UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from________to________
Commission File Number: 1-11917
FBL FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Iowa 42-1411715
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (515) 225-5400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Class A Common Stock, Without Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment of this Form 10-K. [x] Yes [ ] No
Aggregate market value of Class A Common Stock stock held by non-affiliates
of the registrant (computed as of March 4, 1998): $325,241,437
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 16,806,193 shares of Class A
Common Stock and 1,192,990 shares of Class B Common Stock as of March 4, 1998.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
proxy statement for the annual meeting of shareholders to be held May 19, 1998
are incorporated by reference into Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
FBL Financial Group, Inc. (the Company) currently underwrites, markets and
distributes life insurance, annuities, property-casualty insurance and mutual
funds to individuals and small businesses in 15 midwestern and western states.
The Company has exclusive marketing arrangements with the state Farm Bureau
Federations in its territory and targets sales to approximately 700,000 Farm
Bureau member families and other rural, small town and suburban residents
through an exclusive agency force. The Company was incorporated in Iowa in
October 1993 and its principal insurance subsidiaries include Farm Bureau Life
Insurance Company (Farm Bureau Life), Western Farm Bureau Life Insurance
(Western Life), EquiTrust Life Insurance Company (EquiTrust) and Utah Farm
Bureau Insurance Company (Utah Insurance).
On March 17, 1998, the Company's Board of Directors approved the sale of Utah
Insurance to Farm Bureau Mutual Insurance Company (Farm Bureau Mutual), an
affiliate. As a result of the sale, which is subject to regulatory approval, the
Company will no longer have property-casualty operations. It is anticipated that
the sale will take place on March 31, 1998. See "Property-Casualty Segment --
Sale of Utah Insurance".
Beginning in July 1998, the Company anticipates underwriting variable universal
life insurance and variable annuity products to non-Farm Bureau members through
a marketing arrangement with a regional broker-dealer that operates in the
midwest. Also, in December 1997, the Company entered into an agreement to assist
an unaffiliated life insurance company in the development, marketing and
administration of variable universal life insurance and variable annuity
products. The Company will share in the risks, costs and operating results of
these products, which are expected to be available for sale by July 1998,
through a reinsurance arrangement. These new alliances are not expected to have
a significant impact on operating results for 1998 since the marketing of the
related products are not expected to begin until the middle of the year.
BUSINESS STRATEGY
The Company's current management team which was appointed in 1991 has initiated
a growth strategy focused on cross selling opportunities within the Company's
traditional marketing territory, alliances within the national Farm Bureau
organization and alliances beyond the Farm Bureau network. The Company's growth
strategies are summarized below:
CROSS SELLING OPPORTUNITIES. The Company has significant opportunity to increase
its sales through cross selling life insurance products to Farm Bureau members
who already own property-casualty policies offered by the Company or other Farm
Bureau affiliated property-casualty companies. For example, in the four-state
region consisting of Iowa, Minnesota, South Dakota and Utah, approximately 27%
of Farm Bureau members own at least one of the Company's life products, 62% own
at least one of the Company's property-casualty products and approximately 20%
own both, providing significant opportunity for cross selling. During 1997, the
Company enhanced its agent recruiting and training programs to encourage the
sale of life and annuity products to Farm Bureau members.
ALLIANCES WITHIN THE FARM BUREAU ORGANIZATION. Since 1993, the Company has
consolidated operations with two Farm Bureau affiliated insurance companies,
resulting in a significant expansion of marketing area and revenue base.
Management believes that additional opportunities exist in the cultivation of
new business alliances within the national Farm Bureau organization. Such
alliances can range from marketing agreements to sell the Company's variable
products to the consolidation of resources through acquisition. Management
believes the Company's position as a publicly traded Farm Bureau affiliated
insurance company will increase its attractiveness as a merger partner.
Additionally, the Company seeks to leverage its position as the only Farm Bureau
company with variable product expertise by entering into joint ventures and
other marketing arrangements with Farm Bureau affiliates and other
organizations.
<PAGE>
ALLIANCES BEYOND THE FARM BUREAU NETWORK. The Company is also focusing on
creating alliances with unaffiliated life insurance companies and broker
organizations outside the Farm Bureau organization. Management believes that
revenue growth can be achieved by selling non-Farm Bureau labeled insurance and
annuity products through these entities. The Company will look to leverage its
expertise in designing, registering and marketing variable products through
unaffiliated insurance companies that do not have the expertise or systems to
underwrite variable products. Management believes alliances with these types of
entities will be an efficient means to leverage the Company's insurance product
expertise and expand its distribution channels. As noted above, the Company
entered into two such alliances during 1997. Alliances of this nature will
continue to be sought to broaden the Company's distribution system and target
the needs of new market segments.
During 1997, the Company acquired EquiTrust Life Insurance Company, a shell life
insurance company licensed in 38 states, to underwrite life insurance and
annuity products outside the Farm Bureau network.
MARKETING
MARKET AREA
The Company's sales are currently conducted in the following 15 state region:
multi-line (both life and property-casualty products offered through the
Company) states - Arizona, Iowa, Minnesota, New Mexico, South Dakota and Utah;
life only (only life products offered through the Company) states - Colorado,
Idaho, Montana, Nebraska, North Dakota, Oklahoma, Wisconsin and Wyoming; and
variable products only (only variable products offered through the Company)
state - Kansas.
The Company's target market consists primarily of farmers, ranchers, rural and
suburban residents and related individuals and businesses. Management believes
that this target market represents a relatively financially conservative and
stable market which is generally familiar with Farm Bureau and the benefits of
Farm Bureau membership. Many of the Company's customers are self employed
individuals who are responsible for providing for their own insurance needs.
Their financial planning needs tend to focus on security, primary insurance
needs and retirement savings.
Beginning in 1998, the Company's marketing area will expand as a result of the
alliances entered into during 1997. Through direct writings or reinsurance
arrangements, the Company will retain risks underwritten throughout the United
States.
AFFILIATION WITH FARM BUREAU
Many of the Company's customers are members of Farm Bureau organizations
affiliated with the American Farm Bureau Federation, the nation's largest grass
roots farm and ranch organization with 4.8 million member families. In order to
market insurance products in a given state using the "Farm Bureau" and "FB"
designations and related trademarks and service marks, a company must have
permission from the state's Farm Bureau Federation. Historically, these
marketing rights have only been granted to companies owned by or closely
affiliated with Farm Bureau Federations. For each of the 15 states in the
Company's current market territory, the Company has the exclusive right to use
the "Farm Bureau" name and "FB" logo for marketing the products it sells in that
state.
The American Farm Bureau Federation has the right to terminate the Company's
right to use the "Farm Bureau" and "FB" designations as to all states (i) in the
event of a material breach of the trademark license not cured by the Company
within 60 days, (ii) immediately in the event of termination by the American
Farm Bureau of the Iowa Farm Bureau's membership in the American Farm Bureau or
(iii) in the event of a material breach of the Iowa Farm Bureau Federation's
membership agreement with the American Farm Bureau Federation, including by
reason of the failure of the Iowa Farm Bureau Federation to cause the Company to
adhere to the American Farm Bureau Federation's policies. Each state Farm Bureau
federation in the Company's trade territory could terminate the right of the
Company to use the Farm Bureau designations in that particular state without
cause on 60 days' notice. Management believes that the occurrence of any such
termination is highly unlikely.
Management believes its relationship with Farm Bureau provides a number of
advantages. Farm Bureau organizations in the Company's current territory tend to
be well known and long established, have active memberships and provide a number
of benefits other than financial services. Management believes the strength of
<PAGE>
these organizations provides enhanced prestige and brand awareness for the
Company's products and increased access to Farm Bureau members. Additionally,
Farm Bureau members provide a financially conservative and stable target market
which has resulted in persistency for the Company's products that exceeds
industry averages.
The Company's life insurance products are currently available for sale to both
members and non-members. Most of the Company's property-casualty products are
available only for sale to Farm Bureau members. Annual Farm Bureau memberships
generally cost $24 to $130 and are available to individuals and families who are
farmers and ranchers, and to the general public as well.
To facilitate the Company's working relationship with state Farm Bureau
organizations, the President of each of the 15 state Farm Bureau federations in
the Company's market territory serves on the Company's Board of Directors.
Pursuant to a royalty agreement with the Company, each state Farm Bureau
federation or its assignee benefits from its relationship with the Company
through receipt of royalties on the sale of the Company's products in the state.
For the year ended December 31, 1997, total royalties paid to Farm Bureau
organizations were approximately $1.8 million.
Beginning in 1996, the Company entered into marketing arrangements with all of
the Farm Bureau property-casualty companies in its marketing area, both
affiliated and non-affiliated, pursuant to which the property-casualty companies
develop and manage their common agency force for a fee in the nature of an
overwrite commission based on first year life insurance premiums and annuity
deposits. The overwrite commissions are generally equal to one-third of the
first year commissions paid to the agent by the Company. Overwrite commissions
paid by the Company for 1997 totaled $3.9 million.
The Company is assisted in its relationships with the property-casualty
organizations by an Advisory Committee, consisting of the general manager of
each Farm Bureau property-casualty insurance company in the Company's market
territory. The Advisory Committee meets on a regular basis to coordinate efforts
and issues relating to the agency force and other related matters. Management
views the Advisory Committee as an important contributor to the Company's
success in marketing its products through the Farm Bureau system.
All of the state Farm Bureau federations in the Company's current marketing area
are associated with the American Farm Bureau Federation. The primary goal of the
American Farm Bureau Federation is to improve net farm income and the quality of
life of farmers, ranchers and other rural residents through education and
representation with respect to public policy issues. There are currently Farm
Bureau federations in all 50 states and Puerto Rico. Within each state, Farm
Bureau is generally organized at the county level. Farm Bureau programs
generally include policy development, state and national lobbying activities,
leadership development, speaker corps, media relations, crime prevention,
marketing clubs, women's activities, young farmers activities, promotion and
education and commodity promotion activities. Member services provided by Farm
Bureau vary state by state but generally include newspapers and magazines, theft
and arson rewards, eye care programs, vehicle purchase and leasing programs,
accidental death insurance, credit card programs, computerized farm accounting
services, electronic information networks, feeder cattle procurement services,
health care insurance and financial planning services.
EXCLUSIVE AGENCY FORCE
The Company's life insurance, annuities, disability income insurance,
property-casualty insurance and mutual funds are currently marketed throughout
its market territory by an exclusive Farm Bureau force of approximately 1,826
agents and agency managers. The Company has a written contract with each member
of the agency force. The contracts specify and limit the authority of the agents
to solicit insurance applications on behalf of the Company; describe the nature
of the independent contractor relationship between the Company and the agent;
define the agent as an exclusive agent limited to selling insurance of the types
sold on behalf of the Company, only for the Company and Farm Bureau affiliated
insurance companies; allow either party to immediately terminate the contract;
specify the compensation payable to the agents; reserve ownership of customer
lists to the Company, and set forth all other terms and conditions of the
relationship.
<PAGE>
Sales activities of the Company's agents focus on personal contact and on cross
selling the multiple lines of products available through Farm Bureau affiliated
companies. Agents' offices are generally located in or serve as the Farm Bureau
office for their community. Management believes that Farm Bureau name
recognition and access to Farm Bureau membership leads to additional customers
and cross selling of additional insurance products.
The Company's agents are independent contractors and exclusive agents of the
Company. In the multi-line states, the Company's agents are supervised by agency
managers and assistant managers employed by Farm Bureau Mutual, Western
Agricultural Insurance Company (Western Ag) or Western Farm Bureau Mutual
Insurance Company (Western Mutual), all of which are under the direction of the
Company. There are approximately 63 agents and managers in Arizona, 42 in New
Mexico, 404 in Iowa, 153 in Minnesota, 57 in South Dakota and 85 in Utah, all of
whom market a full range of the Company's life insurance and property-casualty
products and most of whom market the Company sponsored mutual funds.
In the life-only states, the Company's life insurance products and its sponsored
mutual funds are marketed through agents of the property-casualty company
affiliated with the Farm Bureau Federation in each state. These agents market
the Company's life and mutual fund products (in Kansas, variable products only)
on an exclusive basis and market the property-casualty products of such
affiliated property-casualty companies. The agents are under the management of
such Farm Bureau affiliated property-casualty companies. Agents as well as
agency managers in the life-only states are independent contractors of the
Company. Average life production per agent in the life-only states has
historically been less than average life production per agent in the multi-line
states. Management believes that average life production in these states will
increase, over time, as the agents continue to benefit from the Company's
ongoing training programs and marketing support.
Over 92% of the agents in the multi-line states are licensed with the National
Association of Securities Dealers (NASD) to sell the Company's variable life and
annuity products and sponsored mutual funds. Over 97% of Nebraska agents and 76%
of agents in Wisconsin are also NASD licensed. The Company continues to
emphasize the training of agents for NASD licensing in the Company's western
territory where, currently, 56% of the agents are NASD licensed.
The Company is responsible for product and sales training for all lines of
business in the multi-line states, and for training the agency force in life
insurance products and sales methods in the life-only states.
The Company structures its agents' life products compensation system to
encourage production and persistency. Agents receive commissions for new life
insurance and annuity sales and service fees on premium payments in subsequent
years. Production bonuses are paid based on the volume of new life business
written in the prior 12 months and on premium payments in the first three years
subsequent to when new business is written. Production bonuses allow agents to
increase their compensation significantly. Persistency is a common measure of
the quality of life business and is included in calculating the bonus to either
increase or decrease (or even eliminate) the production bonuses earned, because
the Company is willing to pay added incentives for higher volumes of business
only as long as the business is profitable. In 1997, approximately 46% of agent
compensation in the multi-line states was derived from the sale of life and
annuity products.
For property-casualty business written in the multi-line states, the Company's
compensation system is designed to encourage production and profitability.
Agents receive commissions and service fees which are increased or reduced
according to production level and profitability to the Company as measured by
loss ratios. An agent can earn higher property-casualty commissions for
achievement of production standards in life insurance, property insurance and
casualty insurance, tying compensation to production of all lines of business.
In the life-only states, most of the Farm Bureau property-casualty companies
also adjust property-casualty commissions according to life insurance production
levels.
The focus of agency managers is to recruit and train agents to achieve high
production levels of profitable business. Agency managers receive overwrite
commissions on each agent's life insurance commissions which vary according to
that agent's productivity level and persistency of business. During the first
three years of an agent's relationship with the Company, the agent's manager
receives additional overwrite commissions to encourage early agent development.
<PAGE>
Farm Bureau Life and Western Life have a variety of incentives and recognitions
to focus agents on production of quality life insurance business. Some
recognitions are jointly conducted with the property-casualty companies.
Management believes that these programs provide significant incentives for the
most productive agents. Approximately 9% of the agents qualify for the Company's
annual incentive trip.
Agent recruiting, training and financing programs are designed to develop a
productive agent for the long term. The one-year agency force retention rate for
1997 in the multi-line states was approximately 84%. Management believes
retention of agents is enhanced because of their ability to sell both life and
property-casualty insurance products, as well as mutual funds.
RATINGS
Ratings are an important factor in establishing the competitive position of
insurance companies. Farm Bureau Life is rated "A+(Superior)" by A.M. Best, A.M.
Best's second highest rating of 13 ratings assigned to solvent insurance
companies, which currently range from "A++(Superior)" to "D(Very Vulnerable)."
Farm Bureau Life has maintained its existing "A+(Superior)" rating since A.M.
Best first began using this rating methodology. Western Life is rated "A
(Excellent)" and the pool which includes Utah Insurance is rated "Ap
(Excellent)" by A.M. Best. EquiTrust has not yet received a rating from A.M.
Best. Such a rating is expected to be received by May 1998. A.M. Best ratings
consider the claims paying ability of the rated Company and are not a rating of
the investment worthiness of the rated Company.
SEGMENT INFORMATION
The Company's revenues and net income are primarily derived from its life
insurance segment. For information concerning amounts of revenue, operating
profit and loss and identifiable assets attributable to each of the Company's
segments, see Note 14 of Notes to Consolidated Financial Statements.
LIFE INSURANCE SEGMENT
PRODUCTS CURRENTLY UNDERWRITTEN
Farm Bureau Life and Western Life are currently engaged in selling a varied
portfolio of insurance products including variable and traditional permanent
life insurance, term life, variable and traditional annuities and disability
income insurance primarily to individuals in the rural and suburban areas of its
market territory.
VARIABLE UNIVERSAL LIFE INSURANCE. The Company is establishing variable
universal life insurance as its lead life insurance product. The variable
universal life policy provides permanent life insurance protection with a
flexible premium structure which allows the customer to pre-fund future
insurance costs and accumulate savings on a tax-deferred basis. Premiums
received, less policy assessments for administration expenses and mortality
costs, are credited to the policyholder's account balance. The policyholder has
the ability to direct cash value of the policy to an assortment of variable
sub-accounts, all managed by the Company for an additional fee, and assume the
investment risk passed through by those funds. Variable universal life
policyholders can also elect a declared interest option under which the cash
values are credited with interest as declared by the Company. For the year ended
December 31, 1997, variable universal life represented 16% of first year direct
life insurance premiums collected in the life-only states, 70% of the Company's
first year direct life premiums collected in the multi-line states and 53% of
the Company's total first year direct life insurance premiums collected. All the
variable sub-accounts are managed by the Company and offer as investment options
the Company's sponsored mutual funds. See "Variable Sub-Accounts and Mutual
Funds."
UNIVERSAL LIFE INSURANCE. The Company offers a universal life policy which is
similar in design to the variable universal life policy, but without the
additional investment options for the cash value. Interest is credited to the
cash value at rates periodically set by the Company. Agents need not be
registered with the NASD to offer this product. The Company markets a last
survivor universal life policy designed especially for the estate planning
market.
TRADITIONAL LIFE INSURANCE. The Company offers traditional participating whole
life insurance products. Participating whole life insurance provides benefits
for the life of the insured. It provides level premiums and a
<PAGE>
level death benefit and requires payments in excess of mortality charges in
early years to offset increasing mortality costs in later years. Under the terms
of these policies, policyholders have a right to participate in the surplus of
the Company to the extent determined by the board of directors, generally
through annual participating policy dividends. For the year ended December 31,
1997, participating life policies represented 16% of first year life insurance
collected premiums. The Company has a substantial book of in-force participating
policies with persistency which has historically exceeded industry averages.
The Company currently markets non-participating term insurance policies that
provide life insurance protection for a specified period. Term insurance is
mortality based and generally has no accumulation values. The Company may change
the premium scales at any time but may not increase rates above guaranteed
levels. In the past, the Company sold participating term insurance, but has
discontinued such sales.
ANNUITIES. The Company offers annuities which are generally marketed to
individuals in anticipation of retirement. The Company offers variable and
traditional annuities principally in the form of flexible premium deferred
annuities which allow policyholders to make contributions over a number of
periods. For traditional annuity products, policyholder account balances are
credited interest at rates determined by the Company. For variable annuities,
policyholders have the right to direct the cash value of the policy into an
assortment of sub-accounts managed by the Company, thereby assuming the
investment risk passed through by those sub-accounts. See "Variable Sub-Accounts
and Mutual Funds." Approximately 60% of the Company's existing individual
annuity business based on account balances is held in qualified retirement
plans. To further encourage persistency, a surrender charge against the
policyholders' account balance is imposed for early termination of the annuity
contract within a specified period after its effective date.
In 1997, the Company introduced a single premium immediate annuity (SPIA)
product and a single premium deferred annuity (SPDA) product. These products
feature a single premium paid when the contract is issued and interest crediting
similar to other traditional annuities. Benefit payments on SPIA contracts begin
immediately after the issuance of the contract and, for SPDA, are similar to the
Company's other traditional annuity products.
DISABILITY INCOME INSURANCE. The Company writes a number of individual
disability policies. This type of policy provides for payment of benefits in the
event of a disabling accident or illness. Disability benefits reimburse the
policyholder for a specified dollar amount payable over a specific time period
or for the duration of the disability. Disability is defined as inability to
pursue the policyholder's own occupation for the first two years after
disability, and inability to pursue any occupation thereafter. The risks insured
are similar to those insured in a medical expense policy but the claim costs are
much more predictable. Since the policies are guaranteed renewable rather than
noncancellable, the Company may change the premium scale at any time based on
claim costs incurred, subject to regulatory approval. Some disability income
products offer flexibility in coverage amounts as financial needs change.
PRODUCTS TO BE SOLD THROUGH ALLIANCES
The variable products to be marketed through the Company's new alliances are
currently being designed. Product features will be similar to those of products
currently being offered by the Company. However, certain product features such
as surrender charge periods and rates and available investment alternatives will
likely differ from those currently being offered. The product features will be
tailored to the respective target market of each alliance to encourage sales and
persistency.
<PAGE>
The following table sets forth the first year and renewal premiums collected for
the Company's life, annuity and accident and health products for the periods
indicated:
<TABLE>
<CAPTION>
COLLECTED PREMIUMS BY PRODUCT TYPE
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Direct life premiums collected:
Universal life
First year......................... $ 3,522 $ 4,398 $ 2,452 $ 2,321 $ 4,758
Renewal............................ 44,969 46,493 47,901 49,171 24,712
------------- ------------- ------------- ------------- -------------
Total............................ 48,491 50,891 50,353 51,492 29,470
Variable universal life
First year......................... 12,427 9,244 7,689 11,603 9,708
Renewal............................ 19,156 16,715 13,625 10,054 6,914
------------- ------------- ------------- ------------- -------------
Total............................ 31,583 25,959 21,314 21,657 16,622
Participating whole life
First year......................... 3,646 6,105 7,390 9,245 1,500
Renewal............................ 61,660 58,818 54,743 51,058 44,362
------------- ------------- ------------- ------------- -------------
Total............................ 65,306 64,923 62,133 60,303 45,862
Other
First year......................... 3,802 3,409 3,242 3,137 876
Renewal............................ 15,513 14,646 13,891 13,622 7,136
------------- ------------- ------------- ------------- -------------
Total............................ 19,315 18,055 17,133 16,759 8,012
------------- ------------- ------------- ------------- -------------
Total direct life............ 164,695 159,828 150,933 150,211 99,966
Reinsurance ceded........................ (4,681) (4,521) (4,190) (3,891) (1,513)
------------- ------------- ------------- ------------- -------------
Total life, net of reinsurance........... 160,014 155,307 146,743 146,320 98,453
Direct annuity premiums collected:
Traditional annuities:
Individual......................... 54,002 59,111 64,557 69,652 68,329
Group.............................. 7,241 16,502 6,253 5,502 5,644
------------- ------------- ------------- ------------- -------------
Total traditional annuities.. 61,243 75,613 70,810 75,154 73,973
Variable annuities.................... 33,654 16,917 5,962 13,392 -
------------- ------------- ------------- ------------- -------------
Total annuities.......................... 94,897 92,530 76,772 88,546 73,973
Direct accident and health premiums
collected:
First year accident and health........ 1,351 1,464 1,990 2,859 16,145
Renewal accident and health........... 11,313 10,293 18,945 12,603 35,019
------------- ------------- ------------- ------------- -------------
Total accident and health.......... 12,664 11,757 20,935 15,462 51,164
Reinsurance ceded........................ (1,294) (1,199) (10,912) (19,992) (4,614)
------------- ------------- ------------- ------------- -------------
Total accident and health, net of
reinsurance.......................... 11,370 10,558 10,023 (4,530) 46,550
------------- ------------- ------------- ------------- -------------
Total collected premiums, net of
reinsurance........................... $ 266,281 $ 258,395 $ 233,538 $ 230,336 $ 218,976
============= ============= ============= ============= =============
</TABLE>
Total life insurance collected premiums, net of reinsurance, increased to $160.0
million in 1997 from $98.5 million in 1993. This growth was due to the
acquisition of Western Life in 1994 combined with increased production and
strong persistency. Western Life added life collected premiums of $45.4 million
in 1994.
Total direct collected premiums for the Company's lead product, variable
universal life, increased to $31.6 million in 1997 from $16.6 million in 1993.
This growth was due to the Company's continued emphasis on this product combined
with, for most years, a high level of consumer demand for variable products.
Total collected premiums for variable life insurance, however, declined $0.4
million, or 1.6%, to $21.3 million in 1995 from $21.7 million in 1994.
Management believes sales of variable universal life in 1995 were hampered by
the rising interest rate
<PAGE>
environment and poor overall equity market returns in 1994. Industry sales of
variable universal life declined an estimated 13% in 1995 compared to 1994
according to surveys performed by LIMRA International.
Total direct collected premiums on participating whole life insurance increased
to $65.3 million in 1997 from $45.9 million in 1993. First year collected
premiums, however, declined to $3.6 million in 1997 from $6.1 million in 1996
which was down from $7.4 million in 1995. Management believes these decreases
are the result of the emphasis placed on the sale of variable life insurance
products and the current popularity of variable policies.
Total direct annuity collected premiums increased to $94.9 million in 1997 from
$74.0 million in 1993. The Company introduced variable annuities in January 1994
and collected premiums thereon of $13.4 million in that year. Collected premiums
on variable annuities for 1997 increased to $33.7 million after decreasing to
$6.0 million in 1995 due to similar reasons cited above for variable universal
life. During 1996, the Company received $9.3 million in group annuity deposits
from the Western Life pension plan.
The Western Life acquisition also resulted in additional traditional annuity
premium collections in 1994 of $25.1 million. However, this increase was offset
by a $23.9 million decline in traditional annuities sold by the Company due to a
change in marketing strategy in 1994 to emphasize the sale of variable annuity
products.
Total direct accident and health collected premiums, net of reinsurance,
decreased $35.2 million, to $11.4 million in 1997 from $46.6 million in 1993.
This decline was due primarily to the Company's exiting its medical insurance
business in 1994, partially offset by growth in disability income collected
premiums.
LIFE INSURANCE AND ANNUITIES IN FORCE
The following table sets forth information regarding life insurance and
annuities in force at the end of each period presented:
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT FACE AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Life insurance
Universal
Number of policies................... 109,558 107,817 105,256 103,623 72,224
Policyholder account balances........ $ 565,291 $ 540,116 $ 503,877 $ 467,773 $ 300,989
Direct face amounts.................. 8,830 8,476 8,096 7,841 5,907
Traditional
Number of policies................... 267,476 266,599 267,452 267,590 207,674
Future policy benefits............... $ 672,885 $ 645,684 $ 617,376 $ 597,961 $ 488,533
Direct face amounts.................. 9,551 8,719 8,113 7,380 4,056
Total life
Number of policies................... 377,034 374,416 372,708 371,213 279,898
Direct face amounts.................. $ 18,381 $ 17,195 $ 16,209 $ 15,221 $ 9,963
Deposit administration funds -
Policyholder account balances........... $ 77,254 $ 54,028 $ 48,109 $ 37,565 $ 25,467
Annuities
Number of policies................... 49,912 50,255 49,575 48,409 33,194
Policyholder account balances........ $ 808,740 $ 808,221 $ 779,827 $ 731,254 $ 508,447
Future policy benefits............... 127,509 123,646 110,412 108,115 87,244
Liabilities related to separate accounts.. 138,409 79,043 44,789 28,043 9,400
</TABLE>
<PAGE>
The Company has experienced low lapse rates compared to the life insurance
industry, as indicated in the following table:
<TABLE>
<CAPTION>
LAPSE RATES FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Company life insurance lapse rates..... 7.0% 7.5% 7.9%(1) 7.2% 5.9%
Industry life insurance lapse rates.... (2) 8.5 8.8 8.9 9.7
</TABLE>
- -------------------
(1) The increase in the Company's lapse rate from 1993 to 1994 was largely
because of the acquisition of the business of Western Life in 1994.
(2) The industry lapse rate for the year ended December 31, 1997 is not
available as of the filing date of this Form 10-K.
UNDERWRITING
The Company has adopted and follows detailed, uniform underwriting standards and
procedures designed to properly assess and quantify life insurance risks before
issuing policies to individuals. To implement these procedures, the Company
employs a professional underwriting staff of eleven underwriters who have an
average of 20 years of experience in the insurance industry. The Company's
underwriters review each applicant's written application, which is prepared
under the supervision of the Company's agents, and any required medical records.
The Company employs blood and urine testing to provide additional information on
applications of over $100,000 face amount. Based on the results of these tests,
the Company may adjust the mortality charge or decline coverage completely. Any
nicotine use by a life insurance applicant within the preceding one year results
in a substantially higher mortality charge. In accordance with industry
practice, material misrepresentation on a policy application can result in the
cancellation by the Company of the policy upon the return of any premiums paid.
The increasing incidence of Acquired Immune Deficiency Syndrome (AIDS) has not
adversely affected the Company's mortality experience. The Company considers
AIDS information and testing results in its underwriting and pricing decisions.
For all individual life insurance applications of over $100,000 face amount, the
applicant must submit to a blood test which includes HIV antibody testing. The
Company has incurred negligible death benefits due to known AIDS-related deaths.
REINSURANCE
In keeping with industry practices, the Company reinsures portions of its life
insurance and disability income exposure with unaffiliated insurance companies
under traditional indemnity reinsurance agreements. New insurance sales are
reinsured above prescribed limits and do not require the reinsurer's prior
approval within certain guidelines. These treaties are automatically renewed and
nonterminable for the first 10 years with regard to cessions already made and
are terminable after 90 days with regard to future cessions. After 10 years the
Company has the right to terminate and can generally discontinue the reinsurance
on a block of business. This is normally done to increase the Company's
retention on older business to the same level as current cessions.
Generally, the Company enters into indemnity reinsurance arrangements to assist
in diversifying its risks and to limit its maximum loss on risks that exceed the
Company's policy retention limits. The retention limits for Farm Bureau Life are
$500,000 and for Western Life are $250,000 per life. Indemnity reinsurance does
not fully discharge the Company's obligation to pay claims on the reinsured
business. The Company as the ceding insurer remains responsible for policy
claims to the extent the reinsurer fails to pay such claims. No reinsurer of
business ceded by the Company has failed to pay any material policy claims
(either individually or in the aggregate) with respect to such ceded business.
There is currently no life reinsurance with affiliated insurance companies, and
all reinsurance entered into is in the ordinary course of business. The Company
continually monitors the financial strength of its reinsurers. If for any reason
such reinsurance coverages would need to be replaced, the Company believes that
replacement coverages from financially responsible reinsurers would be
available. A summary of the Company's primary reinsurers as of December 31, 1997
is as follows:
<PAGE>
<TABLE>
<CAPTION>
REINSURER AMOUNT OF IN
A.M. BEST RATING FORCE CEDED
------------------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Lincoln National Life Insurance Company................................... A+ $ 471.6
Business Men's Assurance Company.......................................... A 271.1
The Cologne Life Reinsurance Company...................................... A+ 197.0
All other................................................................. 308.9
-------------------
Total................................................................. $ 1,248.6
===================
</TABLE>
POLICY RESERVES
The policy liabilities reflected in the consolidated financial statements are
calculated in accordance with generally accepted accounting principles (GAAP).
Liabilities for universal life and annuity policies consist of the premiums and
considerations received plus accumulated credited interest, less accumulated
policyholder assessments and benefits. For traditional policies, liabilities for
future policy benefits have been provided based on the net level premium method,
including assumptions as to interest, mortality and other assumptions underlying
the guaranteed policy cash values. See Note 1 of Notes to Consolidated Financial
Statements for additional information regarding policy liability assumptions
under GAAP.
INTEREST CREDITING AND PARTICIPATING DIVIDEND POLICY
The Company's asset/liability management committee meets monthly, or more
frequently if required, to review and establish current period interest rates
based upon existing and anticipated investment opportunities. This applies to
new sales and to universal life insurance and annuity products after any initial
guaranteed period. Earnings on assets are examined by portfolio. Interest rates
are then established based on each product's required interest spread and
competitive market conditions at the time.
Farm Bureau Life and Western Life pay dividends, credit interest and determine
other nonguaranteed elements on their individual insurance policies depending on
the type of product. Some elements, such as dividends, are generally declared
for a year at a time. Interest rates and other nonguaranteed elements are
determined based on experience as it emerges and with regard to competitive
factors.
Policyholder dividends are currently being paid and will continue to be paid as
declared on traditional participating whole life business, some term business,
and the participating annuity policies. Policyholder dividend scales are
generally established annually and are based on the performance of assets
supporting these policies, the mortality experience of the policies, and expense
levels. Other factors, such as changes in tax law, may be considered as well.
Average credited rates on the Company's universal life contracts were 6.18%,
6.39% and 6.68% and average credited rates on annuity contracts were 6.18%,
6.35% and 6.57% for the years ended December 31, 1997, 1996 and 1995,
respectively.
VARIABLE SUB-ACCOUNTS AND MUTUAL FUNDS
The Company sponsors the FBL Series Fund, Inc. (the Series Fund) and FBL
Variable Insurance Series Fund (the Insurance Series Fund) which are open-end,
diversified series management investment companies. The Series Fund is available
to the general public. The Variable Insurance Series Fund offers its shares,
without a sales charge, only to the separate accounts of participating insurance
companies as the investment medium for variable annuity contracts or variable
life insurance policies issued by the participating insurance companies.
Currently, the Company is the only participating company with its variable
annuity and variable universal life separate accounts investing in the Variable
Insurance Series Fund. The Company uses only the Variable Insurance Series Fund
to provide variable annuity and variable universal life insurance sub-accounts
to its customers. These Funds each currently issue shares in six investment
series (a Portfolio or collectively the Portfolios) with distinct investment
objectives: (1) long-term capital appreciation by investing in equity securities
which have a potential to earn a high return on capital or are undervalued by
the market place; (2) as high a level of current income as is consistent with
investment in a portfolio of debt securities deemed to be of high grade; (3) as
high a level of current income as is consistent with investment in a portfolio
of fixed-income securities rated in the lower categories of established rating
<PAGE>
services; (4) high total investment return of income and capital appreciation by
investing in growth common stocks, high grade debt securities and preferred
stocks and high quality short-term money market instruments; (5) high current
income consistent with liquidity and stability of principal, and (6) an
unmanaged index fund, which seeks growth of capital and income by investing
primarily in common stocks of designated well-capitalized, established
companies. The net assets of the equity, the managed and the money market
portfolios at December 31, 1997 aggregated $326.1 million and the net assets of
the bond portfolios on that date were $35.9 million.
FBL Investment Advisory Services, Inc. (the Advisor), a subsidiary of the
Company, receives an annual fee based on the average daily net assets of each
Portfolio that ranges from 0.25% to 0.60% for the Series Fund and from 0.20% to
0.45% for the Variable Insurance Series Fund. The Advisor also serves as
distributor and principal underwriter for the Funds. The Advisor receives from
the Series Fund a 0.50% annual distribution services fee, a 0.25% annual
administration services fee and a 0.05% accounting fee, and receives directly
any contingent deferred sales charge paid on the early redemption of shares. FBL
Marketing Services, Inc., another subsidiary of the Company, serves as the
principal dealer for the Series Fund and receives commissions and service fees.
The Company also sponsors a money market fund, FBL Money Market Fund, Inc.
(Money Market Fund) which is a no-load open-end diversified management
investment company with an investment objective of maximum current income
consistent with liquidity and stability of principal. The Advisor acts as the
investment advisor, manager and principal underwriter of the Money Market Fund
and receives an annual management fee, accrued daily and payable monthly, on a
graduated basis commencing at 0.25% of the first $200 million of average daily
assets, and certain other fees. The net assets of the Money Market Fund were
$24.6 million at December 31, 1997.
FBL Series Fund, Inc. and FBL Money Market Fund, Inc. are offered through
registered representatives of FBL Marketing Services, Inc. For more complete
information including fees, charges and other expenses, obtain a prospectus from
FBL Marketing Services, Inc., 5400 University Avenue, West Des Moines, Iowa
50266. Read the prospectus before you invest or pay money.
PROPERTY-CASUALTY SEGMENT
SALE OF UTAH INSURANCE
On March 17, 1998, the Company's Board of Directors approved the sale of Utah
Insurance to Farm Bureau Mutual. As a result of the transaction, which is
subject to the approval of the Utah Insurance Department, the Company will no
longer have property-casualty operations. It is anticipated that the transaction
will close on March 31, 1998.
Utah Insurance will continue to be managed by the Company under an existing
management contract. Accordingly, the transaction will not impact the number of
employees of the Company and the agency force in Utah will still be managed by
employees of FBL Financial Group, Inc. As a result, the sale is not expected to
have a significant impact on the Company's life insurance segment.
The Company will receive $25.0 million in cash on the date of the sale. In
addition, 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
book value of Utah Insurance at December 31, 1997 was $27.7 million.
The Company will report Utah Insurance's operations as discontinued beginning in
the first quarter of 1998.
PRODUCTS
The Company underwrites the following major lines of property-casualty
insurance: automobile, homeowners, farm and ranch owners, workers' compensation,
crop, and other.
<PAGE>
PERSONAL AND COMMERCIAL AUTOMOBILE coverage insures individuals and businesses,
respectively, against losses incurred from personal bodily injury, bodily injury
to third parties, property damage to an insured's vehicle, and property damage
to other vehicles and other property.
HOMEOWNERS INSURANCE insures individuals for losses to their residences and
personal property, such as those caused by fire, wind, hail, water damage, theft
and vandalism, and against third-party liability claims.
FARM AND RANCH OWNERS insurance expands the personal liability and property
protection of a homeowners policy to include farm and ranch liabilities, as well
as farm and ranch property protection.
WORKERS' COMPENSATION coverage insures employers against employee medical and
indemnity claims resulting from injuries related to work. Workers' compensation
policies are often written in conjunction with other commercial policies.
CROP INSURANCE includes crop hail, multi-peril crop and revenue assurance
insurance. Crop hail provides protection from financial loss to an insured's
crop investments from hail. Multi-peril crop insurance protects from perils
including drought, frost, flood and insect damage. Revenue assurance protects
the insured from losses in revenues attributable to decreases in yield and/or
price of the underlying commodities.
The Company also offers a variety of other products, such as umbrella policies,
personal inland marine endorsements, business owner/commercial package, garage
liability, general liability and home venture coverages.
The Company also participates in reinsurance arrangements. See "Reinsurance
Arrangements."
FARM BUREAU MUTUAL POOL
Utah Insurance participates in a reinsurance pooling agreement (the Farm Bureau
Mutual pool) with Farm Bureau Mutual, South Dakota Farm Bureau Mutual Insurance
Company (South Dakota Mutual), Western Agricultural Insurance Company (Western
Ag), and Western Farm Bureau Mutual Insurance Company (Western Farm Bureau
Mutual), with all five companies operating under the common management of the
Company. All retained insurance business of Utah Insurance, South Dakota Mutual,
Western Ag, and Western Farm Bureau Mutual is assumed by Farm Bureau Mutual. The
combined business is then assumed by the five property-casualty companies, in
specified proportions, not in excess of an amount that would create a net
written premium to surplus ratio that exceeds acceptable industry standards.
This allows each property-casualty company, which may write premiums directly in
only one or two states, to obtain better geographic and business diversification
of risk, and therefore tends to create greater stability in the underwriting
results.
In the pool, all premiums, losses, loss adjustment expenses, acquisition and
other underwriting and administrative expenses, except reinsurance assumed from
reinsurance intermediaries and certain other insurance companies, are combined
and distributed proportionately to each property-casualty company. This provides
the five companies with substantially the same underwriting results for any
given accident year. The overall operating results of the five companies differ
based on their respective investment income, changes in the companies' level of
participation in the pool and other miscellaneous items.
<PAGE>
The following table sets forth net premiums earned by the Farm Bureau Mutual
pool by product line for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net premiums earned
Automobile........................... $ 149,387 $ 115,776 $ 114,468 $ 111,954 $ 104,739
Homeowners........................... 24,845 16,658 14,954 13,476 11,658
Farm and ranch owners................ 38,487 28,192 26,033 24,577 23,189
Workers' compensation................ 12,647 13,475 15,153 14,261 11,363
Crop................................. 15,114 16,370 16,457 10,063 12,785
Reinsurance.......................... 12,397 30,490 35,325 37,564 38,675
Other................................ 17,948 10,865 11,466 10,328 9,303
------------ ------------ ------------ ------------ ------------
Total net premiums earned............ $ 270,825 $ 231,826 $ 233,856 $ 222,223 $ 211,712
============ ============ ============ ============ ============
</TABLE>
Through December 31, 1995, Utah Insurance's participation in the Farm Bureau
Mutual pool (which only included three companies at the time) was 8%. On June
30, 1996, Utah Insurance's share of the pool was increased to 20%, retroactive
to January 1, 1996. Effective January 1, 1997, Western Ag and Western Farm
Bureau Mutual became full participants in the Farm Bureau Mutual pool and Utah
Insurance's pool participation percentage decreased from 20% to 18%.
Accordingly, operating results include that amount applicable to 8% of the Farm
Bureau Mutual pool for the years ended December 31, 1995, 1994 and 1993 and six
months ended June 30, 1996, 20% of the Farm Bureau Mutual pool for the six month
period ended December 31, 1996 and 18% of the Farm Bureau Mutual pool for the
year ended December 31, 1997. Participation in the development of loss and loss
adjustment expense reserves during the periods remain at the rate in effect when
the underlying claims were incurred
The following table sets forth Utah Insurance's share of the Farm Bureau Mutual
pool for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net premiums earned
Automobile.......................... $ 26,890 $ 16,318 $ 9,158 $ 8,957 $ 8,379
Homeowners.......................... 4,472 2,358 1,196 1,078 933
Farm and ranch owners............... 6,928 3,976 2,083 1,966 1,855
Workers' compensation............... 2,276 1,882 1,212 1,141 909
Crop................................ 2,721 2,695 1,317 805 1,023
Reinsurance......................... 2,231 4,217 2,826 3,005 3,094
Other............................... 3,231 1,529 917 826 744
------------ ------------ ------------ ------------ ------------
Total net premiums earned........... $ 48,749 $ 32,975 $ 18,709 $ 17,778 $ 16,937
============ ============ ============ ============ ============
</TABLE>
The following table sets forth net premiums earned by the Farm Bureau Mutual
pool by state for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Iowa................................... $ 120,175 $ 116,670 $ 116,069 $ 105,890 $ 102,670
Minnesota.............................. 49,096 46,670 46,035 43,512 39,595
South Dakota........................... 12,392 11,860 10,951 10,710 9,373
Utah................................... 28,077 26,136 25,476 24,547 21,399
Arizona................................ 19,833 - - - -
New Mexico............................. 21,869 - - - -
All other states....................... 6,986 - - - -
Other (assumed)........................ 12,397 30,490 35,325 37,564 38,675
------------ ------------ ------------ ------------ ------------
$ 270,825 $ 231,826 $ 233,856 $ 222,223 $ 211,712
============ ============ ============ ============ ============
</TABLE>
<PAGE>
The following table sets forth the statutory loss and loss adjustment expense
(LAE), expense and combined ratios of Utah Insurance for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Loss and LAE ratios:
Automobile........................... 78.7% 86.3% 76.7% 80.0% 84.9%
Homeowners........................... 88.6 101.0 76.0 89.4 85.0
Farm and ranch owners................ 98.2 93.8 75.5 84.4 83.5
Workers' compensation................ 83.7 65.2 56.5 59.1 56.5
Crop................................. 61.8 54.6 81.2 88.3 116.3
Reinsurance.......................... 71.6 81.0 62.3 62.1 71.3
Other................................ 57.4 83.7 65.5 48.8 78.2
Total Loss and LAE ratio............. 79.9 84.0 72.8 75.6 82.4
Expense ratio.......................... 27.0 25.1 25.1 25.9 26.2
Combined ratio......................... 106.9 109.1 97.9 101.5 108.6
</TABLE>
UNDERWRITING AND PRICING
Rating and classification plans for non-commercial lines are independently
developed and maintained by experienced casualty actuaries. Commercial lines
rates are developed from Insurance Services Office and National Council of
Compensation Insurers industry data. Rates are reviewed regularly for adequacy.
Auto rates are reviewed at least annually.
Underwriting of new automobile business utilizes Claims Loss Underwriting
Exchange, Motor Vehicle Record, and Credit Bureau Report data. Most of this data
is available to agents in the field. Renewal business is monitored on an
exception basis for claim frequency and severity characteristics that trigger
reunderwriting activities. Because the Company stresses "total" accounts, most
individual lines of business have loss-sensitive premium structures that provide
multiple levels of rates by means of surcharges or discounts in order to
accommodate and retain various levels of risks. In 1997, the Company introduced
a new rating tier called "ultra" for its automobile business to allow more
appropriate classification and pricing of better-than-average risks. Risks that
cannot be directly accommodated are placed with non-affiliated sub-standard auto
markets and other niche writers through a brokerage subsidiary of the Company.
The Company's multi-line exclusive agents are being increasingly involved in the
underwriting process with the availability of underwriting information in the
field and the Company's growing emphasis upon agent entry and electronic
submission of policy applications and changes (currently available for personal
auto insurance only). Profitability is tracked by individual agent loss ratios.
An agent's loss ratio can affect commission levels by up to plus or minus 20%.
Agent profitability and compliance with underwriting rules also impact an
agent's binding authority.
OPERATIONS AND CLAIMS
The management of insurance operations from the West Des Moines, Iowa home
office facilitates uniform procedures and introduction of new technology and
allows for reduced supervisory and managerial personnel. The Company is in the
process of converting its multiple administration and processing systems to one
common system which will substantially reduce information technology maintenance
costs while improving service and turnaround times.
Field claim activities are decentralized to ensure prompt handling of local
claims. However, some claim functions are being centralized to realize
processing efficiencies and expense savings. For example, first notices of loss
are being directed to a centralized home office "800" phone service unit which
electronically distributes loss assignments to the appropriate staff in the
field.
<PAGE>
Information technology is a key component in enhancing the Company's claim
service and in controlling claims costs. The Company was among the first in the
United States to implement an expert system that evaluates the value of bodily
injury claims. The Company also uses computerized building replacement cost and
automobile physical damage cost estimators and auto glass networks. Among the
innovative claim practices utilized by the Company are alternative dispute
resolution to reduce litigation costs, preferred provider organizations to
control auto and workers' compensation medical costs, and specialized
subrogation and property loss units.
REINSURANCE ARRANGEMENTS
Utah Insurance participates with Farm Bureau Mutual and South Dakota Mutual,
Western Ag, and Western Farm Bureau Mutual in several reinsurance agreements
with American Agricultural Insurance Company (American Ag). American Ag is a
reinsurance company which is owned by, and which reinsures, many of the Farm
Bureau property-casualty insurance companies throughout the United States. Under
these reinsurance agreements, Utah Insurance, Farm Bureau Mutual, South Dakota
Mutual, Western Ag, and Western Farm Bureau Mutual retain $0.3 million of
exposure for property risks, with the excess being ceded to American Ag (up to
$32.0 million of exposure). The property-casualty companies have a property
catastrophe occurrence cover for $28.0 million excess of a $4.3 million loss.
They retain $0.5 million for casualty exposures with the excess being ceded to
American Ag up to $11.5 million. The property-casualty companies maintain an
excess treaty for workers' compensation to a total limit of $15.0 million. Crop
hail proportional treaties exist that cede approximately 40% of the Company's
crop hail premium.
Effective January 1, 1997, Utah Insurance ceased assuming business from
reinsurance intermediaries, non-Farm Bureau companies and several American Ag
pools. As a result, Utah Insurance has eliminated its exposure to coastal
catastrophes.
LOSS AND LOSS ADJUSTMENT EXPENSE
The reserves for losses and LAE on property-casualty business are determined
using case basis evaluations and statistical analyses and represent estimates of
the ultimate net cost of all reported and unreported losses and loss adjustment
expenses that are unpaid. These reserves include estimates of future trends in
claim severity, frequency and other factors that could vary as the losses are
ultimately settled. Although considerable uncertainty is inherent in such
estimates, management believes that the reserve for losses and loss adjustment
expenses is adequate. The estimates are continually reviewed and, as adjustments
to these reserves become necessary, such adjustments are reflected in current
operations.
The following table reflects for the companies participating in the Farm Bureau
Mutual pool the development of their combined losses and LAE for the periods
indicated at the end of that year and each subsequent year. The first line shows
reserves, net of reinsurance, as originally reported at the end of the stated
year. The section under the caption "Cumulative amount paid as of" shows the
cumulative amounts paid, net of reinsurance, in respect of that reserve as of
the end of each subsequent year. The section under the caption "Reserves
reestimated as of" shows the original recorded reserve as adjusted as of the end
of each subsequent year to reflect the cumulative amounts paid and all other
facts and circumstances discovered during each such year. The line, "Net
cumulative redundancy (deficiency)" reflects the difference between the latest
reestimated reserve amount and the reserve amount as originally established. The
line "Gross cumulative redundancy" reflects the difference between the latest
reestimated reserve amount and the reserve amount as originally established,
before the effect of reinsurance ceded. The table represents development by
incurred year. Conditions and trends that have affected the development of these
reserves in the past will not necessarily recur in the future. It may not be
appropriate to use this cumulative history in the projection of future
performance.
<PAGE>
<TABLE>
<CAPTION>
INCURRED YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
--------- --------- --------- --------- --------- --------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for
losses and LAE..... $ 173,922 $ 164,790 $ 159,672 $ 152,277 $ 145,934 $ 125,424 $ 113,108 $ 104,355 $ 90,890 $ 74,979
Cumulative amount
paid as of
One year later..... 71,205 68,357 66,910 62,684 63,319 52,452 51,193 46,000 38,794
Two years later.... 95,827 93,650 92,152 87,443 77,745 72,934 67,557 55,723
Three years later.. 106,672 104,736 100,939 87,643 85,547 78,390 65,782
Four years later... 110,185 107,375 93,656 90,527 85,278 70,958
Five years later... 109,920 96,006 93,742 87,129 74,092
Six years later.... 97,448 94,879 88,382 75,074
Seven years later.. 95,739 89,054 75,757
Eight years later.. 89,531 76,131
Nine years later... 76,405
Reserves re-
estimated as of
One year later..... 152,238 145,513 140,943 134,321 129,890 106,794 105,780 94,857 78,989
Two years later.... 138,643 133,338 129,791 124,502 109,354 99,967 95,964 78,885
Three years later.. 128,490 124,213 120,672 104,988 100,975 91,938 78,564
Four years later... 122,130 116,543 102,790 99,302 92,757 77,513
Five years later... 116,764 101,408 98,837 92,078 78,729
Six years later.... 101,915 98,400 91,821 78,167
Seven years later.. 98,444 91,623 78,069
Eight years later.. 91,532 78,086
Nine years later... 78,023
--------- --------- --------- --------- --------- --------- --------- -------- --------
Net cumulative
redundancy
(deficiency)....... $ 12,552 $ 21,029 $ 23,787 $ 23,804 $ 8,660 $ 11,193 $ 5,911 $ (642) $ (3,044)
========= ========= ========= ========= ========= ========= ========= ======== ========
Net reserve.......... $ 173,922 $ 164,790 $ 159,672 $ 152,277 $ 145,934
Reinsurance
recoverable........ 24,877 31,684 16,078 15,975 20,898
--------- --------- --------- --------- ---------
Gross reserve........ $ 198,799 $ 196,474 $ 175,750 $ 168,252 $ 166,832
========= ========= ========= ========= =========
Net re-estimated
reserve............ $ 152,238 $ 138,643 $ 128,490 $ 122,130
Re-estimated
reinsurance
recoverable........ 28,538 8,375 9,057 20,117
--------- --------- --------- ---------
Gross re-estimated
reserve............ $ 180,776 $ 147,018 $ 137,547 $ 142,247
========= ========= ========= =========
Gross cumulative
redundancy......... $ 15,698 $ 28,732 $ 30,705 $ 24,585
========= ========= ========= =========
</TABLE>
See "Farm Burau Mutual Pool" for a description of Utah Insurance's participation
level in the Farm Bureau Mutual pool during the period from January 1, 1990
(date the Farm Bureau Mutual pool was formed) to December 31, 1997.
The net cumulative deficiencies of $0.7 million and $3.1 million for 1989 and
1988, respectively, were the result of general adverse claim development not
anticipated when initially establishing the reserves. Since the inception of the
Farm Bureau Mutual pool in 1990, management has implemented more sophisticated
and frequent methodologies for establishing reserves as is evidenced by the net
cumulative redundancies during 1990 through 1996.
COMPETITION
The Company operates in a highly competitive industry. The operating results of
companies in the insurance industry have been historically subject to
significant fluctuations due to competition, economic conditions, interest
rates, investment performance, maintenance of its insurance ratings from rating
agencies such as A.M. Best and other factors. Management believes the Company's
ability to compete with other insurance companies is dependent upon, among other
things, its ability to attract and retain agents to market its insurance
products, its ability to develop competitive and profitable products and its
maintenance of high ratings from A.M. Best. A.M. Best ratings consider the
claims paying ability of the rated company and are not a rating of the
investment worthiness of the rated
<PAGE>
company. In connection with the development and sale of its products, the
Company encounters significant competition from other insurance companies, and
other financial institutions, such as banks, many of whom have financial
resources substantially greater than those of the Company.
REGULATION
The Company's insurance subsidiaries are subject to government regulation in
each of the states in which they conduct business. Such regulatory authority is
vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including rates, policy forms and capital
adequacy, and is concerned primarily with the protection of policyholders rather
than stockholders. The Company's variable insurance products, mutual funds,
investment advisor and certain licensed broker-dealers and agents are also
subject to regulation by the Securities and Exchange Commission, the NASD, and
state agencies.
Increased scrutiny has been placed upon the insurance regulatory framework, and
certain state legislatures have considered or enacted laws that alter, and in
many cases increase, state authority to regulate insurance companies and
insurance holding company systems. In light of recent legislative developments,
the National Association of Insurance Commissioners (NAIC) and state insurance
regulators continue to reexamine existing laws and regulations, specifically
focusing on insurance company investments and solvency issues, risk-adjusted
capital guidelines, interpretations of existing laws, the development of new
laws, the implementation of nonstatutory guidelines and the circumstances under
which dividends may be paid. Management does not believe the adoption in any of
its states of operation of any of the current NAIC initiatives will have a
material adverse impact on the Company; however, the Company cannot predict the
form of any future proposals or regulation.
EMPLOYEES
At March 4, 1998, the Company had approximately 1,200 employees. Many employees
and the executive officers of the Company also provide services to Farm Bureau
Mutual and other affiliates of the Company pursuant to management agreements.
None of the employees are members of a collective bargaining unit. Management
believes that relations with its employees are good.
ITEM 2. PROPERTIES
The principal operations of the Company and its subsidiaries are conducted from
owned property consisting of approximately 400,000 square feet of space on a 68
acre site located at 5400 University Avenue, West Des Moines, Iowa 50266.
Approximately 60,000 square feet of this property are leased to an unaffiliated
company under an operating lease expiring in 1999, and approximately 140,000
square feet are leased to the Iowa Farm Bureau Federation and affiliated
companies. During the first quarter of 1998, the Company's Board of Directors
approved a transaction whereby the Company will exchange its home office
properties for 1,268,056 unregistered shares of Class A common stock owned by
the Iowa Farm Bureau Federation. The Company will lease back approximately
200,000 square feet of space from the Iowa Farm Bureau Federation under a 15
year operating lease.
The Company also leases office space totaling approximately 16,000 square feet
for a service center in Denver, Colorado. This space is in facilities owned by
Colorado Farm Bureau Mutual Insurance Company, a related party.
Management considers the current facilities to be adequate for the foreseeable
needs of the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to lawsuits arising in the normal course of business. The
Company believes the resolution of these lawsuits will not have a material
adverse effect on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Class A common stock of FBL Financial Group, Inc. (trading symbol "FFG") has
been listed on the New York Stock Exchange since July 19, 1996, the Company's
first day of public trading. The following table sets forth the ranges of high
and low sales prices per share for the Class A common stock as reported on the
New York Stock Exchange.
<TABLE>
<CAPTION>
Market Price
----------------------------------------
Period High Low
--------------------------------------------------- ------------------- ------------------
<S> <C> <C>
July 19, 1996 through September 30, 1996......... $ 21 - 3/8 $ 17 - 7/8
October 1, 1996 though December 31, 1996......... 24 - 7/8 21
January 1, 1997 through March 31, 1997........... 26 - 3/8 23
April 1, 1997 through June 30, 1997.............. 38 24 - 1/4
July 1, 1997 through September 30, 1997.......... 39 30 - 7/8
October 1, 1997 through December 31, 1997........ 41 - 1/2 35 - 7/8
</TABLE>
There is no established public trading market for the Company's Class B common
stock and there was no established public trading market for the Company's Class
A common stock prior to July 19, 1996. As of March 4, 1998, there were
approximately 2,100 holders of Class A common stock, including participants
holding securities under the name of a broker (i.e., in "street name"), and 27
holders of Class B common stock.
DIVIDENDS
The Company declared and paid a $0.10 cash dividend per share on its common
stock during each of the four quarters during 1997 and declared and paid a $0.07
cash dividend per share on its common stock during the fourth quarter of 1996.
The Company intends to declare regular quarterly cash dividends in the future.
However, the payment of dividends in the future will be subject to the
discretion of the Board of Directors and will depend upon general business
conditions, legal restrictions on the payment of dividends and other factors
that the Board of Directors deems relevant. It is anticipated the quarterly
dividend rate during 1998 will be $0.15 per common share.
As a holding company, FBL Financial Group, Inc. is largely dependent upon
dividends from its life insurance subsidiaries to pay dividends to its
stockholders. The Company's insurance subsidiaries are subject to state laws
that restrict their ability to distribute dividends. During 1998, the maximum
amounts legally available for distribution by Farm Bureau Life and Western Life
are $37.8 million and $9.0 million, respectively, without prior approval of
insurance regulatory authorities. Similar restrictions exist with respect to the
payment of dividends by Utah Insurance. Such restrictions are not considered to
bear significantly on the ability of the Company to meet the obligations of any
member of the consolidated group.
The aforementioned dividend restriction for Farm Bureau Life is before giving
effect to a planned dividend of the Company's home office properties in March
1998. With the dividend of the home office properties, which is valued at $45.7
million, the dividends available from the Life Companies without prior approval
from an insurance commissioner are in excess of the parent company's anticipated
dividend and interest requirements for 1998. Dividend and interest requirements
of the parent company for 1998 total $15.4 million while dividends available
from the Life Companies without prior regulatory approval total $9.0 million.
Based on the capital position of Farm Bureau Life, the Company anticipates that
it will receive regulatory approval from the Iowa insurance commissioner for an
extraordinary dividend to cover this temporary shortfall of funds. If such
approval is not obtained, it is anticipated the parent company would obtain the
necessary funds through a short-term borrowing with a bank or affiliate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," and Note 10 of Notes to
Consolidated Financial Statements.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial and statutory data of the
Company for the periods indicated. This information should be read in
conjunction with the consolidated financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The selected data, with the exception of
the information presented under the caption "Other Data", are derived from the
Company's consolidated financial statements which have been audited by Ernst &
Young LLP, independent auditors.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA (1):
Premiums and product charges:
Interest sensitive product charges ......... $ 47,979 $ 43,654 $ 43,722 $ 42,734 $ 26,500
Traditional life insurance and
accident and health premiums (2) ......... 92,528 92,780 85,611 70,266 92,487
Property-casualty premiums ................. 48,749 32,975 18,709 17,778 16,937
------------ ------------ ------------ ------------ ------------
Total premiums and product charges ............ 189,256 169,409 148,042 130,778 135,924
Net investment income ......................... 224,273 210,729 223,108 178,834 138,320
Realized gains on investments ................. 40,981 52,793 5,883 9,448 3,967
Other income .................................. 28,648 23,936 28,952 30,825 25,251
------------ ------------ ------------ ------------ ------------
Total revenues ................................ $ 483,158 $ 456,867 $ 405,985 $ 349,885 $ 303,462
============ ============ ============ ============ ============
Income (loss) from continuing operations
before income taxes, minority interest
in earnings of subsidiaries and equity
income by segment:
Life insurance ............................. $ 114,881 $ 118,984 $ 88,500 $ 58,573 $ 38,898
Property-casualty insurance ................ 677 (2,046) 2,083 1,288 33
Corporate .................................. (294) (85) (136) 12 --
------------ ------------ ------------ ------------ ------------
Total ...................................... 115,264 116,853 90,447 59,873 38,931
Income from continuing operations ............. 75,827 82,884 59,628 35,587 22,705
Income from continuing operations per
common share (3) ........................... $ 4.05 $ 3.74 $ 2.53 $ 1.52 $ 1.26
Income from continuing operations per
common share - assuming dilution (3) ....... $ 3.98 $ 3.73 $ 2.53 $ 1.52 $ 1.26
Net income (4) ................................ $ 75,827 $ 82,884 $ 59,628 $ 42,066 $ 19,803
Net income applicable to common stock (4) ..... 73,656 80,634 59,628 42,066 19,803
Earnings per common share (3) ................. $ 4.05 $ 3.74 $ 2.53 $ 1.80 $ 1.10
Earnings per common share - assuming
dilution (3) ............................... $ 3.98 $ 3.73 $ 2.53 $ 1.80 $ 1.10
Cash dividends per common share ............... $ 0.40 $ 0.07 $ -- $ -- $ --
CONSOLIDATED BALANCE SHEET DATA (1):
Total investments ............................. $ 3,009,913 $ 2,889,095 $ 2,646,123 $ 2,337,154 $ 1,757,277
Total assets .................................. 3,601,526 3,368,192 3,093,582 2,795,266 2,145,580
Long-term debt ................................ 24,577 24,581 12,604 18,519 30,638
Total liabilities ............................. 2,894,708 2,724,867 2,524,781 2,359,945 1,816,937
Total stockholders' equity .................... 605,315 638,522 564,298 430,743 312,277
Book value per common share ................... $ 33.53 $ 28.55 $ 23.65 $ 18.37 $ 17.07
Book value per common share excluding
unrealized appreciation (depreciation) (5).. $ 30.73 $ 27.50 $ 22.25 $ 19.63 $ 17.07
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OTHER DATA (1):
<S> <C> <C> <C> <C> <C>
Adjusted operating income (6) ......... $ 46,977 $ 42,495 $ 41,648 $ 29,780 $ 19,024
Adjusted operating income per common
share (3)(6) ........................ $ 2.59 $ 1.97 $ 1.77 $ 1.27 $ 1.06
Adjusted operating income per common
share - assuming dilution (3) (6) ... $ 2.54 $ 1.96 $ 1.77 $ 1.27 $ 1.06
Life insurance statutory capital and
surplus (7) (8) ..................... $ 360,782 $ 344,965 $ 288,302 $ 250,709 $ 177,130
Net statutory premiums collected by the
Company's life insurance
subsidiaries (7) (9) ................ 266,281 258,395 233,538 230,336 218,976
Life insurance in force ............... 17,132,235 16,113,121 15,254,669 14,296,709 9,525,136
Statutory property-casualty ratios (7):
Loss & loss adjustment expense (10) . 79.9 % 84.0 % 72.8 % 75.6 % 82.4 %
Expense (11) ........................ 27.0 25.1 25.1 25.9 26.2
Combined (12) ....................... 106.9 109.1 97.9 101.5 108.6
</TABLE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) The comparability of selected data from year to year is impacted by the
acquisition of Western Farm Bureau Life Insurance Company and the
minority interests in FBL Insurance Company and Rural Security Life
Insurance Company in January 1994.
(2) During 1994, the Company ceased writing medical insurance business. As
a result, accident and health premiums decreased $48.4 million in 1994
compared to 1993. The Company continues to sell individual disability
income insurance.
(3) The earnings per common share amounts prior to 1997 have been restated
as required to comply with Statement of Financial Accounting Standards
No. 128, "Earnings Per Share." For further discussion of earnings per
common share and the impact of Statement No. 128, see Note 13 of Notes
to Consolidated Financial Statements.
(4) The Company recognized net income (loss) related to its discontinued
cable television operations of $6.5 million, or $0.28 per share and
$(2.9) million, or $(0.16) per share for the years ended December 31,
1994 and 1993, respectively.
(5) Excludes unrealized appreciation (depreciation) of fixed maturity
securities, net (after 1993).
(6) Adjusted operating income equals net income adjusted to eliminate
certain items which management believes are not indicative of operating
trends because they are unusual and/or nonrecurring in nature,
including the impact of realized gains on investments, discontinued
operations and net income (loss) from a venture capital investment
company subsidiary. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Adjusted Operating
Income."
(7) Statutory data has been derived from the annual statements of the
Company's insurance subsidiaries, as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting
practices.
(8) Statutory capital and surplus reflects amounts related to Farm Bureau
Life Insurance Company and Western Farm Bureau Life Insurance Company
(after 1993) only and does not include the Asset Valuation Reserve or
Interest Maintenance Reserve for the appropriate years.
(9) Net statutory premiums as presented for statutory reporting purposes
include premiums collected from annuities and universal life-type
products. For GAAP reporting, such premiums received are not reported
as revenues.
(10) Loss and loss adjustment expense ratio equals the sum of statutory
incurred losses and loss adjustment expenses divided by statutory
earned premiums.
(11) Expense ratio equals all statutory expenses, including policyholder
dividends and excluding loss and loss adjustment expenses, divided by
statutory net written premiums.
(12) Combined ratio equals the sum of the loss and loss adjustment expense
and expense ratios.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING ANALYSIS OF THE CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE HEREIN. UNLESS NOTED
OTHERWISE, ALL REFERENCES INCLUDED HEREIN TO THE COMPANY INCLUDE ALL OF ITS
DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE
SUBSIDIARIES, FARM BUREAU LIFE INSURANCE COMPANY (FARM BUREAU LIFE) AND WESTERN
FARM BUREAU LIFE INSURANCE COMPANY (WESTERN LIFE) (COLLECTIVELY, THE LIFE
COMPANIES) AND ITS PROPERTY-CASUALTY INSURANCE SUBSIDIARY, UTAH FARM BUREAU
INSURANCE COMPANY (UTAH INSURANCE).
OVERVIEW
LIFE INSURANCE OPERATIONS. The Life Companies sell universal life, variable
universal life, traditional life and disability income insurance and traditional
and variable annuity products. These products are currently marketed to Farm
Bureau members and other individuals and businesses in 15 midwestern and western
states through an exclusive agency force. Several subsidiaries support various
functional areas of Farm Bureau Life, Western Life and other affiliates, by
providing investment advisory, marketing and distribution, and leasing services.
In accordance with generally accepted accounting principles, premiums and
considerations received for interest sensitive products such as universal life
insurance and ordinary annuities are reflected as increases in liabilities for
policyholder account balances and not as revenues. Revenues reported for
interest sensitive products consist of policy charges for the cost of insurance,
administration charges, amortization of policy initiation fees and surrender
charges assessed against policyholder account balances. Surrender benefits paid
relating to these products are reflected as decreases in liabilities for
policyholder account balances and not as expenses. The Life Companies receive
investment income earned from the funds deposited into account balances, a
portion of which is passed through to the policyholders in the form of interest
credited. Amounts for interest credited to policyholder account balances and
benefit claims in excess of policyholder account balances are reported as
expenses in the consolidated financial statements.
Premium revenues reported for traditional life and disability income insurance
products are recognized as revenues when due. Future policy benefits are
recognized as expenses over the life of the policy by means of the provision for
future policy benefits.
For variable universal life and variable annuities, premiums received are not
reported as revenues. Similar to universal life and ordinary annuities, revenues
reported consist of fee income and product charges collected from the
policyholders. Expenses related to these products include benefit claims
incurred in excess of policyholder account balances.
The costs related to acquiring new business, including certain costs of issuing
policies and certain other variable selling expenses (principally commissions),
defined as deferred policy acquisition costs, are capitalized and amortized into
expense. For nonparticipating traditional life and accident and health insurance
products, these costs are amortized over the premium paying period of the
related policies, in proportion to the ratio of annual premium revenues to total
anticipated premium revenues. Such anticipated premium revenues are estimated
using the same assumptions used for computing liabilities for future policy
benefits. For participating traditional life insurance and interest sensitive
products, these costs are amortized generally in proportion to expected gross
profits from surrender charges and investment, mortality, and expense margins.
This amortization is adjusted when the Life Companies revise their estimate of
current or future gross profits or margins. For example, deferred policy
acquisition costs are amortized earlier than originally estimated when policy
terminations are higher than originally estimated or when investments backing
the related policyholder liabilities are sold at a gain prior to their
anticipated maturity. Death and other policyholder benefits reflect exposure to
mortality risk and fluctuate from period to period based on the level of claims
incurred under insurance retention limits. The profitability of the Life
Companies is primarily affected by expense levels, investment results and
fluctuations in mortality and other policyholder benefits. The Company has the
ability to mitigate adverse experience through adjustments to credited interest
rates, policyholder dividends or cost of insurance charges.
<PAGE>
Beginning in July 1998, the Company anticipates underwriting variable universal
life insurance and variable annuity products to non-Farm Bureau members through
a marketing arrangement with a regional broker-dealer that operates in the
Midwest. Also, in December 1997, the Company entered into an agreement to assist
an unaffiliated life insurance company in the development, marketing and
administration of variable universal life insurance and variable annuity
products. The Company will share in the risks, costs and operating results of
these products, which are expected to be available for sale by July 1998,
through a reinsurance arrangement. These new alliances are not expected to have
a significant impact on operating results for 1998 since the marketing of the
related products are not expected to begin until the middle of the year.
PROPERTY-CASUALTY OPERATIONS. The Company's property-casualty product lines and
the percentage of property-casualty premiums associated with such lines for 1997
were as follows: automobile (55.1%), farm and ranch owners (14.2%), homeowners
(9.2%), crop (5.6%), workers' compensation (4.7%), reinsurance assumed (4.6%)
and other (6.6%).
Property-casualty business written by Utah Insurance is currently pooled with
business written by Farm Bureau Mutual Insurance Company and three other
property-casualty affiliates (hereinafter, the Farm Bureau Mutual pool). Under
the terms of the reinsurance agreement, Utah Insurance and the other affiliates
cede to Farm Bureau Mutual Insurance Company all of their insurance business and
assume back from Farm Bureau Mutual Insurance Company an amount equal to their
participation in the pooling agreement. Also, losses, loss adjustment expenses,
and other underwriting and administrative expenses are prorated among the
companies on the basis of their participation in the pooling agreement. Through
December 31, 1995, Utah Insurance's participation in the Farm Bureau Mutual pool
(which only included three companies at the time) was 8%. On June 30, 1996, Utah
Insurance's share of the pool was increased to 20%, retroactive to January 1,
1996. Effective January 1, 1997, Western Agricultural Insurance Company and
Western Farm Bureau Mutual Insurance Company, two affiliates of the Company,
became full participants in the Farm Bureau Mutual pool and Utah Insurance's
pool participation percentage decreased from 20% to 18%. Accordingly, the
property-casualty results included in the statement of operations include that
amount applicable to 8% of the Farm Bureau Mutual pool for the year ended
December 31, 1995 and six months ended June 30, 1996, 20% of the Farm Bureau
Mutual pool for the six month period ended December 31, 1996 and 18% of the Farm
Bureau Mutual pool for the year ended December 31, 1997. Participation in the
development of loss and loss adjustment expense reserves during the periods
remain at the rate in effect when the underlying claims were incurred. In
addition, effective January 1, 1997, the reinsurance pool no longer includes
reinsurance assumed from reinsurance intermediaries and certain other insurance
companies. As a result, beginning January 1, 1997, Utah Insurance has eliminated
its exposure to coastal catastrophes.
Utah Insurance's premium volume in 1997 was not significantly impacted by the
decrease in reinsurance pool participation from 20% to 18% or the elimination of
certain reinsurance assumed business from the pool due to the increase in the
size of the pool with the addition of Western Agricultural Insurance Company and
Western Farm Bureau Mutual Insurance Company.
SEGMENT INFORMATION. The Company's revenues and net income are primarily derived
from its life insurance segment. For information concerning amounts of revenue,
operating profit and loss and identifiable assets attributable to each of the
Company's segments, see Note 14 of Notes to Consolidated Financial Statements.
<PAGE>
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
A summary of the Company's premiums and product charges is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Premiums and product charges:
Interest sensitive product charges................................. $ 47,979 $ 43,654
Traditional life insurance and accident and health premiums........ 92,528 92,780
Property-casualty premiums......................................... 48,749 32,975
------------ ------------
Total........................................................... $ 189,256 $ 169,409
============ ============
</TABLE>
Premiums and product charges increased $19.9 million, or 11.7%, to $189.3
million for 1997 compared to $169.4 million for 1996. Interest sensitive product
charges increased $4.3 million, or 9.9%, due to an increase in the volume and
age of business in force, partially offset by decreases in cost of insurance
rates ranging from 4% to 12% which took effect March 14, 1996. Traditional life
and accident and health insurance premiums decreased $0.3 million, or 0.3%, to
$92.5 million for 1997. Management believes the sale of traditional life
insurance products decreased due to a marketing emphasis placed on the sale of
variable universal life insurance products. Premiums collected on variable
universal life insurance products increased 21.7% to $31.6 million in 1997 from
$26.0 million in 1996. Property-casualty premiums increased $15.8 million, or
47.8%, primarily due to the increase in Utah Insurance's reinsurance pool
participation to 20% from 8% on June 30, 1996. In addition, the impact on
premiums of rate decreases on private passenger auto and workers' compensation
insurance was more than offset by growth in the volume of business in force.
Net investment income increased $13.6 million, or 6.4%, to $224.3 million for
1997 compared to $210.7 million for 1996. The increase resulted principally from
a 6.8% increase in average invested assets, excluding invested assets of FBL
Ventures of South Dakota, Inc. (FBL Ventures), a venture capital subsidiary, to
$2,913.4 million in 1997 from $2,728.6 million in 1996, and a four basis point
increase in the annualized yield earned on average invested assets (excluding
yield attributable to FBL Ventures) to 7.66% in 1997 from 7.62% in 1996. Yield
on invested assets increased in 1997 compared to 1996 despite a general decline
in market interest rates during the same period due principally to the sale of
equity securities which generate little current income and reinvestment of the
proceeds in fixed maturity securities. During 1997 and 1996, the Company had net
sales of equity securities with a fair value totaling $65.4 million and $72.6
million, respectively. The increase in average invested assets is attributable
to net positive cash flows from operating activities totaling $106.1 million and
net gains on investments during 1997. Offsetting the increase in net investment
income was a $1.8 million decrease in the net investment income of FBL Ventures
to $1.1 million for 1997 from $2.9 million for 1996. See "Adjusted Operating
Income".
Realized gains on investments decreased $11.8 million to $41.0 million for 1997
compared to $52.8 million for 1996. The 1997 and 1996 gains resulted primarily
from the sale of equity securities. Realized gains during 1997 were partially
offset by $23.8 million in realized losses resulting from writedowns of
investments that became other-than-temporarily impaired during 1997. These
writedowns are attributable primarily to four equity securities and are the
result of sustained operating losses, unsuccessful efforts to raise capital,
rejection of product design by regulatory authorities and various other economic
factors that became evident during 1997. The level of realized gains is subject
to fluctuation from period to period depending on the prevailing interest rate
and economic environment and the timing of the sale of investments.
Other income increased $4.7 million, or 19.7%, to $28.6 million for 1997
compared to $23.9 million for 1996 due primarily to an increase in the level of
leasing, management and financial services provided to affiliates and third
parties. In addition, during 1997 the company increased the investment advisory
rate charged for certain types of investments.
<PAGE>
A summary of the Company's policy benefits is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Policy benefits:
Interest sensitive products benefits................................. $ 122,729 $ 119,186
Traditional life insurance and accident and health benefits.......... 56,369 53,864
Increase in traditional life and accident and health future policy
benefits.......................................................... 27,173 25,875
Distributions to participating policyholders......................... 25,860 26,345
Property-casualty losses and loss adjustment expenses................ 38,959 28,365
------------ ------------
Total............................................................. $ 271,090 $ 253,635
============ ============
</TABLE>
Policy benefits increased $17.5 million, or 6.9%, to $271.1 million for 1997
compared to $253.6 million for 1996. Included in this increase is a $3.5 million
increase in interest sensitive product benefits consisting of a $1.5 million
increase in universal life death benefits in excess of related account balances
and a $2.0 million increase in interest credited to these contracts. The
increase in interest credited is attributable to a larger volume of business in
force partially offset by a decrease in interest crediting rates on these
contracts. The weighted average crediting rate for the Company's universal life
liabilities decreased to 6.18% for 1997 from 6.39% for 1996, and the weighted
average crediting rate for the Company's annuity liabilities decreased to 6.18%
for 1997 from 6.35% for 1996. The decrease in interest crediting rates was
greater than the reduction (seven basis points) in the annualized yield on the
types of invested assets supporting universal life and annuity liabilities due
to the Company's initiatives (decreases to interest crediting rates) to increase
interest rate spreads and profitability on this business. Traditional life and
accident and health benefits increased $3.8 million, or 4.8%, consisting of a
$1.3 million increase in the change in the reserves on these products, a $1.8
million increase in surrender benefits, a $0.9 million increase in accident and
health benefits, and a $0.2 million net decrease in other benefits. The increase
in the change in reserves on traditional products is attributable to growth in
the volume and age of business in force and, for 1997, is net of a $1.4 million
one-time reduction in reserves related to a change in the funding of the
Company's defined benefit retirement plan. Distributions to policyholders
decreased to $25.9 million from $26.3 million due to a reduction in the average
dividend credited to these policies to 5.89% at December 31, 1997 from 6.12% at
December 31, 1996, partially offset by growth in the amount and age of
participating business in force. Losses and loss adjustment expenses incurred on
property-casualty policies increased $10.6 million, or 37.3%, to $39.0 million
for 1997 from $28.4 million for 1996 due primarily to the changes in Utah
Insurance's reinsurance pool participation. The loss and loss adjustment expense
ratio decreased in 1997 to 79.9% from 86.0% in 1996 due generally to more
favorable weather conditions during 1997.
A summary of the Company's underwriting, acquisition and insurance expenses is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals.................................. $ 9,037 $ 9,191
Amortization of deferred policy acquisition costs..................... 17,140 15,510
Other underwriting, acquisition and insurance expenses, net of deferrals 48,961 41,747
------------ ------------
Total.............................................................. $ 75,138 $ 66,448
============ ============
</TABLE>
Commission expense decreased $0.2 million, or 1.7%, to $9.0 million for 1997
compared to $9.2 million for 1996. This decrease occurred despite a 3.0%
increase in direct life insurance premiums collected during 1997. During 1996,
first year commissions totaling $0.2 million were charged to expense rather than
capitalized due to marginal profits on products no longer sold by the Company.
In addition, commissions decreased due to multi-tiered commission structures on
certain life insurance products whereby renewal commission rates decline over
the life of the underlying policies.
<PAGE>
Amortization of deferred policy acquisition costs increased $1.6 million, or
10.5%, to $17.1 million for 1997 compared to $15.5 million for 1996.
Amortization attributable to property-casualty operations increased $1.8 million
due primarily to the changes in Utah Insurance's reinsurance pool participation.
Amortization attributable to life operations decreased $0.2 million.
Other underwriting, acquisition and insurance expenses increased $7.3 million,
or 17.3%, to $49.0 million for 1997 compared to $41.7 million for 1996. Expenses
attributable to property-casualty operations increased $2.5 million due
primarily to the changes in Utah Insurance's reinsurance pool participation.
Amortization of value of insurance in force acquired increased $1.6 million in
1997 compared to 1996 due to the impact of realized gains and losses on
investments backing the related policyholder liabilities. In connection with the
adoption of a new accounting pronouncement during 1997, the Company established
a reserve for future assessments from guarantee fund associations and certain
other entities which resulted in a $1.8 million increase in insurance expenses.
In addition, the Company incurred $1.0 million in consulting fees during 1997,
including $0.3 million allocated to the property-casualty segment, in connection
with the modification of its computer systems to help ensure the systems are
Year 2000 compliant. See "Impact of Year 2000".
Interest expense was $1.5 million for 1997 compared to $0.9 million for 1996 due
primarily to an increase in the average debt outstanding to $24.6 million for
1997 from $15.5 million for 1996.
Other expenses increased $1.2 million, or 6.1%, to $20.2 million for 1997
compared to $19.0 million for 1996 due principally to an increase in the level
of leasing, management and financial services provided to affiliates and third
parties.
Pretax income before minority interest and equity income decreased $1.6 million,
or 1.4%, to $115.3 million for 1997 compared to $116.9 million for 1996. Pretax
income was generated principally from the life insurance segment as the
property-casualty segment experienced pretax income of $0.7 million in 1997 and
a pretax loss of $2.0 million in 1996. The decrease in pretax income from life
operations is primarily the result of the impact of realized gains on
investments.
Income taxes increased $0.5 million, or 1.5%, to $38.3 million for 1997 compared
to $37.8 million for 1996. The effective tax rate for 1997 was 33.3% compared to
32.3% for 1996. The effective tax rates were lower than the federal statutory
rate of 35% due primarily to tax exempt interest and dividend income and, in
1996, other permanent differences between book and taxable income primarily
relating to investment transactions. In addition, during 1997, the Company
realized a tax benefit associated with the payment of dividends on its
mandatorily redeemable preferred stock of subsidiary trust. The impact of these
items was partially offset during 1997 and 1996 by state income taxes.
Equity income, net of related income taxes, decreased $2.3 million, or 52.0%, to
$2.1 million during 1997 compared to $4.4 million for 1996. Equity income
includes the Company's proportionate share of gains and losses on investments
owned by the underlying 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 partnerships and joint ventures.
Net income applicable to common stock decreased $6.9 million, or 8.7%, to $73.7
million for 1997 compared to $80.6 million for 1996. The decrease was partially
the result of the changes in pretax and equity income discussed above.
Contributing to the decrease in net income applicable to common stock is a $2.8
million increase in dividends on company-obligated madatorily redeemable
preferred stock of subsidiary trust resulting from the issuance of these
securities on May 30, 1997. During 1998, it is expected that dividends on the
mandatorily redeemable preferred stock will increase approximately $2.1 million,
to $4.9 million. This increase is expected to be offset by a $2.0 million
decrease in dividends on Series A and B preferred stock to $0.2 million for
1998. See "Liquidity and Capital Resources - FBL Financial Group, Inc." and Note
2 of Notes to Consolidated Financial Statements.
<PAGE>
1996 COMPARED TO 1995
A summary of the Company's premiums and product charges is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Premiums and product charges:
Interest sensitive product charges................................... $ 43,654 $ 43,722
Traditional life insurance and accident and health premiums.......... 92,780 85,611
Property-casualty premiums........................................... 32,975 18,709
------------- ------------
Total............................................................. $ 169,409 $ 148,042
============= ============
</TABLE>
Premiums and product charges increased $21.4 million, or 14.4%, to $169.4
million for 1996 compared to $148.0 million for 1995. This increase included a
$7.2 million, or 8.4%, increase in traditional life insurance and accident and
health premiums which, management believes, is principally attributable to
implementation of a new incentive agent compensation program effective January
1, 1996, introduction of a uniform portfolio of life insurance and annuity
products throughout the Company's marketing territory in March 1996 and more
effective and increased training of its agency force. Interest sensitive product
charges decreased $0.1 million, or 0.2%, to $43.7 million for 1996 principally
due to decreases in cost of insurance rates ranging from 4% to 12%
(approximately $2.7 million) which took effect March 14, 1996, and a decrease in
the amortization of unearned revenues. These decreases were partially offset by
growth in the volume of business in force and a $0.8 million increase in fees on
premium deposits as a result of an increase in receipts from interest sensitive
products. Property-casualty premiums increased $14.3 million, or 76.3%,
primarily due to the increase in Utah Insurance's reinsurance pool participation
percentage from 8% to 20%, which resulted in $14.4 million of additional
premiums during 1996. This increase was partially offset by the Company's
nonrenewal of certain unaffiliated reinsurance assumed contracts and premium
rate decreases on workers' compensation insurance which collectively totaled
approximately $0.4 million.
Net investment income decreased $12.4 million, or 5.5%, to $210.7 million for
1996 compared to $223.1 million for 1995. The decrease was predominately the
result of the nonrecurrence in 1996 of gains recognized on two private equity
investments held by FBL Ventures of South Dakota Inc. (FBL Ventures), a venture
capital subsidiary, during 1995. During 1996, this subsidiary recognized net
investment income of $2.9 million compared to $25.4 million for 1995. See
"Adjusted Operating Income." Also contributing to the decrease was a 26 basis
point decline in the annualized yield earned on average invested assets
(excluding yield attributable to FBL Ventures) to 7.62% in 1996 from 7.88% in
1995. These decreases were partially offset by a 9.3% increase in average
invested assets (excluding invested assets of FBL Ventures) to $2,728.6 million
in 1996 from $2,496.3 million in 1995. The increase in average invested assets
is primarily attributable to net positive cash flows from operating activities
and net positive cash flows from interest sensitive products totaling $143.5
million and $34.7 million, respectively, during 1996. The decline in yield on
average invested assets is the result of investing a majority of these positive
cash flows and cash from investing activities in lower yielding securities. The
newer securities have lower yields due principally to market interest rates
during 1996 being lower than the average effective yield of the investment
portfolio and the average yield on those securities sold, maturing or repaid
during the year.
Realized gains on investments increased $46.9 million, or 797.4%, to $52.8
million for 1996 compared to $5.9 million for 1995. The increase resulted
primarily from a $50.4 million gain from sales of a portion of one equity
investment during 1996. The level of realized gains is subject to fluctuation
from period to period depending on the prevailing interest rate and economic
environment and the timing of the sale of investments.
Other income decreased $5.1 million, or 17.3%, to $23.9 million for 1996
compared to $29.0 million for 1995 due primarily to a $4.4 million decrease in
commission income from the sale of unaffiliated insurers' medical products.
Effective January 1, 1996, a majority of these products are marketed through
Farm Bureau Mutual Insurance Company, an affiliate.
<PAGE>
A summary of the Company's policy benefits is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Policy benefits:
Interest sensitive product benefits................................... $ 119,186 $ 112,125
Traditional life insurance and accident and health benefits........... 53,864 49,316
Increase in traditional life and accident and health future policy
benefits........................................................... 25,875 22,976
Distributions to participating policyholders.......................... 26,345 25,747
Property-casualty losses and loss adjustment expenses................. 28,365 13,621
------------- ------------
Total.............................................................. $ 253,635 $ 223,785
============= ============
</TABLE>
Policy benefits increased $29.8 million, or 13.3%, to $253.6 million for 1996
compared to $223.8 million for 1995. Included in this increase was a $7.1
million increase in interest sensitive product benefits consisting of a $4.8
million increase in interest credited to these contracts and a $2.3 million
increase in universal life death benefits in excess of related account balances.
The increase in interest credited is principally attributable to a larger volume
of business in force as the Company's interest crediting rates decreased during
the periods. The weighted average crediting rate for the Company's universal
life liabilities decreased to 6.39% for 1996 from 6.68% for 1995, and the
weighted average crediting rate for the Company's annuity liabilities decreased
to 6.35% for 1996 from 6.57% for 1995. The decrease in interest crediting rates
was greater than the decrease (20 basis points) in the annualized yield on the
types of invested assets supporting universal life and annuity liabilities due
primarily to the timing of the Company's adjustments to its interest crediting
rates for fluctuations in portfolio yield. Traditional life and accident and
health benefits increased $7.4 million, or 10.3%, consisting of a $3.4 million
increase in death and surrender benefits, a $2.9 million increase in the change
in the reserves on these products, a $1.4 million increase in accident and
health benefits and a $0.3 million net decrease in other benefits. Distributions
to policyholders increased to $26.3 million from $25.7 million due to an
increase in the amount of participating business in force, partially offset by a
reduction in the average dividend rate credited to these policies to 6.12% from
6.49%. Losses and loss adjustment expenses incurred on property-casualty
policies increased $14.8 million, or 108.2%, to $28.4 million for 1996 from
$13.6 million for 1995 due primarily to the increase in Utah Insurance's
reinsurance pool participation percentage, resulting in $13.5 million of
additional losses and loss adjustment expenses. In addition, less favorable
weather conditions in 1996 caused an increase in property losses, including
approximately $0.8 million in assumed losses attributable to Hurricane Fran.
During 1997, the Company discontinued participation in assumed reinsurance with
coastal catastrophe exposures. The loss and loss adjustment expense ratio
increased in 1996 to 86.0% from 72.8% in 1995.
A summary of the Company's underwriting, acquisition and insurance expenses is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals.................................. $ 9,191 $ 8,043
Amortization of deferred policy acquisition costs..................... 15,510 10,727
Other underwriting, acquisition and insurance expenses, net of deferrals 41,747 54,661
------------- ------------
Total.............................................................. $ 66,448 $ 73,431
============= ============
</TABLE>
Commission expense increased $1.2 million, or 14.3%, to $9.2 million for 1996
compared to $8.0 million for 1995. This increase is primarily attributable to a
change in the Company's incentive agent compensation program effective January
1, 1996, under which agency managers are paid overwrite commissions on first
year and renewal premiums rather than a base salary. Also contributing to the
increase in commission expense is a 5.9% increase in direct life insurance
premiums collected in 1996 compared to 1995.
<PAGE>
Amortization of deferred policy acquisition costs increased $4.8 million, or
44.6%, to $15.5 million for 1996 compared to $10.7 million for 1995 principally
due to the increase in Utah Insurance's reinsurance pool participation which
resulted in $3.8 million of additional amortization during 1996. In addition,
amortization increased due to a greater volume of business in force and an
increase in the emergence of profits on the underlying business. Partially
offsetting these increases was a $1.8 million reduction in amortization due to
the impact of realized gains and losses on investments backing the related
policyholder liabilities.
Other underwriting, acquisition and insurance expenses decreased $13.0 million,
or 23.6%, to $41.7 million for 1996 compared to $54.7 million for 1995. This
decrease is primarily attributable to new marketing agreements with Farm Bureau
property-casualty insurance companies doing business in the Company's marketing
territory whereby the property-casualty insurance companies develop and manage
the Company's agency force for a fee based on commissions on first year life
insurance premiums and annuity deposits. As a result of the agreements, various
fixed marketing costs that were charged to expense in 1995 have been replaced by
lower fees ($3.6 million for 1996) which vary based on premium volume and are
deferred and amortized with other policy acquisition costs. In addition, expense
reductions were realized as a result of discontinuing the sale of unaffiliated
insurers' medical products (see discussion regarding other income above). Also,
approximately $1.9 million of the decrease is attributable to the elimination of
an agent bonus program in 1996 and one-time severance benefit payments to
certain employees in 1995. Furthermore, amortization of value of insurance in
force acquired decreased $0.6 million in 1996 compared to 1995 due to the impact
of realized gains and losses on investments. Partially offsetting these
decreases was a $0.9 million increase in property-casualty underwriting and
insurance expenses as a result of the increase in Utah Insurance's reinsurance
pool participation percentage.
Interest expense was $0.9 million for 1996 compared to $1.0 million for 1995 due
to relatively consistent average outstanding debt balances during the periods.
Other expenses increased $1.7 million, or 9.8%, to $19.0 million for 1996
compared to $17.3 million for 1995 due principally to an increase in the level
of investment advisory and management services provided to affiliates and other
third parties.
Pretax income before minority interest in earnings of subsidiaries and equity
income increased $26.5 million, or 29.2%, to $116.9 million for 1996 compared to
$90.4 million for 1995. This increase was primarily the result of the impact of
realized gains on investments offset, in part, by the $22.5 million decrease in
net investment income attributable to FBL Ventures.
Income taxes increased $5.7 million, or 17.8%, to $37.8 million for 1996
compared to $32.1 million for 1995. The effective tax rate for 1996 was 32.3%
compared to 35.5% for 1995. The effective tax rate during 1996 was lower than
the federal statutory rate of 35% due primarily to tax exempt interest and
dividend income and other permanent differences between book and taxable income
arising from investment transactions. During 1995, the effect of tax exempt
interest and dividend income was more than offset by state income taxes
primarily on realized gains attributable to noninsurance subsidiaries.
Net income applicable to common stock increased $21.0 million, or 35.2%, to
$80.6 million for 1996 compared to $59.6 million for 1995. The increase was
primarily the result of the changes in pretax income and effective tax rate
discussed above. In addition, there was a $2.7 million increase in equity income
principally arising from eight equity investments whose principal assets were
sold or liquidated during 1996. Partially offsetting the increase in net income
applicable to common stock was $2.3 million in dividends paid during 1996 to the
Company's preferred stockholder as a result of the exchange of 5.0 million
shares of Class A Common Stock for 5.0 million shares of Series A Preferred
Stock on July 18, 1996.
<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) and net
income from a venture capital investment company subsidiary.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income applicable to common stock....................... $ 73,656 $ 80,634 $ 59,628
Adjustments:
Net realized gains on investments........................ (25,956) (34,992) (2,761)
Net income from FBL Ventures............................. (723) (3,147) (15,219)
-------------- -------------- --------------
Adjusted operating income applicable to common stock........ $ 46,977 $ 42,495 $ 41,648
============== ============== ==============
Adjusted operating earnings per common share................ $ 2.59 $ 1.97 $ 1.77
============== ============== ==============
Adjusted operating earnings per common share - assuming
dilution................................................. $ 2.54 $ 1.96 $ 1.77
============== ============== ==============
</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 has not been included in
adjusted operating income.
In 1996, the Company began selling the venture capital investments owned by FBL
Ventures in an attempt to exit most aspects of the venture capital investment
business. During 1997, the remaining investments of FBL Ventures (13 venture
capital securities with a total carrying value of $15.0 million) were
transferred to Farm Bureau Life and FBL Ventures was dissolved. The transfer of
investments had no impact on net income.
SUBSEQUENT EVENT - SALE OF HOME OFFICE PROPERTIES
During the first quarter of 1998, the Company's Board of Directors approved a
transaction whereby the Company will exchange its home office properties for
1,268,056 unregistered shares of Class A common stock owned by the Iowa Farm
Bureau Federation, the Company's majority shareholder. The value of the
transaction is $45.7 million, or $36.00 per common share. As a result of the
exchange, the common shares outstanding at December 31, 1997 will decrease
1,268,056, or approximately seven percent.
The Company will lease a portion of the properties back from the Iowa Farm
Bureau Federation under a 15-year operating lease. A gain on the transaction of
approximately $21.0 million will be deferred by the Company and recognized over
the term of the operating lease. During 1997, the Company earned $3.1 million in
rental income from the property and incurred related operating expenses and
depreciation charges totaling $4.8 million. During 1998, it is estimated the
Company's annual lease expense, net of rental income from subleases with certain
affiliates, will total approximately $3.8 million.
The transaction is structured as a tax-free exchange of a real estate
subsidiary. Farm Bureau Life will transfer a subsidiary which owns the buildings
to FBL Financial Group in the form of a dividend. FBL Financial Group will then
exchange the real estate subsidiary's common stock for the Class A common stock.
The real estate subsidiary has no assets or operations other than the home
office properties. The dividend from Farm Bureau Life has been approved by the
Insurance Division, Department of Commerce, State of Iowa. See "Liquidity and
Capital Resources - FBL Financial Group, Inc.".
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
FBL FINANCIAL GROUP, INC.
Parent company cash inflows from operations consist primarily of dividends from
subsidiaries, if declared and paid, fees which it charges the various
subsidiaries and affiliates for management of their operations and income tax
settlements received pursuant to the Company's intercompany tax allocation
agreement. 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.
On May 30, 1997, FBL Financial Group Capital Trust (the Trust), a consolidated
wholly-owned subsidiary of the Company, issued $97.0 million of 5% Preferred
Securities to the Iowa Farm Bureau Federation. In connection with the Trust's
issuance of the 5% Preferred Securities and the related purchase of all of the
Trust's common securities, the parent company issued to the Trust $100.0 million
principal amount of its 5% Subordinated Deferrable Interest Notes, due June 30,
2047 (the Notes). Concurrent with the issuance of the Notes, the Company
purchased from the Iowa Farm Bureau Federation 5,000,000 shares of the parent
company's Series A preferred stock at its liquidation value of $100.0 million.
In addition, the parent company issued 5,000,000 shares of Series B preferred
stock to the Iowa Farm Bureau Federation for $3.0 million.
The purchase of Series A preferred stock and simultaneous issuance of Series B
preferred stock and 5% Preferred Securities were noncash transactions. Except
for the maturity of the Notes on June 1, 2047, the parent company's future cash
flow requirements were not changed significantly by the aforementioned
transactions. See Note 2 of Notes to Consolidated Financial Statements for
additional information.
On April 4, 1997, the parent company purchased 965,370 shares of its Class A
common stock under a stock repurchase plan for $24.8 million. The shares were
purchased from certain Farm Bureau property-casualty insurance companies which
had a concentration of their investments in the Company. The concentrations
arose principally due to the appreciation of the Company's stock price which
caused the investments to exceed statutory or internal guidelines.
During 1997, the Company paid common stock dividends of $7.3 million and
preferred stock dividends of $2.2 million. During 1996, the Company paid common
stock dividends of $1.3 million and preferred stock dividends of $2.3 million.
No dividends were paid during 1995. It is anticipated dividend requirements for
1998 will be $0.15 per quarter per common share and $0.0075 per quarter per
preferred share, or approximately $10.4 million. In addition, interest payments
on the Notes are estimated to be $5.0 million for 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
Notes. 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. During 1998, the maximum amount
legally available for distribution to FBL Financial Group, Inc. without further
regulatory approval is approximately $37.8 million from Farm Bureau Life (before
giving effect to the dividend of the home office properties which has a value of
$45.7 million), and $9.0 million from Western Life. Similar restrictions exist
with respect to the payments of dividends by Utah Insurance. Such restrictions
are not considered to bear significantly on the ability of the Company to meet
its obligations or its anticipated dividends.
<PAGE>
With the dividend of the home office properties, the dividends available from
the Life Companies without prior approval from an insurance commissioner are in
excess of the parent company's anticipated dividend and interest requirements
for 1998. Dividend and interest requirements of the parent company for 1998
total $15.4 million while dividends available from the Life Companies without
prior regulatory approval total $9.0 million. Based on the capital position of
Farm Bureau Life, the Company anticipates that it will receive regulatory
approval from the Iowa insurance commissioner for an extraordinary dividend to
cover this temporary shortfall of funds. If such approval is not obtained, it is
anticipated the parent company would obtain the necessary funds through a
short-term borrowing with a bank or affiliate.
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
1997, with cash inflows at levels sufficient to provide the funds necessary to
meet their obligations.
For property-casualty operations, the major sources of cash inflow are premiums
and investment income. Major sources of cash outflow are losses and loss
adjustment expenses paid and other underwriting expenses. As with the Life
Companies, the liquidity position of Utah Insurance continued to be favorable in
1997, with cash inflows at levels sufficient to provide the funds necessary to
meet its obligations.
For all insurance operations, cash outflow requirements for operations are
typically met from the year's normal premium and deposit cash inflows. This has
been the case for all reported periods as the insurance companies' operations
and financing activities relating to interest sensitive products provided funds
amounting to $121.2 million in 1997, $177.1 million in 1996 and $156.5 million
in 1995. These funds were primarily used to increase the insurance companies'
fixed maturity investment portfolios.
Matching the investment portfolio maturities to the cash flow demands of the
type of insurance being provided is an important consideration for each type of
life insurance. The Life Companies continually monitor benefit and claim
statistics to provide projections of future cash requirements. As part of this
monitoring process, the Life Companies perform cash flow testing of their assets
and liabilities under various scenarios to evaluate the adequacy of reserves. In
developing their investment strategy, the Life Companies establish a level of
cash and securities which, combined with expected net cash inflows from
operations, maturities of fixed maturity investments and principal payments on
mortgage 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 available to provide it
additional liquidity. The line of credit available is based on the amount of
capital stock of the Federal Home Loan Bank of Des Moines owned by Farm Bureau
Life, which supported a borrowing capacity of $43.9 million as of December 31,
1997. Interest is payable at the current market rate on the date of issuance. As
of December 31, 1997, no line of credit agreement was open and there were no
borrowings outstanding.
Management anticipates that funds to meet its short-term and long-term capital
expenditures, cash dividends to stockholders and operating cash needs will come
from existing capital and internally generated funds. Management believes that
the current level of cash and available-for-sale and short-term securities,
combined with expected net cash inflows from operations, maturities of fixed
maturity investments, principal payments on mortgage and asset-backed
securities, mortgage loans and its insurance products, are adequate to meet the
Company's anticipated cash obligations for the foreseeable future.
Notwithstanding the above, management currently anticipates refinancing the
Company's $24.5 million lease-backed note payable that is due August, 1999.
<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 December 31,
1997, the Company had no material commitments for capital expenditures. As noted
above, during the first quarter of 1998, the Company agreed to exchange its home
office properties for 1,268,056 shares of Class A common stock owned by the Iowa
Farm Bureau Federation.
INVESTMENTS
The Company's total investment portfolio increased $120.8 million, or 4.2%, to
$3,009.9 million at December 31, 1997 compared to $2,889.1 million at December
31, 1996. This increase is primarily the result of positive cash flows from
operations and unrealized appreciation on fixed maturity securities available
for sale. These increases are offset, in part, by the acquisition of 965,370
shares of Class A common stock for $24.8 million during 1997. In addition, the
Company invested $33.3 million in two entities which are accounted for using the
equity method. These investments are included in the securities and indebtedness
of related parties line item on the balance sheet.
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. In addition, management monitors the cash flow
characteristics of the investment portfolio to help ensure funds are available
to satisfy policyholder and other obligations.
The Company's investment portfolio is summarized in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
CARRYING CARRYING CARRYING
VALUE PERCENT VALUE PERCENT VALUE PERCENT
------------ -------- ----------- -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Public.................... $ 1,871,409 62.2 % $ 1,734,849 60.0 % $ 1,597,236 60.4 %
144A private placement.... 277,232 9.2 303,000 10.5 335,905 12.7
Private placement......... 268,030 8.9 230,446 8.0 143,068 5.4
------------ -------- ----------- -------- ------------ --------
Total fixed maturities.... 2,416,671 80.3 2,268,295 78.5 2,076,209 78.5
Equity securities............ 57,755 1.9 86,991 3.0 83,714 3.1
Mortgage loans on real estate 323,605 10.8 293,777 10.2 266,623 10.1
Investment real estate:
Acquired for debt......... 1,168 - 2,007 0.1 2,220 0.1
Investment................ 38,774 1.3 26,384 0.9 26,384 1.0
Policy loans................. 121,941 4.1 118,996 4.1 116,107 4.4
Other long-term investments.. 14,438 0.5 24,287 0.8 24,805 0.9
Short-term investments....... 35,561 1.1 68,358 2.4 50,061 1.9
------------ -------- ----------- -------- ------------ --------
Total investments...... $ 3,009,913 100.0 % $ 2,889,095 100.0 % $ 2,646,123 100.0 %
============ ======== =========== ======== ============ ========
</TABLE>
As of December 31, 1997, 95.3% (based on carrying value) of the fixed maturity
securities were investment grade debt securities, defined as being in the
highest two National Association of Insurance Commissioners (NAIC) designations.
Non-investment grade debt securities generally provide higher yields and involve
greater risks than investment grade debt securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment grade issuers. In addition, the trading market for
these securities is usually more limited than for investment grade debt
securities. The Company regularly reviews the percentage of its portfolio which
is invested in non-investment grade debt securities (NAIC designations 3 through
6). As of December 31, 1997, the Company's investment in non-investment grade
debt was 4.7% of fixed maturity securities. At that time no single
non-investment grade holding exceeded 0.3% of total investments.
<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>
DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ------------------------
NAIC EQUIVALENT S&P RATINGS CARRYING CARRYING CARRYING
DESIGNATION (1) VALUE PERCENT VALUE PERCENT VALUE PERCENT
- ----------- ------------------------ ----------- -------- ----------- -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1 (AAA,AA, A).............. $ 1,613,295 66.8 % $ 1,488,548 65.6 % $ 1,311,216 63.1 %
2 (BBB).................... 690,241 28.5 624,209 27.5 582,678 28.1
----------- -------- ----------- -------- ------------ --------
Total investment grade... 2,303,536 95.3 2,112,757 93.1 1,893,894 91.2
3 (BB)..................... 62,214 2.6 103,292 4.6 100,622 4.8
4 (B)...................... 47,226 2.0 48,932 2.2 79,987 3.9
5 (CCC, CC, C)............. 525 - 275 - 56 -
6 In or near default....... 3,170 0.1 3,039 0.1 1,650 0.1
----------- -------- ----------- -------- ------------ --------
Total below investment
grade.................. 113,135 4.7 155,538 6.9 182,315 8.8
----------- -------- ----------- -------- ------------ --------
Total fixed maturities... $ 2,416,671 100.0 % $ 2,268,295 100.0 % $ 2,076,209 100.0 %
=========== ======== =========== ======== ============ ========
</TABLE>
- ---------------------
(1) Private placement securities are generally rated by the Securities
Valuation Office of the NAIC. Comparisons between NAIC designations and
S & P ratings are published by the NAIC. S & P has not rated some of
the fixed maturity securities in the Company's portfolio.
Mortgage and other asset-backed securities constitute a significant portion of
the Company's portfolio of securities. These securities were purchased at a time
when, management believed, these types of investments provided superior
risk-adjusted returns compared to returns of more conventional investments such
as corporate bonds and mortgage loans. These securities are diversified as to
collateral types, cash flow characteristics and maturity. At December 31, 1997,
the Company held $640.6 million (21.3% of total investments) in residential
mortgage-backed securities, $276.9 million (9.2% of total investments) in
commercial mortgage-backed securities and $229.7 million (7.6% of total
investments) in other asset-backed securities.
At December 31, 1997, the Company held residential collateralized mortgage
obligation (CMO) investments with a market value of $597.8 million as part of
its mortgage-backed securities holdings. CMOs consist of pools of mortgages
divided into sections or "tranches" which provide sequential retirement of the
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 December 31, 1997, 80.4% 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 December 31, 1997, the Company held $323.6 million or 10.8% of invested
assets in mortgage loans. These mortgage loans are diversified as to property
type, location and loan size, and are collateralized by the related properties.
At December 31, 1997, mortgages more than 60 days delinquent accounted for 0.1%
of the carrying value of the mortgage portfolio. The Company's mortgage lending
policies establish limits on the amount that can be loaned to one borrower and
require diversification by geographic location and collateral type. Regions with
the largest concentration of the Company's mortgage loan portfolio at December
31, 1997 include: West South Central (25% in 1997 and 17% in 1996), which
includes Oklahoma and Texas; Pacific (24% in 1997 and 26% in 1996), which
includes California, Oregon and Washington; and Mountain (16% in 1997 and 22% in
1996), which includes Arizona, Colorado, Idaho, New Mexico, Utah and Wyoming.
Mortgage loans on real estate have also been analyzed by collateral types with
office buildings (48% in 1997 and 1996) and retail facilities (33% in 1997 and
32% in 1996), representing the largest holdings.
<PAGE>
The Company's investment portfolio at December 31, 1997, also included $35.6
million of short-term investments and $242.6 million in carrying value of U.S.
Government and U.S. Government agency backed securities that could be readily
converted to cash at or near carrying value.
The Company's asset-liability management program includes (i) designing and
developing products which encourage persistency and, as a result, creating a
stable liability structure; and (ii) structuring the investment portfolio with
duration and cash flow characteristics consistent with the duration and cash
flow characteristics of the Company's insurance liabilities. At December 31,
1997, the weighted average life of the fixed maturity portfolio, based on market
values excluding convertible bonds, was approximately 7.5 years. Based on the
fixed income analytical system utilized by the Company, including its mortgage
backed prepayment assumptions, the effective duration of the fixed income
portfolio was 4.6 as of December 31, 1997.
OTHER ASSETS
During 1997, the Company invested $25.0 million in an unaffiliated life
insurance company and $8.3 million in a broker-dealer in connection with
alliances to sell variable insurance and variable annuity products. These
investments are the primary reason for the $27.2 million increase in securities
and indebtedness of related parties to $64.4 million at December 31, 1997 from
$37.2 million at December 31, 1996. Deferred policy acquisition costs increased
$18.3 million, or 10.9%, due principally to the capitalization of costs incurred
with new sales. Assets held in separate accounts increased $59.4 million, or
75.1%, to $138.4 million at December 31, 1997 due primarily to net transfers to
the separate accounts resulting from sales of the Company's variable products
and appreciation in the value of separate account investments. At December 31,
1997, the Company had total assets of $3,601.5 million, a 6.9% increase from
total assets at December 31, 1996.
LIABILITIES AND MINORITY INTEREST
Policy liabilities and accruals increased $95.9 million, or 4.2%, due primarily
to an increase in the volume of life insurance business in force. At December
31, 1997, the Company had total liabilities of $2,894.7 million, a 6.2% increase
from total liabilities at December 31, 1996. Minority interest in subsidiaries
increased $96.7 million to $101.5 million at December 31, 1997, as a result of
the issuance of 5% Preferred Securities during May 1997. See "Liquidity and
Capital Resources - FBL Financial Group, Inc." and Note 2 of Notes to
Consolidated Financial Statements for more information regarding this
transaction.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased $33.2 million, or 5.2%, to $605.3 million at
December 31, 1997 compared to $638.5 million at December 31, 1996. This decrease
is principally attributable to a $97 million decrease in preferred stock. On May
30, 1997, the Company purchased $100.0 million of Series A preferred stock from
and issued $3.0 million of Series B preferred stock to the Iowa Farm Bureau
Federation. In addition, on April 4, 1997, the Company purchased 965,370 shares
of its Class A common stock under a stock repurchase plan for $24.8 million. See
"Liquidity and Capital Resources - FBL Financial Group, Inc." and Note 2 of
Notes to Consolidated Financial Statements for more information regarding these
transactions. These decreases were offset by net income during the year ended
December 31, 1997 and net unrealized appreciation of fixed maturity securities
classified as available for sale.
At December 31, 1997, common stockholders' equity was $602.3 million, or $33.53
per share, compared to $538.5 million, or $28.55 per share at December 31, 1996.
Included in stockholders' equity per common share is $2.80 and $1.05 at December
31, 1997 and 1996, 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 $20.7 million during the year ended December 31, 1997,
after related adjustments to deferred policy acquisition costs, value of
insurance in force acquired, unearned revenue reserve and deferred income taxes.
<PAGE>
PENDING ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board (FASB) 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
continue to report two primary operating segments: life and property-casualty.
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.
Also in June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income". Statement No. 130 establishes standards for reporting comprehensive
income and its components which include net income and items currently recorded
directly in stockholders' equity such as unrealized gains and losses on fixed
maturity securities classified as available for sale. The impact of Statement
No. 130 is not expected to be material to the Company as the Statement does not
change the computation or disclosure of net income or stockholders' equity.
Statement No. 130 is effective for and will be adopted in the first quarter of
1998.
The NAIC is in the process of codifying statutory accounting practices
(Codification). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Company's insurance subsidiaries use to prepare their
statutory-basis financial statements. Codification, which is expected to be
approved by the NAIC in 1998, will require adoption by the various state
insurance departments before it becomes the prescribed statutory basis of
accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company's insurance
subsidiaries, the respective states of domicile must adopt Codification as the
prescribed basis of accounting on which domestic insurers must report their
statutory-basis results. At this time it is unclear whether the respective
states of domicile will adopt Codification.
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.
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 Company
is currently in the process of modifying or replacing portions of its software
to help ensure that its computer systems will function properly when using
date-sensitive information. The testing of these modifications is also currently
being performed. Furthermore, 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 modifications. The
Company anticipates completing the Year 2000 project no later than December 31,
1998, and prior to any anticipated impact on its operating systems. 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 $2.5
million and is being funded through operating cash flows. Year 2000 modification
costs incurred and charged to expense during 1997 totaled $1.0 million. It is
anticipated the project costs to be charged to expense during 1998 will total
approximately $1.5 million and that these expenses will primarily be incurred
during the first three quarters of the year.
<PAGE>
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.
EFFECTS OF INFLATION AND INTEREST RATE CHANGES
The Company does not believe that inflation has had a material effect on its
consolidated results of operations. The Company attempts to invest new funds in
securities with expected durations that match the related policyholder
obligations to reduce its exposure to interest rate fluctuations. In general,
the market value of the Company's fixed maturity and mortgage loan portfolios
increase or decrease in inverse relationship with fluctuations in interest
rates, and the yield realized by the Company on new investments increases or
decreases in direct relationship with interest rate changes.
Also, interest rate changes may have temporary effects on the sale and
profitability of the annuity and universal life products offered by the Company.
For example, if interest rates rise, competing investments (such as annuities or
life insurance offered by the Company's competitors, certificates of deposit,
mutual funds, and similar instruments) may become more attractive to potential
purchasers of the Company's products until the Company increases the interest
rate credited to holders of its annuity and universal life products. In
contrast, as interest rates fall, the Company attempts to adjust its credited
rates to compensate for the corresponding decline in investment income. The
Company monitors interest rates and sells annuities and universal life contracts
that permit flexible responses to interest rate changes as part of the Company's
management of interest spreads.
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, in
addition to those identified under "Impact of Year 2000", include the following:
* Changes to interest rate levels and stock market performance may
impact the Company's lapse rates, market value of investment portfolio
and the Company's ability to sell its life insurance products,
notwithstanding product features to mitigate the financial impact of
such changes.
* Extraordinary acts of nature or man may result in higher than expected
claim activity.
* Changes in federal and state income tax laws and regulations may
affect the relative tax advantage of the Company's products.
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FBL FINANCIAL GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Report of Management...................................................... 38
Report of Independent Auditors............................................ 39
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................................... 40
Consolidated Statements of Income......................................... 42
Consolidated Statements of Changes in Stockholders' Equity................ 43
Consolidated Statements of Cash Flows..................................... 44
Notes to Consolidated Financial Statements................................ 46
<PAGE>
REPORT OF MANAGEMENT
To Our Stockholders
The management of FBL Financial Group, Inc. is responsible for the integrity of
the financial information contained in this annual report. The accompanying
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles appropriate in the circumstances and
have been audited by Ernst & Young LLP. A copy of their audit opinion follows
this letter. The financial information contained elsewhere in this annual report
is consistent with that of the financial statements except for information
described as being in accordance with statutory accounting practices.
Certain financial information presented depends on management's estimates and
judgments regarding the ultimate outcome of transactions which are not yet
complete. Management believes these estimates and judgements are fair and
reasonable based upon available information.
Management maintains a system of internal control designed to meet its
responsibilities for preparing reliable financial statements. The system is
designed to provide reasonable assurance that assets are safeguarded and
transactions are properly authorized and reported. Reasonable assurance is based
upon the premise that the cost of controls should not exceed the benefits
derived from them. An internal audit department is maintained to continually
monitor and challenge the adequacy of internal control. It is management's
opinion that its system of internal control during the periods covered by this
annual report was effective in providing reasonable assurance that its financial
statements are fairly stated in all material respects.
The Audit Committee of the Board of Directors, composed solely of nonmanagement
directors, meets periodically with management, internal auditors and Ernst &
Young LLP to review internal accounting control, audit activities and financial
reporting matters. The internal auditors and Ernst & Young LLP have free access
to the Audit Committee, with and without the presence of management, to discuss
the adequacy of internal control and to review the quality of financial
reporting.
Thomas R. Gibson
CHIEF EXECUTIVE OFFICER AND DIRECTOR
James W. Noyce
CHIEF FINANCIAL OFFICER
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
FBL Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of FBL Financial
Group, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FBL
Financial Group, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 16, 1998
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 1997 - $668,426; 1996 -
$709,168) ........................................................... $ 644,631 $ 694,351
Available for sale, at market (amortized cost: 1997 - $1,688,210; 1996 -
$1,542,748) ......................................................... 1,772,040 1,573,944
Equity securities, at market (cost: 1997 - $60,509; 1996 - $74,792) ...... 57,755 86,991
Mortgage loans on real estate ............................................ 323,605 293,777
Investment real estate, less allowances for depreciation of $2,682 in 1997
and $1,930 in 1996 ..................................................... 39,942 28,391
Policy loans ............................................................. 121,941 118,996
Other long-term investments .............................................. 14,438 24,287
Short-term investments ................................................... 35,561 68,358
------------- -------------
Total investments ........................................................... 3,009,913 2,889,095
Cash and cash equivalents ................................................... 2,397 3,583
Securities and indebtedness of related parties .............................. 64,442 37,213
Accrued investment income ................................................... 34,894 33,537
Accounts and notes receivable ............................................... 1,401 2,235
Amounts receivable from affiliates .......................................... 3,656 4,439
Reinsurance recoverable ..................................................... 39,248 38,919
Deferred policy acquisition costs ........................................... 185,187 166,912
Value of insurance in force acquired ........................................ 16,044 19,928
Property and equipment, less allowances for depreciation of $48,847 in 1997
and $46,824 in 1996 ...................................................... 63,481 62,510
Current income taxes recoverable ............................................ 11,671 4,002
Goodwill, less accumulated amortization of $2,792 in 1997 and $2,172 in
1996 ..................................................................... 10,640 9,726
Other assets ................................................................ 20,143 17,050
Assets held in separate accounts ............................................ 138,409 79,043
------------- -------------
Total assets ........................................................ $ 3,601,526 $ 3,368,192
============= =============
</TABLE>
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products ....................................... $ 1,578,794 $ 1,526,011
Traditional life insurance and accident and health products ....... 711,722 678,674
Unearned revenue reserve .......................................... 23,530 22,215
Other policy claims and benefits ..................................... 13,488 10,737
Reserves on property-casualty policies ............................... 46,464 43,189
Unearned premiums on property-casualty policies ...................... 29,498 26,774
------------- -------------
2,403,496 2,307,600
Other policyholders' funds:
Supplementary contracts without life contingencies ................... 137,398 125,581
Advance premiums and other deposits .................................. 85,280 86,410
Accrued dividends .................................................... 13,801 14,243
------------- -------------
236,479 226,234
Long-term debt ......................................................... 24,577 24,581
Amounts payable to affiliates .......................................... 60 547
Deferred income taxes .................................................. 42,564 40,612
Other liabilities ...................................................... 49,123 46,250
Liabilities related to separate accounts ............................... 138,409 79,043
------------- -------------
Total liabilities ................................................. 2,894,708 2,724,867
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock of subsidiary
trust ................................................................ 97,000 --
Other .................................................................. 4,503 4,803
Stockholders' equity:
Preferred stock, without par value, at liquidation value - authorized
10,000,000 shares, issued and outstanding 5,000,000 Series B shares in
1997 and 5,000,000 Series A shares in 1996 ........................... 3,000 100,000
Class A common stock, without par value - authorized 88,500,000 shares,
issued and outstanding 16,769,729 shares in 1997 and 17,666,810 shares
in 1996 .............................................................. 42,907 43,773
Class B common stock, without par value - authorized 1,500,000 shares,
issued and outstanding 1,192,990 shares .............................. 7,567 7,567
Net unrealized investment gains ........................................ 48,559 27,858
Retained earnings ...................................................... 503,282 459,324
------------- -------------
Total stockholders' equity ........................................... 605,315 638,522
------------- -------------
Total liabilities and stockholders' equity ........................ $ 3,601,526 $ 3,368,192
============= =============
</TABLE>
See accompanying notes.
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Interest sensitive product charges ........................ $ 47,979 $ 43,654 $ 43,722
Traditional life insurance and accident and health premiums 92,528 92,780 85,611
Property-casualty premiums ................................ 48,749 32,975 18,709
Net investment income ..................................... 224,273 210,729 223,108
Realized gains on investments ............................. 40,981 52,793 5,883
Other income .............................................. 28,648 23,936 28,952
------------ ------------ ------------
Total revenues .......................................... 483,158 456,867 405,985
Benefits and expenses:
Interest sensitive product benefits ....................... 122,729 119,186 112,125
Traditional life insurance and accident and health benefits 56,369 53,864 49,316
Increase in traditional life and accident and health future
policy benefits ......................................... 27,173 25,875 22,976
Distributions to participating policyholders .............. 25,860 26,345 25,747
Property-casualty losses and loss adjustment expenses ..... 38,959 28,365 13,621
Underwriting, acquisition and insurance expenses .......... 75,138 66,448 73,431
Interest expense .......................................... 1,493 912 1,007
Other expenses ............................................ 20,173 19,019 17,315
------------ ------------ ------------
Total benefits and expenses ............................. 367,894 340,014 315,538
------------ ------------ ------------
115,264 116,853 90,447
Income taxes ................................................. (38,345) (37,778) (32,070)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily redeemable
preferred stock of subsidiary trust ..................... (2,829) -- --
Other ..................................................... (351) (542) (351)
Equity income, net of related income taxes ................... 2,088 4,351 1,602
------------ ------------ ------------
Net income ................................................... 75,827 82,884 59,628
Dividends on Series A and B preferred stock .................. (2,171) (2,250) --
------------ ------------ ------------
Net income applicable to common stock ........................ $ 73,656 $ 80,634 $ 59,628
============ ============ ============
Earnings per common share .................................... $ 4.05 $ 3.74 $ 2.53
============ ============ ============
Earnings per common share - assuming dilution ................ $ 3.98 $ 3.73 $ 2.53
============ ============ ============
</TABLE>
See accompanying notes.
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON NET
STOCK AND UNREALIZED
CLASS A CLASS B ADDITIONAL INVESTMENT TOTAL
PREFERRED COMMON COMMON PAID-IN GAINS RETAINED STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL (LOSSES) EARNINGS EQUITY
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 .... $ -- $ -- $ -- $ 142,199 $ (31,838) $ 320,382 $ 430,743
Net income for 1995 ......... -- -- -- -- -- 59,628 59,628
Change in net unrealized
investment gains/losses... -- -- -- -- 69,645 -- 69,645
Issuance of 400,000
shares of stock for cash.. -- -- -- 4,189 -- -- 4,189
Issuance of 6,200 shares
of stock for minority
interest in subsidiary.... -- -- -- 93 -- -- 93
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995.. -- -- -- 146,481 37,807 380,010 564,298
Recapitalization and
conversion of common
stock..................... -- 139,157 7,324 (146,481) -- -- --
Exchange of common stock
for preferred stock....... 100,000 (100,000) -- -- -- -- --
Net income for 1996 ........ -- -- -- -- -- 82,884 82,884
Change in net unrealized
investment gains/losses... -- -- -- -- (9,949) -- (9,949)
Adjustment resulting from
capital transaction of
equity investee........... -- 4,616 243 -- -- -- 4,859
Dividends on preferred
stock..................... -- -- -- -- -- (2,250) (2,250)
Dividends on common stock... -- -- -- -- -- (1,320) (1,320)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996... 100,000 43,773 7,567 -- 27,858 459,324 638,522
Net income for 1997 ........ -- -- -- -- -- 75,827 75,827
Change in net unrealized
investment gains/losses... -- -- -- -- 20,701 -- 20,701
Purchase of Series A
preferred stock........... (100,000) -- -- -- -- -- (100,000)
Issuance of Series B
preferred stock........... 3,000 -- -- -- -- -- 3,000
Purchase of 965,370
shares of common stock.... -- (2,402) -- -- -- (22,432) (24,834)
Issuance of 68,289 shares
of common stock under
stock option plan,
including related
income tax benefit........ -- 1,536 -- -- -- -- 1,536
Dividends on preferred
stock..................... -- -- -- -- -- (2,171) (2,171)
Dividends on common stock... -- -- -- -- -- (7,266) (7,266)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997... $ 3,000 $ 42,907 $ 7,567 $ -- $ 48,559 $ 503,282 $ 605,315
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .................................................. $ 75,827 $ 82,884 $ 59,628
Adjustments to reconcile net income to net cash provided by
operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances ................ 107,238 105,176 100,169
Charges for mortality and administration ............. (48,468) (44,981) (44,462)
Deferral of unearned revenues ........................ 2,417 1,858 1,696
Amortization of unearned revenue reserve ............. (775) (531) (956)
Provision for depreciation and amortization ............. 17,409 15,567 15,040
Net gains and losses related to investments held by
broker-dealer and investment company subsidiaries .... (1,130) (3,272) (25,801)
Realized gains on investments ........................... (40,981) (52,793) (5,883)
Increase in traditional life, accident and health and
property-casualty benefit accruals ................... 32,920 49,914 23,810
Policy acquisition costs deferred ....................... (39,413) (33,951) (25,918)
Amortization of deferred policy acquisition costs ....... 17,140 15,510 10,727
Provision for deferred income taxes ..................... (9,192) 3,707 13,914
Other ................................................... (6,924) 4,388 (23,189)
----------- ----------- -----------
Net cash provided by operating activities ................... 106,068 143,476 98,775
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment .................. 50,366 43,023 20,890
Fixed maturities - available for sale ................... 296,315 259,929 262,000
Equity securities ....................................... 115,742 102,237 30,674
Mortgage loans on real estate ........................... 48,059 29,086 23,774
Investment real estate .................................. 1,191 5,075 5,751
Policy loans ............................................ 27,513 25,754 24,798
Other long-term investments ............................. 660 10,951 11,609
Short-term investments - net ............................ 35,389 -- 69,622
----------- ----------- -----------
575,235 476,055 449,118
Acquisition of investments:
Fixed maturities - held for investment .................. -- (53,690) (170,926)
Fixed maturities - available for sale ................... (434,880) (481,225) (334,270)
Equity securities ....................................... (50,368) (29,631) (30,742)
Mortgage loans on real estate ........................... (78,703) (56,295) (23,456)
Investment real estate .................................. (10,208) (5,001) (8,073)
Policy loans ............................................ (30,458) (28,643) (27,057)
Other long-term investments ............................. (4,960) (946) (13,632)
Short-term investments - net ............................ -- (19,054) --
----------- ----------- -----------
(609,577) (674,485) (608,156)
</TABLE>
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Proceeds from disposal, repayments of advances and other
distributions from equity investees ...................... $ 16,519 $ 37,058 $ 32,193
Investments in and advances to equity investees .............. (41,018) (10,396) (21,463)
Net cash paid for acquisitions ............................... (9,694) -- --
Net purchases of property and equipment and other ............ (13,249) (10,867) (5,579)
----------- ----------- -----------
Net cash used in investing activities ........................ (81,784) (182,635) (153,887)
FINANCING ACTIVITIES
Receipts from interest sensitive products credited to
policyholder account balances ............................ 258,919 220,328 208,588
Return of policyholder account balances on interest sensitive
products ................................................. (247,823) (185,627) (150,986)
Proceeds from short-term borrowings .......................... -- -- 8
Repayments of short-term borrowings .......................... -- -- (6,396)
Proceeds from long-term debt ................................. -- 24,500 --
Repayments of long-term debt ................................. (4) (12,523) (5,915)
Distributions on company-obligated mandatorily redeemable
preferred stock of subsidiary trust ...................... (2,829) -- --
Other distributions to minority interests .................... (663) (366) (339)
Purchase of common stock ..................................... (24,834) -- --
Issuance of common stock ..................................... 1,201 -- 4,189
Dividends paid ............................................... (9,437) (3,570) --
----------- ----------- -----------
Net cash provided by (used in) financing activities .......... (25,470) 42,742 49,149
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ............. (1,186) 3,583 (5,963)
Cash and cash equivalents at beginning of year ............... 3,583 -- 5,963
----------- ----------- -----------
Cash and cash equivalents at end of year ..................... $ 2,397 $ 3,583 $ --
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ................................................. $ 1,486 $ 836 $ 1,086
Income taxes ............................................. 55,997 26,302 23,032
</TABLE>
See accompanying notes.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
FBL Financial Group, Inc. (the Company) operates predominantly in the life
insurance industry through its principal subsidiaries, Farm Bureau Life
Insurance Company (Farm Bureau Life) and Western Farm Bureau Life Insurance
Company (Western Life). The Company currently markets its products, which
consist primarily of individual life insurance policies and annuity contracts,
to Farm Bureau members and other individuals and businesses in 15 midwestern and
western states. Several subsidiaries support various functional areas of Farm
Bureau Life, Western Life and other affiliates, by providing investment
advisory, marketing and distribution, and leasing services. As these functions
relate directly to the primary business activities, these entities have been
included in the life insurance business segment.
The Company also owns Utah Farm Bureau Insurance Company (Utah Insurance), a
property-casualty insurance company providing individual and small business
coverages. The operations of Utah Insurance have been treated as a separate
segment for financial reporting purposes.
CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its direct and indirect subsidiaries. All significant intercompany
transactions have been eliminated.
INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
Fixed maturity securities, comprised of bonds and redeemable preferred stocks,
that the Company has the positive intent and ability to hold to maturity are
designated as "held for investment". Held for investment securities are reported
at cost adjusted for amortization of premiums and discounts. Changes in the
market value of these securities, except for declines that are other than
temporary, are not reflected in the Company's financial statements. Fixed
maturity securities which may be sold are designated as "available for sale".
Available for sale securities are reported at market value and unrealized gains
and losses on these securities are included directly in stockholders' equity,
net of certain adjustments (see Note 3). Premiums and discounts are
amortized/accrued using methods which result in a constant yield over the
securities' expected lives. Amortization/accrual of premiums and discounts on
mortgage and asset-backed securities incorporates prepayment assumptions to
estimate the securities' expected lives.
Equity securities, comprised of common and non-redeemable preferred stocks, are
reported at market value. The change in unrealized appreciation and depreciation
of equity securities is included directly in stockholders' equity, net of any
related deferred income taxes.
MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate are reported at cost adjusted for amortization of
premiums and accrual of discounts. If the value of any mortgage loan is
determined to be impaired (i.e., when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement), the carrying value of the mortgage loan is reduced to its fair
value, which may be based upon the present value of expected future cash flows
from the loan (discounted at the loan's effective interest rate), or the fair
value of the underlying collateral. The carrying value of impaired loans is
reduced by the establishment of a valuation allowance, changes to which are
recognized as realized gains or losses on investments. Interest income on
impaired loans is recorded on a cash basis.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT REAL ESTATE
Investment real estate is reported at cost less allowances for depreciation.
Real estate acquired through foreclosure, which is included with investment real
estate in the consolidated balance sheet, is recorded at the lower of cost
(which includes the balance of the mortgage loan, any accrued interest and any
costs incurred to obtain title to the property) or fair value as determined at
or before the foreclosure date. The carrying value of these assets is subject to
regular review. If the fair value, less estimated sales costs, of real estate
owned decreases to an amount lower than its carrying value, a valuation
allowance is established for the difference. This valuation allowance can be
reduced or eliminated should the fair value of the property increase. Changes in
this valuation allowance are recognized as realized gains or losses on
investments. At December 31, 1997 and 1996, the Company had valuation allowances
on its investment real estate totaling $0.1 million and $0.3 million,
respectively.
OTHER INVESTMENTS
Policy loans are reported at unpaid principal balance. Short-term investments
are reported at cost adjusted for amortization of premiums and accrual of
discounts.
Other long-term investments include certain nontraditional investments and
securities held by subsidiaries engaged in the broker-dealer or venture capital
investment company industries. Nontraditional investments include a debt-related
instrument and investment deposits which are reported at cost. In accordance
with accounting practices for the broker-dealer and investment company
industries, marketable securities held by subsidiaries in these industries are
valued at market value if readily marketable or at fair value, as determined by
the Board of Directors of the subsidiary holding the security, if not readily
marketable. The resulting difference between cost and market is included in the
statements of income as net investment income. Realized gains and losses are
also reported as a component of net investment income. The Company recorded
transfers from its venture capital subsidiary, which was dissolved during 1997,
at fair value on the date of transfer, re-establishing a new cost basis for the
security.
Securities and indebtedness of related parties include investments in
partnerships and corporations over which the Company may exercise significant
influence. Such investments are accounted for using the equity method. Changes
in the value of the Company's investment in equity investees attributable to
capital transactions of the investee, such as a public offering of stock, are
recorded directly to stockholders' equity. Securities and indebtedness of
related parties also includes advances and loans to the partnerships and
corporations which are principally reported at cost.
REALIZED GAINS AND LOSSES ON INVESTMENTS
The carrying values of all the Company's investments are reviewed on an ongoing
basis for credit deterioration, and if this review indicates a decline in market
value that is other than temporary, the Company's carrying value in the
investment is reduced to its estimated realizable value (the sum of the
estimated nondiscounted cash flows for securities or fair value for mortgage
loans on real estate) and a specific writedown is taken. Such reductions in
carrying value are recognized as realized losses on investments. Realized gains
and losses on sales are determined on the basis of specific identification of
investments. If the Company expects that an issuer of a security will modify its
payment pattern from contractual terms but no writedown is required, future
investment income is recognized at the rate implicit in the calculation of net
realizable value under the expected payment pattern.
MARKET VALUES
Market values of fixed maturity securities are reported based on quoted market
prices, where available. Market values of fixed maturity securities not actively
traded in a liquid market are estimated using a matrix calculation assuming a
spread (based on interest rates and a risk assessment of the bonds) over U. S.
Treasury bonds. Market values of redeemable preferred stock and equity
securities are based on the latest quoted market prices, or for those not
readily marketable, generally at values which are representative of the market
values of comparable issues.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE ACQUIRED
To the extent recoverable from future policy revenues and gross profits, certain
costs of acquiring new insurance business, principally commissions and other
expenses related to the production of new business, have been deferred. The
value of insurance in force acquired represents the cost assigned to insurance
contracts when an insurance company is acquired. The initial value is determined
by an actuarial study using expected future gross profits as a measurement of
the net present value of the insurance acquired. Interest accrues on the
unamortized balance at rates that range from 5.91% to 6.79%.
For participating traditional life insurance and interest sensitive products
(principally universal life insurance policies and annuity contracts), these
costs are being amortized generally in proportion to expected gross profits
(after dividends to policyholders, if applicable) from surrender charges and
investment, mortality, and expense margins. That amortization is adjusted
retrospectively when estimates of current or future gross profits/margins
(including the impact of investment gains and losses) to be realized from a
group of products are revised. For nonparticipating traditional life and
accident and health insurance products, these costs are amortized over the
premium paying period of the related policies, in proportion to the ratio of
annual premium revenues to total anticipated premium revenues. Such anticipated
premium revenues are estimated using the same assumptions used for computing
liabilities for future policy benefits. The deferred policy acquisition costs
for property-casualty insurance are amortized over the effective period of the
related insurance policies; deferred policy acquisition costs for these policies
are charged to expense when such costs are deemed not to be recoverable from the
related unearned premiums and any related investment income.
PROPERTY AND EQUIPMENT
Property and equipment, comprised primarily of home office properties, furniture
and equipment, are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily using the straight-line method over
the estimated useful lives of the assets. Depreciation expense for the years
ended December 31, 1997, 1996 and 1995 was $11.0 million, $10.0 million and $9.7
million, respectively.
GOODWILL
Goodwill represents the excess of the fair value of assets exchanged over the
net assets acquired. Goodwill is generally being amortized on a straight-line
basis over a period of 20 years. The carrying value of goodwill is regularly
reviewed for indicators of impairment in value, which in the view of management
are other than temporary. If facts and circumstances suggest that goodwill is
impaired, the Company assesses the fair value of the underlying business and
reduces goodwill to an amount that results in the book value of the underlying
business approximating fair value. The Company has not recorded any such
writedowns during the years ended December 31, 1997, 1996 or 1995.
FUTURE POLICY BENEFITS
The liability for future policy benefits for participating traditional life
insurance is based on net level premium reserves, including assumptions as to
interest, mortality, and other assumptions underlying the guaranteed policy cash
values. Reserve interest assumptions are level and range from 2.5% to 6.0%. The
average rate of assumed investment yields used in estimating gross margins was
8.15% in 1997, 8.34% in 1996 and 8.14% in 1995. Accrued dividends for
participating business are established for anticipated amounts earned to date
for the period through the policy's next anniversary and are provided for as a
separate liability. The declaration of future dividends for participating
business is at the discretion of the Board of Directors. Participating business
accounted for 42% of receipts from policyholders during the year ended December
31, 1997 and represented 19% of life insurance inforce at December 31, 1997.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The liabilities for future policy benefits for accident and health insurance are
computed using a net level or two-year preliminary term method, including
assumptions as to morbidity, mortality and interest and to include provisions
for possible unfavorable deviations. Policy benefit claims are charged to
expense in the period that the claims are incurred.
Future policy benefit reserves for interest sensitive products are computed
under a retrospective deposit method and represent policy account balances
before applicable surrender charges. Policy benefits and claims that are charged
to expense include benefit claims incurred in the period in excess of related
policy account balances.
Interest crediting rates for interest sensitive products ranged from 4.00% to
7.00% in 1997 and from 4.00% to 7.50% in 1996 and 1995.
The unearned revenue reserve reflects the unamortized balance of the excess of
first year administration charges over renewal period administration charges
(policy initiation fees) on interest sensitive products. These excess charges
have been deferred and are being recognized in income over the period benefited
using the same assumptions and factors used to amortize deferred policy
acquisition costs.
RESERVES AND UNEARNED PREMIUMS ON PROPERTY-CASUALTY POLICIES
Unpaid property-casualty losses and loss adjustment expenses represent the
estimated liability for reported claims plus those incurred but not yet reported
and the related estimated adjustment expenses. The reserve for unpaid claims and
related adjustment expenses is determined using case-basis evaluations and
statistical analyses and represents estimates of the ultimate cost of all unpaid
losses incurred through December 31 of each year. Although considerable
variability is inherent in such estimates, management believes that the reserve
for unpaid losses and related loss adjustment expenses is adequate. The
estimates are continually reviewed and adjusted as necessary; such adjustments
are included in current operations and are accounted for as changes in
estimates.
Salvage and subrogation recoverables are estimated using statistical analysis.
The salvage and subrogation recoverable amounts, which have been offset against
reserves on property-casualty policies in the accompanying consolidated balance
sheets, were $1.6 million and $1.2 million at December 31, 1997 and 1996,
respectively.
Property-casualty insurance unearned premiums are calculated on a daily or
monthly pro rata basis based upon the unexpired terms of the underlying
policies.
GUARANTEE FUND ASSESSMENTS
From time to time assessments are levied on the Company's insurance subsidiaries
by guaranty associations in most states in which the subsidiaries are licensed.
These assessments are to cover losses of policyholders of insolvent or
rehabilitated companies. In some states, these assessments can be partially
recovered through a reduction in future premium taxes. During 1997, the Company
adopted Statement of Position (SOP) 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments", which requires the accrual of
such assessments. Prior to 1997, the Company recognized its obligation for
guarantee fund assessments when such assessments were received and an asset was
recorded for future premium tax offsets on assessments paid. The impact of
adopting SOP 97-3 was not separately reported as a change in accounting
principles because the impact of adoption was not material to the Company.
At December 31, 1997, the Company had an undiscounted reserve of $2.8 million to
cover estimated future assessments on known insolvencies and had an asset
totaling $3.9 million representing estimated premium tax offsets on paid and
future assessments. Expenses incurred for guaranty fund assessments, net of
related premium tax offsets, totaled $1.9 million (including $1.6 million
related to the adoption of SOP 97-3), $0.1 million and $0.2 million during the
years ended December 31, 1997, 1996 and 1995, respectively. It is estimated
future guarantee fund assessments on known insolvencies will be paid during the
three year period ended December 31, 2000 and substantially all the related
future premium tax offsets will be realized during the six year period ended
December 31, 2003. The Company believes the reserve for guarantee fund
assessments is sufficient to provide for future assessments based upon known
insolvencies and projected premium levels.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEFERRED INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred income tax expenses or credits are based on
the changes in the asset or liability from period to period.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying
consolidated balance sheets represent funds that are separately administered,
principally for the benefit of certain policyholders who bear the underlying
investment risk. The separate account assets and liabilities are carried at fair
value. Revenues and expenses related to the separate account assets and
liabilities, to the extent of benefits paid or provided to the separate account
policyholders, are excluded from the amounts reported in the accompanying
consolidated statements of income.
RECOGNITION OF PREMIUM REVENUES AND COSTS
Revenues for interest sensitive products consist of policy charges for the cost
of insurance, administration charges, amortization of policy initiation fees and
surrender charges assessed against policyholder account balances. Expenses
related to these products include interest credited to policyholder account
balances and benefit claims incurred in excess of policyholder account balances.
Traditional life insurance premiums are recognized as revenues over the
premium-paying period. Future policy benefits and policy acquisition costs are
recognized as expenses over the life of the policy by means of the provision for
future policy benefits and amortization of deferred policy acquisition costs.
Property-casualty insurance premiums are recognized using a daily or monthly pro
rata method over the terms of the policies.
All insurance-related revenues, benefits, losses and expenses are reported net
of reinsurance ceded.
REINSURANCE
The Company uses reinsurance to manage certain risks associated with its
insurance operations. These reinsurance arrangements provide for greater
diversification of business, allow management to control exposure to potential
risks arising from large losses and provide additional capacity for growth.
The Company's life insurance operations cede reinsurance to various reinsurers.
The cost of reinsurance is generally amortized over the contract periods of the
reinsurance agreements.
The Company's property-casualty operations assume and cede reinsurance,
principally as a participant in a reinsurance pooling agreement with certain
affiliates. The Company's contracts are generally prospective and the cost of
insurance is amortized over the contract periods in proportion to the amount of
insurance protection provided. During 1996, the Company had one reinsurance
contract with both retrospective and prospective provisions. The retrospective
portion of the contract was accounted for separately and the related net loss
relating to that portion of the contract was deferred and amortized over the
remaining terms of the underlying policies in proportion to the amount of
insurance protection provided.
OTHER INCOME AND OTHER EXPENSES
Other income and other expenses include revenue and expenses generated by the
Company's various non-insurance subsidiaries for investment advisory, marketing
and distribution, and leasing services. A portion of these activities are
performed on behalf of affiliates of the Company. In addition, certain revenue
generated by the Company's insurance subsidiaries have been classified as other
income. During the years ended December 31, 1997, 1996 and 1995, revenues of the
insurance subsidiaries included as other income aggregated $4.6 million, $3.2
million and $9.8 million, respectively. Lease income from leases with affiliates
totaled $3.0 million for the year ended December 31, 1997 and $2.4 million for
each of the years ended December 31, 1996 and 1995. Investment advisory fee
income
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from affiliates totaled $1.2 million, $0.9 million and $0.7 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (Statement) No. 128, "Earnings per Share".
Statement No. 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is similar to
the previously reported fully diluted earnings per share, except in determining
the number of dilutive shares outstanding for options and warrants. Under
Statement No. 128, diluted earnings per share assumes the proceeds that would be
received upon the exercise of all dilutive options and warrants would be used to
repurchase the Company's common shares at the average market price of such stock
during the period. Under prior rules, the higher of the average market price or
ending market price was used. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to the
requirements of Statement No. 128.
DIVIDENDS PER COMMON SHARE
During the years ended December 31, 1997 and 1996, the Company paid cash
dividends totaling $0.40 and $0.07 per common share, respectively. No dividends
were paid during the year ended December 31, 1995.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 consolidated financial statements have been
reclassified to conform to the 1997 financial statement presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. For
example, significant estimates and assumptions are utilized in the calculation
of deferred policy acquisition costs, policyholder liabilities and accruals and
valuation allowances on investments. It is reasonably possible that actual
experience could differ from the estimates and assumptions utilized which could
have a material impact on the consolidated financial statements.
PENDING ACCOUNTING CHANGES
In June 1997, the FASB 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 continue to report two primary operating
segments: life and property-casualty. 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.
Also in June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income". Statement No. 130 establishes standards for reporting comprehensive
income and its components which include net income and items currently recorded
directly in stockholders' equity such as unrealized gains and losses on fixed
maturity securities classified as available for sale. The impact of Statement
No. 130 is not expected to be material to the Company as the Statement does not
change the computation or disclosure of net income or stockholders' equity.
Statement No. 130 is effective for and will be adopted in the first quarter of
1998.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY AND MINORITY INTEREST
On March 12, 1996, the Company's stockholders approved a change to the Company's
capital structure and a related revision to the Company's Articles of
Incorporation (the Recapitalization). The restated Articles of Incorporation
authorize the Company to issue 88,500,000 shares of Class A common stock,
without par value; 1,500,000 shares of Class B common stock, without par value,
and 10,000,000 shares of preferred stock. Pursuant to the Recapitalization, each
outstanding share of common stock prior to Recapitalization was converted on a
pro rata basis to 1,900 shares of Class A common stock and 100 shares of Class B
common stock.
On April 29, 1996, the Company designated 5,000,000 shares of its preferred
stock as Series A preferred stock and on July 18, 1996, such shares were
exchanged for 5,000,000 shares of Class A common stock. The Series A preferred
stock paid quarterly cash dividends of $0.25 per share and had voting rights
identical to that of Class A common stock. As described below, the Series A
preferred stock was redeemed during 1997.
On May 30, 1997, FBL Financial Group Capital Trust (the Trust), a consolidated
wholly-owned subsidiary of the Company, issued $97.0 million of 5% Preferred
Securities to the Company's majority stockholder, the Iowa Farm Bureau
Federation. In connection with the Trust's issuance of the 5% Preferred
Securities and the related purchase by the Company of all of the Trust's common
securities, the Company issued to the Trust $100.0 million principal amount of
its 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the Notes).
The sole assets of the Trust are and will be the Notes and any interest accrued
thereon. The interest payment dates on the Notes correspond to the distribution
dates on the 5% Preferred Securities. The 5% Preferred Securities, which have a
liquidation value of $1,000.00 per share plus accrued and unpaid distributions,
mature simultaneously with the Notes. As of December 31, 1997, 97,000 shares of
5% Preferred Securities were outstanding, all of which are unconditionally
guaranteed by the Company.
Concurrent with the issuance of the 5% Preferred Securities, the Company
purchased from the Iowa Farm Bureau Federation the Company's Series A preferred
stock at its liquidation value of $100.0 million. In addition, the Company
issued 5,000,000 shares of Series B preferred stock to the Iowa Farm Bureau
Federation for $3.0 million. Each share of Series B preferred stock has a
liquidation preference of $0.60 and voting rights identical to that of Class A
common stock. The Series B preferred stock pays cumulative annual cash dividends
of $0.03 per share, payable quarterly, and is redeemable by the Company, at the
option of the Company, at $0.60 per share plus unpaid dividends if the stock
ceases to be beneficially owned by a Farm Bureau organization.
The purchase of Series A preferred stock and simultaneous issuance of Series B
preferred stock and 5% Preferred Securities were treated as noncash transactions
for purposes of the statement of cash flows.
On March 18, 1997, the Company's Board of Directors approved a plan to
repurchase up to 1,000,000 unregistered shares of Company's Class A common
stock. On April 4, 1997, the Company purchased 965,370 shares of Class A common
stock under this plan at $25.725 per share ($24.8 million), the average of the
closing prices over the prior ten days of trading on the New York Stock
Exchange. The shares were purchased from certain Farm Bureau property-casualty
insurance companies which had a concentration of their investments in the
Company. The concentrations arose principally due to the appreciation of the
Company's stock price which caused the investments to exceed statutory or
internal guidelines. 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.
Holders of the Class A common stock and Series preferred stock, together as a
group, and Class B common stock vote as separate classes on all issues. Only
holders of the Class A common stock and Series preferred stock vote for the
election of Class A Directors (three to five) and only holders of the Class B
common stock vote for the election of Class B Directors (ten to twenty). Voting
for the Directors is noncumulative. In addition, various ownership aspects of
the Company's Class B common stock are governed by a Class B Shareholder
Agreement which results in the Iowa Farm Bureau Federation, which owns 66.4% of
the Company's voting stock as of December 31, 1997, maintaining control of the
Company. Holders of Class A common stock and Class B common stock are entitled
to share ratably on a share-for-share basis with respect to common stock
dividends.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT OPERATIONS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables contain amortized cost and market value information on
fixed maturities and equity securities at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
---------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
Corporate securities................... $ 5,008 $ 814 $ (8) $ 5,814
Mortgage-backed securities............. 639,623 24,822 (1,833) 662,612
------------- -------------- -------------- --------------
Total fixed maturities..................... $ 644,631 $ 25,636 $ (1,841) $ 668,426
============= ============== ============== ==============
AVAILABLE FOR SALE
---------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997
Bonds:
United States Government and agencies.. $ 115,036 $ 2,439 $ (147) $ 117,328
State, municipal and other governments. 66,190 2,761 (128) 68,823
Public utilities....................... 138,328 6,682 (495) 144,515
Corporate securities................... 847,140 62,157 (6,472) 902,825
Mortgage and asset-backed securities... 492,020 16,857 (1,310) 507,567
Redeemable preferred stock................. 29,496 1,618 (132) 30,982
------------- -------------- -------------- --------------
Total fixed maturities..................... $ 1,688,210 $ 92,514 $ (8,684) $ 1,772,040
============= ============== ============== ==============
Equity securities.......................... $ 60,509 $ 4,657 $ (7,411) $ 57,755
============= ============== ============== ==============
HELD FOR INVESTMENT
---------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
Bonds:
Corporate securities................... $ 5,009 $ 649 $ (9) $ 5,649
Mortgage-backed securities............. 689,342 20,677 (6,500) 703,519
------------- -------------- -------------- --------------
Total fixed maturities..................... $ 694,351 $ 21,326 $ (6,509) $ 709,168
============= ============== ============== ==============
</TABLE>
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
---------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and agencies.. $ 158,645 $ 688 $ (2,323) $ 157,010
State, municipal and other governments. 33,059 1,180 (84) 34,155
Public utilities....................... 188,898 5,677 (1,785) 192,790
Corporate securities................... 760,233 34,019 (13,070) 781,182
Mortgage and asset-backed securities... 368,740 8,966 (3,417) 374,289
Redeemable preferred stock................. 33,173 1,439 (94) 34,518
------------- -------------- -------------- --------------
Total fixed maturities..................... $ 1,542,748 $ 51,969 $ (20,773) $ 1,573,944
============= ============== ============== ==============
Equity securities.......................... $ 74,792 $ 31,061 $ (18,862) $ 86,991
============= ============== ============== ==============
</TABLE>
Amortized cost of securities held by subsidiaries engaged in the broker-dealer
and investment company industries was $4.3 million and $10.6 million at December
31, 1997 and 1996, respectively. Net unrealized appreciation on these securities
as of December 31, 1997 and 1996, included gross unrealized gains of $0.1
million and $5.6 million, respectively. There were no gross unrealized losses on
these securities at December 31, 1997, and gross unrealized losses totaled $0.3
million at December 31, 1996. Short-term investments have been excluded from the
above schedules as amortized cost approximates market value for these
securities.
The carrying value and estimated market value of the Company's portfolio of
fixed maturity securities at December 31, 1997, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
HELD FOR INVESTMENT AVAILABLE FOR SALE
------------------------------- ------------------------------
ESTIMATED ESTIMATED
AMORTIZED COST MARKET VALUE AMORTIZED COST MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less.................. $ - $ - $ 28,832 $ 28,889
Due after one year through five years.... - - 187,614 194,091
Due after five years through ten years... 5,008 5,814 269,686 286,526
Due after ten years...................... - - 680,562 723,985
------------- -------------- -------------- --------------
5,008 5,814 1,166,694 1,233,491
Mortgage and asset-backed securities..... 639,623 662,612 492,020 507,567
Redeemable preferred stocks.............. - - 29,496 30,982
------------- -------------- -------------- --------------
$ 644,631 $ 668,426 $ 1,688,210 $ 1,772,040
============= ============== ============== ==============
</TABLE>
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The unrealized appreciation or depreciation on fixed maturity and equity
securities available for sale is reported as a separate component of
stockholders' equity, reduced by adjustments to deferred policy acquisition
costs, value of insurance in force acquired and unearned revenue reserve that
would have been required as a charge or credit to income had such amounts been
realized, and a provision for deferred income taxes. Net unrealized investment
gains as reported were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unrealized appreciation on fixed maturity and equity securities available
for sale.............................................................. $ 81,076 $ 43,395
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs..................................... (6,019) (2,021)
Value of insurance in force acquired.................................. (1,061) 1,104
Unearned revenue reserve.............................................. 709 382
Provision for deferred income taxes....................................... (26,146) (15,002)
------------ ------------
Net unrealized investment gains........................................... $ 48,559 $ 27,858
============ ============
</TABLE>
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loan portfolio consists principally of commercial
mortgage loans. The Company's lending policies require that the loans be
collateralized by the value of the related property, establish limits on the
amount that can be loaned to one borrower and require diversification by
geographic location and collateral type. Regions in which at least 20% of the
Company's mortgage loan portfolio is invested during the years presented
include: West South Central (25% in 1997 and 17% in 1996), which includes
Oklahoma and Texas; Pacific (24% in 1997 and 26% in 1996), which includes
California, Oregon and Washington; and Mountain (16% in 1997 and 22% in 1996),
which includes Arizona, Colorado, Idaho, New Mexico, Utah and Wyoming. Mortgage
loans on real estate have also been analyzed during the years presented by
collateral types with office buildings (48% in 1997 and 1996) and retail
facilities (33% in 1997 and 32% in 1996), representing the largest holdings.
The Company has also provided an allowance for possible losses against its
mortgage loan portfolio. An analysis of this allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year................................ $ 1,128 $ 800 $ 800
Realized losses......................................... - 2,983 10
Uncollectible amounts written off, net of recoveries... (316) (2,655) (10)
--------------- --------------- --------------
Balance at end of year...................................... $ 812 $ 1,128 $ 800
=============== =============== ==============
</TABLE>
Impaired loans (those loans in which the Company does not believe it will
collect all amounts due according to the contractual terms of the respective
loan agreements) totaled $0.3 million at December 31, 1997 and $4.0 million at
December 31, 1996. No valuation allowance was established on the impaired loans
at December 31, 1997, and a valuation allowance of $0.5 million was established
at December 31, 1996.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET INVESTMENT INCOME
Components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Held for investment...................................... $ 53,726 $ 56,062 $ 50,050
Available for sale....................................... 129,820 113,919 108,748
Equity securities........................................... 1,283 1,367 1,163
Mortgage loans on real estate............................... 26,160 24,791 23,850
Investment real estate...................................... 4,902 5,024 4,970
Policy loans................................................ 7,587 7,314 7,189
Other long-term investments................................. 3,143 3,860 26,249
Short-term investments...................................... 4,142 3,825 3,344
Other....................................................... 4,523 3,680 5,667
-------------- -------------- --------------
235,286 219,842 231,230
Less investment expenses.................................... (11,013) (9,113) (8,122)
-------------- -------------- --------------
Net investment income....................................... $ 224,273 $ 210,729 $ 223,108
============== ============== ==============
</TABLE>
Investment income from other long-term investments, which includes investments
held by subsidiaries engaged in the broker-dealer and investment company
industries, is comprised of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Dividends, interest and other income........................ $ 2,011 $ 751 $ 519
Net realized gain (loss) from investment transactions....... 6,288 (1,811) 25,810
Change in unrealized appreciation/depreciation of investments (5,156) 4,920 (80)
-------------- -------------- --------------
$ 3,143 $ 3,860 $ 26,249
============== ============== ==============
</TABLE>
During the year ended December 31, 1997, 13 securities with a total fair value
of $15.0 million were transferred to Farm Bureau Life from the Company's venture
capital subsidiary, upon its dissolution. During the year ended December 31,
1995, two securities with a total fair value of $27.6 million were transferred
out of the subsidiary. Realized gains (recognized in net investment income) of
$6.3 million and $24.6 million were recognized on the 1997 and 1995 transfers,
respectively, although neither transfer had an impact on net income (as
unrealized appreciation had been reported prior to the transfer).
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REALIZED AND UNREALIZED GAINS AND LOSSES
Realized gains (losses) and the change in unrealized appreciation/depreciation
on investments, excluding amounts attributed to investments held by subsidiaries
engaged in the broker-dealer and investment company industries discussed above,
are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REALIZED
Fixed maturities - available for sale....................... $ 4,328 $ 1,079 $ 5,524
Equity securities........................................... 37,468 56,584 (647)
Mortgage loans on real estate............................... - (2,983) (10)
Investment real estate...................................... (28) 411 (1)
Other long-term investments................................. (300) (154) (158)
Securities and indebtedness of related parties.............. (487) (1,387) 1,182
Notes receivable and other.................................. - (757) (7)
-------------- -------------- --------------
Realized gains on investments............................... $ 40,981 $ 52,793 $ 5,883
============== ============== ==============
UNREALIZED
Fixed maturities:
Held for investment...................................... $ 8,978 $ (14,510) $ 60,854
Available for sale....................................... 52,634 (36,256) 119,406
Equity securities........................................... (14,953) 5,523 9,960
-------------- -------------- --------------
Change in unrealized appreciation/depreciation of investments $ 46,659 $ (45,243) $ 190,220
============== ============== ==============
</TABLE>
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
An analysis of sales, maturities and principal repayments of the Company's fixed
maturities portfolio for the years ended December 31, 1997, 1996, and 1995 is as
follows:
<TABLE>
<CAPTION>
GROSS REALIZED GROSS REALIZED
AMORTIZED COST GAINS LOSSES PROCEEDS
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Scheduled principal repayments and
calls:
Available for sale.................. $ 180,918 $ 42 $ (2) $ 180,958
Held for investment................. 50,366 - - 50,366
Sales - available for sale............ 111,069 6,492 (2,204) 115,357
-------------- -------------- -------------- --------------
Total............................. $ 342,353 $ 6,534 $ (2,206) $ 346,681
============== ============== ============== ==============
YEAR ENDED DECEMBER 31, 1996
Scheduled principal repayments and
calls:
Available for sale.................. $ 159,214 $ - $ - $ 159,214
Held for investment................. 43,023 - - 43,023
Sales - available for sale............ 99,136 5,268 (3,689) 100,715
-------------- -------------- -------------- --------------
Total............................. $ 301,373 $ 5,268 $ (3,689) $ 302,952
============== ============== ============== ==============
YEAR ENDED DECEMBER 31, 1995
Scheduled principal repayments and
calls:
Available for sale.................. $ 121,276 $ 12 $ (44) $ 121,244
Held for investment................. 20,890 - - 20,890
Sales - available for sale............ 134,986 7,371 (1,601) 140,756
-------------- -------------- -------------- --------------
Total............................. $ 277,152 $ 7,383 $ (1,645) $ 282,890
============== ============== ============== ==============
</TABLE>
Realized losses totaling $0.5 million and $0.2 million were incurred during the
years ended December 31, 1996 and 1995, respectively, as a result of writedowns
for other than temporary impairment of fixed maturity securities.
No such writedowns were recorded during the year ended December 31, 1997.
Income taxes during the years ended December 31, 1997, 1996 and 1995 include a
provision of $14.3 million, $18.5 million and $2.1 million, respectively, for
the tax effect of realized gains.
OTHER
In December 1997, the Company acquired a 35% interest in an unaffiliated life
insurance company for $25.0 million. The excess (approximately $5.1 million) of
the carrying amount of the investment, which is classified as securities and
indebtedness of related parties on the consolidated balance sheet, over the
amount of underlying equity in net assets is attributable to goodwill and is
being amortized over a 20 year period. The investment is being accounted for
using the equity method. The insurance company underwrites and markets life
insurance and annuity products throughout the United States.
Also in December 1997, the Company acquired all of the common stock of EquiTrust
Life Insurance Company for $9.7 million. EquiTrust Life Insurance Company is a
shell life insurance company licensed in 38 states. Goodwill totaling $1.5
million was recorded in connection with the acquisition and is being amortized
over 20 years.
In February 1996, an equity investee of the Company completed an initial public
offering which resulted in an increase of $4.9 million, net of $2.6 million in
taxes, in the Company's share of the investee's stockholders' equity. This
increase was credited directly to common stock, allocated proportionately among
Class A common stock and Class B common stock based on shares outstanding.
Subsequent to the public offering, the Company reclassified the investment to
equity securities. The Company has sold the majority of its holdings in this
investment and
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
realized gains of $24.3 million during the year ended December 31, 1997 and
$50.4 million during the year ended December 31, 1996.
At December 31, 1997, affidavits of deposits covering investments with a
carrying value totaling $2,085.4 million were on deposit with state agencies to
meet regulatory requirements.
At December 31, 1997, the Company had committed to provide additional funding
for mortgage loans on real estate aggregating $10.4 million. These commitments
arose in the normal course of business at terms which are comparable to similar
investments.
The carrying value of investments which have been non-income producing for the
twelve months preceding December 31, 1997, include: fixed maturities - $3.2
million; mortgage loans on real estate - $0.2 million; and other long-term
investments - $1.6 million.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States Government) exceeded ten percent of stockholders'
equity at December 31, 1997.
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the consolidated balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 also excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements and allows companies to forego the disclosures when
those estimates can only be made at excessive cost. Accordingly, the aggregate
fair value amounts presented herein are limited by each of these factors and do
not purport to represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
FIXED MATURITY SECURITIES: Fair values for fixed maturity securities are based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using a matrix calculation assuming a
spread (based on interest rates and a risk assessment of the bonds) over U. S.
Treasury bonds.
EQUITY SECURITIES: The fair values for equity securities are based on quoted
market prices, where available. For equity securities that are not actively
traded, estimated fair values are based on values of comparable issues.
MORTGAGE LOANS ON REAL ESTATE AND POLICY LOANS: Fair values are estimated by
discounting expected cash flows using interest rates currently being offered for
similar loans.
OTHER LONG-TERM INVESTMENTS: The fair values for nontraditional debt instruments
and investment deposits are estimated by discounting expected cash flows using
interest rates currently being offered for similar investments. The fair values
for investments held by subsidiaries in the broker-dealer and investment company
industries are based on quoted market prices, where available. For holdings that
are not actively traded, fair values are determined in good faith by the Board
of Directors of the subsidiary holding the security.
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate their fair values.
SECURITIES AND INDEBTEDNESS OF RELATED PARTIES: Fair values for loans and
advances are estimated by discounting expected cash flows using interest rates
currently being offered for similar investments. As allowed by Statement No.
107, fair values are not assigned to investments accounted for using the equity
method.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ASSETS AND LIABILITIES OF SEPARATE ACCOUNTS: Separate account assets and
liabilities are reported at estimated fair value in the Company's consolidated
balance sheet.
FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' FUNDS: Fair values of the
Company's liabilities under contracts not involving significant mortality or
morbidity risks (principally deferred annuities, deposit administration funds
and supplementary contracts) are stated at cash surrender value, the cost the
Company would incur to extinguish the liability. The Company is not required to
estimate the fair value of its liabilities under other contracts.
LONG-TERM DEBT: The fair values for long-term debt are estimated using
discounted cash flow analysis based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED STOCK OF SUBSIDIARY TRUST:
Fair values are estimated by discounting expected cash flows using interest
rates currently being offered for similar securities.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement No.
107:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
----------------- ---------------- ---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities:
Held for investment.................. $ 644,631 $ 668,426 $ 694,351 $ 709,168
Available for sale................... 1,772,040 1,772,040 1,573,944 1,573,944
Equity securities....................... 57,755 57,755 86,991 86,991
Mortgage loans on real estate........... 323,605 337,868 293,777 308,802
Policy loans............................ 121,941 131,311 118,996 118,996
Other long-term investments............. 14,438 14,036 24,287 23,801
Cash and short-term investments......... 37,958 37,958 71,941 71,941
Securities and indebtedness of related
parties.............................. 5,451 5,829 11,658 12,292
Assets held in separate accounts........ 138,409 138,409 79,043 79,043
MINORITY INTEREST - Company-obligated
mandatorily redeemable preferred stock
of subsidiary trust.................. $ 97,000 $ 54,921 $ - $ -
LIABILITIES
Future policy benefits.................. $ 1,013,503 $ 988,535 $ 978,307 $ 950,870
Other policyholders' funds.............. 221,675 221,675 211,029 211,029
Long-term debt.......................... 24,577 24,583 24,581 24,590
Liabilities related to separate accounts 138,409 138,409 79,043 79,043
</TABLE>
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REINSURANCE AND POLICY PROVISIONS
LIFE INSURANCE OPERATIONS
An analysis of the value of insurance in force acquired for the years ended
December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Excluding impact of net unrealized investment gains and losses:
Balance at beginning of year............................. $ 18,824 $ 18,900 $ 19,571
Accretion of interest during the year.................... 1,062 1,226 1,250
Amortization of asset.................................... (2,781) (1,302) (1,921)
-------------- -------------- --------------
Balance prior to impact of net unrealized investment gains
and losses............................................... 17,105 18,824 18,900
Impact of net unrealized investment gains and losses........ (1,061) 1,104 (4,451)
-------------- -------------- --------------
Balance at end of year...................................... $ 16,044 $ 19,928 $ 14,449
============== ============== ==============
</TABLE>
Net amortization of the value of insurance in force acquired, based on expected
future gross profits/margins, for the next five years and thereafter is expected
to be as follows: 1998 - $1.0 million; 1999 - $1.0 million; 2000 - $1.1 million;
2001 - $1.1 million; 2002 - $1.1 million; and thereafter, through 2023 - $11.8
million.
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers. Reinsurance coverages
for life insurance vary according to the age and risk classification of the
insured with retention limits ranging up to $0.5 million of coverage per
individual life. The Company does not use financial or surplus relief
reinsurance. Life insurance in force ceded on a consolidated basis totaled
$1,248.6 million (6.8% of total life insurance in force) at December 31, 1997
and $1,082.3 million (6.3% of total life insurance in force) at December 31,
1996.
Reinsurance contracts do not relieve the Company of its obligations to its
policyholders. To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, the Company's life insurance
subsidiaries would be liable for these obligations, and payment of these
obligations could result in losses to the Company. To limit the possibility of
such losses, the Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk.
No allowance for uncollectible amounts has been established against the
Company's asset for reinsurance recoverable since none of the receivables are
deemed to be uncollectible. Insurance premiums and product charges have been
reduced by $6.0 million, $5.7 million and $14.9 million and insurance benefits
have been reduced by $6.6 million, $5.1 million and $8.5 million during the
years ended December 31, 1997, 1996 and 1995, respectively, as a result of
cession agreements. The amount of reinsurance assumed is not significant.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unpaid claims on accident and health policies (entirely disability income
products) include amounts for losses and related adjustment expense and are
estimates of the ultimate net costs of all losses, reported and unreported.
These estimates are subject to the impact of future changes in claim severity,
frequency and other factors. The activity in the liability for unpaid claims and
related adjustment expense, net of reinsurance, is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Unpaid claims liability, net of related reinsurance, at
beginning of year....................................... $ 14,801 $ 14,964 $ 11,982
Add:
Provision for claims occurring in the current year...... 8,289 5,334 5,522
Increase (decrease) in estimated expense for claims
occurring in the prior years......................... 3,038 (485) 2,251
-------------- -------------- --------------
Incurred claim expense during the current year............. 11,327 4,849 7,773
Deduct expense payments for claims occurring during:
Current year............................................ 2,010 1,996 2,306
Prior years............................................. 2,919 3,016 2,485
-------------- -------------- --------------
4,929 5,012 4,791
-------------- -------------- --------------
Unpaid claims liability, net of related reinsurance, at end
of year................................................. 21,199 14,801 14,964
Active life reserve........................................ 16,924 16,419 15,871
-------------- -------------- --------------
Net accident and health reserves........................... 38,123 31,220 30,835
Reinsurance ceded.......................................... 2,940 2,498 1,819
-------------- -------------- --------------
Gross accident and health reserves......................... $ 41,063 $ 33,718 $ 32,654
============== ============== ==============
</TABLE>
Reserves for unpaid claims are developed using industry mortality and morbidity
data. One year development on prior year reserves represents Company experience
being more or less favorable than that of the industry. Over time, the Company
expects its experience with respect to disability income business to be
comparable to that of the industry. A certain level of volatility in development
is inherent in these reserves since the underlying block of business is
relatively small.
PROPERTY-CASUALTY OPERATIONS
Risks are reinsured with other companies to permit the recovery of a portion of
losses and loss adjustment expenses incurred and are treated (to the extent of
the reinsurance) as risks for which the Company is not liable; however, the
Company remains liable to the extent that reinsuring companies cannot meet their
obligations under these reinsurance contracts.
Property-casualty business written by Utah Insurance is currently pooled with
business written by Farm Bureau Mutual Insurance Company and three other
property-casualty affiliates (hereinafter, the Farm Bureau Mutual pool). Under
the terms of the reinsurance agreement, Utah Insurance and the other affiliates
cede to Farm Bureau Mutual Insurance Company all of their insurance business and
assume back from Farm Bureau Mutual Insurance Company an amount equal to their
participation in the pooling agreement. Also, losses, loss adjustment expenses,
and other underwriting and administrative expenses are prorated among the
companies on the basis of their participation in the pooling agreement. Through
December 31, 1995, Utah Insurance's participation in the Farm Bureau Mutual pool
(which only included three companies at the time) was 8%. On June 30, 1996, Utah
Insurance's share of the pool was increased to 20%, retroactive to January 1,
1996. Effective January 1, 1997, Western Agricultural Insurance Company and
Western Farm Bureau Mutual Insurance Company became full participants in the
Farm Bureau Mutual pool and Utah Insurance's pool participation percentage
decreased from 20% to 18%. Accordingly, the property-casualty results included
in the statement of operations include that amount applicable to 8% of the Farm
Bureau Mutual pool for the year ended December 31, 1995 and six months ended
June 30, 1996, 20% of the Farm Bureau Mutual pool for the six month period ended
December 31, 1996 and 18% of the Farm Bureau Mutual pool for the year ended
December 31, 1997. Participation in the development on loss and loss adjustment
expense reserves during the periods remain at the rate in effect when the
underlying claims were incurred.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with retrospective accounting for reinsurance assumed, the
property-casualty operating results for the first six months of 1996
attributable to the increase in the Farm Bureau Mutual pool percentage ($0.8
million loss) was deferred and amortized over the premium paying period of the
underlying policies (generally 6 to 12 months). As a result of the increase in
the Farm Bureau Mutual pool participation percentage, the Company recorded
additional investments ($13.5 million), deferred policy acquisition costs ($1.6
million), other assets ($1.3 million), reserves and unearned premiums on
property-casualty policies ($16.8 million) and other liabilities ($0.4 million).
There was no significant transfer of assets or liabilities in connection with
the decrease in Farm Bureau Mutual pool participation from 20% to 18% due
primarily to the increase in the size of the pool with the addition of Western
Agricultural Insurance Company and Western Farm Bureau Mutual Insurance Company.
Property-casualty premiums earned and losses and loss adjustment expenses
incurred, reflect the following reinsurance amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
PREMIUMS EARNED
Direct premiums written.................................... $ 29,230 $ 27,256 $ 26,244
Assumed from non-affiliates................................ - 1 5
Ceded to non-affiliates.................................... (630) (670) (615)
Assumed from Farm Bureau Mutual pool....................... 50,934 32,264 18,851
Ceded to Farm Bureau Mutual pool........................... (28,600) (26,587) (25,634)
-------------- -------------- --------------
Net premiums written....................................... 50,934 32,264 18,851
Decrease (increase) in reserve for unearned premiums, net
of reinsurance and effect of changes in reinsurance pool
participation percentage................................ (1,954) 378 (150)
Increase (decrease) in accrued retrospective premiums...... (231) 333 8
-------------- -------------- --------------
Total premiums earned...................................... $ 48,749 $ 32,975 $ 18,709
============== ============== ==============
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED
Direct losses and loss adjustment expenses paid............ $ 21,094 $ 18,296 $ 18,532
Net ceded to non-affiliates................................ (1,138) (241) 91
Assumed from Farm Bureau Mutual pool....................... 34,871 23,484 13,030
Ceded to Farm Bureau Mutual pool........................... (19,956) (18,055) (18,623)
-------------- -------------- --------------
Net losses and loss adjustment expenses paid............... 34,871 23,484 13,030
Increase in losses and loss adjustment expense reserves,
net of reinsurance and effect of changes in reinsurance
pool participation percentage........................... 4,088 4,881 591
-------------- -------------- --------------
Total losses and loss adjustment expenses incurred......... $ 38,959 $ 28,365 $ 13,621
============== ============== ==============
</TABLE>
The difference between premiums on a written and on an earned basis is not
significant.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The activity in the reserves on property-casualty policies, net of reinsurance
and salvage and subrogation recoverables, is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Reserves on property-casualty policies (gross), beginning
of year................................................. $ 43,189 $ 29,984 $ 28,828
Less reinsurance recoverable on unpaid losses and loss
adjustment expenses, beginning of year.................. (19,489) (17,210) (16,646)
-------------- -------------- --------------
Reserve for losses and loss adjustment expenses, net of
related reinsurance, beginning of year.................. 23,700 12,774 12,182
Add:
Provision for losses and loss adjustment expenses for
claims occurring in the current year................. 40,655 29,495 14,529
Decrease in estimated losses and loss adjustment
expenses for claims occurring in the prior years..... (1,696) (1,130) (908)
-------------- -------------- --------------
Incurred losses and loss adjustment expenses during the
current year............................................ 38,959 28,365 13,621
Reserves assumed with increase in reinsurance pool
participation percentage................................ - 6,045 -
Deduct loss and loss adjustment expense payments for
claims occurring during:
Current year............................................ (23,929) (18,013) (7,678)
Prior years............................................. (10,943) (5,471) (5,351)
-------------- -------------- --------------
(34,872) (23,484) (13,029)
-------------- -------------- --------------
Reserve for losses and loss adjustment expenses, net of
related reinsurance, end of year........................ 27,787 23,700 12,774
Reinsurance recoverables on unpaid losses and loss
adjustment expenses, end of year........................ 18,677 19,489 17,210
-------------- -------------- --------------
Reserves on property-casualty policies (gross), end of year. $ 46,464 $ 43,189 $ 29,984
============== ============== ==============
</TABLE>
6. INCOME TAXES
The Company files a consolidated federal income tax return with Utah Insurance,
Farm Bureau Life and certain of its subsidiaries and FBL Financial Services,
Inc. and its subsidiaries. The companies included in the consolidated federal
income tax return each report current income tax expense as allocated under a
consolidated tax allocation agreement. Generally, this allocation results in
profitable companies recognizing a tax provision as if the individual company
filed a separate return and loss companies recognizing benefits to the extent
their losses contribute to reduce consolidated taxes. The companies file
separate state income tax returns. Western Life files a separate federal income
tax return.
Deferred income taxes have been established based upon the temporary differences
between the financial statement and income tax bases of assets and liabilities
within each entity. The reversal of the temporary differences will result in
taxable or deductible amounts in future years when the related asset or
liability is recovered or settled.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Taxes provided in consolidated statements of income on:
Income before minority interest in earnings of
subsidiaries and equity income:
Current.............................................. $ 47,615 $ 34,668 $ 19,230
Deferred............................................. (9,270) 3,110 12,840
-------------- -------------- --------------
38,345 37,778 32,070
Equity income:
Current.............................................. 1,048 1,746 (212)
Deferred............................................. 78 597 1,074
-------------- -------------- --------------
1,126 2,343 862
Taxes provided in consolidated statement of changes in
stockholders' equity:
Change in net unrealized investment gains/losses -
deferred............................................. 11,144 (5,357) 37,503
Adjustment resulting from capital transaction of equity
investee - deferred.................................. - 2,617 -
Adjustment resulting from the issuance of shares under
stock option plan - current.......................... (335) - -
-------------- -------------- --------------
10,809 (2,740) 37,503
-------------- -------------- --------------
$ 50,280 $ 37,381 $ 70,435
============== ============== ==============
</TABLE>
The effective tax rate on income before income taxes, minority interest in
earnings of subsidiaries and equity income is different from the prevailing
federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes, minority interest in earnings
of subsidiaries and equity income....................... $ 115,264 $ 116,853 $ 90,447
============== ============== ==============
Income tax at federal statutory rate (35%)................. $ 40,342 $ 40,899 $ 31,657
Tax effect (decrease) of:
Tax-exempt interest income.............................. (604) (559) (586)
Tax-exempt dividend income.............................. (1,213) (1,257) (803)
State income taxes...................................... 240 231 1,337
Dividends on company-obligated mandatorily redeemable
preferred stock of subsidiary trust................... (990) - -
Other items............................................. 570 (1,536) 465
-------------- -------------- --------------
Income tax expense......................................... $ 38,345 $ 37,778 $ 32,070
============== ============== ==============
</TABLE>
The Internal Revenue Service (IRS) has examined the Company's tax years through
1994 and the Company is in the process of appealing the proposed adjustments to
the IRS's Appeals Division for tax years 1988 through 1994. All tax years prior
to 1993 are settled for Western Life. Management believes that any adjustments
raised by the IRS as a result of their examinations will have an immaterial
impact on the Company's financial statements.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Fixed maturity and equity securities......................... $ 36,452 $ 25,402
Deferred policy acquisition costs............................ 53,101 48,367
Value of insurance in force acquired......................... 5,613 6,961
Deferred investment gains.................................... - 10,177
Other........................................................ 18,175 19,672
------------- -------------
113,341 110,579
Deferred income tax assets:
Future policy benefits....................................... (44,071) (44,030)
Accrued dividends............................................ (3,533) (3,209)
Accrued pension costs........................................ (11,831) (13,290)
Other........................................................ (11,342) (9,438)
------------- -------------
(70,777) (69,967)
------------- -------------
Deferred income tax liability.................................... $ 42,564 $ 40,612
============= =============
</TABLE>
Prior to 1984, a portion of current income of the Company's life insurance
subsidiaries was not subject to current income taxation, but was accumulated,
for tax purposes, in a memorandum account designated as "policyholders' surplus
account". The aggregate accumulation in this account at December 31, 1997 was
$11.1 million and $0.7 million for Farm Bureau Life and Western Life,
respectively. Should the policyholders' surplus account of Farm Bureau Life and
Western Life exceed the limitation prescribed by federal income tax law, or
should distributions be made by Farm Bureau Life and Western Life to the parent
company in excess of $445.3 million and $136.9 million, respectively, such
excess would be subject to federal income taxes at rates then effective.
Deferred income taxes of $4.2 million have not been provided on amounts included
in this memorandum account since the Company contemplates no action and can
foresee no events that would create such a tax.
Deferred income taxes were also reported on equity income. These taxes arise
from the recognition of income and losses differently for purposes of filing
federal income tax returns than for financial reporting purposes.
7. CREDIT ARRANGEMENTS
As an investor in the Federal Home Loan Bank (FHLB), the Company has the right
to borrow up to $43.9 million from the FHLB as of December 31, 1997. As of
December 31, 1997 and 1996, the Company had no outstanding debt under this
credit arrangement.
The Company's long-term debt consists primarily of a lease-backed note payable
with an outstanding balance of $24.5 million at December 31, 1997 and 1996.
Interest on the note is charged at a variable rate equal to LIBOR plus 0.31%
(6.03% at December 31, 1997 and 5.81% at December 31, 1996) with a maximum rate
of 14.0% per annum. The note is due August 1999, and is secured by rentals to be
received under certain operating leases with members of the consolidated group
and other affiliates.
8. RETIREMENT AND COMPENSATION PLANS
The Company participates with several affiliates in various defined benefit
plans covering substantially all employees. The benefits of these plans are
based primarily on years of service and employees' compensation. The Company and
affiliates have adopted a policy of allocating the net periodic pension cost of
the plans between themselves generally on a basis of time incurred by the
respective employees for each employer. Such allocations are reviewed annually.
Pension expense aggregated $8.3 million, $9.6 million and $8.1 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Prior to January 1, 1996, the Company provided benefits to agents of the Company
and certain of its affiliates through the Agents' Career Incentive Plan. Company
contributions to the plan were based upon the individual agent's earned
commissions and varied based upon the overall production level and the number of
years of service. Company contributions charged to expense with respect to this
plan during the year ended December 31, 1995 were $1.4 million. During 1996, in
conjunction with a restructuring of the agents' compensation program,
contributions to this plan were discontinued.
The Company has established deferred compensation plans for certain key current
and former employees and has certain other benefit plans which provide for
retirement and other benefits. These plans have been accrued or funded as deemed
appropriate by management of the Company.
Certain of the assets related to these plans are on deposit with the Company and
amounts relating to these plans are included in the financial statements herein.
In addition, certain amounts included in the policy liabilities for interest
sensitive products relate to deposit administration funds maintained by the
Company on behalf of affiliates offering substantially the same benefit programs
as the Company.
In addition to benefits offered under the aforementioned benefit plans, the
Company and several other affiliates sponsor a plan that provides group term
life insurance benefits to retired full-time employees who have worked ten years
and attained age 55 while in service with the Company. Postretirement benefit
expense is allocated in a manner consistent with pension expense discussed
above. Postretirement pension expense aggregated $0.3 million, $0.2 million and
$0.1 million for each of the years ended December 31, 1997, 1996 and 1995,
respectively.
9. STOCK COMPENSATION
During 1996, the Company adopted the 1996 Class A Common Stock Compensation Plan
(the Plan) under which incentive stock options, nonqualified stock options,
bonus stock, restricted stock and stock appreciation rights may be granted to
directors, officers and employees. Option shares granted to directors are fully
vested upon grant and have a contractual term that varies with the length of
time the director remains on the Board. Option shares granted to officers and
employees generally vest over a period up to five years contingent upon
continued employment with the Company and have a contractual term of 10 years.
Information relating to stock options during 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE TOTAL
SHARES PER SHARE EXERCISE PRICE
---------------- ---------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Shares granted during 1996 and under option at
December 31, 1996....................................... 821,232 $ 17.67 $ 14,511
Granted................................................. 68,842 26.07 1,795
Exercised............................................... 68,289 17.58 1,201
Forfeited............................................... 19,949 17.61 351
-------------- --------------
Shares under option at December 31, 1997.................... 801,836 18.40 $ 14,754
============== ==============
Exercisable options:
December 31, 1996....................................... 104,000 $ 17.62 $ 1,832
December 31, 1997....................................... 257,165 17.99 4,626
</TABLE>
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information regarding stock options outstanding at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
CURRENTLY EXERCISABLE
WEIGHTED- -----------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE PRICE EXERCISE PRICE
OUTSTANDING LIFE (IN YEARS) PER SHARE NUMBER PER SHARE
--------------- --------------- -------------- ------------ ---------------
Range of exercise prices:
<S> <C> <C> <C> <C> <C>
At $17.50.............. 710,849 8.32 $ 17.50 242,551 $ 17.50
$17.51 - $25.00........ 72,664 8.99 24.01 10,614 23.64
$25.01 - $32.50........ 12,885 9.42 28.21 2,000 25.25
$32.51 - $40.50........ 5,438 9.81 37.44 2,000 40.50
----------- -----------
$17.50 - $40.50........ 801,836 8.41 18.40 257,165 17.99
=========== ===========
</TABLE>
At December 31, 1997 and 1996, shares of Class A common stock available for
grant as additional awards under the Plan totaled 879,875 and 928,768,
respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related Interpretations in accounting
for its stock options. Under APB 25, because the exercise price of the Company's
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Under the alternative accounting
method provided by Statement No. 123, compensation expense is recognized in an
amount equal to the estimated fair value of stock options on the date of grant.
The Company has not adopted the accounting provisions of Statement No. 123
because the valuation of non-traded stock options is highly subjective and, in
management's opinion, the existing pricing models do not necessarily provide a
reliable single measure of the fair value of the Company's options.
Pro forma information regarding net income and earnings per common share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Risk-free interest rate..................................................... 6.34 % 6.50 %
Dividend yield.............................................................. 1.60 % 1.60 %
Volatility factor of the expected market price.............................. 0.12 0.12
Weighted-average expected life.............................................. 5.1 years 5.1 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company's employee stock options have characteristics significantly different
from those of traded options and the subjective input assumptions can materially
affect the fair value estimate produced by the Black-Scholes option valuation
model.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net earnings and earnings per common share were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net income - as reported....................................................... $ 75,827 $ 82,884
Net income - pro forma......................................................... 75,240 82,488
Earnings per common share - as reported........................................ 4.05 3.74
Earnings per common share - pro forma.......................................... 4.02 3.72
Earnings per common share - assuming dilution, as reported..................... 3.98 3.73
Earnings per common share - assuming dilution, pro forma....................... 3.97 3.72
Weighted-average fair value of options granted during the year................. 4.58 3.53
</TABLE>
The pro forma impact is likely to increase in future years as additional options
are granted and amortized ratably over the vesting period.
10. STOCKHOLDERS' EQUITY OF SUBSIDIARIES
REDEEMABLE PREFERRED STOCK OF SUBSIDIARIES
Western Life is authorized to issue up to 100,000 shares of redeemable preferred
stock in series at $200.00 per share. There were 22,517 and 24,017 preferred
shares outstanding at December 31, 1997 and 1996, respectively, all of which are
currently redeemable at the option of Western Life. Dividends accrue at fixed or
variable rates depending on the series and can range from 7.5% to 15.0%. Under
certain circumstances and with respect to certain matters, the holders of
redeemable preferred stock are entitled to vote separately as a class. The
redeemable preferred stock and related dividends are reported as minority
interest in subsidiaries in the consolidated financial statements.
STATUTORY LIMITATIONS ON SUBSIDIARY DIVIDENDS
The ability of Farm Bureau Life and Western Life to pay dividends to the parent
company is restricted because prior approval of insurance regulatory authorities
is required for payment of dividends to the stockholder which exceed an annual
limitation. During 1998, Farm Bureau Life and Western Life could pay dividends
to the parent company of approximately $37.8 million and $9.0 million,
respectively, without prior approval of insurance regulatory authorities.
Similar restrictions exist with respect to the payments of dividends by Utah
Insurance. Such restrictions are not considered to bear significantly on the
ability of the Company to meet the obligations of any member of the consolidated
group.
STATUTORY ACCOUNTING POLICIES
The financial statements of the Company's insurance subsidiaries included herein
differ from related statutory-basis financial statements principally as follows:
(a) the bond portfolio is segregated into held-for-investment (carried at
amortized cost) and available-for-sale (carried at fair value) classifications
rather than generally being carried at amortized cost; (b) acquisition costs of
acquiring new business are deferred and amortized over the life of the policies
rather than charged to operations as incurred; (c) future policy benefit
reserves for participating traditional life insurance products are based on net
level premium methods and guaranteed cash value assumptions which may differ
from statutory reserves; (d) future policy benefit reserves on certain interest
sensitive products are based on full account values, rather than discounting
methodologies utilizing statutory interest rates; (e) deferred income taxes are
provided for the difference between the financial statement and income tax bases
of assets and liabilities; (f) net realized gains or losses attributed to
changes in the level of market interest rates are recognized as gains or losses
in the statement of income when the sale is completed rather than deferred and
amortized over the remaining life of the fixed maturity security or mortgage
loan; (g) declines in the estimated realizable value of investments are charged
to
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the statement of income when such declines are judged to be other than temporary
rather than through the establishment of a formula-determined statutory
investment reserve (carried as a liability), changes in which are charged
directly to surplus; (h) agents' balances and certain other assets designated as
"non-admitted assets" for statutory purposes are reported as assets rather than
being charged to surplus; (i) revenues for interest sensitive products consist
of policy charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed rather
than premiums received; (j) pension income or expense is recognized in
accordance with Statement No. 87, "Employers' Accounting for Pensions" rather
than in accordance with rules and regulations permitted by the Employee
Retirement Income Security Act of 1974; (k) the financial statements of
subsidiaries are consolidated with those of the insurance subsidiary; and (l)
assets and liabilities are restated to fair values when a change in ownership
occurs that is accounted for as a purchase, with provisions for goodwill and
other intangible assets, rather than continuing to be presented at historical
cost.
The Company's insurance subsidiaries reported the following statutory amounts to
regulatory agencies, after appropriate elimination of intercompany accounts:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- -------------------------------------------------
1997 1996 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Life insurance subsidiaries. $ 360,782 $ 344,965 $ 85,342 $ 83,008 $ 54,441
Property-casualty insurance
subsidiary.............. 21,582 21,992 (129) (3,096) 1,454
------------- ------------- ------------- ------------- -------------
Total....................... $ 382,364 $ 366,957 $ 85,213 $ 79,912 $ 55,895
============= ============= ============= ============= =============
</TABLE>
The National Association of Insurance Commissioners (NAIC) is in the process of
codifying statutory accounting practices (Codification). Codification will
likely change, to some extent, prescribed statutory accounting practices and may
result in changes to the accounting practices that the Company's insurance
subsidiaries use to prepare their statutory-basis financial statements.
Codification, which is expected to be approved by the NAIC in 1998, will require
adoption by the various state insurance departments before it becomes the
prescribed statutory basis of accounting for insurance companies domesticated
within those states. Accordingly, before Codification becomes effective for the
Company's insurance subsidiaries, the respective states of domicile must adopt
Codification as the prescribed basis of accounting on which domestic insurers
must report their statutory-basis results. At this time it is unclear whether
the respective states of domicile will adopt Codification.
11. MANAGEMENT AND OTHER AGREEMENTS
The Company shares certain office facilities and services with the Iowa Farm
Bureau Federation and its affiliated companies. These expenses are allocated by
the Company on the basis of cost and time studies that are updated annually and
consist primarily of salaries and related expenses, travel, and occupancy costs.
In addition, prior to January 1, 1996, the Company participated in a management
agreement with Farm Bureau Management Corporation, a wholly-owned subsidiary of
the Iowa Farm Bureau Federation. Under this agreement, Farm Bureau Management
Corporation provided general business, administration and management services to
the Company. During 1996, the Company assumed responsibility for providing a
majority of these services for itself as well as Farm Bureau Management
Corporation and other affiliates. During the years ended December 31, 1997, 1996
and 1995, the Company incurred expenses under this contract of $0.8 million,
$2.6 million and $3.7 million, respectively. During 1997 and 1996, the Company
earned management fee income of $0.2 million related to these services.
Effective January 1, 1996, the Company entered into marketing agreements with
the property-casualty companies operating within its marketing territory,
including Farm Bureau Mutual Insurance Company and other affiliates. Under the
marketing agreements, the property-casualty companies assumed responsibility for
development and management of the Company's agency force for a fee equal to a
percentage of commissions on first year life insurance premiums and annuity
deposits. During the years ended December 31, 1997 and 1996, the Company paid
$3.9 million and $3.6 million, respectively, to the property-casualty companies
under these arrangements.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is licensed by the Iowa Farm Bureau Federation to use the "Farm
Bureau" and "FB" designations in Iowa. In connection with this license,
royalties of $0.6 million, $0.5 million and $0.3 million were paid to the Iowa
Farm Bureau Federation for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company has similar arrangements with Farm Bureau
organizations in other states in its market territory. Total royalties paid to
Farm Bureau organizations other than the Iowa Farm Bureau Federation in 1997,
1996 and 1995 were $1.2 million, $0.9 million and $0.6 million, respectively.
12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company may be involved in litigation
where amounts are alleged that are substantially in excess of contractual policy
benefits or certain other agreements. At December 31, 1997, management is not
aware of any claims for which a material loss is reasonably possible.
In connection with an investment in a limited real estate partnership in 1996,
the Company has agreed to pay any cash flow deficiencies of a medium-sized
shopping center owned by the partnership through January 1, 2001. At December
31, 1997, the Company assessed the probability and amount of future cash flows
from the property and determined that no accrual was necessary. At December 31,
1997 and 1996, the limited partnership had a $5.4 million mortgage loan, secured
by the shopping center, with Farm Bureau Mutual Insurance Company.
13. EARNINGS PER SHARE
The following table sets forth the computation of earnings per common share and
earnings per common share assuming dilution:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income.............................................. $ 75,827 $ 82,884 $ 59,628
Dividends on Series A and B preferred stock............. (2,171) (2,250) -
-------------- -------------- --------------
Numerator for earnings per common share-income
available to common stockholders................. $ 73,656 $ 80,634 $ 59,628
============== ============== ==============
Denominator:
Denominator for earnings per common share -
weighted-average shares.............................. 18,166,429 21,572,129 23,591,100
Effect of dilutive securities - employee stock options.. 319,189 63,067 -
-------------- -------------- --------------
Denominator for diluted earnings per common share -
adjusted weighted-average shares................. 18,485,618 21,635,196 23,591,100
============== ============== ==============
Earnings per common share................................... $ 4.05 $ 3.74 $ 2.53
============== ============== ==============
Earnings per common share - assuming dilution............... $ 3.98 $ 3.73 $ 2.53
============== ============== ==============
</TABLE>
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT INFORMATION
The Company currently operates in two principal segments - life insurance
(including traditional and universal life, annuity and accident and health
coverages) and property-casualty insurance. Information concerning the Company's
business segments for the years ended December 31, 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
PROPERTY-
CASUALTY
CONSOLIDATED LIFE INSURANCE INSURANCE CORPORATE
-------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues, year ended December 31:
1997.................................. $ 483,158 $ 429,691 $ 53,199 $ 268
1996.................................. 456,867 420,976 35,698 193
1995.................................. 405,985 385,480 20,489 16
Income (loss) before income taxes,
minority interest in earnings of
subsidiaries and equity income, year
ended December 31:
1997.................................. 115,264 114,881 677 (294)
1996.................................. 116,853 118,984 (2,046) (85)
1995.................................. 90,447 88,500 2,083 (136)
Identifiable assets, December 31:
1997.................................. 3,601,526 3,487,444 106,829 7,253
1996.................................. 3,368,192 3,264,037 99,577 4,578
1995.................................. 3,093,582 3,032,548 60,250 784
</TABLE>
Corporate revenues and income (loss) noted above for 1997 and 1996 do not
include $0.3 million in revenues that are eliminated in consolidation. In
addition, at December 31, 1997 and 1996, identifiable assets for the Corporate
segment do not include $3.5 million and $3.0 million, respectively, in
intercompany receivables that are eliminated in consolidation. Other
intercompany balances that are eliminated in consolidation are not significant
to the respective segments. Corporate assets consist principally of cash,
receivables from affiliates and short-term investments. Capital expenditures and
depreciation and amortization are not considered material.
15. SUBSEQUENT EVENT (UNAUDITED)
During the first quarter of 1998, the Company's Board of Directors approved a
transaction whereby the Company will exchange its home office properties for
1,268,056 unregistered shares of Class A common stock owned by the Iowa Farm
Bureau Federation. The value of the transaction is $45.7 million, or $36.00 per
common share. As a result of the exchange, the common shares outstanding at
December 31, 1997 will decrease 1,268,056, or approximately seven percent.
The Company will lease a portion of the properties back from the Iowa Farm
Bureau Federation under a 15-year operating lease. A gain on the transaction of
approximately $21.0 million will be deferred by the Company and amortized over
the term of the operating lease. The transaction is structured as a tax-free
exchange of a real estate subsidiary and is expected to close in March 1998.
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited quarterly results of operations are as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Premiums and product charges.............. $ 45,051 $ 50,658 $ 47,843 $ 45,704
Net investment income..................... 54,808 56,033 56,220 57,212
Realized gains on investments............. 21,837 2,116 10,533 6,495
Total revenues............................ 128,077 115,783 121,668 117,630
Net income................................ 26,553 12,838 20,124 16,312
Net income applicable to common stock..... 25,303 11,992 20,087 16,274
Earnings per common share................. $ 1.34 $ 0.67 $ 1.12 $ 0.91
Earnings per common share - assuming
dilution............................... $ 1.33 $ 0.66 $ 1.10 $ 0.89
1996
---------------------------------------------------------------------
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Premiums and product charges.............. $ 37,398 $ 43,229 $ 46,047 $ 42,735
Net investment income..................... 52,428 52,208 50,706 55,387
Realized gains (losses) on investments.... (2,098) 1,515 16,529 36,847
Total revenues............................ 93,320 102,940 119,804 140,803
Net income................................ 10,889 13,575 20,486 37,934
Net income applicable to common stock..... 10,889 13,575 19,486 36,684
Earnings per common share................. $ 0.46 $ 0.57 $ 0.99 $ 1.95
Earnings per common share - assuming
dilution............................... $ 0.46 $ 0.57 $ 0.98 $ 1.93
</TABLE>
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with Statement No. 128.
Earnings per common share for each quarter is computed independently of earnings
per common share for the year. As a result, the sum of the quarterly earnings
per common share amounts may not equal the earnings per common share for the
year due primarily to transactions affecting the number of weighted average
common shares outstanding in each quarter.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
The information required by Part III is hereby incorporated by reference from
the Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A within 120 days after December 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. See index to Financial Statements on page 37
for a list of financial statements included in this Report.
2. Financial Statement Schedules. The following financial statement
schedules are included as part of this Report immediately following
the signature page:
Schedule I -- Summary of Investments
Schedule II -- Condensed Financial Information of Registrant
(Parent Company)
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
All other schedules are omitted, either because they are not applicable, not
required, or because the information they contain is included elsewhere in the
consolidated financial statements or notes.
3. Exhibits.
21 Subsidiaries of FBL Financial Group, Inc.
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K dated December 8, 1997, was filed with the
Commission to report under Item 5, the announced formation of an
alliance with American Equity Investment Life Holding Company.
A report on Form 8-K dated December 18, 1997, was filed with the
Commission to report under Item 5, the announced formation of an
alliance with Berthel Fisher & Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, this 17th day of March, 1998.
FBL Financial Group, Inc.
By: /s/ EDWARD M. WIEDERSTEIN
------------------------------
Edward M. Wiederstein
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated;
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------ ---------------------------------- --------------
<S> <C> <C>
/s/ THOMAS R. GIBSON Chief Executive Officer and Director March 17, 1998
- ----------------------------- (Principal Executive Officer)
Thomas R. Gibson
/s/ JAMES W. NOYCE Chief Financial Officer (Principal March 17, 1998
- ----------------------------- Financial and Accounting Officer)
James W. Noyce
/s/ EDWARD M. WIEDERSTEIN Chairman of the Board and Director March 17, 1998
- -----------------------------
Edward M. Wiederstein
/s/ ROGER BILL MITCHELL Second Vice Chair and Director March 17, 1998
- -----------------------------
Roger Bill Mitchell
/s/ KENNETH R. ASHBY Director March 17, 1998
- -----------------------------
Kenneth R. Ashby
Director March 17, 1998
- -----------------------------
Jerry L. Chicoine
Director March 17, 1998
- -----------------------------
Al Christopherson
/s/ JOHN W. CREER Director March 17, 1998
- -----------------------------
John W. Creer
/s/ KENNY J. EVANS Director March 17, 1998
- -----------------------------
Kenny J. Evans
/s/ JACK M. GIVENS Director March 17, 1998
- -----------------------------
Jack M. Givens
/s/ GARY L. HALL Director March 17, 1998
- -----------------------------
Gary L. Hall
/s/ JAMES K. HARMON Director March 17, 1998
- -----------------------------
James K. Harmon
/s/ KAREN J. HENRY Director March 17, 1998
- -----------------------------
Karen J. Henry
<PAGE>
Signature Title Date
- ------------------------------ ---------------------------------- --------------
/s/ RICHARD G. KJERSTAD Director March 17, 1998
- -----------------------------
Richard G. Kjerstad
/s/ DAVID L. MCCLURE Director March 17, 1998
- -----------------------------
David L. McClure
/s/ BRYCE P. NEIDIG Director March 17, 1998
- -----------------------------
Bryce P. Neidig
/s/ HOWARD D. POULSON Director March 17, 1998
- -----------------------------
Howard D. Poulson
/s/ FRANK S. PRIESTLEY Director March 17, 1998
- -----------------------------
Frank S. Priestley
/s/ JOHN J. VAN SWEDEN Director March 17, 1998
- -----------------------------
John J. Van Sweden
/s/ JOHN E. WALKER Director March 17, 1998
- -----------------------------
John E. Walker
/s/ RICHARD D. HARRIS Senior Vice President, Secretary, March 17, 1998
- ----------------------------- Treasurer and Director
Richard D. Harris
/s/ STEPHEN M. MORAIN Senior Vice President, General March 17, 1998
- ----------------------------- Counsel and Director
Stephen M. Morain
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
The Board of Directors and Stockholders
FBL Financial Group, Inc.
We have audited the consolidated balance sheets of FBL Financial Group, Inc. as
of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997, and have issued our report thereon
dated February 16, 1998 (included elsewhere in this Form 10-K). Our audits also
included the financial statement schedules listed in Item 14(a) of this Form
10-K. These schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 16, 1998
<PAGE>
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER
THAN INVESTMENTS IN RELATED PARTIES
FBL FINANCIAL GROUP, INC.
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------------------------------------- --------------------- --------------------- ---------------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
- ------------------------------------------------- --------------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities, held for investment:
Bonds:
Corporate securities......................... $ 5,008 $ 5,814 $ 5,008
Mortgage-backed securities................... 639,623 662,612 639,623
--------------------- --------------------- ---------------------
Total .................................... 644,631 $ 668,426 644,631
=====================
Fixed maturity securities, available for sale:
Bonds:
United States Government and agencies........ 115,036 117,328 117,328
State, municipal and other governments....... 66,190 68,823 68,823
Public utilities............................. 138,328 144,515 144,515
Corporate securities......................... 841,243 896,357 896,357
Mortgage and asset-backed securities......... 492,020 507,567 507,567
Convertible bonds............................ 5,897 6,468 6,468
Redeemable preferred stock..................... 29,496 30,982 30,982
--------------------- --------------------- ---------------------
Total..................................... 1,688,210 $ 1,772,040 1,772,040
=====================
Equity securities, available-for-sale:
Common stocks:
Public utilities............................. 359 392 392
Banks, trusts, and insurance companies....... 7,105 7,225 7,225
Industrial, miscellaneous, and all other..... 38,051 35,106 35,106
Nonredeemable preferred stocks................. 14,994 15,032 15,032
--------------------- --------------------- ---------------------
Total..................................... 60,509 $ 57,755 57,755
=====================
Mortgage loans on real estate................... 324,417 323,605 (2)
Investment real estate.......................... 40,010 39,942 (2)
Policy loans.................................... 121,941 121,941
Other long-term investments..................... 14,626 14,438 (3)
Short-term investments.......................... 35,561 35,561
--------------------- ---------------------
$ 2,929,905 $ 3,009,913
===================== =====================
</TABLE>
(1) On the basis of cost adjusted for repayments and amortization of premiums
and accrual of discounts for fixed maturities, other long-term investments
and short-term investments; original cost for equity securities; unpaid
principal balance for mortgage loans on real estate and policy loans, and
original cost less accumulated depreciation for investment real estate.
(2) Amount not equal to cost (Column B) because of allowance for possible
losses deducted from cost to determine reported amount.
(3) Amount not equal to cost (Column B) because other long-term investments
include securities held by broker-dealer and investment company
subsidiaries which carry securities at market value. Also, an allowance for
possible losses in deducted from cost to determine reported amount.
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996
-------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................................... $ 409 $ 489
Amounts receivable from affiliates........................................... 2,843 3,369
Amounts receivable from subsidiaries (eliminated in consolidation)........... 3,463 2,994
Current income taxes recoverable............................................. 1,356 -
Other assets................................................................. 2,644 721
Investments in subsidiaries (eliminated in consolidation).................... 703,458 639,022
-------------- ---------------
Total assets.......................................................... $ 714,173 $ 646,595
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses and other liabilities................................... $ 1,783 $ 714
Amounts payable to affiliates............................................ 202 61
Amounts payable to subsidiaries (eliminated in consolidation)............ 6,844 7,201
Current income taxes payable............................................. - 84
Deferred income taxes.................................................... 29 13
Long-term debt (eliminated in consolidation)............................. 100,000 -
-------------- ---------------
Total liabilities..................................................... 108,858 8,073
Stockholders' equity:
Preferred stock.......................................................... 3,000 100,000
Class A common stock..................................................... 42,907 43,773
Class B common stock..................................................... 7,567 7,567
Net unrealized investment gains of subsidiaries.......................... 48,559 27,858
Retained earnings........................................................ 503,282 459,324
-------------- ---------------
Total stockholders' equity............................................ 605,315 638,522
-------------- ---------------
Total liabilities and stockholders' equity...................... $ 714,173 $ 646,595
============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
SCHEDULE II -CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
Revenues:
Net investment income..................................... $ 22 $ 16 $ 16
Dividends from subsidiaries (eliminated in consolidation). 37,038 20,096 11,111
Management fee income from affiliates..................... 247 182 -
Management fee income from subsidiaries (eliminated in
consolidation)......................................... 290 284 -
------------- -------------- -------------
Total revenues......................................... 37,597 20,578 11,127
Expenses:
Interest expense (eliminated in consolidation)............ 2,917 - -
General and administrative expenses....................... 562 278 152
------------- -------------- -------------
Total expenses......................................... 3,479 278 152
------------- -------------- -------------
34,118 20,300 10,975
Income taxes.................................................. 975 (61) 52
------------- -------------- -------------
Income before equity in undistributed income of subsidiaries.. 35,093 20,239 11,027
Equity in undistributed income of subsidiaries (eliminated in
consolidation)............................................ 40,734 62,645 48,601
------------- -------------- -------------
Net income.................................................... 75,827 82,884 59,628
Dividends on Series A and B preferred stock................... (2,171) (2,250) -
------------- -------------- -------------
Net income applicable to common stock......................... $ 73,656 $ 80,634 $ 59,628
============= ============== =============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........... $ (4,048) $ 1,104 $ (75)
INVESTING ACTIVITIES
Investments in subsidiaries (eliminated in consolidation). - (17,500) (3,698)
Dividends and return of capital from subsidiaries
(eliminated in consolidation).......................... 37,038 20,000 -
------------- -------------- -------------
Net cash provided by (used in) investing activities........... 37,038 2,500 (3,698)
FINANCING ACTIVITIES
Purchase of common stock.................................. (24,834) - -
Issuance of common stock.................................. 1,201 - 4,189
Dividends paid............................................ (9,437) (3,570) -
------------- -------------- -------------
Net cash provided by (used in) financing activities........... (33,070) (3,570) 4,189
------------- -------------- -------------
Increase (decrease) in cash and cash equivalents.............. (80) 34 416
Cash and cash equivalents at beginning of year................ 489 455 39
------------- -------------- -------------
Cash and cash equivalents at end of year...................... $ 409 $ 489 $ 455
============= ============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash received (paid) during the year for income taxes......... $ (111) $ 73 $ -
Noncash investing and financing activities:
Investment in subsidiaries................................ (3,000) - -
Issuance of long-term debt................................ 100,000 - -
Purchase of Series A preferred stock...................... (100,000) - -
Issuance of Series B preferred stock...................... 3,000 - -
------------- -------------- -------------
- - -
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BASIS OF PRESENTATION
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of FBL Financial
Group, Inc.
In the parent company only financial statements, the Company's investments in
subsidiaries are stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition and net unrealized gains/losses on
the subsidiaries' investments classified as "available-for-sale" in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities".
2. CASH DIVIDENDS FROM SUBSIDIARY
During the years ended December 31, 1997 and 1996, the parent company received
cash dividends totaling $37.0 million and $5.0 million, respectively.
<PAGE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
FBL FINANCIAL GROUP, INC.
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------------- -------------- --------------- -------------- ---------------
FUTURE POLICY
DEFERRED BENEFITS,
POLICY LOSSES, OTHER
ACQUISITION CLAIMS AND UNEARNED POLICYHOLDER PREMIUM
COSTS LOSS EXPENSES REVENUES FUNDS REVENUE
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
December 31, 1997:
<S> <C> <C> <C> <C> <C>
Life insurance.................. $ 181,916 $ 2,304,004 $ 23,530 $ 236,479 $ 140,507
Property-casualty insurance..... 3,271 46,464 29,498 - 48,749
----------- ------------ ----------- ------------ -----------
Total............................... $ 185,187 $ 2,350,468 $ 53,028 $ 236,479 $ 189,256
=========== ============ =========== ============ ===========
December 31, 1996:
Life insurance.................. $ 164,277 $ 2,215,422 $ 22,215 $ 226,234 $ 136,434
Property-casualty insurance..... 2,635 43,189 26,774 - 32,975
----------- ------------ ----------- ------------ -----------
Total............................... $ 166,912 $ 2,258,611 $ 48,989 $ 226,234 $ 169,409
=========== ============ =========== ============ ===========
December 31, 1995:
Life insurance.................. $ 136,771 $ 2,102,201 $ 20,081 $ 215,242 $ 129,333
Property-casualty insurance..... 1,021 29,984 15,906 - 18,709
----------- ------------ ----------- ------------ -----------
Total............................... $ 137,792 $ 2,132,185 $ 35,987 $ 215,242 $ 148,042
=========== ============ =========== ============ ===========
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
-------- -------------- -------------- --------------- -------------- --------------
BENEFITS, AMORTIZATION
CLAIMS, OF DEFERRED
NET LOSSES AND POLICY OTHER
INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
INCOME EXPENSES COSTS EXPENSES WRITTEN
-------------- -------------- --------------- -------------- --------------
(DOLLARS IN THOUSANDS)
December 31, 1997:
Life insurance.................. $ 220,366 $ 206,271 $ 8,474 $ 53,109
Property-casualty insurance..... 3,907 38,959 8,666 4,889 $ 50,934
------------ ------------- ------------- ------------ ===========
Total............................... $ 224,273 $ 245,230 $ 17,140 $ 57,998
============ ============= ============= ============
December 31, 1996:
Life insurance.................. $ 208,265 $ 198,925 $ 8,667 $ 48,594
Property-casualty insurance..... 2,464 28,365 6,843 2,344 $ 32,264
------------ ------------- ------------- ------------ ===========
Total............................... $ 210,729 $ 227,290 $ 15,510 $ 50,938
============ ============= ============= ============
December 31, 1995:
Life insurance.................. $ 221,525 $ 184,417 $ 7,736 $ 60,991
Property-casualty insurance..... 1,583 13,621 2,991 1,713 $ 18,851
------------ ------------- ------------- ------------ ===========
Total............................... $ 223,108 $ 198,038 $ 10,727 $ 62,704
============ ============= ============= ============
</TABLE>
<PAGE>
SCHEDULE IV - REINSURANCE
FBL FINANCIAL GROUP, INC.
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------------- -------------- --------------- -------------- ---------------
CEDED TO ASSUMED FROM PERCENT OF
OTHER OTHER AMOUNT
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT ASSUMED TO NET
--------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Life insurance in force, at end
of year....................... $ 18,380,799 $ 1,248,564 $ - $ 17,132,235 -
============ ============ =========== ============ ===========
Insurance premiums and other
considerations:
Interest sensitive product
charges..................... $ 49,793 $ 1,814 $ - $ 47,979
Traditional life insurance
and accident and health
premiums.................... 96,708 4,180 - 92,528
Property-casualty premiums.... 28,460 28,461 48,750 48,749 100.0 %
----------- ------------ ----------- ------------ -----------
$ 174,961 $ 34,455 $ 48,750 $ 189,256 25.8 %
============ ============ =========== ============ ===========
Year ended December 31, 1996:
Life insurance in force, at end
of year....................... $ 17,195,432 $ 1,082,311 $ - $ 16,113,121 -
============ ============ =========== ============ ===========
Insurance premiums and other
considerations:
Interest sensitive product
charges..................... $ 45,549 $ 1,895 $ - $ 43,654 -
Traditional life insurance
and accident and health
premiums.................... 96,567 3,787 - 92,780 -
Property-casualty premiums.... 26,807 26,810 32,978 32,975 100.0 %
------------ ------------ ----------- ------------ -----------
$ 168,923 $ 32,492 $ 32,978 $ 169,409 19.5 %
============ ============ =========== ============ ===========
Year ended December 31, 1995:
Life insurance in force, at end
of year....................... $ 16,208,497 $ 953,828 $ - $ 15,254,669 -
============ ============ =========== ============ ===========
Insurance premiums and other
considerations:
Interest sensitive product
charges..................... $ 45,505 $ 1,783 $ - $ 43,722 -
Traditional life insurance
and accident and health
premiums.................... 98,682 13,071 - 85,611 -
Property-casualty premiums.... 26,093 26,240 18,856 18,709 100.8 %
------------ ------------ ----------- ------------ -----------
$ 170,280 $ 41,094 $ 18,856 $ 148,042 12.7 %
============ ============ =========== ============ ===========
</TABLE>
EXHIBIT 21
FBL FINANCIAL GROUP, INC.
SUBSIDIARIES OF FBL FINANCIAL GROUP, INC.
STATE OF
INCORPORATION
---------------
Insurance Subsidiaries:
EquiTrust Life Insurance Company............................ Iowa
Farm Bureau Life Insurance Company.......................... Iowa
Universal Assurors Life Insurance Company................... Iowa
Utah Farm Bureau Insurance Company.......................... Utah
Western Farm Bureau Life Insurance Company.................. Colorado
Noninsurance Subsidiaries:
FBL Financial Group Capital Trust........................... Delaware
FBL Financial Services, Inc................................. Iowa
FBL Insurance Brokerage, Inc................................ Iowa
FBL Investment Advisory Services, Inc....................... Delaware
FBL Leasing Services, Inc................................... Iowa
FBL Marketing Services, Inc................................. Delaware
FBL Real Estate Ventures, Ltd............................... Wisconsin
Western Ag Insurance Agency, Inc............................ Arizona
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-17007) pertaining to the Amended and Restated FBL Financial Group,
Inc. 1996 Class A Common Stock Compensation Plan and Registration Statement
(Form S-8 No. 333-08567) pertaining to the Iowa Farm Bureau Federation and
Affiliated Companies 401(k) Savings Plan of our reports dated February 16, 1998,
with respect to the consolidated financial statements and schedules of FBL
Financial Group, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1997.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 13, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 1,772,040
<DEBT-CARRYING-VALUE> 644,631
<DEBT-MARKET-VALUE> 668,426
<EQUITIES> 57,755
<MORTGAGE> 323,605
<REAL-ESTATE> 39,942
<TOTAL-INVEST> 3,009,913
<CASH> 2,397
<RECOVER-REINSURE> 39,248
<DEFERRED-ACQUISITION> 185,187
<TOTAL-ASSETS> 3,601,526
<POLICY-LOSSES> 2,336,980
<UNEARNED-PREMIUMS> 29,498
<POLICY-OTHER> 37,018
<POLICY-HOLDER-FUNDS> 236,479
<NOTES-PAYABLE> 24,577
0
3,000
<COMMON> 50,474
<OTHER-SE> 551,841
<TOTAL-LIABILITY-AND-EQUITY> 3,601,526
189,256
<INVESTMENT-INCOME> 224,273
<INVESTMENT-GAINS> 40,981
<OTHER-INCOME> 28,648
<BENEFITS> 245,230
<UNDERWRITING-AMORTIZATION> 17,140
<UNDERWRITING-OTHER> 57,998
<INCOME-PRETAX> 115,264
<INCOME-TAX> 38,345
<INCOME-CONTINUING> 75,827
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,827
<EPS-PRIMARY> 4.05
<EPS-DILUTED> 3.98
<RESERVE-OPEN> 23,700
<PROVISION-CURRENT> 40,655
<PROVISION-PRIOR> (1,696)
<PAYMENTS-CURRENT> 23,929
<PAYMENTS-PRIOR> 10,943
<RESERVE-CLOSE> 27,787
<CUMULATIVE-DEFICIENCY> (1,696)
</TABLE>
