsidiaries use to prepare their statutory-basis financial statements.
11. MANAGEMENT AND SERVICES AGREEMENTS
The Company shares certain office facilities and services with the Iowa Farm
Bureau Federation and its affiliated companies. These expenses are allocated by
the Company on the basis of cost and time studies that are updated annually and
consist primarily of salaries and related expenses, travel, and occupancy costs.
In addition, prior to January 1, 1996, the Company participated in a management
agreement with Farm Bureau Management Corporation, a wholly-owned subsidiary of
the Iowa Farm Bureau Federation. Under this agreement, Farm Bureau Management
Corporation provided general business, administration and management services to
the Company. During 1996, the Company assumed responsibility for providing a
majority of these services for itself as well as Farm Bureau Management
Corporation and other affiliates. During the years ended December 31, 1996, 1995
and 1994, the Company incurred expenses under this contract of $2.6 million,
$3.7 million and $3.1 million, respectively. During 1996, the Company earned
management fee income of $0.2 million related to these services.
Prior to February 1995, Western Life maintained a management services agreement
with Western Farm Bureau Management Corporation. Under the terms of the
agreement, Western Farm Bureau Management Corporation provided all management,
investment advisory, administrative, underwriting, policyholder services, legal,
actuarial and other management-related services for Western Life. These services
are now provided by the Company.
Effective January 1, 1996, the Company entered into marketing agreements with
the property-casualty companies operating within its marketing territory,
including Farm Bureau Mutual Insurance Company and other affiliates. Under the
marketing agreements, the property-casualty companies assumed responsibility for
development and management of the Company's agency force for a fee equal to a
percentage of commissions on first year life insurance premiums and annuity
deposits. The Company paid $3.6 million to the property-casualty companies under
these arrangements during the year ended December 31, 1996.
12. 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 December 31, 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 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. Because the Company is not able to
reasonably estimate the potential amounts of future assessments, the Company
recognizes its obligation for guaranty fund assessments when it receives notice
that an amount is payable to a guaranty fund. Expenses incurred for guaranty
fund assessments were $0.6 million, $1.3 million and $1.6 million during the
years ended December 31, 1996, 1995 and 1994, respectively.
In connection with an investment in a limited real estate partnership in 1996,
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 December
31, 1996, the Company assessed the probability and amount of future cash flows
from the property and determined that no accrual was necessary. During 1996, the
limited partnership obtained a $5.4 million mortgage loan, secured by the
shopping center, from Farm Bureau Mutual Insurance Company.
13. SEGMENT INFORMATION AND DISCONTINUED OPERATIONS
The Company currently operates in two principal segments - life insurance
(including traditional and universal life, annuity and accident and health
coverages) and property-casualty insurance. Prior to 1995, the Company was also
involved in cable television operations.
On December 23, 1994, the Company sold substantially all operating assets and
certain liabilities of its cable television subsidiary, Vantage Cable
Associates, L.P., to Galaxy Telecom, L.P. for $38.4 million, of which $32.0
million was paid in cash and $6.4 million was represented by a Class D limited
partnership interest in Galaxy Telecom, L.P. The Company recognized a gain on
the sale of approximately $15.4 million, after expenses, closing adjustments and
post-closing adjustments of approximately $1.4 million.
Revenues of the discontinued operations aggregated $10.2 million for the period
from January 1, 1994 through December 22, 1994. Interest expense, $2.9 million
for the period from January 1, 1994 through December 22, 1994, has been
allocated to discontinued operations based on debt that can be identified as
specifically attributed to those operations.
Information concerning the Company's continuing business segments for the years
ended December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
PROPERTY-
LIFE CASUALTY
CONSOLIDATED INSURANCE INSURANCE CORPORATE
------------ --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues, year ended December 31:
1996 $456,867 $420,976 $35,698 $193
1995 405,985 385,480 20,489 16
1994 349,885 330,422 19,448 15
Income (loss) from continuing operations before
income taxes, minority interest in earnings of
subsidiaries and equity income (loss), year ended
December 31:
1996 116,853 118,984 (2,046) (85)
1995 90,447 88,500 2,083 (136)
1994 59,873 58,573 1,288 12
Identifiable assets, December 31:
1996 3,368,192 3,264,037 99,577 4,578
1995 3,093,582 3,032,548 60,250 784
1994 2,795,266 2,738,519 56,708 39
</TABLE>
Corporate revenues and income (loss) from continuing operations noted above for
1996 do not include $0.3 million in revenues and identifiable assets do not
include $3.0 million in intercompany receivables that are eliminated in
consolidation. Other intercompany balances that are eliminated in consolidation
are not significant to the respective segments. Corporate assets consist
principally of cash, receivables from affiliates and short-term investments.
Capital expenditures and depreciation and amortization are not considered
material.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited quarterly results of operations are as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Premiums and product charges $ 37,398 $ 43,229 $ 46,047 $ 42,735
Net investment income 52,428 52,208 50,706 55,387
Realized gains (losses) on investments (2,098) 1,515 16,529 36,847
Total revenues 93,320 102,940 119,804 140,803
Net income 10,889 13,575 20,486 37,934
Net income applicable to common stock 10,889 13,575 19,486 36,684
Net income per common share $ 0.46 $ 0.57 $ 0.98 $ 1.93
1995
--------------------------------------------------
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Premiums and product charges $35,565 $ 39,728 $ 36,780 $ 35,969
Net investment income 48,037 52,824 56,297 65,950
Realized gains (losses) on investments 1,850 988 4,034 (989)
Total revenues 92,590 100,841 104,393 108,161
Net income 9,043 11,065 21,418 18,102
Net income per common share $ 0.39 $ 0.47 $ 0.91 $ 0.76
</TABLE>
Net income per common share for each quarter is computed independently of net
income per common share for the year. As a result, the sum of the quarterly net
income per share may not equal the net income per share for the year due
primarily to transactions affecting the number of weighted average common shares
outstanding in each quarter. Net investment income during 1995 fluctuated during
the year due to net investment income (loss) from FBL Ventures which totaled
$(0.1) million in the first quarter, $3.2 million in the second quarter, $6.4
million in the third quarter and $15.9 million in the fourth quarter.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
The information required by Part III is hereby incorporated by reference from
the Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A within 120 days after December 31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. See index to Financial Statements for a list
of financial statements included in this Report.
2. Financial Statement Schedules. The following financial statement
schedules are included as part of this Report immediately following
the signature page:
Schedule I -- Summary of Investments
Schedule II -- Condensed Financial Information of Registrant
(Parent Company)
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
All other schedules are omitted, either because they are not applicable, not
required, or because the information they contain is included elsewhere in the
consolidated financial statements or notes.
3. Exhibits.
11 Computation of Earnings Per Share
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K. None
SIGNATURES
Pursuant to the requirements of Section 13 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, this 18th day of March, 1997.
FBL Financial Group, Inc.
By: /s/ EDWARD M. WIEDERSTEIN
Edward M. Wiederstein
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ THOMAS R. GIBSON Chief Executive Officer, and Director (Principal Executive March 18, 1997
--------------------- Officer)
Thomas R. Gibson
/s/ JAMES W. NOYCE Chief Financial Officer (Principal Financial and Accounting March 18, 1997
------------------- Officer)
James W. Noyce
/s/ EDWARD M. WIEDERSTEIN Chairman of the Board and Director March 18, 1997
--------------------------
Edward M. Wiederstein
/s/ V. THOMAS GEARY First Vice Chair and Director March 18, 1997
--------------------
V. Thomas Geary
/s/ ROGER BILL MITCHELL Second Vice Chair and Director March 18, 1997
------------------------
Roger Bill Mitchell
/s/ KENNETH R. ASHBY Director March 18, 1997
---------------------
Kenneth R. Ashby
/s/ JERRY L. CHICOINE Director March 18, 1997
----------------------
Jerry L. Chicoine
/s/ AL CHRISTOPHERSON Director March 18, 1997
----------------------
Al Christopherson
/s/ JOHN W. CREER Director March 18, 1997
------------------
John. W. Creer
/s/ KENNY J. EVANS Director March 18, 1997
-------------------
Kenny J. Evans
/s/ GARY HALL Director March 18, 1997
----------------------
Gary Hall
/s/ KAREN J. HENRY Director March 18, 1997
-------------------
Karen J. Henry
/s/ RICHARD KJERSTAD Director March 18, 1997
----------------------
Richard Kjerstad
/s/ DAVID L. MCCLURE Director March 18, 1997
---------------------
David L. McClure
/s/ BRUCE P. NEIDIG Director March 18, 1997
---------------------
Bruce P. Neidig
/s/ HOWARD D. POULSON Director March 18, 1997
----------------------
Howard D. Poulson
/s/ HOWARD G. SCHMID Director March 18, 1997
--------------------
Howard G. Schmid
/s/ JOHN J. VAN SWEDEN Director March 18, 1997
-----------------------
John J. Van Sweden
/s/ JOHN E. WALKER Director March 18, 1997
-------------------
John E. Walker
/s/ RICHARD D. HARRIS Senior Vice President, Secretary, Treasurer and Director March 18, 1997
---------------------
Richard D. Harris
/s/ STEPHEN M. MORAIN Senior Vice President, General Counsel and Director March 18, 1997
----------------------
Stephen M. Morain
</TABLE>
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
The Board of Directors and Stockholders
FBL Financial Group, Inc.
We have audited the consolidated balance sheets of FBL Financial Group, Inc. as
of December 31, 1996 and 1995, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996, and have issued our report thereon
dated March 3, 1997 (included elsewhere in this Form 10-K). Our audits also
included the financial statement schedules listed in Item 14(a) of this Form
10-K. These schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 3, 1997
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER
THAN INVESTMENTS IN RELATED PARTIES
FBL FINANCIAL GROUP, INC.
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
------------------ -------- ----- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities, held for investment:
Bonds:
United States Government and government
agencies and authorities $ 209,220 $ 215,849 $ 209,220
Corporate mortgage-backed securities 480,122 487,670 480,122
All other corporate bonds 5,009 5,649 5,009
--------- ---------- ---------
Total 694,351 $ 709,168 694,351
==========
Fixed maturity securities, available for sale:
Bonds:
United States Government and government agencies and authorities 237,609 $ 238,780 238,780
States, municipalities, and political subdivisions 33,059 34,155 34,155
Public utilities 188,898 192,790 192,790
Corporate mortgage and asset-backed securities 289,776 292,519 292,519
Convertible bonds 2,500 2,525 2,525
All other corporate bonds 757,733 778,657 778,657
Redeemable preferred stocks 33,173 34,518 34,518
--------- ---------- ---------
Total 1,542,748 $1,573,944 1,573,944
==========
Equity securities, available-for-sale:
Common stocks:
Public utilities 8,335 $ 7,678 7,678
Banks, trusts, and insurance companies 12,576 22,673 22,673
Industrial, miscellaneous, and all other 51,837 55,139 55,139
Nonredeemable preferred stocks 2,044 1,501 1,501
--------- ---------- ---------
Total 74,792 $ 86,991 86,991
==========
Held in inventory:
Bonds 949 $ 954 954
Redeemable preferred stocks 1,500 1,630 1,630
Common stocks 8,172 13,315 13,315
--------- ---------- ---------
Total 10,621 $ 15,899 15,899
==========
Mortgage loans on real estate 294,905 293,777(2)
Investment real estate 28,721 28,391(2)
Policy loans 118,996 118,996
Other long-term investments 8,388 8,388
Short-term investments 68,358 68,358
---------- ----------
$2,841,880 $2,889,095
========== ==========
</TABLE>
(1) On the basis of cost adjusted for repayments and amortization of premiums
and accrual of discounts for fixed maturities, other long-term investments
and short-term investments; original cost for equity securities; unpaid
principal balance for mortgage loans on real estate and policy loans, and
original cost less accumulated depreciation for investment real estate.
(2) Amount not equal to cost (Column B) because of allowance for possible
losses deducted from cost to determine reported amount.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 489 $ 455
Investments in subsidiaries (eliminated in consolidation) 639,022 563,871
Amounts receivable from affiliates 3,369 --
Amounts receivable from subsidiaries (eliminated in consolidation) 2,994 --
Current income taxes recoverable -- 90
Other assets 721 239
-------- --------
Total assets $646,595 $564,655
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses and other liabilities $ 714 $ 304
Amounts payable to affiliates 61 --
Amounts payable to subsidiaries (eliminated in consolidation) 7,201 --
Current income taxes payable 84 --
Deferred income taxes 13 53
-------- --------
Total liabilities 8,073 357
Stockholders' equity:
Preferred Stock 100,000 --
Common Stock -- 1,193
Class A Common Stock 43,773 --
Class B Common Stock 7,567 --
Additional paid-in capital -- 145,288
Net unrealized investment gains of subsidiaries 27,858 37,807
Retained earnings 459,324 380,010
-------- --------
Total stockholders' equity 638,522 564,298
-------- --------
Total liabilities and stockholders' equity $646,595 $564,655
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (CONTINUED)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Net investment income $ 16 $ 16 $ 15
Dividends from subsidiaries (eliminated in consolidation) 20,096 11,111 32
Management fee income from affiliates 182 -- --
Management fee income from subsidiaries (eliminated
in consolidation) 284 -- --
-------- -------- --------
Total revenues 20,578 11,127 47
Expenses 278 152 3
-------- -------- --------
20,300 10,975 44
Income taxes (61) 52 (15)
-------- -------- --------
Income (loss) before equity in undistributed income of subsidiaries 20,239 11,027 29
Equity in undistributed income of subsidiaries (eliminated in consolidation) 62,645 48,601 42,037
-------- -------- --------
Net income 82,884 59,628 42,066
Dividends on preferred stock (2,250) -- --
-------- -------- --------
Net income applicable to common stock $ 80,634 $ 59,628 $ 42,066
======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- ------- -----------
<S> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 1,104 $ (75) $ 48
INVESTING ACTIVITIES
Investments in subsidiaries (eliminated in consolidation) (17,500) (3,698) (1,184)
Dividends and return of capital from subsidiaries
(eliminated in consolidation) 20,000 -- 32
-------- ------- -----------
Net cash provided by (used in) investing activities 2,500 (3,698) (1,152)
FINANCING ACTIVITIES
Issuance of common stock for cash -- 4,189 1,143
Dividends paid (3,570) -- --
Cash held by former parent at time of reorganization
(eliminated in consolidation) -- -- (1,220)
-------- ------- -----------
Net cash provided by (used in) financing activities (3,570) 4,189 (77)
-------- ------- -----------
Increase (decrease) in cash and cash equivalents 34 416 (1,181)
Cash and cash equivalents at beginning of year 455 39 1,220
-------- ------- -----------
Cash and cash equivalents at end of year $ 489 $ 455 $ 39
======== ======= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash received during the year for income taxes $ 73 $ -- $ --
Noncash investing activity resulting from reorganization:
Investment in subsidiaries -- -- (232,302)
Other investments -- -- 1,010,219
Other non-cash assets -- -- 278,573
Policyholder liabilities -- -- (990,257)
Other liabilities -- -- (67,453)
-------- ------- -----------
-- -- (1,220)
</TABLE>
See accompanying notes to condensed financial statements.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of FBL Financial
Group, Inc.
In the parent company only financial statements, the Company's investments in
subsidiaries are stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition and net unrealized gains/losses on
the subsidiaries' investments classified as "available-for-sale" in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities".
Effective January 1, 1994, the parent company acquired 100% of the outstanding
common stock of Farm Bureau Life Insurance Company in a transaction that was
treated as a reorganization. See Note 3 to the Company's consolidated financial
statements for additional information regarding the reorganization.
Certain amounts in the 1995 and 1994 financial statements have been reclassified
to conform to the 1996 financial statement presentation.
2. CASH DIVIDENDS FROM SUBSIDIARY
During 1996, Farm Bureau Life Insurance Company paid cash dividends of $5.0
million and during 1994, Western Farm Bureau Life Insurance Company paid cash
dividends of $32,000 to the parent company.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
FBL FINANCIAL GROUP, INC.
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Future policy
benefits,
Deferred losses,
policy claims and Other
acquisition loss Unearned policyholder Premium
costs expenses revenues funds revenue
-------- ---------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
December 31, 1996:
Life insurance $164,277 $2,161,394 $22,215 $226,234 $136,434
Property-casualty insurance 2,635 43,189 26,774 -- 32,975
-------- ---------- ------- -------- --------
Total $166,912 $2,204,583 $48,989 $226,234 $169,409
======== ========== ======= ======== ========
December 31, 1995:
Life insurance $136,771 $2,054,092 $20,081 $215,242 $129,333
Property-casualty insurance 1,021 29,984 15,906 -- 18,709
-------- ---------- ------- -------- --------
Total $137,792 $2,084,076 $35,987 $215,242 $148,042
======== ========== ======= ======== ========
December 31, 1994:
Life Insurance $139,384 $1,950,174 $20,693 $199,575 $113,000
Property-casualty insurance 996 28,828 15,654 -- 17,778
-------- ---------- ------- -------- --------
Total $140,380 $1,979,002 $36,347 $199,575 $130,778
======== ========== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
-------- -------- -------- -------- -------- --------
Benefits, Amortization
claims, of deferred
Net losses and policy Other
investment settlement acquisition operating Premiums
income expenses costs expenses written
-------- ---------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
December 31, 1996:
Life insurance $208,265 $ 198,925 $ 8,667 $ 48,594
Property-casualty insurance 2,464 28,365 6,843 2,344 $ 32,264
-------- ---------- ------- -------- ========
Total $210,729 $ 227,290 $15,510 $ 50,938
======== ========== ======= ========
December 31, 1995:
Life insurance $221,525 $ 184,417 $ 7,736 $ 60,991
Property-casualty insurance 1,583 13,621 2,991 1,713 $ 18,851
-------- ---------- ------- -------- ========
Total $223,108 $ 198,038 $10,727 $ 62,704
======== ========== ======= ========
December 31, 1994:
Life insurance $177,310 $ 158,165 $ 6,837 $ 63,130
Property-casualty insurance 1,524 13,441 3,229 1,456 $ 18,339
-------- ---------- ------- -------- ========
Total $178,834 $ 171,606 $10,066 $ 64,586
======== ========== ======= ========
</TABLE>
SCHEDULE IV - REINSURANCE
FBL FINANCIAL GROUP, INC.
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
PERCENT OF
CEDED TO ASSUMED AMOUNT
GROSS OTHER FROM OTHER ASSUMED
AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
------ --------- --------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Life insurance in force, at end of year $17,195,432 $ 1,082,311 $ -- $16,113,121 --
=========== =========== ====== =========== =====
Insurance premiums and other considerations:
Universal life and annuity product charges $ 45,549 $ 1,895 $ -- $ 43,654 --
Traditional life insurance and accident and
health premiums 96,567 3,787 -- 92,780 --
Property-casualty premiums 26,807 26,810 32,978 32,975 100.0%
----------- ----------- ------- ----------- -----
$ 168,923 $ 32,492 $32,978 $ 169,409 19.5%
=========== =========== ======= =========== =====
Year ended December 31, 1995:
Life insurance in force, at end of year $16,208,497 $ 953,828 $ -- $15,254,669 --
=========== =========== ======= =========== =====
Insurance premiums and other considerations:
Universal life and annuity product charges $ 45,505 $ 1,783 $ -- $ 43,722 --
Traditional life insurance and accident and
health premiums 98,682 13,071 -- 85,611 --
Property-casualty premiums 26,093 26,240 18,856 18,709 100.8%
----------- ----------- ------- ----------- -----
$ 170,280 $ 41,094 $18,856 $ 148,042 12.7%
=========== =========== ======= =========== =====
Year ended December 31, 1994:
Life insurance in force, at end of year $15,221,217 $ 924,508 $ -- $14,296,709 --
=========== =========== ======= =========== =====
Insurance premiums and other considerations:
Universal life and annuity product charges $ 44,432 $ 1,698 $ -- $ 42,734 --
Traditional life insurance and accident and
health premiums 91,629 21,382 19 70,266 --
Property-casualty premiums 25,846 26,415 18,347 17,778 103.2%
----------- ----------- ------- ----------- -----
$ 161,907 $ 49,495 $18,366 $ 130,778 14.0%
=========== =========== ======= =========== =====
</TABLE>
Exhibit 11
FBL FINANCIAL GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------ ----------- -----------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
PRIMARY:
Average shares outstanding 21,572,129 23,591,100 23,394,260
Net effect of dilutive stock options - based
on the treasury stock method using
average market price 63,067 -- --
------------ ----------- -----------
Weighted average primary shares outstanding 21,635,196 23,591,100 23,394,260
============ =========== ===========
Net income $ 82,884 $ 59,628 $ 42,066
Dividends on preferred stock (2,250) -- --
------------ ----------- -----------
Net income applicable to common stock $ 80,634 $ 59,628 $ 42,066
============ =========== ===========
Net income per primary common and common
equivalent share $ 3.73 $ 2.53 $ 1.80
============ =========== ===========
FULLY DILUTED:
Average shares outstanding 21,572,129 23,591,100 23,394,260
Net effect of dilutive stock options - based
on the treasury stock method using
period-end market price, if higher than
average market price 97,171 -- --
------------ ----------- -----------
Weighted average fully diluted shares outstanding 21,669,300 23,591,100 23,394,260
============ =========== ===========
Net income $ 82,884 $ 59,628 $ 42,066
Dividends on preferred stock (2,250) -- --
------------ ----------- -----------
Net income applicable to common stock $ 80,634 $ 59,628 $ 42,066
============ =========== ===========
Net income per fully diluted common and common
equivalent share $ 3.72 $ 2.53 $ 1.80
============ =========== ===========
</TABLE>
Note: Net income per fully diluted common and common equivalent share is not
disclosed on the face of the Company's Consolidated Statements of Income
because dilution is less than three percent.
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-17007) pertaining to the Amended and Restated FBL Financial Group,
Inc. 1996 Class A Common Stock Compensation Plan and Registration Statement
(Form S-8 No. 333-08567) pertaining to the Iowa Farm Bureau Federation and
Affiliated Companies 401(k) Savings Plan of our reports dated March 3, 1997,
with respect to the consolidated financial statements and schedules of FBL
Financial Group, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1996.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 20, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 1,573,944
<DEBT-CARRYING-VALUE> 694,351
<DEBT-MARKET-VALUE> 709,168
<EQUITIES> 86,991
<MORTGAGE> 293,777
<REAL-ESTATE> 28,391
<TOTAL-INVEST> 2,889,095
<CASH> 3,583
<RECOVER-REINSURE> 38,919
<DEFERRED-ACQUISITION> 166,912
<TOTAL-ASSETS> 3,368,192
<POLICY-LOSSES> 2,193,846
<UNEARNED-PREMIUMS> 26,774
<POLICY-OTHER> 32,952
<POLICY-HOLDER-FUNDS> 226,234
<NOTES-PAYABLE> 24,581
0
100,000
<COMMON> 51,340
<OTHER-SE> 487,182
<TOTAL-LIABILITY-AND-EQUITY> 3,368,192
169,409
<INVESTMENT-INCOME> 210,729
<INVESTMENT-GAINS> 52,793
<OTHER-INCOME> 23,936
<BENEFITS> 227,290
<UNDERWRITING-AMORTIZATION> 15,510
<UNDERWRITING-OTHER> 50,938
<INCOME-PRETAX> 116,853
<INCOME-TAX> 37,778
<INCOME-CONTINUING> 82,884
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,884
<EPS-PRIMARY> 3.73
<EPS-DILUTED> 3.72
<RESERVE-OPEN> 12,774
<PROVISION-CURRENT> 35,540
<PROVISION-PRIOR> (1,130)
<PAYMENTS-CURRENT> 18,013
<PAYMENTS-PRIOR> 5,471
<RESERVE-CLOSE> 23,700
<CUMULATIVE-DEFICIENCY> (1,130)
</TABLE>
