UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to________________
Commission File Number: 1-11917
FBL FINANCIAL GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Iowa 42-1411715
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266-5997
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(515) 225-5400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 31,410,626 shares of Class A
common stock and 1,192,990 shares of Class B common stock as of October 30,
1998.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 1998 - $566,013; 1997 -
$663,315) ................................................................ $ 539,128 $ 639,598
Available for sale, at market (amortized cost: 1998 - $1,730,637; 1997 -
$1,629,950) .............................................................. 1,840,271 1,711,578
Equity securities, at market (cost: 1998 - $39,664; 1997 - $60,500) .......... 33,608 57,736
Mortgage loans on real estate ................................................ 309,201 323,605
Investment real estate, less allowances for depreciation of $3,816 in 1998
and $2,682 in 1997 ......................................................... 40,873 39,942
Policy loans ................................................................. 123,333 121,941
Other long-term investments .................................................. 10,270 14,438
Short-term investments ....................................................... 80,514 32,073
------------- -------------
Total investments ............................................................... 2,977,198 2,940,911
Cash and cash equivalents ....................................................... 6,882 2,397
Securities and indebtedness of related parties .................................. 66,145 64,442
Accrued investment income ....................................................... 32,761 33,894
Accounts and notes receivable ................................................... 1,173 1,401
Amounts receivable from affiliates .............................................. 1,928 3,656
Reinsurance recoverable ......................................................... 7,044 9,789
Deferred policy acquisition costs ............................................... 197,744 181,916
Value of insurance in force acquired ............................................ 14,412 16,044
Property and equipment, less allowances for depreciation of $31,636 in 1998
and $48,847 in 1997 ........................................................... 38,988 63,481
Current income taxes recoverable ................................................ 7,811 11,925
Goodwill, less accumulated amortization of $3,310 in 1998 and $2,792 in
1997 .......................................................................... 10,122 10,640
Other assets .................................................................... 32,650 15,949
Assets of discontinued operations ............................................... -- 106,672
Assets held in separate accounts ................................................ 171,809 138,409
------------- -------------
Total assets............................................................... $ 3,566,667 $ 3,601,526
============= =============
</TABLE>
1
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products ......................................... $ 1,562,677 $ 1,578,794
Traditional life insurance and accident and health products ......... 728,584 711,722
Unearned revenue reserve ............................................ 24,880 23,530
Other policy claims and benefits ......................................... 10,938 13,488
------------- -------------
2,327,079 2,327,534
Other policyholders' funds:
Supplementary contracts without life contingencies ....................... 145,876 137,398
Advance premiums and other deposits ...................................... 84,339 85,280
Accrued dividends ........................................................ 12,497 13,801
------------- -------------
242,712 236,479
Long-term debt .............................................................. 24,572 24,577
Amounts payable to affiliates ............................................... 6,011 60
Deferred income taxes ....................................................... 48,484 43,592
Other liabilities ........................................................... 61,044 44,939
Liabilities of discontinued operations ...................................... -- 79,118
Liabilities related to separate accounts .................................... 171,809 138,409
------------- -------------
Total liabilities ................................................... 2,881,711 2,894,708
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock of subsidiary
trust ..................................................................... 97,000 97,000
Other ....................................................................... 4,503 4,503
Stockholders' equity:
Preferred stock, without par value, at liquidation value - authorized
10,000,000 shares, issued and outstanding 5,000,000 Series B shares ....... 3,000 3,000
Class A common stock, without par value - authorized 88,500,000 shares,
issued and outstanding 31,393,102 shares in 1998 and 34,732,448 shares
in 1997 ................................................................... 40,499 42,907
Class B common stock, without par value - authorized 1,500,000 shares,
issued and outstanding 1,192,990 shares ................................... 7,567 7,567
Accumulated other comprehensive income - net unrealized investment
gains ..................................................................... 62,286 48,559
Retained earnings ........................................................... 470,101 503,282
------------- -------------
Total stockholders' equity ................................................ 583,453 605,315
------------- -------------
Total liabilities and stockholders' equity ............................. $ 3,566,667 $ 3,601,526
============= =============
</TABLE>
See accompanying notes.
2
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Interest sensitive product charges ..................... $ 12,847 $ 12,362 $ 38,600 $ 35,568
Traditional life insurance and accident and health
premiums ............................................. 22,272 22,044 71,563 71,445
Net investment income .................................. 56,587 55,232 171,260 164,177
Realized gains (losses) on investments ................. 475 10,533 (2,382) 34,458
Other income ........................................... 5,058 4,740 15,366 13,785
------------ ------------ ------------ ------------
Total revenues ....................................... 97,239 104,911 294,407 319,433
Benefits and expenses:
Interest sensitive product benefits .................... 30,477 30,424 91,858 92,785
Traditional life insurance and accident and health
benefits ............................................. 13,910 11,923 43,077 41,579
Increase in traditional life and accident and health
future policy benefits ............................... 5,498 6,076 17,908 19,775
Distributions to participating policyholders ........... 6,032 5,715 19,340 19,280
Underwriting, acquisition and insurance expenses ....... 15,295 15,692 47,335 45,033
Interest expense ....................................... 471 357 1,239 1,122
Other expenses ......................................... 3,888 2,654 11,262 8,075
------------ ------------ ------------ ------------
Total benefits and expenses .......................... 75,571 72,841 232,019 227,649
------------ ------------ ------------ ------------
21,668 32,070 62,388 91,784
Income taxes ............................................... (6,747) (11,245) (19,576) (31,102)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily
redeemable preferred stock of subsidiary trust ....... (1,213) (1,213) (3,638) (1,617)
Other .................................................. (83) (89) (251) (266)
Equity income, net of related income taxes ................. 573 762 1,221 878
------------ ------------ ------------ ------------
Income from continuing operations .......................... 14,198 20,285 40,144 59,677
Discontinued operations:
Income (loss) from property-casualty operations, net
of related income taxes .............................. -- (161) 287 (162)
Gain on disposal of property-casualty operations, net
of related income taxes .............................. -- -- 179 --
------------ ------------ ------------ ------------
Net income ................................................. 14,198 20,124 40,610 59,515
Dividends on Series A and B preferred stock ................ (38) (37) (113) (2,133)
------------ ------------ ------------ ------------
Net income applicable to common stock ...................... $ 14,160 $ 20,087 $ 40,497 $ 57,382
============ ============ ============ ============
Earnings per common share:
Income from continuing operations ...................... $ 0.43 $ 0.56 $ 1.19 $ 1.57
Discontinued operations ................................ -- -- 0.01 --
------------ ------------ ------------ ------------
Earnings per common share .............................. $ 0.43 $ 0.56 $ 1.20 $ 1.57
============ ============ ============ ============
Earnings per common share - assuming dilution:
Income from continuing operations ...................... $ 0.42 $ 0.55 $ 1.16 $ 1.55
Discontinued operations ................................ -- -- 0.01 --
------------ ------------ ------------ ------------
Earnings per common share - assuming dilution .......... $ 0.42 $ 0.55 $ 1.17 $ 1.55
============ ============ ============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A CLASS B OTHER TOTAL
PREFERRED COMMON COMMON COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK STOCK INCOME EARNINGS EQUITY
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ........ $ 100,000 $ 43,773 $ 7,567 $ 27,858 $ 459,324 $ 638,522
Comprehensive income:
Net income for nine months
ended September 30, 1997 ..... -- -- -- -- 59,515 59,515
Change in net unrealized
investment gains/losses ...... -- -- -- 18,653 -- 18,653
------------
Total comprehensive income ...... 78,168
Purchase of Series A preferred
stock ......................... (100,000) -- -- -- -- (100,000)
Issuance of Series B preferred
stock ......................... 3,000 -- -- -- -- 3,000
Purchase of 1,930,740 shares
of common stock ............... -- (2,402) -- -- (22,432) (24,834)
Issuance of 86,504 shares of
common stock under stock
option plan, including
related income tax benefit .... -- 902 -- -- -- 902
Dividends on preferred stock .... -- -- -- -- (2,133) (2,133)
Dividends on common stock ....... -- -- -- -- (5,470) (5,470)
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 1997 ..... $ 3,000 $ 42,273 $ 7,567 $ 46,511 $ 488,804 $ 588,155
============ ============ ============ ============ ============ ============
Balance at January 1, 1998 ........ $ 3,000 $ 42,907 $ 7,567 $ 48,559 $ 503,282 $ 605,315
Comprehensive income:
Net income for nine months
ended September 30, 1998 ..... -- -- -- -- 40,610 40,610
Change in net unrealized
investment gains/losses ...... -- -- -- 13,727 -- 13,727
------------
Total comprehensive income ...... 54,337
Acquisition of 2,536,112 shares
of common stock in
exchange for properties ....... -- (3,340) -- -- (42,310) (45,650)
Purchase of 961,536 shares of
common stock .................. -- (1,224) -- -- (23,784) (25,008)
Issuance of 158,302 shares of
common stock under stock
option plan, including related
income tax benefit ............ -- 2,156 -- -- -- 2,156
Dividends on preferred stock .... -- -- -- -- (113) (113)
Dividends on common stock ....... -- -- -- -- (7,584) (7,584)
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 1998 ..... $ 3,000 $ 40,499 $ 7,567 $ 62,286 $ 470,101 $ 583,453
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Continuing operations:
Net income .................................................................... $ 40,144 $ 59,677
Adjustments to reconcile net income to net cash provided by continuing
operations:
Adjustments related to interest sensitive products:
Interest credited to account balances ................................ 79,229 79,596
Charges for mortality and administration ............................. (38,646) (36,099)
Deferral of unearned revenues ........................................ 1,968 1,782
Amortization of unearned revenue reserve ............................. (579) (563)
Provision for depreciation and amortization .............................. 7,014 13,507
Net gains and losses related to investments held by broker-dealer and
investment company subsidiaries ...................................... 286 (1,038)
Realized losses (gains) on investments ................................... 2,382 (34,458)
Increase in traditional life and accident and health benefit accruals .... 17,840 20,303
Policy acquisition costs deferred ........................................ (23,054) (22,216)
Amortization of deferred policy acquisition costs ........................ 6,499 6,624
Provision for deferred income taxes ...................................... (1,864) (10,657)
Other .................................................................... (14,159) 6,758
------------ ------------
Net cash provided by continuing operations ......................................... 77,060 83,216
Discontinued operations:
Net income (loss) ............................................................. 466 (162)
Adjustments to reconcile net income (loss) to net cash provided by
discontinued operations .................................................. 2,006 7,564
------------ ------------
Net cash provided by discontinued operations ....................................... 2,472 7,402
------------ ------------
Net cash provided by operating activities .......................................... 79,532 90,618
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment ........................................ 103,552 33,489
Fixed maturities - available for sale ......................................... 216,634 222,352
Equity securities ............................................................. 23,861 98,489
Mortgage loans on real estate ................................................. 53,506 33,070
Investment real estate ........................................................ 1,339 832
Policy loans .................................................................. 21,899 21,416
Other long-term investments ................................................... 2,121 257
------------ ------------
422,912 409,905
</TABLE>
5
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Acquisition of investments:
Fixed maturities - held for investment ..................................... $ -- $ (74)
Fixed maturities - available for sale ...................................... (318,065) (323,864)
Equity securities .......................................................... (1,618) (30,350)
Mortgage loans on real estate .............................................. (39,087) (41,672)
Investment real estate ..................................................... (2,884) (6,902)
Policy loans ............................................................... (23,291) (23,901)
Other long-term investments ................................................ (1,714) (1,615)
Short-term investments - net ............................................... (48,441) (36,415)
------------ ------------
(435,100) (464,793)
Proceeds from disposal, repayments of advances and other distributions from
equity investees ........................................................... 3,953 8,994
Investments in and advances to equity investees ................................. (3,964) (6,241)
Net purchases of property and equipment and other ............................... (7,488) (8,872)
Investing activities of discontinued operations ................................. (2,474) (7,931)
Net proceeds from sale of discontinued operations ............................... 24,844 --
------------ ------------
Net cash provided by (used in) investing activities ............................. 2,683 (68,938)
FINANCING ACTIVITIES
Receipts from interest sensitive products credited to policyholder account
balances .................................................................... 184,941 190,811
Return of policyholder account balances on interest sensitive products .......... (233,163) (179,420)
Proceeds from short-term debt with affiliate .................................... 5,771 --
Repayments of long-term debt .................................................... (5) (3)
Distributions on company-obligated mandatorily redeemable preferred stock of
subsidiary trust ............................................................ (3,638) (1,617)
Other distributions to minority interests ....................................... (335) (663)
Purchase of common stock ........................................................ (25,008) (24,834)
Issuance of common stock ........................................................ 1,404 758
Dividends paid .................................................................. (7,697) (7,603)
------------ ------------
Net cash used in financing activities ........................................... (77,730) (22,571)
------------ ------------
Increase (decrease) in cash and cash equivalents ................................ 4,485 (891)
Cash and cash equivalents at beginning of period ................................ 2,397 3,583
------------ ------------
Cash and cash equivalents at end of period ...................................... $ 6,882 $ 2,692
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ................................................................... $ 1,206 $ 1,115
Income taxes ............................................................... 16,451 43,634
</TABLE>
See accompanying notes.
6
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three- and nine-month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and notes thereto for the year ended
December 31, 1997 included in the Company's annual report on Form 10-K.
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 presentation.
2. STOCKHOLDERS' EQUITY
STOCK SPLIT
On March 17, 1998, the Company's Board of Directors approved a two-for-one
common stock split payable in the form of a 100% stock dividend to stockholders
of record as of April 6, 1998. The additional shares were distributed April 17,
1998. All references to the number of common shares and per share amounts in
this report have been restated as appropriate to reflect the effect of the share
dividend for all periods presented.
As required by the Company's Articles of Incorporation, holders of the Class B
common stock received Class A common shares in payment of the share dividend. In
addition, the 5.0 million shares of Series B preferred stock have non-dilutive
voting rights. As a result, voting rights on these shares increased
proportionately while the number of shares outstanding did not change.
EXCHANGE OF HOME OFFICE PROPERTIES
On March 30, 1998, the Company exchanged a subsidiary owning its home office
properties for 2,536,112 unregistered shares of Class A common stock owned by
the Iowa Farm Bureau Federation, its majority shareholder. The value of the
transaction, which was structured as a tax-free exchange of a real estate
subsidiary, was $45.7 million, or $18.00 per common share. The book value of the
properties was $24.7 million on the date of the exchange. The transaction was
accounted for as a noncash financing activity for purposes of the statements of
cash flows.
The Company is leasing a portion of the properties back from a wholly-owned
subsidiary of the Iowa Farm Bureau Federation under a 15-year operating lease. A
gain on the transaction of approximately $21.0 million was deferred by the
Company and is being amortized over the term of the operating lease.
STOCK REPURCHASES
During the second quarter of 1998, the Company repurchased 961,536 shares of
Class A common stock, for $25.0 million, in accordance with a stock repurchase
plan approved by the Company's Board of Directors on May 19, 1998. Of the shares
repurchased, 770,736 were unregistered shares owned by eight Farm Bureau
entities. The purchase amount was allocated partly to Class A common stock based
on the average common stock balance per share on the acquisition date with the
remainder allocated to retained earnings.
3. DISCONTINUED OPERATIONS
On March 31, 1998, the Company sold its wholly-owned subsidiary, Utah Farm
Bureau Insurance Company (Utah Insurance), to Farm Bureau Mutual Insurance
Company (Farm Bureau Mutual), an affiliate. As a result of the sale,
7
<PAGE>
which was approved by the Company's Board of Directors on March 17, 1998, the
Company no longer has property-casualty operations. Prior year financial
statements have been restated to reflect the operations of Utah Insurance as
discontinued.
The Company received $25.0 million in cash on the date of the sale, resulting in
a $0.2 million gain net of related income taxes. The tax benefit recorded in
connection with the sale ($1.0 million) is greater than the prevailing federal
income tax rate due to the reversal of cumulative temporary differences between
the book and income tax bases of Utah Insurance's assets and liabilities. The
Company may receive additional consideration during each of the five years in
the period ending December 31, 2002, in accordance with an earn-out provision
included in the underlying sales agreement. Under the earn-out arrangement, the
Company and Farm Bureau Mutual will share equally in the dollar amount by which
the incurred losses on Utah Insurance's direct business, net of reinsurance
ceded, is less than the incurred losses assumed in the valuation model used to
derive the initial $25.0 million acquisition price. The earn-out calculation
will be performed and any settlement (subject to a maximum of $2.0 million per
year) will be made on a calendar year basis. The Company has not accrued any
contingent consideration as such amounts, if any, cannot be reasonably estimated
as of September 30, 1998. Any receipts as a result of the earn-out provision
will be recorded as an adjustment to the gain on the disposal of the
discontinued segment.
Revenues from discontinued operations for the nine months ended September 30,
1998 and 1997 totaled $12.9 million and $39.9 million, respectively, and for the
three months ended September 30, 1997 totaled $14.6 million. Income tax expense
(benefit) from discontinued operations for the nine months ended September 30,
1998 and 1997 totaled $36,000 and $(0.4) million, respectively, and for the
three months ended September 30, 1997 totaled $(0.2) million.
4. INVESTMENT OPERATIONS
Fixed maturity securities, comprised of bonds and redeemable preferred stocks,
that the Company has the positive intent and ability to hold to maturity are
designated as "held for investment". Held for investment securities are reported
at cost adjusted for amortization of premiums and discounts. Changes in the
market value of these securities, except for declines that are other than
temporary, are not reflected in the Company's financial statements. Fixed
maturity securities which may be sold are designated as "available for sale".
Available for sale securities are reported at market value and unrealized gains
and losses on these securities are included directly in stockholders' equity,
net of related adjustments to deferred policy acquisition costs, value of
insurance in force acquired, unearned revenue reserve and deferred income taxes.
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.
Net unrealized investment gains as reported were comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unrealized appreciation on fixed maturity and equity securities available for
sale ........................................................................ $ 103,578 $ 81,076
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs ........................................... (6,746) (6,019)
Value of insurance in force acquired ........................................ (1,749) (1,061)
Unearned revenue reserve .................................................... 748 709
Provision for deferred income taxes .............................................. (33,540) (26,146)
------------ ------------
62,291 48,559
Proportionate share of net unrealized investment losses of equity investees ...... (5) --
------------ ------------
Net unrealized investment gains .................................................. $ 62,286 $ 48,559
============ ============
</TABLE>
8
<PAGE>
5. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement No. 130, "Reporting
Comprehensive Income". Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income or stockholders'
equity. Statement No. 130 requires unrealized gains and losses on the Company's
available-for-sale securities to be included in other comprehensive income.
During the three months ended September 30, 1998 and 1997, comprehensive income
totaled $24.1 million and $40.7 million, respectively. During the nine months
ended September 30, 1998 and 1997, comprehensive income totaled $54.3 million
and $78.2 million, respectively.
6. EARNINGS PER SHARE
The following table sets forth the computation of earnings per common share and
earnings per common share - assuming dilution:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Numerator:
Income from continuing operations ................ $ 14,198 $ 20,285 $ 40,144 $ 59,677
Income from discontinued operations .............. -- (161) 466 (162)
------------ ------------ ------------ ------------
Net income ....................................... 14,198 20,124 40,610 59,515
Dividends on Series A and B preferred stock ...... (38) (37) (113) (2,133)
------------ ------------ ------------ ------------
Numerator for earnings per common share-
income available to common stockholders .... $ 14,160 $ 20,087 $ 40,497 $ 57,382
============ ============ ============ ============
Denominator:
Denominator for earnings per common
share - weighted-average shares ............... 32,573,076 35,840,562 33,887,349 36,480,708
Effect of dilutive securities - employee stock
options ....................................... 832,951 699,774 847,441 575,234
------------ ------------ ------------ ------------
Denominator for diluted earnings per
common share - adjusted weighted-
average shares ............................. 33,406,027 36,540,336 34,734,790 37,055,942
============ ============ ============ ============
Earnings per common share:
Income from continuing operations ................ $ 0.43 $ 0.56 $ 1.19 $ 1.57
Discontinued operations .......................... -- -- 0.01 --
------------ ------------ ------------ ------------
Earnings per common share ........................ $ 0.43 $ 0.56 $ 1.20 $ 1.57
============ ============ ============ ============
Earnings per common share - assuming dilution:
Income from continuing operations ................ $ 0.42 $ 0.55 $ 1.16 $ 1.55
Discontinued operations .......................... -- -- 0.01 --
------------ ------------ ------------ ------------
Earnings per common share - assuming dilution .... $ 0.42 $ 0.55 $ 1.17 $ 1.55
============ ============ ============ ============
</TABLE>
For purposes of the calculation of earnings per common share, dividends on
Series A and B preferred stock are attributed to continuing operations.
9
<PAGE>
7. CREDIT ARRANGEMENTS
The Company has a $12.0 million line of credit with Farm Bureau Mutual in the
form of a revolving demand note. Borrowings on the note, which totaled $5.8
million at September 30, 1998, are being used to acquire assets that will be
leased to certain affiliates, including Farm Bureau Mutual. Interest is payable
at a rate equal to the prime rate of a national bank (8.25% at September 30,
1998).
As an investor in the Federal Home Loan Bank (FHLB), the Company has the right
to borrow up to $54.0 million from the FHLB as of September 30, 1998. The
Company had no outstanding debt under this credit arrangement as of September
30, 1998 or December 31, 1997.
8. PENDING ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". Statement No.
133 requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives are to be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. A provision of
Statement No. 133 allows companies to transfer securities classified as held to
maturity to either the available-for-sale or trading categories in connection
with the adoption of the new standard. The Statement is effective for the
Company in the year 2000, with earlier adoption encouraged. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information". Statement
No. 131 establishes standards for reporting information about operating
segments, products and markets. Generally, Statement No. 131 requires financial
information to be reported on the basis on which it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. Under Statement No. 131, it is anticipated that the Company will
report two primary operating segments: life and property-casualty (as
discontinued). However, the non-insurance support operations, including
investment advisory, marketing and distribution and leasing services, will no
longer be part of the life insurance segment. While each of these non-insurance
operations constitute a separate segment under the new rules, their operations
do not currently meet the statement's quantitative thresholds for separate
segment reporting. Accordingly, it is anticipated that such non-insurance
operations will be aggregated and disclosed in total. While earlier application
is allowed, Statement No. 131 is effective for and will be adopted in the fourth
quarter of 1998.
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company may be involved in litigation
where amounts are alleged that are substantially in excess of contractual policy
benefits or certain other agreements. At September 30, 1998, management is not
aware of any claims for which a material loss is reasonably possible.
The Company seeks to limit its exposure to loss on any single insured or event
and to recover a portion of benefits paid by ceding reinsurance to other
insurance enterprises. Reinsurance contracts do not relieve the Company of its
obligations to policyholders. To the extent that reinsuring companies are later
unable to meet obligations under reinsurance agreements, the Company's insurance
subsidiaries would be liable for these obligations, and payment of these
obligations could result in losses to the Company. To limit the possibility of
such losses, the Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk. No allowance for uncollectible amounts
has been established against the reinsurance recoverable since all amounts are
deemed to be collectible.
During the first quarter of 1998, the Company entered into a 15-year operating
lease with the Iowa Farm Bureau Federation for the lease of its home office
properties. Future remaining minimum lease payments under this lease as of
September 30, 1998 are as follows: 1998 - $0.4 million; 1999 - $1.7 million;
2000 - $2.1 million; 2001 - $2.1 million; 2002 - $2.1 million; and thereafter,
through 2013 - $25.9 million.
10
<PAGE>
In connection with an investment in a real estate limited partnership, the
Company has agreed to pay any cash flow deficiencies of a medium-sized shopping
center owned by the partnership through January 1, 2001. At September 30, 1998,
the Company recorded a $0.3 million reserve for expected future cash flow
deficiencies. No such reserve was recorded at December 31, 1998. The limited
partnership has a $5.3 million mortgage loan, secured by the shopping center,
with Farm Bureau Mutual.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING ANALYSIS OF THE CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE HEREIN. UNLESS NOTED
OTHERWISE, ALL REFERENCES INCLUDED HEREIN TO THE COMPANY INCLUDE ALL OF ITS
DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE
SUBSIDIARIES, FARM BUREAU LIFE INSURANCE COMPANY (FARM BUREAU LIFE) AND WESTERN
FARM BUREAU LIFE INSURANCE COMPANY (WESTERN LIFE) (COLLECTIVELY, THE LIFE
COMPANIES).
On March 17, 1998, the Company's Board of Directors approved a two-for-one
common stock split payable in the form of a 100% stock dividend to stockholders
of record as of April 6, 1998. The additional shares were distributed April 17,
1998. All references to the number of common shares and per share amounts in
this report have been restated as appropriate to reflect the effect of the share
dividend for all periods presented.
On March 31, 1998, the Company sold its wholly-owned subsidiary, Utah Farm
Bureau Insurance Company (Utah Insurance), to Farm Bureau Mutual Insurance
Company (Farm Bureau Mutual), an affiliate. As a result of the sale, which was
approved by the Company's Board of Directors on March 17, 1998, the Company no
longer has property-casualty operations. Results of the property-casualty
operations have been reported separately as "discontinued" and applicable
amounts for the 1997 periods presented herein have been restated.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
A summary of the Company's premiums and product charges is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Premiums and product charges:
Interest sensitive product charges ...................... $ 12,847 $ 12,362 $ 38,600 $ 35,568
Traditional life insurance and accident and health
premiums ............................................ 22,272 22,044 71,563 71,445
----------- ----------- ----------- -----------
Total ............................................... $ 35,119 $ 34,406 $ 110,163 $ 107,013
=========== =========== =========== ===========
</TABLE>
Interest sensitive product charges increased $0.5 million, or 3.9%, for the
third quarter of 1998 and $3.0 million, or 8.5%, for the nine months ended
September 30, 1998 compared to the respective periods in 1997. These increases
are due primarily to increased cost of insurance charges resulting from an
increase in the volume and age of business in force. In addition, mortality and
expense charges have increased as a result of growth in variable product account
balances.
Traditional life insurance and accident and health premiums increased $0.2
million, or 1.0%, for the third quarter of 1998 and $0.1 million, or 0.2%, for
the nine months ended September 30, 1998 compared to the respective periods in
1997. Management believes the modest increase in the sale of traditional life
insurance products is the result of a marketing emphasis placed on the sale of
variable universal life insurance contracts. Premiums collected on variable
universal life insurance products increased 24.3% to $9.6 million for the 1998
quarter and increased 19.3% to $28.3 million for the nine months ended September
30, 1998.
Net investment income increased $1.4 million, or 2.5%, for the third quarter of
1998 and $7.1 million, or 4.3%, for the nine months ended September 30, 1998
compared to the respective periods in 1997. These increases are attributable to
increases in invested assets and the yield earned on those investments. The
annualized yield earned on average invested assets was 8.00% for the nine months
ended September 30, 1998 compared to 7.75% for the nine months ended September
30, 1997. Despite a general decline in market interest rates during the 12-month
12
<PAGE>
period ended September 30, 1998, yield on invested assets increased due
principally to an increase in fee income and discount accretion associated with
bond calls and prepayments on mortgage loans and mortgage-backed securities. Fee
income from mortgage loan prepayments and bond calls increased 85.4% to $1.9
million for the third quarter of 1998 and increased 498.2% to $7.7 million for
the nine-month period. In addition, included in investment income during 1998 is
net discount accretion on mortgage and asset-backed securities totaling $0.2
million for the third quarter and $0.9 million for the nine-month period
attributable to an increase in future principal prepayment assumptions. Such
revenue is not expected to be a consistently recurring source of income for the
Company.
Realized gains (losses) on investments decreased $10.1 million, or 95.5%, for
the third quarter of 1998 and $36.8 million, or 106.9%, for the nine months
ended September 30, 1998 compared to the respective periods in 1997. Included in
realized gains (losses) during the third quarter of 1998 was $0.4 million in
realized losses resulting from writedowns of investments that became
other-than-temporarily impaired. There were no such impairment losses during the
third quarter of 1997. For the nine-month periods, impairment losses totaled
$8.5 million in 1998 and $19.4 million in 1997. These writedowns are the result
of sustained operating losses, non-renewal of sales contracts, rejection of
product design by regulatory authorities and various other economic factors that
became evident in the respective periods. The realized gains recognized during
the nine months ended September 30, 1997 resulted primarily from the sale of
equity securities. The level of realized gains (losses) is subject to
fluctuation from period to period depending on the prevailing interest rate and
economic environment and the timing of the sale of investments.
Other income increased $0.3 million, or 6.7%, for the third quarter of 1998 and
$1.6 million, or 11.5%, for the nine months ended September 30, 1998 compared to
the respective periods in 1997. These increases are attributable to an increase
in the level of leasing, investment advisory and other financial services
provided to affiliates and third parties. These increases are partially offset
by decreases in rental income of $0.6 million for the third quarter and $1.3
million for the nine-month period due to the exchange of home office properties
on March 30, 1998. See "Exchange of Home Office Properties".
A summary of the Company's policy benefits is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Policy benefits:
Interest sensitive product benefits .................... $ 30,477 $ 30,424 $ 91,858 $ 92,785
Traditional life insurance and accident and health
benefits ........................................... 13,910 11,923 43,077 41,579
Increase in traditional life and accident and health
future policy benefits ............................. 5,498 6,076 17,908 19,775
Distributions to participating policyholders ........... 6,032 5,715 19,340 19,280
----------- ----------- ----------- -----------
Total .............................................. $ 55,917 $ 54,138 $ 172,183 $ 173,419
=========== =========== =========== ===========
</TABLE>
Interest sensitive product benefits increased $0.1 million, or 0.2%, for the
third quarter of 1998 and decreased $0.9 million, or 1.0%, for the nine months
ended September 30, 1998 compared to the respective periods in 1997. Universal
life death benefits in excess of related account balances increased $0.4 million
for the quarter and decreased $0.6 million for the nine-month period. Interest
credited to contracts decreased for the 1998 quarter and for the nine months
ended September 30, 1998 due primarily to decreases in interest crediting rates.
The weighted average annualized crediting rate for the Company's universal life
liabilities decreased to 5.99% for the nine months ended September 30, 1998 from
6.22% for nine months ended September 30, 1997, and the weighted average
annualized crediting rate for the Company's annuity liabilities decreased to
5.77% for the 1998 period from 6.15% for the 1997 period. The Company decreased
interest crediting rates on many of its products during the 12-month period
ended September 30, 1998 in response to the general decline in market interest
rates during the same period.
13
<PAGE>
Traditional life insurance and accident and health benefits, including the
related changes in reserves, increased $1.4 million, or 7.8%, for the third
quarter of 1998 and decreased $0.4 million, or 0.6%, for the nine months ended
September 30, 1998 compared to the respective periods in 1997. Death and
surrender benefits on traditional products increased $1.9 million for the third
quarter and $1.3 million for the nine-month period. Mortality experience in the
third quarter of 1998 was in line with expectations compared to the third
quarter of 1997, when mortality experience was better than expected. For the
nine months end September 30, 1998, the increase in death and surrender benefits
was more than offset by a decrease in related reserves and other benefits.
Traditional life insurance and accident and health benefits can tend to
fluctuate from period to period as a result of changes in mortality and
morbidity experience.
Distributions to participating policyholders increased $0.3 million, or 5.5%,
for the third quarter of 1998 and $0.1 million, or 0.3%, for the nine months
ended September 30, 1998 compared to the respective periods in 1997. Growth in
the amount and age of the participating business in force was partially offset
by the impact of a decrease in the average interest rate used in the dividend
formula for these policies to 5.84% at September 30, 1998 from 5.98% at
September 30, 1997.
A summary of the Company's underwriting, acquisition and insurance expenses is
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals ............... $ 2,282 $ 2,277 $ 6,968 $ 6,896
Amortization of deferred policy acquisition costs .. 2,044 2,858 6,499 6,624
Other underwriting, acquisition and insurance
expenses, net of deferrals ..................... 10,969 10,557 33,868 31,513
---------- ---------- ---------- ----------
Total .......................................... $ 15,295 $ 15,692 $ 47,335 $ 45,033
========== ========== ========== ==========
</TABLE>
Commission expense was flat for the third quarter of 1998 and increased $0.1
million, or 1.0%, for the nine months ended September 30, 1998 compared to the
respective period in 1997. Commission expense was relatively consistent during
the periods as direct life insurance premiums collected increased 2.0% for the
nine-month period ended September 30, 1998 compared to the same period in 1997.
Amortization of deferred policy acquisition costs decreased $0.8 million, or
28.5%, for the third quarter of 1998 and $0.1 million, or 1.9%, for the nine
months ended September 30, 1998 compared to the respective periods in 1997. The
decrease for the quarter is primarily attributable to the increase in death
benefits noted above. In addition, amortization decreased for the quarter and
nine-month period due to the impact of realized gains and losses on investments
backing the related policyholder liabilities.
Other underwriting, acquisition and insurance expenses increased $0.4 million,
or 3.9%, for the third quarter of 1998 and $2.4 million, or 7.5%, for the nine
months ended September 30, 1998 compared to the respective periods in 1997.
During the first nine months of 1998 and 1997, expenses totaling $1.6 million
and $0.2 million, respectively, were incurred relating to modifying the
Company's computer systems to prepare for the Year 2000 date conversion.
Expenses also increased during the nine-month period as a result of start-up
activities relating to the sale of variable products through alternative
distribution channels. These increases were partially offset by a $1.8 million
decrease in home office real estate expense during the nine-month period due to
the exchange of home office properties on March 30, 1998. See "Impact of Year
2000" and "Exchange of Home Office Properties".
Other expenses increased $1.2 million, or 46.5%, for the third quarter of 1998
and $3.2 million, or 39.5%, for the nine months ended September 30, 1998
compared to the respective periods in 1997. These increases are attributable to
an increase in the level of leasing, investment advisory and other financial
services provided to affiliates and third parties.
14
<PAGE>
Pretax income before minority interest, equity income and discontinued
operations decreased $10.4 million, or 32.4%, for the third quarter of 1998 and
$29.4 million, or 32.0%, for the nine months ended September 30, 1998 compared
to the respective periods in 1997. The decrease in pretax income is primarily
the result of the decrease in realized gains on investments partially offset by
an increase in income earned on invested assets.
Income taxes decreased $4.5 million, or 40.0%, for the third quarter of 1998 and
$11.5 million, or 37.1%, for the nine months ended September 30, 1998 compared
to the respective periods in 1997. The effective tax rate for the nine months
ended September 30, 1998 was 31.4% compared to 33.9% for the respective period
in 1997. The effective tax rates were lower than the federal statutory rate of
35% due primarily to tax exempt interest and dividend income partially offset by
state income taxes. In addition, during the 1998 period the Company realized the
full tax benefit associated with the payment of dividends on mandatorily
redeemable preferred stock of a subsidiary trust. The trust's preferred stock
was issued on May 30, 1997.
Equity income, net of related income taxes, decreased $0.2 million, or 24.8%,
for the third quarter of 1998 and increased $0.3 million, or 39.1%, for the nine
months ended September 30, 1998 compared to the respective periods in 1997.
Equity income includes, among other items, the Company's proportionate share of
gains and losses on investments owned by the underlying companies, partnerships
and joint ventures. The level of these gains and losses is subject to
fluctuation from period to period depending on the prevailing economic
environment and the timing of the sale of investments held by the entities.
Net income applicable to common stock decreased $5.9 million, or 29.5%, for the
third quarter of 1998 and $16.9 million, or 29.4%, for the nine months ended
September 30, 1998 compared to the respective periods in 1997. The decrease is
primarily the result of the changes in income from continuing operations
discussed above. As discussed in more detail in the section that follows, the
decrease for the nine-month period was partially offset by a $0.6 million
increase in income/gain from discontinued operations. A decrease in dividends on
Series A and B preferred stock was offset by an increase in dividends on
company-obligated mandatorily redeemable preferred stock of a subsidiary trust.
DISCONTINUED OPERATIONS
The Company recorded a gain of $0.2 million, net of related income taxes, on the
sale of Utah Insurance. In addition, the increase in net unrealized appreciation
on securities classified as available for sale was reduced $1.4 million, net of
related income taxes, as a result of the sale. The gain on the sale may be
increased in future periods in accordance with an earnout provision included in
the related sales agreement. See "Liquidity and Capital Resources - FBL
Financial Group, Inc.".
Income (loss) from discontinued operations for the nine months ended September
30, 1998 and 1997 totaled $0.3 million and $(0.2) million, respectively.
Revenues from discontinued operations for the nine months ended September 30,
1998 and 1997 totaled $12.9 million and $39.9 million, respectively, and for the
quarter ended September 30, 1997 totaled $14.6 million.
EXCHANGE OF HOME OFFICE PROPERTIES
On March 30, 1998, the Company exchanged a subsidiary owning its home office
properties for 2,536,112 unregistered shares of Class A common stock owned by
the Iowa Farm Bureau Federation. The Company is leasing a portion of the
properties back from a wholly-owned subsidiary of the Iowa Farm Bureau
Federation under a 15-year operating lease. The value of the transaction, which
was structured as a tax-free exchange of a real estate subsidiary, was $45.7
million, or $18.00 per common share. The book value of the properties was $24.7
million on the date of the exchange. A gain on the transaction of approximately
$21.0 million was deferred by the Company and is being amortized over the term
of the operating lease. The exchange did not have a significant impact on income
from continuing operations for the three- and nine-month periods ended September
30, 1998, nor is it expected to have a significant impact in the future, as the
increase in net expense associated with leasing the properties versus owning
them directly is substantially offset by the amortization of the deferred gain
on the transaction.
15
<PAGE>
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, unearned revenue reserve, value of
insurance in force acquired and income taxes attributable to such gains), loss
on disposal of the property-casualty segment and net income from a venture
capital investment company subsidiary.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income applicable to common stock ...... $ 14,160 $ 20,087 $ 40,497 $ 57,382
Adjustments:
Net realized losses (gains) on
investments ......................... (258) (6,569) 1,536 (21,914)
Gain on disposal of property-casualty
operations .......................... -- -- (179) --
Net income from FBL Ventures ........... -- -- -- (723)
----------- ----------- ----------- -----------
Adjusted operating income applicable to
common stock ........................... $ 13,902 $ 13,518 $ 41,854 $ 34,745
=========== =========== =========== ===========
Adjusted operating income per common
share .................................. $ 0.43 $ 0.38 $ 1.24 $ 0.95
=========== =========== =========== ===========
Adjusted operating income per common
share - assuming dilution .............. $ 0.42 $ 0.37 $ 1.20 $ 0.94
=========== =========== =========== ===========
</TABLE>
FBL Ventures was a wholly owned investment company subsidiary of Farm Bureau
Life which invested in start-up and mezzanine level venture capital investments
in various sectors. Operating results of FBL Ventures were recognized in
accordance with accounting principles for investment companies and, as such,
unrealized and realized gains and losses on investments were included in net
investment income. Because of the venture capital nature of the underlying
investments, the results of FBL Ventures tended to fluctuate significantly from
year to year and needed to be evaluated over a much longer period of time.
Therefore, the net income attributable to FBL Ventures was not included in
adjusted operating income. On June 30, 1997, FBL Ventures was dissolved.
IMPACT OF YEAR 2000
Many of the Company's computer programs were originally written using two digits
rather than four to define a particular year. As a result, these computer
programs have time-sensitive software that may recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions to operations, including, but not limited
to, a temporary inability to process transactions, send premium notices and
calculate policy reserves and accruals. To a lesser extent, the Company is
dependent on various non-information technology systems, such as telephone
switches. The Year 2000 could also cause these systems to fail or malfunction.
During 1997, the Company completed a comprehensive assessment of the Year 2000
issue and developed a plan to address the issue in a timely manner. The plan
consists of the following three phases: (1) identification of all information
technology and non-information technology systems that have time-sensitive
software, (2) modification or replacement of the software/systems and (3)
testing the modified or new software/systems. In addition, the Company has
initiated formal communications with all of its significant vendors to determine
the extent to which the Company's interface systems are vulnerable to those
third parties' failure to remediate their own Year 2000 issues.
The Company has and will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000
16
<PAGE>
modifications. With only a few exceptions, the Company anticipates completing
the Year 2000 modifications and testing no later than December 31, 1998. The
exceptions are limited to a few third-party software packages for which the Year
2000 compliant version will not become available until the first quarter of
1999. It is anticipated that the Company will complete its system modifications
and testing prior to any material impact on its operating systems.
Non-information technology systems that are not Year 2000 compliant have been
replaced or have been identified and will be replaced by December 31, 1999.
The total incremental cost of the Year 2000 project (those costs which the
Company would not have incurred had the Year 2000 issue not existed) is
estimated to be $3.8 million and is being funded through operating cash flows.
Year 2000 modification costs incurred and charged to expense during the nine
months ended September 30, 1998 and year ended December 31, 1997 totaled $1.8
million (including $0.2 million attributable to discontinued operations) and
$1.0 million (including $0.3 million attributable to discontinued operations),
respectively. It is anticipated the project costs to be charged to expense
during the remainder of 1998 and 1999 will total approximately $0.4 million and
$0.6 million, respectively.
Despite the Company's extensive efforts to modify or replace computer programs
and information systems that are time-sensitive, the Company could experience a
disruption to its operations as a result of the Year 2000. The Company is
currently developing a contingency plan to address any critical system that may
malfunction despite the testing being performed. The contingency plan, which is
expected to be completed by December 31, 1998, will provide for the availability
of staff, prioritize tasks and outline procedures to fix any systems that are
malfunctioning.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantees that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
FBL FINANCIAL GROUP, INC.
Parent company cash inflows from operations consists primarily of dividends from
subsidiaries, if declared and paid, fees which it charges the various
subsidiaries and affiliates for management of their operations and tax
settlements between the parent company and its subsidiaries. Cash outflows are
principally for salaries and other expenses related to providing such management
services, dividends on outstanding stock and interest on holding company debt
issued to a subsidiary. In addition, the parent company will on occasion enter
into capital transactions such as the acquisition of its common stock.
The Company received $25.0 million in cash on March 31, 1998 in connection with
the sale of Utah Insurance. The Company may receive additional consideration
during each of the five years in the period ending December 31, 2002, in
accordance with an earn-out provision included in the underlying sales
agreement. Under the earn-out arrangement, the Company and Farm Bureau Mutual
will share equally in the dollar amount by which the incurred losses on Utah
Insurance's direct business, net of reinsurance ceded, is less than the incurred
losses assumed in the valuation model used to derive the initial $25.0 million
acquisition price. The earn-out calculation will be performed and any settlement
(subject to a maximum of $2.0 million per year) will be made on a calendar year
basis.
The exchange of home office properties for Class A common stock on March 30,
1998 was structured as a tax-free exchange of a real estate subsidiary. Farm
Bureau Life transferred a subsidiary which owned the buildings to FBL Financial
Group, Inc. in the form of a dividend. FBL Financial Group, Inc. then exchanged
the real estate subsidiary's common stock for the Class A common stock. The
transaction was accounted for as a noncash financing activity for purposes of
the statements of cash flows.
During the second quarter of 1998, the Company used the proceeds from the sale
of Utah Insurance to repurchase 961,536 shares of Class A common stock. The
repurchases, which totaled $25.0 million, were made in accordance with a stock
repurchase plan approved by the Company's Board of Directors on May 19, 1998.
During the nine months ended September 30, 1998, the parent company paid common
and preferred stock dividends totaling $7.7 million. Common and preferred
dividends totaling $7.6 million were paid during the corresponding 1997 period.
It is anticipated dividend requirements for the fourth quarter of 1998 will be
$0.075 per common share and $0.0075 per preferred share, or approximately $2.5
million. In addition, interest payments on the holding company debt are
estimated to be $1.3 million for the fourth quarter of 1998.
FBL Financial Group, Inc. relies primarily on dividends from the Life Companies
to make any dividend payments to its stockholders and interest payments on its
debt. 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 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 December 31 of the preceding year.
For the fourth quarter of 1998, the maximum amount legally available for
distribution to FBL Financial Group, Inc. without further regulatory approval is
approximately $8.7 million from Western Life. No such amount is available from
Farm Bureau Life during the fourth quarter of 1998 due to the dividend of the
home office properties. The amount available from Western Life is in excess of
anticipated dividend and interest requirements of the parent company for the
remainder of 1998, which total $3.8 million.
18
<PAGE>
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
the nine-month period ended September 30, 1998, with cash inflows at levels
sufficient to provide the funds necessary to meet their obligations.
For the discontinued property-casualty operations, the major sources of cash
inflow were premiums and investment income. Major sources of cash outflow were
losses and loss adjustment expenses paid and other underwriting expenses. The
liquidity position of Utah Insurance was favorable through the date of its sale,
with cash inflows at levels sufficient to provide the funds necessary to meet
its obligations. Due to the relatively small size of the property-casualty
segment, the disposal of the segment has not had a significant impact on the
liquidity position of the Company.
For the life insurance operations, cash outflow requirements for operations are
typically met from the year's normal premium and deposit cash inflows. This has
been the case for the reported periods as the Life Companies' continuing
operations and financing activities relating to interest sensitive products
provided funds amounting to $35.2 million and $97.0 million in the nine months
ended September 30, 1998 and 1997, respectively. These funds were primarily used
to increase the insurance companies' short-term and 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 and asset-backed securities and mortgage loans, are believed adequate
to meet anticipated short-term and long-term benefit and expense payment
obligations.
Through its membership in the Federal Home Loan Bank of Des Moines, Farm Bureau
Life is eligible to borrow on a line of credit to provide it additional
liquidity. The line of credit available is based on the amount of capital stock
of the Federal Home Loan Bank of Des Moines owned by Farm Bureau Life, which
supported a borrowing capacity of $54.0 million as of September 30, 1998.
Interest is payable at the current market rate on the date of issuance.
As of September 30, 1998, no borrowings were outstanding on this line of credit.
The Company has a $12.0 million line of credit with Farm Bureau Mutual in the
form of a revolving demand note. Borrowings on the note, which totaled $5.8
million at September 30, 1998, are being used to acquire assets that will be
leased to certain affiliates, including Farm Bureau Mutual. Interest is payable
at a rate equal to the prime rate of a national bank (8.25% at September 30,
1998).
Management anticipates that funds to meet its short-term and long-term capital
expenditures, cash dividends to stockholders and operating cash needs will come
from existing capital and internally generated funds. Management believes that
the current level of cash and available-for-sale and short-term securities,
combined with expected net cash inflows from operations, maturities of fixed
maturity investments, principal payments on mortgage and asset-backed
securities, mortgage loans and its insurance products, are adequate to meet the
Company's anticipated cash obligations for the foreseeable future. Not
withstanding the above, management currently anticipates refinancing the
Company's $24.5 million lease-backed note payable that is due August, 1999.
19
<PAGE>
The Company may from time to time review potential acquisition opportunities.
The Company anticipates that funding for any such acquisition may be provided
from available cash resources, debt or equity financing. As of September 30,
1998, the Company had no material commitments for capital expenditures.
INVESTMENTS
The Company's total investment portfolio increased $36.3 million, or 1.2%, to
$2,977.2 million at September 30, 1998 compared to $2,940.9 million at December
31, 1997. This increase is primarily the result of an increase in unrealized
appreciation on fixed maturity securities classified as available for sale and
positive cash flows from operations, partially offset by net withdrawals of
policyholder account balances on interest sensitive products.
Over the last several years, the mix of the Company's life insurance business
has been shifting from traditional to variable products. The Company expects
this trend to continue as an emphasis is being placed on the sale of variable
products. A majority of premiums received on variable products are typically
invested in the Company's separate accounts as opposed to the general account
investments. This trend is expected to impact the future growth rate of the
Company's investment portfolio and separate account assets.
The Company's investment portfolio is managed by its internal investment
professionals. The investment strategy is designed to achieve superior
risk-adjusted returns consistent with the 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>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------------------- -------------------------------
CARRYING VALUE PERCENT CARRYING VALUE PERCENT
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Fixed maturities: (DOLLARS IN THOUSANDS)
Public ....................... $ 1,786,302 60.0% $ 1,807,240 61.4%
144A private placement ....... 356,994 12.0 276,578 9.4
Private placement ............ 236,103 7.9 267,358 9.1
------------ ------------ ------------ ------------
Total fixed maturities ....... 2,379,399 79.9 2,351,176 79.9
Equity securities ............... 33,608 1.1 57,736 2.0
Mortgage loans on real estate ... 309,201 10.4 323,605 11.0
Investment real estate:
Acquired for debt ............ 954 -- 1,168 --
Investment ................... 39,919 1.3 38,774 1.3
Policy loans .................... 123,333 4.2 121,941 4.2
Other long-term investments ..... 10,270 0.4 14,438 0.5
Short-term investments .......... 80,514 2.7 32,073 1.1
------------ ------------ ------------ ------------
Total investments ........ $ 2,977,198 100.0% $ 2,940,911 100.0%
============ ============ ============ ============
</TABLE>
As of September 30, 1998, 94.0% (based on carrying value) of the fixed maturity
securities were investment grade debt securities, defined as being in the
highest two National Association of Insurance Commissioners (NAIC) designations.
Non-investment grade debt securities generally provide higher yields and involve
greater risks than investment grade debt securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment grade issuers. In addition, the trading market for
these securities is usually more limited than for investment grade debt
securities. The Company regularly reviews the percentage of its portfolio which
is invested in non-investment grade debt securities (NAIC designations 3 through
6). As of September 30, 1998, the Company's investment in non-investment grade
debt was 6.0% of fixed maturity securities. At that time no single
non-investment grade holding exceeded 0.4% of total investments.
20
<PAGE>
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>
SEPTEMBER 30, 1998
----------------------------------
NAIC DESIGNATION EQUIVALENT S&P RATINGS (1) CARRYING VALUE PERCENT
- ---------------------- ------------------------------------------ ---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1 (AAA, AA, A)............................. $ 1,507,771 63.4%
2 (BBB).................................... 729,325 30.6
---------------- --------------
Total investment grade................... 2,237,096 94.0
3 (BB)..................................... 111,540 4.7
4 (B)...................................... 22,766 1.0
5 (CCC, CC, C)............................. 4,600 0.2
6 In or near default....................... 3,397 0.1
---------------- ---------------
Total below investment grade............. 142,303 6.0
---------------- ---------------
Total fixed maturities................... $ 2,379,399 100.0%
================ ===============
</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.
The following tables contain amortized cost and market value information on
fixed maturities and equity securities at September 30, 1998:
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
--------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Bonds:
Corporate securities ...................... $ 5,007 $ 363 $ (8) $ 5,362
Mortgage-backed securities ................ 534,121 27,455 (925) 560,651
------------ ------------ ------------ ------------
Total fixed maturities ......................... $ 539,128 $ 27,818 $ (933) $ 566,013
============ ============ ============ ============
<CAPTION>
AVAILABLE FOR SALE
--------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies ..... $ 83,772 $ 6,901 $ -- $ 90,673
State, municipal and other governments .... 53,358 3,033 (102) 56,289
Public utilities .......................... 137,333 12,084 (747) 148,670
Corporate securities ...................... 903,122 75,535 (13,836) 964,821
Mortgage and asset-backed securities ...... 517,824 28,849 (1,076) 545,597
Redeemable preferred stock ..................... 35,228 1,360 (2,367) 34,221
------------ ------------ ------------ ------------
Total fixed maturities ......................... $ 1,730,637 $ 127,762 $ (18,128) $ 1,840,271
============ ============ ============ ============
Equity securities .............................. $ 39,664 $ 716 $ (6,772) $ 33,608
============ ============ ============ ============
</TABLE>
21
<PAGE>
The carrying value and estimated market value of the Company's portfolio of
fixed maturity securities at September 30, 1998, by contractual maturity, are
shown below.
<TABLE>
<CAPTION>
HELD FOR INVESTMENT AVAILABLE FOR SALE
------------------------------- -------------------------------
ESTIMATED ESTIMATED
AMORTIZED COST MARKET VALUE AMORTIZED COST MARKET VALUE
-------------- ------------ -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less .................. $ -- $ -- $ 23,881 $ 23,998
Due after one year through five years .... -- -- 155,310 158,920
Due after five years through ten years ... 5,007 5,362 349,885 374,893
Due after ten years ...................... -- -- 648,509 702,642
------------ ------------ ------------ ------------
5,007 5,362 1,177,585 1,260,453
Mortgage and asset-backed securities ..... 534,121 560,651 517,824 545,597
Redeemable preferred stocks .............. -- -- 35,228 34,221
------------ ------------ ------------ ------------
$ 539,128 $ 566,013 $ 1,730,637 $ 1,840,271
============ ============ ============ ============
</TABLE>
Mortgage and other asset-backed securities constitute a significant portion of
the Company's portfolio of securities. Management believes that at the time of
purchase these securities provided superior risk-adjusted returns compared to
returns of more conventional investments such as corporate bonds and mortgage
loans. These securities are diversified as to collateral types, cash flow
characteristics and maturity. At September 30, 1998, the Company held $547.0
million (18.4% of total investments) in residential mortgage-backed securities,
$254.2 million (8.5% of total investments) in commercial mortgage-backed
securities and $278.5 million (9.4% of total investments) in other asset-backed
securities.
At September 30, 1998, the Company held residential collateralized mortgage
obligation (CMO) investments with a carrying value of $514.4 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 (e.g., 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 September 30, 1998, 76.8% of the Company's
CMO investments are in PAC and sequential pay securities. The Company does not
purchase certain types of collateralized mortgage obligations which it believes
subjects the investment portfolio to greater than average risk. These include,
but are not limited to, interest only, principal only, floater, inverse floater,
PAC II, Z and support tranches.
At September 30, 1998, the Company held $309.2 million or 10.4% of invested
assets in mortgage loans. These mortgage loans are diversified as to property
type, location and loan size, and are collateralized by the related properties.
At September 30, 1998, mortgages more than 60 days delinquent accounted for 0.3%
of the carrying value of the mortgage portfolio. The Company's mortgage lending
policies establish limits on the amount that can be loaned to one borrower and
require diversification by geographic location and collateral type. Regions with
the largest concentration of the Company's mortgage loan portfolio at September
30, 1998 include: Pacific (25%) which includes California and Washington; and
West South Central (24%) which includes Oklahoma and Texas. Mortgage loans on
real estate are also diversified by collateral types with retail facilities
(38%) and office buildings (35%) representing the largest holdings at September
30, 1998.
The Company's investment portfolio at September 30, 1998, also included $80.5
million of short-term investments and $215.1 million in carrying value of U.S.
Government and U.S. Government agency backed securities that could be readily
converted to cash at or near carrying value.
22
<PAGE>
The Company's asset-liability management program includes (i) designing and
developing products which encourage persistency and, as a result, create a
stable liability structure; and (ii) structuring the investment portfolio with
duration and cash flow characteristics consistent with the duration and cash
flow characteristics of the Company's insurance liabilities. At September 30,
1998, the weighted average life of the fixed maturity portfolio, based on market
values excluding convertible bonds, was approximately 6.8 years. Based on the
fixed income analytical system utilized by the Company, including its mortgage
backed prepayment assumptions, the effective duration of the fixed income
portfolio was 4.3 as of September 30, 1998.
OTHER ASSETS
Deferred policy acquisition costs increased $15.8 million, or 8.7%, due
principally to the capitalization of costs incurred with new sales. Property and
equipment decreased $24.5 million, or 38.6% , due principally to the exchange of
home office properties for Class A common stock. Assets of discontinued
operations decreased $106.7 million as a result of the sale of Utah Insurance.
Assets held in separate accounts increased $33.4 million, or 24.1%, to $171.8
million at September 30, 1998 due primarily to increased sales of the Company's
variable products, partially offset by depreciation in the value of separate
account investments. At September 30, 1998, the Company had total assets of
$3,566.7 million, a 1.0% decrease from total assets at December 31, 1997.
LIABILITIES
Policy liabilities and accruals decreased $0.5 million due primarily to an
increase in the return of policyholder account balances on interest sensitive
products to $233.2 million for the nine months ended September 30, 1998 from
$179.4 million for the respective period in 1997. This increase includes a $14.3
million pension distribution made to an affiliate during the second quarter of
1998. In addition, the increase includes a $19.2 million increase in net
transfers to separate accounts resulting from continued popularity of the
Company's variable products. As noted under the "Investments" section above, the
mix of the Company's life insurance business has been shifting from traditional
to variable products. This trend will have an impact on the future growth rate
of the Company's policy liabilities and accruals as well as the separate account
liabilities.
Other liabilities increased $16.1 million, or 35.8%, due primarily to the
deferral of the gain on the exchange of home office properties for Class A
common stock. Liabilities of discontinued operations decreased $79.1 million as
a result of the sale of Utah Insurance. At September 30, 1998, the Company had
total liabilities of $2,881.7 million, a 0.4% decrease from total liabilities at
December 31, 1997.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased $21.8 million, or 3.6%, to $583.5 million at
September 30, 1998 compared to $605.3 million at December 31, 1997. This
decrease is principally attributable to the exchange of home office properties
for Class A common stock and stock repurchases which, collectively, resulted in
a $70.7 million decrease in equity. These decreases were offset by net income
during the nine months ended September 30, 1998 and net unrealized appreciation
of securities classified as available for sale.
At September 30, 1998, common stockholders' equity was $580.5 million, or $17.81
per share, compared to $602.3 million, or $16.77 per share at December 31, 1997.
Included in stockholders' equity per common share is $2.03 and $1.41 at
September 30, 1998 and December 31, 1997, 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 increased stockholders' equity $13.7 million during the
nine-month period ended September 30, 1998, after related adjustments to
deferred policy acquisition costs, value of insurance in force acquired,
unearned revenue reserve and deferred income taxes.
23
<PAGE>
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 its investment
portfolio and the Company's ability to sell its life insurance
products, notwithstanding product features designed to mitigate the
financial impact of such changes.
* Changes in the amount of available resources, and the effect of third
party modification plans and other uncertainties, may impact the
ability of the Company to become Year 2000 compliant on a timely
basis.
* Changes in federal and state income tax laws and regulations may
affect the relative tax advantage of the Company's products.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.17 Revolving Demand Note with Farm Bureau Mutual Insurance
Company dated May 15, 1998
10.18 Amendment to Revolving Demand Note with Farm Bureau Mutual
Insurance Company dated May 15, 1998
27 Financial Data Schedule for the nine-month period ended
September 30, 1998
27.1 Restated Financial Data Schedules for the six-month period
ended June 30, 1998, three-month period ended March 31, 1998,
year ended December 31, 1997 and nine-month period ended
September 30, 1997. The periods have been restated for
discontinued operations and certain reclassifications.
27.2 Restated Financial Data Schedules for the six-month period
ended June 30, 1997, three-month period ended March 31, 1997
and year ended December 31, 1996. The periods have been
restated for discontinued operations and certain
reclassifications.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1998:
None
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 10, 1998
FBL FINANCIAL GROUP, INC.
By /s/ Thomas R. Gibson
-----------------------------------------
Chief Executive Officer (Principal Executive
Officer)
By /s/ James W. Noyce
-----------------------------------------
Chief Financial Officer (Principal Financial
and Accounting Officer)
26
EXHIBIT 10.17
REVOLVING DEMAND NOTE
$10,000,000.00 MAY 15, 1998
ON DEMAND, FOR VALUE RECEIVED, the undersigned, FBL Leasing Services,
Inc. ("Borrower"), hereby unconditionally promises to pay to the order of Farm
Bureau Mutual Insurance Company ("Lender") in lawful money of the United States
of America and in immediately available funds, the principal sum of Ten Million
and no/100 Dollars ($10,000,000.00), or, if less, the aggregate unpaid principal
amount of all advances made by Lender to Borrower hereunder. The outstanding
principal balance of this Revolving Demand Note shall be payable in full on
demand therefor.
Borrower further promises to pay interest on the outstanding unpaid
principal amount hereof from the date hereof until payment in full hereof, at
the per annum rate equal to The Chase Manhattan Bank, N.A., New York, New York,
"prime rate" (the "Base Rate") on the date of this Note; provided, however, that
following the occurrence of a default, Borrower shall pay to Lender interest on
the unpaid principal amount hereof at the greater of the per annum rate of
fifteen percent (15%) or the Base Rate plus six percent (6%) (the "Default
Rate"). Interest shall be payable monthly in arrears on or before the 10th day
of each calendar month for the preceding calendar month, beginning with June 10,
1998, and shall be calculated on the basis of a 360-day year for the actual
number of days elapsed. The Base Rate shall be adjusted when The Chase Manhattan
Bank adjusts its "prime rate." Each change in the Base Rate hereunder shall take
effect simultaneously with the date of adjustment by The Chase Manhattan Bank of
its "prime rate." In no contingency or event whatsoever shall interest charged
hereunder, however, such interest may be characterized or computed, exceed the
highest rate permissible under any law which a court of competent jurisdiction
shall, in a final determination, deem applicable hereto. In the event that such
a court determines that Lender has received interest hereunder in excess of the
highest rate applicable hereto, Lender shall promptly refund such excess
interest to Borrower.
If payment hereunder becomes due and payable on a Saturday, Sunday or
legal holiday under the laws of the State of Iowa, the due date thereof shall be
extended to the next succeeding business day, and interest shall be payable
thereon during such extension at the rate specified above.
The principal and all accrued interest hereunder may be prepaid by
Borrower, in part or in full, at any time. Payments received by Lender from
Borrower on this Revolving Demand Note shall be applied in such manner and in
such order as Lender shall determine in its sole discretion.
Presentment, protest and notice of nonpayment and protest are hereby
waived by Borrower. This Revolving Demand Note shall be interpreted and the
rights and liabilities of the parties hereto determined in accordance with the
laws of the State of Iowa. Whenever possible each provision of this Revolving
Demand Note shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Revolving Demand Note shall
be prohibited by or invalid under applicable law, such provision shall be
ineffective to the
<PAGE>
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Revolving Demand Note.
Whenever in this Revolving Demand Note reference is made to Lender or Borrower,
such reference shall be deemed to include, as applicable, a reference to their
respective successors and assigns. The provisions of this Revolving Demand Note
shall be binding upon Borrower and its successors and assigns, and shall inure
to the benefit of Lender and its successors and assigns.
FARM BUREAU MUTUAL FBL LEASING SERVICES
INSURANCE COMPANY
By: /s/ Lou Ann Sandburg By: /s/ James W. Noyce
--------------------------------- ---------------------------------------
Lou Ann Sandburg, Vice President James W. Noyce, President and Treasurer
Investments
EXHIBIT 10.18
AMENDMENT TO REVOLVING DEMAND NOTE
THIS AMENDMENT TO REVOLVING DEMAND NOTE ("Amendment") made as of the
26th day of August, 1998, by and between FBL LEASING SERVICES, INC., an Iowa
corporation having it principal place of business at 5400 University Avenue,
West Des Moines, Iowa ("Borrower") and FARM BUREAU MUTUAL INSURANCE COMPANY, a
mutual insurance company organized and existing under the laws of the State of
Iowa having its principal place of business at 5400 University Avenue, West Des
Moines, Iowa ("Lender").
WHEREAS, Borrower and Lender entered into a Note dated the 15th day of
May, 1998, pursuant to the terms of which Lender agreed to loan to Borrower the
aggregate amount of Ten Million Dollars ($10,000,000.00).
WHEREAS, Borrower and Lender mutually desire to amend the Note as
hereinafter set forth.
NOW, THEREAFTER, in consideration of the premises and covenants
contained herein, it is hereby mutually agreed as follows:
1. The aggregate principal amount of the Note at any one time
outstanding is hereby increased effective the date hereof to
Twelve Million Dollars ($12,000,000.00).
2. The Note shall in all other respects remain unchanged and in
full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment in
duplicate as of the day and year first written above.
FBL LEASING SERVICES, INC. FARM BUREAU LIFE INSURANCE
COMPANY
/s/ James W. Noyce /s/ Lou Ann Sandburg
- -------------------------------------- ------------------------------------
James W. Noyce Lou Ann Sandburg
President and Treasurer Vice President Investments
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 1,840,271
<DEBT-CARRYING-VALUE> 539,128
<DEBT-MARKET-VALUE> 566,013
<EQUITIES> 33,608
<MORTGAGE> 309,201
<REAL-ESTATE> 40,873
<TOTAL-INVEST> 2,977,198
<CASH> 6,882
<RECOVER-REINSURE> 7,044
<DEFERRED-ACQUISITION> 197,744
<TOTAL-ASSETS> 3,566,667
<POLICY-LOSSES> 2,291,261
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 35,818
<POLICY-HOLDER-FUNDS> 242,712
<NOTES-PAYABLE> 24,572
0
3,000
<COMMON> 48,066
<OTHER-SE> 532,387
<TOTAL-LIABILITY-AND-EQUITY> 3,566,667
110,163
<INVESTMENT-INCOME> 171,260
<INVESTMENT-GAINS> (2,382)
<OTHER-INCOME> 15,366
<BENEFITS> 152,843
<UNDERWRITING-AMORTIZATION> 6,499
<UNDERWRITING-OTHER> 40,836
<INCOME-PRETAX> 62,388
<INCOME-TAX> 19,576
<INCOME-CONTINUING> 40,144
<DISCONTINUED> 466
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,610
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.17
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1998 MAR-31-1998 DEC-31-1997 SEP-30-1997
<DEBT-HELD-FOR-SALE> 1,761,113 1,785,165 1,711,578 1,656,388
<DEBT-CARRYING-VALUE> 593,057 619,626 639,598 655,739
<DEBT-MARKET-VALUE> 614,905 641,844 663,315 678,217
<EQUITIES> 43,523 53,727 57,736 61,860
<MORTGAGE> 305,741 317,768 323,605 301,656
<REAL-ESTATE> 41,759 40,915 39,942 37,454
<TOTAL-INVEST> 2,957,232 2,990,708 2,940,911 2,951,047
<CASH> 3,418 5,363 2,397 2,692
<RECOVER-REINSURE> 7,286 7,003 9,789 9,213
<DEFERRED-ACQUISITION> 194,744 187,708 181,916 177,366
<TOTAL-ASSETS> 3,548,186 3,552,126 3,601,526 3,555,739
<POLICY-LOSSES> 2,284,251 2,299,729 2,290,516 2,271,043
<UNEARNED-PREMIUMS> 0 0 0 0
<POLICY-OTHER> 34,381 33,537 37,018 32,195
<POLICY-HOLDER-FUNDS> 241,855 240,605 236,479 232,953
<NOTES-PAYABLE> 24,574 24,575 24,577 24,578
0 0 0 0
3,000 3,000 3,000 3,000
<COMMON> 47,579 48,537 50,474 49,840
<OTHER-SE> 510,728 522,591 551,841 535,315
<TOTAL-LIABILITY-AND-EQUITY> 3,548,186 3,552,126 3,601,526 3,555,739
75,044 35,496 140,507 107,013
<INVESTMENT-INCOME> 114,673 56,070 220,366 164,177
<INVESTMENT-GAINS> (2,857) 1,312 40,953 34,458
<OTHER-INCOME> 10,308 5,284 19,525 13,785
<BENEFITS> 102,958 50,366 206,271 154,139
<UNDERWRITING-AMORTIZATION> 4,455 1,695 8,474 6,624
<UNDERWRITING-OTHER> 27,585 13,875 53,109 38,409
<INCOME-PRETAX> 40,720 21,700 114,587 91,784
<INCOME-TAX> 12,829 7,025 38,367 31,102
<INCOME-CONTINUING> 25,946 13,076 75,128 59,677
<DISCONTINUED> 466 466 699 (162)
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 26,412 13,542 75,827 59,515
<EPS-PRIMARY> 0.76 0.38<F1> 4.05 3.15
<EPS-DILUTED> 0.74 0.37<F1> 3.98 3.10
<RESERVE-OPEN> 0 0 23,700 0
<PROVISION-CURRENT> 0 0 40,655 0
<PROVISION-PRIOR> 0 0 (1,696) 0
<PAYMENTS-CURRENT> 0 0 23,929 0
<PAYMENTS-PRIOR> 0 0 10,943 0
<RESERVE-CLOSE> 0 0 27,787 0
<CUMULATIVE-DEFICIENCY> 0 0 (1,696) 0
<FN>
<F1>ON MARCH 17, 1998, THE COMPANY'S BOARD OF DIRECTORS APPROVED A TWO-FOR-ONE
COMMON STOCK SPLIT PAYABLE IN THE FORM OF A 100% STOCK DIVIDEND TO STOCKHOLDERS
OF RECORD AS OF APRIL 6, 1998. THE ADDITIONAL SHARES WERE DISTRIBUTED APRIL 17,
1998. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED FOR THE STOCK SPLIT.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 MAR-31-1997 DEC-31-1996
<DEBT-HELD-FOR-SALE> 1,611,633 1,537,826 1,519,827
<DEBT-CARRYING-VALUE> 669,494 678,529 688,912
<DEBT-MARKET-VALUE> 683,943 681,716 703,728
<EQUITIES> 60,645 74,114 86,977
<MORTGAGE> 309,943 300,811 293,777
<REAL-ESTATE> 27,970 28,081 28,391
<TOTAL-INVEST> 2,864,344 2,836,278 2,829,517
<CASH> 4,101 4,535 3,583
<RECOVER-REINSURE> 7,944 8,009 9,433
<DEFERRED-ACQUISITION> 175,572 171,584 164,277
<TOTAL-ASSETS> 3,463,001 3,397,733 3,368,192
<POLICY-LOSSES> 2,252,177 2,230,247 2,204,685
<UNEARNED-PREMIUMS> 0 0 0
<POLICY-OTHER> 32,783 32,268 32,952
<POLICY-HOLDER-FUNDS> 230,157 231,360 226,234
<NOTES-PAYABLE> 24,580 24,581 24,581
0 0 0
3,000 100,000 100,000
<COMMON> 49,308 51,340 51,340
<OTHER-SE> 496,501 485,152 487,182
<TOTAL-LIABILITY-AND-EQUITY> 3,463,001 3,397,733 3,368,192
72,607 33,844 136,434
<INVESTMENT-INCOME> 108,945 53,882 208,265
<INVESTMENT-GAINS> 23,925 21,836 52,760
<OTHER-INCOME> 9,045 4,281 15,914
<BENEFITS> 105,716 50,119 198,925
<UNDERWRITING-AMORTIZATION> 3,766 2,153 8,667
<UNDERWRITING-OTHER> 25,575 12,831 48,594
<INCOME-PRETAX> 59,714 39,213 118,899
<INCOME-TAX> 19,857 13,218 38,660
<INCOME-CONTINUING> 39,392 26,529 84,048
<DISCONTINUED> (1) 24 (1,164)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 39,391 26,553 82,884
<EPS-PRIMARY> 2.03 1.34 3.74
<EPS-DILUTED> 2.00 1.33 3.73
<RESERVE-OPEN> 0 0 12,774
<PROVISION-CURRENT> 0 0 35,540
<PROVISION-PRIOR> 0 0 (1,130)
<PAYMENTS-CURRENT> 0 0 18,013
<PAYMENTS-PRIOR> 0 0 5,471
<RESERVE-CLOSE> 0 0 23,700
<CUMULATIVE-DEFICIENCY> 0 0 (1,130)
</TABLE>
