UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________ to____________________
Commission File Number: 1-11917
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FBL Financial Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Iowa 42-1411715
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5400 University Avenue, West Des Moines, Iowa 50266-5997
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(515) 225-5400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. |X| Yes |_| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. |_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 29,836,625 shares of Class A
common stock and 1,192,990 shares of Class B common stock as of May 1, 2000.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost (market: 2000 - $329,132; 1999 -
$337,794) .............................................................. $ 328,721 $ 339,362
Available for sale, at market (amortized cost: 2000 - $2,118,258; 1999 -
$2,077,341) ............................................................ 2,051,603 2,002,030
Equity securities, at market (cost: 2000 - $43,455; 1999 - $38,147) ......... 42,452 35,345
Mortgage loans on real estate ............................................... 320,375 314,523
Investment real estate, less allowances for depreciation of $2,461 in 2000
and $2,300 in 1999 ........................................................ 19,462 20,119
Policy loans ................................................................ 124,297 123,717
Other long-term investments ................................................. 8,545 8,575
Short-term investments ...................................................... 49,594 106,529
------------ ------------
Total investments .............................................................. 2,945,049 2,950,200
Cash and cash equivalents ...................................................... 3,296 6,482
Securities and indebtedness of related parties ................................. 61,187 61,309
Accrued investment income ...................................................... 35,355 35,707
Accounts and notes receivable .................................................. 1,855 1,733
Amounts receivable from affiliates ............................................. 6,237 4,484
Reinsurance recoverable ........................................................ 4,428 4,812
Deferred policy acquisition costs .............................................. 241,368 236,263
Value of insurance in force acquired ........................................... 15,445 15,894
Property and equipment, less allowances for depreciation of $41,253 in 2000
and $40,115 in 1999 ......................................................... 59,632 60,506
Current income taxes recoverable ............................................... 1,820 --
Deferred income taxes .......................................................... -- 4,616
Goodwill, less accumulated amortization of $4,355 in 2000 and $4,181 in
1999 ........................................................................ 9,077 9,251
Other assets ................................................................... 16,625 15,046
Assets held in separate accounts ............................................... 284,770 256,028
------------ ------------
Total assets ........................................................... $ 3,686,144 $ 3,662,331
============ ============
</TABLE>
1
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products ........................................... $ 1,612,659 $ 1,626,042
Traditional life insurance and accident and health products ........... 757,389 752,733
Unearned revenue reserve .............................................. 27,921 27,650
Other policy claims and benefits ......................................... 9,714 10,019
------------ ------------
2,407,683 2,416,444
Other policyholders' funds:
Supplementary contracts without life contingencies ....................... 162,584 160,848
Advance premiums and other deposits ...................................... 83,189 83,258
Accrued dividends ........................................................ 13,609 13,554
------------ ------------
259,382 257,660
Short-term debt payable to affiliate ....................................... 11,694 11,694
Amounts payable to affiliates .............................................. 245 166
Long-term debt ............................................................. 40,000 40,000
Current income taxes payable ............................................... -- 1,002
Deferred income taxes ...................................................... 4,124 --
Other liabilities .......................................................... 68,270 77,184
Liabilities related to separate accounts ................................... 284,770 256,028
------------ ------------
Total liabilities ..................................................... 3,076,168 3,060,178
Commitments and contingencies
Minority interest in subsidiaries:
Company-obligated mandatorily redeemable preferred stock
of subsidiary trust ...................................................... 97,000 97,000
Other ...................................................................... 237 145
Stockholders' equity:
Preferred stock, without par value, at liquidation value - authorized
10,000,000 shares, issued and outstanding 5,000,000 Series B shares ...... 3,000 3,000
Class A common stock, without par value - authorized 88,500,000 shares,
issued and outstanding 29,809,602 shares in 2000 and 30,307,232 shares
in 1999 .................................................................. 42,204 42,308
Class B common stock, without par value - authorized 1,500,000 shares,
issued and outstanding 1,192,990 shares .................................. 7,558 7,558
Accumulated other comprehensive loss ....................................... (48,264) (49,917)
Retained earnings .......................................................... 508,241 502,059
------------ ------------
Total stockholders' equity ............................................... 512,739 505,008
------------ ------------
Total liabilities and stockholders' equity ............................ $ 3,686,144 $ 3,662,331
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Interest sensitive product charges ........................................... $ 14,722 $ 13,432
Traditional life insurance and accident and health premiums .................. 24,003 23,411
Net investment income ........................................................ 54,683 55,987
Realized losses on investments ............................................... (61) (2,240)
Other income ................................................................. 4,498 4,929
------------ ------------
Total revenues ............................................................ 97,845 95,519
Benefits and expenses:
Interest sensitive product benefits .......................................... 30,968 29,317
Traditional life insurance and accident and health benefits .................. 15,745 15,753
Increase in traditional life and accident and health future policy benefits .. 4,654 4,197
Distributions to participating policyholders ................................. 6,257 6,439
Underwriting, acquisition and insurance expenses ............................. 18,295 16,609
Interest expense ............................................................. 861 547
Other expenses ............................................................... 3,819 4,002
------------ ------------
Total benefits and expenses ............................................... 80,599 76,864
------------ ------------
17,246 18,655
Income taxes ..................................................................... (5,537) (6,035)
Minority interest in earnings of subsidiaries:
Dividends on company-obligated mandatorily redeemable preferred stock of
subsidiary trust .......................................................... (1,213) (1,213)
Other ........................................................................ (42) 14
Equity income, net of related income taxes ....................................... 7,680 204
------------ ------------
Net income ....................................................................... $ 18,134 $ 11,625
============ ============
Earnings per common share ........................................................ $ 0.58 $ 0.35
============ ============
Earnings per common share - assuming dilution .................................... $ 0.57 $ 0.35
============ ============
Cash dividends per common share ................................................. $ 0.090 $ 0.083
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A CLASS B OTHER TOTAL
PREFERRED COMMON COMMON COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK STOCK STOCK INCOME (LOSS) EARNINGS EQUITY
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 ........ $ 3,000 $ 42,034 $ 7,558 $ 50,050 $ 480,946 $ 583,588
Comprehensive income (loss):
Net income for three
months ended March 31,
1999 ....................... -- -- -- -- 11,625 11,625
Change in net unrealized
investment gains/losses .... -- -- -- (25,578) -- (25,578)
------------
Total comprehensive loss ....... (13,953)
Purchase of 146,200 shares
of common stock .............. -- (196) -- -- (2,614) (2,810)
Issuance of 26,162 shares of
common stock under
employee benefit and
stock option plans,
including related income
tax benefit .................. -- 468 -- -- -- 468
Dividends on preferred stock .... -- -- -- -- (37) (37)
Dividends on common stock ....... -- -- -- -- (2,697) (2,697)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1999 ......... $ 3,000 $ 42,306 $ 7,558 $ 24,472 $ 487,223 $ 564,559
============ ============ ============ ============ ============ ============
Balance at January 1, 2000 ........ $ 3,000 $ 42,308 $ 7,558 $ (49,917) $ 502,059 $ 505,008
Comprehensive income:
Net income for three
months ended March 31,
2000 ....................... -- -- -- -- 18,134 18,134
Change in net unrealized
investment gains/losses .... -- -- -- 1,653 -- 1,653
------------
Total comprehensive income ..... 19,787
Purchase of 573,581 shares
of common stock .............. -- (803) -- -- (9,123) (9,926)
Issuance of 75,951 shares of
common stock under
employee benefit and
stock option plans,
including related income
tax benefit .................. -- 699 -- -- -- 699
Dividends on preferred stock .... -- -- -- -- (37) (37)
Dividends on common stock ....... -- -- -- -- (2,792) (2,792)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2000 ......... $ 3,000 $ 42,204 $ 7,558 $ (48,264) $ 508,241 $ 512,739
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income .......................................................................... $ 18,134 $ 11,625
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments related to interest sensitive products:
Interest credited to account balances ......................................... 26,179 25,903
Charges for mortality and administration ...................................... (14,412) (13,274)
Deferral of unearned revenues ................................................. 660 630
Amortization of unearned revenue reserve ...................................... (329) (281)
Provision for depreciation and amortization ...................................... 4,539 3,493
Equity income .................................................................... (7,680) (204)
Realized losses on investments ................................................... 61 2,240
Increase in traditional life and accident and health benefit accruals ............ 4,654 4,760
Policy acquisition costs deferred ................................................ (8,794) (8,216)
Amortization of deferred policy acquisition costs ................................ 2,977 2,521
Provision for deferred income taxes .............................................. 7,818 379
Other ............................................................................ (5,994) (1,464)
------------ ------------
Net cash provided by operating activities ............................................ 27,813 28,112
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities - held for investment ........................................... 10,528 52,729
Fixed maturities - available for sale ............................................ 48,035 33,891
Equity securities ................................................................ 1,755 1,714
Mortgage loans on real estate .................................................... 16,589 18,006
Investment real estate ........................................................... 524 5,535
Policy loans ..................................................................... 7,787 7,200
Other long-term investments ...................................................... 1 663
Short-term investments - net ..................................................... 56,935 4,419
------------ ------------
142,154 124,157
Acquisition of investments:
Fixed maturities - available for sale ............................................ (103,895) (120,072)
Equity securities ................................................................ (2,368) (1,734)
Mortgage loans on real estate .................................................... (22,494) (13,596)
Investment real estate ........................................................... -- (146)
Policy loans ..................................................................... (8,367) (6,875)
Other long-term investments ...................................................... -- (519)
------------ ------------
(137,124) (142,942)
</TABLE>
5
<PAGE>
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
INVESTING ACTIVITIES (CONTINUED):
Proceeds from disposal, repayments of advances and other distributions from
equity investees ................................................................. $ 1,181 $ 2,538
Investments in and advances to equity investees ...................................... (344) (460)
Net proceeds from sale of discontinued operations .................................... 2,000 1,229
Net purchases of property and equipment and other .................................... (2,037) (4,825)
------------ ------------
Net cash provided by (used in) investing activities .................................. 5,830 (20,303)
FINANCING ACTIVITIES
Receipts from interest sensitive and variable products credited to policyholder
account balances ................................................................. 61,751 53,799
Return of policyholder account balances on interest sensitive and variable
products ......................................................................... (85,165) (56,028)
Proceeds from short-term debt with affiliate ......................................... -- 960
Repayments of long-term debt ......................................................... -- (71)
Distributions on company-obligated mandatorily redeemable preferred stock of
subsidiary trust ................................................................. (1,213) (1,213)
Other distributions to minority interests - net ...................................... 50 (168)
Purchase of common stock ............................................................. (10,088) (2,810)
Issuance of common stock ............................................................. 665 430
Dividends paid ....................................................................... (2,829) (2,734)
------------ ------------
Net cash used in financing activities ................................................ (36,829) (7,835)
------------ ------------
Decrease in cash and cash equivalents ................................................ (3,186) (26)
Cash and cash equivalents at beginning of period ..................................... 6,482 4,516
------------ ------------
Cash and cash equivalents at end of period ........................................... $ 3,296 $ 4,490
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest ......................................................................... $ 633 $ 503
Income taxes ..................................................................... 4,692 (133)
</TABLE>
See accompanying notes.
6
<PAGE>
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of FBL Financial
Group, Inc. (we or the Company) have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. Our financial
statements include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of our financial position and results of
operations. Operating results for the three-month period ended March 31, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to our consolidated
financial statements and notes for the year ended December 31, 1999 included in
our annual report on Form 10-K.
Certain reclassifications have been made to the 1999 financial statements to
conform to the 2000 presentation.
2. ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (Statement) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Accounting for gains or losses resulting from changes in the values
of those derivatives is dependent on the use of the derivative and whether it
qualifies for hedge accounting. Statement No. 133 also allows companies to
transfer securities classified as held for investment to either the
available-for-sale or trading categories in connection with the adoption of the
new standard. The Statement is effective for the year beginning January 1, 2001,
with earlier adoption encouraged. Because of our minimal use of derivatives, we
do not anticipate that the adoption of the new Statement will have a significant
effect on our earnings or financial position.
3. INVESTMENT OPERATIONS
Fixed maturity securities, comprised of bonds and redeemable preferred stocks
that we have 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 our financial statements. Fixed maturity securities which may be
sold are designated as "available for sale." Available for sale securities are
reported at market value and unrealized gains and losses on these securities are
included directly in stockholders' equity as a component of accumulated other
comprehensive income or loss. The unrealized gains and losses included in
accumulated other comprehensive income or loss are reduced by a provision for
deferred income taxes and adjustments to deferred policy acquisition costs,
value of insurance in force acquired and unearned revenue reserve that would
have been required as a charge or credit to income had such amounts been
realized. Equity securities, comprised of common and non-redeemable preferred
stocks, are reported at market value. The change in unrealized appreciation and
depreciation of equity securities is included directly in stockholders' equity,
net of any related deferred income taxes, as a component of accumulated other
comprehensive income or loss.
During the first quarter of 2000, an equity investee distributed to us an equity
security with a fair value of $4.2 million. The distribution was treated as a
noncash transaction for purposes of the statement of cash flow.
7
<PAGE>
Net unrealized investment losses as reported were comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unrealized depreciation on fixed maturity and equity securities available for
sale ........................................................................ $ (67,658) $ (78,113)
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs ........................................... 4,865 5,577
Value of insurance in force acquired ........................................ 899 1,040
Unearned revenue reserve .................................................... (494) (554)
Provision for deferred income taxes ............................................. 21,836 25,217
------------ ------------
(40,552) (46,833)
Proportionate share of net unrealized investment losses of equity investees ..... (7,712) (3,084)
------------ ------------
Net unrealized investment losses ................................................ $ (48,264) $ (49,917)
============ ============
</TABLE>
4. CREDIT ARRANGEMENTS
We have a note payable to the Federal Home Loan Bank (FHLB) totaling $40.0
million at March 31, 2000 and at December 31, 1999. The note is due September
17, 2003, and interest on the note is charged at a variable rate equal to the
London Interbank Offered Rate less 0.0475% (6.08% at March 31, 2000 and 5.77% at
December 31, 1999). Fixed maturity securities with a carrying value of $32.3
million are on deposit with the FHLB as collateral for the note. As an investor
in the FHLB, we have the ability to borrow an additional $199.1 million on the
line of credit from the FHLB at March 31, 2000. Any additional borrowing will
require that additional collateral be deposited with the FHLB.
We have a $12.0 million line of credit with Farm Bureau Mutual Insurance Company
(Farm Bureau Mutual), an affiliate, in the form of a revolving demand note.
Borrowings on the note, which totaled $11.7 million at March 31, 2000 and
December 31, 1999 are being used to acquire assets that are leased to certain
affiliates, including Farm Bureau Mutual. Interest is payable at a rate equal to
the prime rate of a national bank (9.00% at March 31, 2000 and 8.50% at December
31, 1999). Rental income from the related leases includes a provision for
interest on the carrying value of the assets.
5. CONTINGENCIES
In the normal course of business, we may be involved in litigation where amounts
are alleged that are substantially in excess of contractual policy benefits or
certain other agreements. At March 31, 2000, management is not aware of any
claims for which a material loss is reasonably possible.
We seek to limit our exposure to loss on any single insured or event and to
recover a portion of benefits paid by ceding reinsurance to other insurance
enterprises. Reinsurance contracts do not relieve us of our obligations to
policyholders. To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, our insurance subsidiaries would be
liable for these obligations, and payment of these obligations could result in
losses. To limit the possibility of such losses, we evaluate the financial
condition of our reinsurers and monitor concentrations of credit risk. No
allowance for uncollectible amounts has been established against our asset for
reinsurance recoverable since none of our receivables are deemed to be
uncollectible.
In connection with an investment in a real estate limited partnership, we have
agreed to pay any cash flow deficiencies of a medium-sized shopping center owned
by the partnership through January 1, 2001. At March 31, 2000, we assessed the
probability and amount of future cash flows from the property and determined
that no accrual was necessary. At December 31, 1999, we recorded a reserve for
expected future cash flow deficiencies totaling $0.4 million. At March 31, 2000,
the limited partnership had a $5.2 million mortgage loan, secured by the
shopping center, with Farm Bureau Mutual.
8
<PAGE>
On March 31, 1998, we sold our wholly-owned subsidiary, Utah Farm Bureau
Insurance Company (Utah Insurance), to Farm Bureau Mutual. We may earn
additional consideration during each of the three years in the period ended
December 31, 2002 in accordance with an earn-out provision. Under the earn-out
arrangement, the Company and Farm Bureau Mutual share equally in the dollar
amount by which the incurred losses on Utah Insurance's direct business, net of
reinsurance ceded, is less than the incurred losses assumed in the valuation
model used to derive the initial acquisition price. The earn-out calculation is
performed and any settlement (subject to a maximum of $2.0 million per year) is
made on a calendar year basis. We have not accrued any contingent consideration
for the three year period ending December 31, 2002 as such amounts, if any,
cannot be reasonably estimated as of March 31, 2000. Receipts as a result of the
earn-out provision are recorded as an adjustment to the gain on the disposal of
the discontinued segment.
6. EARNINGS PER SHARE
The following table sets forth the computation of earnings per common share and
earnings per common share - assuming dilution:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Numerator:
Net income ........................................................... $ 18,134 $ 11,625
Dividends on Series B preferred stock ................................ (37) (37)
------------ ------------
Numerator for earnings per common share-income available to
common stockholders ........................................... $ 18,097 $ 11,588
============ ============
Denominator:
Denominator for earnings per common share - weighted-average
shares ........................................................... 31,197,714 32,696,694
Effect of dilutive securities - employee stock options ............... 435,157 660,743
------------ ------------
Denominator for diluted earnings per common share - adjusted
weighted-average shares ....................................... 31,632,871 33,357,437
============ ============
Earnings per common share ................................................ $ 0.58 $ 0.35
============ ============
Earnings per common share - assuming dilution ............................ $ 0.57 $ 0.35
============ ============
</TABLE>
7. SEGMENT INFORMATION
In general, we are organized by the types of products and services we offer for
sale. Our principal and only reportable operating segment is our life insurance
segment. The life insurance segment includes activities related to the sale of
life insurance, annuities and accident and health insurance products. Operations
have been aggregated into the same segment due to the similarity of the
products, including the underlying economic characteristics, the method of
distribution and the regulatory environment. We also have several other
operating segments that do not meet the quantitative threshold for separate
segment reporting and, therefore, are aggregated herein. A summary of these
segments, along with the related source of revenues, is as follows:
SEGMENT SOURCE OF REVENUES
Investment advisory............ Fee income from the management of
investments
Marketing and distribution..... Commissions and distribution fee income
from the sale of mutual funds and
insurance products not issued by us
Leasing........................ Income from operating leases
Corporate...................... Fees from management and administrative
services
9
<PAGE>
Financial information concerning our operating segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenues from external customers:
Life insurance ......................................... $ 92,645 $ 90,912
All other .............................................. 11,612 9,182
------------ ------------
104,257 100,094
Eliminations ........................................... (6,412) (4,575)
------------ ------------
Consolidated ........................................... $ 97,845 $ 95,519
============ ============
Intersegment revenues:
Life insurance ......................................... $ 504 $ 220
All other .............................................. 5,908 4,355
------------ ------------
6,412 4,575
Eliminations ........................................... (6,412) (4,575)
------------ ------------
Consolidated ........................................... $ -- $ --
============ ============
Net income (loss):
Life insurance ......................................... $ 17,775 $ 12,073
All other .............................................. 359 (448)
------------ ------------
Consolidated ........................................... $ 18,134 $ 11,625
============ ============
</TABLE>
Transactions between segments are recorded at negotiated rates generally
intended to be at levels commensurate with charges that would be assessed to
unaffiliated parties. Our investment in equity method investees and the related
equity income are attributable to the life insurance segment.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING SECTIONS INCLUDE A SUMMARY OF FBL FINANCIAL GROUP, INC.'S
CONSOLIDATED RESULTS OF OPERATIONS, FINANCIAL CONDITION AND WHERE APPROPRIATE,
FACTORS THAT MANAGEMENT BELIEVES MAY AFFECT FUTURE PERFORMANCE. PLEASE READ THIS
DISCUSSION IN CONJUNCTION WITH THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES. UNLESS NOTED OTHERWISE, ALL REFERENCES TO FBL
FINANCIAL GROUP, INC (WE OR THE COMPANY) INCLUDE ALL OF ITS DIRECT AND INDIRECT
SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE SUBSIDIARIES, FARM BUREAU
LIFE INSURANCE COMPANY (FARM BUREAU LIFE) AND EQUITRUST LIFE INSURANCE COMPANY
(EQUITRUST) (COLLECTIVELY, THE LIFE COMPANIES).
Revenues and net income are primarily derived from our life insurance segment.
Revenues and expenses of our other segments, which consist of investment
advisory, marketing and distribution, leasing and management operations, are
principally recorded in the other income and other expense line items on the
Consolidated Statements of Income. See Note 7 of the Notes to Consolidated
Financial Statements (pages 9 and 10) for additional information regarding
segment information.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET INCOME totaled $18.1 million in the 2000 period and $11.6 million in the
1999 period. Adjusted operating income, which does not include the impact of
realized gains and losses on investments, totaled $18.2 million in the 2000
period and $12.9 million in the 1999 period. Net income and adjusted operating
income increased principally due to an increase in equity income from
investments in various partnerships and joint ventures. In addition, net income
increased due to a decrease in realized losses on investments. The following is
a reconciliation of net income to adjusted operating income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net income ............................................................ $ 18,134 $ 11,625
Adjustment - net realized losses on investments ....................... 58 1,303
------------ ------------
Adjusted operating income ............................................. $ 18,192 $ 12,928
============ ============
Earnings per common share - assuming dilution ......................... $ 0.57 $ 0.35
============ ============
Adjusted operating earnings per common share - assuming dilution ...... $ 0.57 $ 0.39
============ ============
</TABLE>
The adjustment for realized gains and losses on investments noted in the table
above is net of adjustments for that portion of amortization of deferred policy
acquisition costs, unearned revenue reserve, value of insurance in force
acquired and income taxes attributable to such gains and losses.
The change in earnings per common share from period to period is positively
impacted by a decrease in the weighted average common shares outstanding during
the fifteen-month period ended March 31, 2000. Weighted average common shares
outstanding, assuming dilution, totaled 31.6 million in the 2000 period and 33.4
million in the 1999 period. This decrease is primarily the result of
acquisitions of common stock by the Company.
11
<PAGE>
A summary of our premiums and product charges is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Premiums and product charges:
Interest sensitive product charges ................................. $ 14,722 $ 13,432
Traditional life insurance and accident and health premiums ........ 24,003 23,411
------------ ------------
Total ........................................................... $ 38,725 $ 36,843
============ ============
</TABLE>
INTEREST SENSITIVE PRODUCT CHARGES increased 9.6% in the 2000 period to $14.7
million. This increase is due primarily to increased cost of insurance charges
resulting from an increase in the volume and age of business in force. In
addition, mortality and expense charges have increased as a result of growth in
variable product account balances.
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH PREMIUMS increased 2.5% in
the 2000 period to $24.0 million. During the 2000 period, traditional life
premiums increased 1.8% to $20.5 million and accident and health premiums
increased 6.7% to $3.5 million. Management believes the modest increase in the
sale of traditional life insurance products is the result of a marketing
emphasis placed on the sale of variable universal life insurance contracts.
Premiums collected on variable universal life insurance products increased 23.9%
to $12.3 million in the 2000 period.
During 2000, it is anticipated that we will discontinue underwriting long-term
disability income insurance and begin to offer, to our agents, a long-term
disability income product underwritten by one of our variable alliance partners.
We will not share in the risks, costs or profits of the new product, but will
earn a commission on new sales. It is anticipated that this change, over time,
will result in a decrease in accident and health premiums and benefits as our
existing block of business matures.
NET INVESTMENT INCOME, which excludes investment income on separate account
assets relating to variable products, decreased 2.3% in the 2000 period to $54.7
million. The annualized yield earned on average invested assets decreased to
7.43% in the 2000 period from 7.79% in the 1999 period due principally to a
decrease in fee income from mortgage loan prepayments and bond calls. Fee income
from mortgage loan prepayments and bond calls was less than $0.1 million in the
2000 period compared to $1.6 million in the 1999 period. The impact of the
decline in annualized yield was partially offset by a 2.2% increase in average
invested assets to $3,023.4 million in the 2000 period.
REALIZED LOSSES ON INVESTMENTS decreased 97.3% in the 2000 period to ($0.1)
million. Realized gains (losses) include writedowns of investments that became
other-than-temporarily impaired totaling $2.3 million in the 2000 period and
$2.2 million in the 1999 period. These writedowns are the result of sustained
operating losses and various other operational or economic factors that became
evident in the respective periods. The level of realized gains (losses) is
subject to fluctuation from period to period depending on the prevailing
interest rate and economic environment and the timing of the sale of
investments.
OTHER INCOME decreased 8.7% in the 2000 period to $4.5 million. This decrease is
primarily due to a decrease in the level of leasing and investment advisory
services provided to affiliates and third parties.
12
<PAGE>
A summary of our policy benefits is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Policy benefits:
Interest sensitive product benefits ...................................... $ 30,968 $ 29,317
Traditional life insurance and accident and health benefits .............. 15,745 15,753
Increase in traditional and accident and health future policy benefits ... 4,654 4,197
Distributions to participating policyholders ............................. 6,257 6,439
------------ ------------
Total ................................................................. $ 57,624 $ 55,706
============ ============
</TABLE>
INTEREST SENSITIVE PRODUCT BENEFITS increased 5.6% in the 2000 period to $31.0
million. The components of interest sensitive product benefits, along with
selected average interest crediting rates, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest credited to account balances ........................... $ 26,179 $ 25,903
Death benefits in excess of related account balances ............ 4,789 3,414
Weighted average contractual crediting rates:
Universal life liabilities ................................... 6.01% 5.97%
Annuity liabilities .......................................... 5.70% 5.70%
</TABLE>
The increase in interest credited in first quarter of 2000 compared to the first
quarter of 1999 is due primarily to growth in the average account balance
outstanding. While we decreased the crediting rate on our deposit administration
contracts effective January 1, 2000, the crediting rate on our product portfolio
has been relatively consistent over the 15-month period ended March 31, 2000.
Interest sensitive death benefits can tend to fluctuate from period to period as
a result of morbidity experience.
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH BENEFITS, INCLUDING THE
RELATED CHANGES IN RESERVES, increased 2.3% in the 2000 period to $20.4 million.
Accident and health benefits, including related change in reserves, increased
73.3% in 2000 to $3.1 million. Death and surrender benefits on traditional
products decreased $0.6 million, or 4.7%, to $13.0 million in the 2000 period.
Traditional life insurance and accident and health benefits can tend to
fluctuate from period to period as a result of changes in mortality and
morbidity experience.
DISTRIBUTIONS TO PARTICIPATING POLICYHOLDERS decreased 2.8% in the 2000 period
to $6.3 million. This decrease is primarily attributable to a decrease in the
average interest rate used in the dividend formula for these policies to 5.72%
at March 31, 2000 from 5.84% at March 31, 1999.
A summary of the our underwriting, acquisition and insurance expenses is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals ...................................... $ 2,673 $ 2,409
Amortization of deferred policy acquisition costs ......................... 2,977 2,521
Other underwriting, acquisition and insurance expenses, net of deferrals .. 12,645 11,679
------------ ------------
Total .................................................................. $ 18,295 $ 16,609
============ ============
</TABLE>
COMMISSION EXPENSE increased 11.0% in the 2000 period to $2.7 million.
Commission expense increased due principally to an increase in direct life
insurance premiums collected.
13
<PAGE>
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS increased 18.1% in the 2000
period to $3.0 million. The increase in amortization is primarily attributable
to the impact of realized gains and losses on investments backing the related
policyholder liabilities. In addition, the increase is also the result of an
increase in the unamortized acquisition cost asset due to growth in the volume
of business in force.
OTHER UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 8.3% in the
2000 period to $12.6 million. Salaries, benefits and other operating expenses
increased in the 2000 period primarily due to increased operating expenses
associated with administering our variable product business and developing
variable product alliances. In addition, the level of agent training and related
costs increased in the 2000 period compared to the 1999 period. These increases
were partially offset by a $0.3 million decrease in expenses associated with
preparing our computer systems for the Year 2000 date conversion.
INTEREST EXPENSE increased 57.4% in the 2000 period to $0.9 million due to an
increase in the average debt outstanding.
OTHER EXPENSES decreased 4.6% in the 2000 period to $3.8 million, due
principally to a decrease in the level of leasing and investment advisory
services provided to affiliates and third parties.
INCOME TAXES decreased 8.3% in the 2000 period to $5.5 million. The effective
tax rate was 32.1% for the 2000 period and 32.4% for the 1999 period. The
effective tax rate was lower than the federal statutory rate of 35% due
primarily to the tax benefit associated with the payment of dividends on
mandatorily redeemable preferred stock of subsidiary trust, tax-exempt interest
and tax-exempt dividend income.
EQUITY INCOME, NET OF RELATED INCOME TAXES, increased in the 2000 period to $7.7
million compared to $0.2 million in the 1999 period. Equity income includes our
proportionate share of gains and losses attributable to our ownership interest
in partnerships, joint ventures and certain companies where we exhibit some
control but have a minority ownership interest. Given the timing of availability
of financial information from these entities, we will consistently use
information that is as much as three months in arrears for certain of these
entities. Several of these entities are venture capital investment companies,
whose operating results are derived primarily from unrealized and realized gains
and losses generated by their investment portfolios. The income in the 2000
period is driven by unrealized appreciation on two internet-related equity
securities owned by two of these venture capital investment companies. As is
normal with these types of entities, the level of these gains and losses is
subject to fluctuation from period to period depending on the prevailing
economic environment, changes in prices of equity securities held by the
investment partnerships, timing and success of initial public offerings and
other exit strategies, and the timing of the sale of investments held by the
partnerships and joint ventures.
FINANCIAL CONDITION
INVESTMENTS
Our total investment portfolio decreased 0.2% to $2,945.0 million at March 31,
2000 compared to $2,950.2 million at December 31, 1999. This decrease is
primarily the result of net cash outflows on interest sensitive and variable
products and the acquisition of our common stock, partially offset by cash flow
from operations.
Over the last several years, the mix of our life insurance business has been
shifting from traditional and interest sensitive products to variable products.
In addition, in an attempt to enhance our persistency rate, we have promoted an
exchange program for the rollover of universal life policies to variable
universal life policies. We expect the shift to variable products to continue
due to this program and the continued popularity of the variable products. A
majority of premiums received on variable products are typically invested in our
separate accounts as opposed to the general account investments. This trend is
expected to impact the future growth rate of our investment portfolio and
separate account assets.
Internal investment professionals manage our investment portfolio. The
investment strategy is designed to achieve superior risk-adjusted returns
consistent with the investment philosophy of maintaining a largely investment
grade portfolio and providing adequate liquidity for obligations to
policyholders and other requirements. We continually
14
<PAGE>
review the returns on invested assets and change the mix of invested assets as
deemed prudent under the current market environment to help maximize current
income.
Our investment portfolio is summarized in the table below:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
----------------------------- -----------------------------
CARRYING VALUE PERCENT CARRYING VALUE PERCENT
-------------- ------------ -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturities:
Public ......................... $ 1,767,335 60.0% $ 1,733,678 58.8%
144A private placement ......... 435,392 14.8 429,269 14.6
Private placement .............. 177,597 6.0 178,445 6.0
------------ ------------ ------------ ------------
Total fixed maturities ......... 2,380,324 80.8 2,341,392 79.4
Equity securities ................ 42,452 1.4 35,345 1.2
Mortgage loans on real estate .... 320,375 10.9 314,523 10.7
Investment real estate:
Acquired for debt .............. 326 -- 783 --
Investment ..................... 19,136 0.7 19,336 0.6
Policy loans ..................... 124,297 4.2 123,717 4.2
Other long-term investments ...... 8,545 0.3 8,575 0.3
Short-term investments ........... 49,594 1.7 106,529 3.6
------------ ------------ ------------ ------------
Total investments ........... $ 2,945,049 100.0% $ 2,950,200 100.0%
============ ============ ============ ============
</TABLE>
As of March 31, 2000, 93.7% (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. We regularly review the percentage of our portfolio which is
invested in non-investment grade debt securities (NAIC designations 3 through
6). As of March 31, 2000, the investment in non-investment grade debt was 6.3%
of fixed maturity securities. At that time no single non-investment grade
holding exceeded 0.3% of total investments.
The following table sets forth the credit quality, by NAIC designation and
Standard & Poors (S & P) rating equivalents, of fixed maturity securities:
FIXED MATURITY SECURITIES BY NAIC DESIGNATION
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------------------
NAIC DESIGNATION EQUIVALENT S&P RATINGS (1) CARRYING VALUE PERCENT
- --------------------- ----------------------------------------------- -------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1 (AAA, AA, A).................................. $ 1,461,474 61.4%
2 (BBB)......................................... 769,133 32.3
------------- ---------
Total investment grade........................ 2,230,607 93.7
3 (BB).......................................... 111,669 4.7
4 (B)........................................... 30,831 1.3
5 (CCC, CC, C).................................. 4,001 0.2
6 In or near default............................ 3,216 0.1
------------- ---------
Total below investment grade.................. 149,717 6.3
------------- ---------
Total fixed maturities........................ $ 2,380,324 100.0%
============= =========
</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 our portfolio.
15
<PAGE>
The following tables contain amortized cost and market value information on
fixed maturities and equity securities at March 31, 2000:
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturities - mortgage-backed
securities ............................. $ 328,721 $ 3,900 $ (3,489) $ 329,132
============== ============== ============== ==============
<CAPTION>
AVAILABLE FOR SALE
------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Bonds:
United States Government and agencies .. $ 71,055 $ 574 $ (1,336) $ 70,293
State, municipal and other governments . 58,156 494 (1,166) 57,484
Public utilities ....................... 116,681 1,897 (3,509) 115,069
Corporate securities ................... 1,062,679 14,518 (57,711) 1,019,486
Mortgage and asset-backed securities ... 764,065 3,731 (19,884) 747,912
Redeemable preferred stocks ................ 45,622 423 (4,686) 41,359
-------------- -------------- -------------- --------------
Total fixed maturities ..................... $ 2,118,258 $ 21,637 $ (88,292) $ 2,051,603
============== ============== ============== ==============
Equity securities .......................... $ 43,455 $ 5,332 $ (6,335) $ 42,452
============== ============== ============== ==============
</TABLE>
The carrying value and estimated market value of our portfolio of fixed maturity
securities at March 31, 2000, 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 .................... $ -- $ -- $ 46,881 $ 47,086
Due after one year through five years ...... -- -- 234,075 227,878
Due after five years through ten years ..... -- -- 415,225 395,346
Due after ten years ........................ -- -- 612,390 592,022
-------------- -------------- -------------- --------------
-- -- 1,308,571 1,262,332
Mortgage and asset-backed securities ....... 328,721 329,132 764,065 747,912
Redeemable preferred stocks ................ -- -- 45,622 41,359
-------------- -------------- -------------- --------------
$ 328,721 $ 329,132 $ 2,118,258 $ 2,051,603
============== ============== ============== ==============
</TABLE>
Mortgage and other asset-backed securities constitute a significant portion of
our portfolio of securities. These securities were purchased at a time when, we
believed, these types of investments provided superior risk-adjusted returns
compared to returns of more conventional investments such as corporate bonds and
mortgage loans. These securities are diversified as to collateral types, cash
flow characteristics and maturity.
The return of principal on mortgage and other asset-backed securities occurs
more frequently and is more variable than that of more traditional fixed
maturity securities. The principal prepayment speeds (e.g., the rate of
individuals refinancing their home mortgages) can vary based on a number of
economic factors that can not be predicted with certainty. These factors include
the prevailing interest rate environment and general status of the economy.
Deviations in actual prepayment speeds from that originally expected can cause a
change in the yield earned on mortgage and asset-backed securities purchased at
a premium or discount. Increases in prepayment speeds, which typically occur in
a decreasing interest rate environment, generally increase the rate at which
discount is accrued and
16
<PAGE>
premium is amortized into income. Decreases in prepayment speeds, which
typically occur in an increasing interest rate environment, generally slow down
the rate these amounts are recorded into income.
The mortgage-backed portfolio includes pass-through and collateralized mortgage
obligation (CMO) securities. With a pass-through security, we receive a pro rata
share of principal payments as payments are made on the underlying mortgage
loans. CMOs consist of pools of mortgages divided into sections or "tranches"
which provide sequential retirement of the bonds. We invest in sequential
tranches, which provide cash flow stability in that principal payments do not
occur until the previous tranches are paid off. In addition, to provide call
protection and more stable average lives, we invests in CMOs such as planned
amortization class (PAC) and targeted amortization class (TAC) securities. CMOs
of these types provide more predictable cash flows within a range of prepayment
speeds by shifting the prepayment risks to support tranches. We do not purchase
certain types of collateralized mortgage obligations that we believe would
subject the investment portfolio to greater than average risk. These include,
but are not limited to, interest only, principal only, floater, inverse floater,
PAC II, Z and support tranches.
The following table sets forth the amortized cost, par value and carrying value
of our mortgage and asset-backed securities at March 31, 2000, summarized by
type of security.
<TABLE>
<CAPTION>
PERCENT
AMORTIZED CARRYING OF FIXED
COST PAR VALUE VALUE MATURITIES
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential mortgage-backed securities:
Sequential ..................................... $ 415,615 $ 420,464 $ 414,426 17.4%
Pass through ................................... 73,648 73,173 70,213 2.9
Planned and targeted amortization class ........ 40,537 40,636 40,453 1.7
Other .......................................... 11,355 11,617 11,348 0.5
------------ ------------ ------------ ------------
Total residential mortgage-backed securities ...... 541,155 545,890 536,440 22.5
Commercial mortgage-backed securities ............. 217,927 216,741 211,618 8.9
Other asset-backed securities ..................... 333,704 335,358 328,575 13.8
------------ ------------ ------------ ------------
Total mortgage and asset-backed securities ........ $ 1,092,786 $ 1,097,989 $ 1,076,633 45.2%
============ ============ ============ ============
</TABLE>
The commercial and other asset-backed securities are primarily sequential
securities. Commercial mortgage-backed securities typically have cash flows that
are less sensitive to interest rate changes than residential securities of
similar types due principally to prepayment restrictions on many of the
underlying commercial mortgage loans. Other asset-backed securities are
principally mortgage related (manufactured housing and home equity loans) which
historically have also demonstrated relatively less cash flow volatility than
residential securities of similar types.
At March 31, 2000, we held $320.4 million or 10.9% 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
March 31, 2000, mortgages more than 60 days delinquent accounted for 0.1% of the
carrying value of the mortgage portfolio. Our 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 our mortgage loan portfolio at March 31, 2000 include:
Pacific (28%) which includes California; and West South Central (25%) which
includes Oklahoma and Texas. Mortgage loans on real estate are also diversified
by collateral types with office buildings (47%) and retail facilities (34%)
representing the largest holdings at March 31, 2000.
Our asset-liability management program includes (i) designing and developing
products which encourage persistency and, as a result, create a stable liability
structure; and (ii) structuring the investment portfolio with duration and cash
flow characteristics consistent with the duration and cash flow characteristics
of our insurance liabilities. At March 31, 2000, the weighted average life of
the fixed maturity portfolio, based on market values and excluding convertible
bonds, was approximately 8.6 years. Based on our utilization of the fixed income
analytical system, including our mortgage backed prepayment assumptions, the
effective duration of the fixed income portfolio was 4.8 as of March 31, 2000.
17
<PAGE>
OTHER ASSETS
Assets held in separate accounts increased $28.7 million, or 11.2%, to $284.8
million at March 31, 2000 due primarily to net transfers to the separate
accounts resulting from sales of our variable products. At March 31, 2000, we
had total assets of $3,686.1 million, a 0.7% increase from total assets at
December 31, 1999.
LIABILITIES
Policy liabilities and accruals decreased 0.4% to $2,407.7 million at March 31,
2000. The slight decrease in policy liabilities is partially attributable to our
marketing emphasis on the sale of variable products. As noted under the
"Investments" section above, the shift in sales to variable products will have
an impact on the future growth rate of our policy liabilities and accruals as
well as the separate account liabilities. At March 31, 2000, we had total
liabilities of $3,076.2 million, a 0.5% increase from total liabilities at
December 31, 1999.
STOCKHOLDERS' EQUITY
Stockholders' equity increased 1.5% to $512.7 million at March 31, 2000,
compared to $505.0 million at December 31, 1999. This increase is principally
attributable to net income and unrealized appreciation on securities classified
as available for sale, partially offset by stock repurchases and dividends paid.
At March 31, 2000, common stockholders' equity was $509.7 million, or $16.44 per
share, compared to $502.0 million, or $15.94 per share at December 31, 1999.
Included in stockholders' equity per common share is ($1.54) at March 31, 2000
and ($1.52) at December 31, 1999 attributable to net unrealized investment
losses resulting from marking our 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 $1.7 million during the three months ended March 31, 2000,
after related adjustments to deferred policy acquisition costs, value of
insurance in force acquired, unearned revenue reserve and deferred income taxes.
LIQUIDITY
FBL FINANCIAL GROUP, INC.
Parent company cash inflows from operations consist primarily of (i) dividends
from subsidiaries, if declared and paid, (ii) fees that it charges the various
subsidiaries and affiliates for management of their operations, (iii) expense
reimbursements from subsidiaries and (iv) tax settlements between the parent
company and its subsidiaries. Cash outflows are principally for salaries and
other expenses related to providing these management services, dividends on
outstanding stock and interest on the parent company debt issued to a
subsidiary. In addition, the parent company will on occasion enter into capital
transactions such as the acquisition of our common stock.
We may receive consideration during each of the three years in the period ending
December 31, 2002 in accordance with an earn-out provision related to our sale
in 1998 of Utah Farm Bureau Insurance Company (Utah Insurance) to Farm Bureau
Mutual Insurance Company (Farm Bureau Mutual). Under the earn-out arrangement,
we and Farm Bureau Mutual share equally in the dollar amount by which the
incurred losses on Utah Insurance's direct business, net of reinsurance ceded,
is less than the incurred losses assumed in the valuation model used to derive
the initial acquisition price. The earn-out calculation is performed and any
settlement (subject to a maximum of $2.0 million per year) is made on a calendar
year basis. Earn-out settlements received, on a pre-tax basis, totaled $2.0
million in the first quarter of 2000 and $1.2 million in the first quarter of
1999.
During the three months ended March 31, 2000, we repurchased 573,581 shares of
Class A common stock for $9.9 million. The repurchases were made in accordance
with a $25.0 million stock repurchase plan approved by our Board of Directors on
December 20, 1999.
18
<PAGE>
During the three months ended March 31, 2000, we paid common and preferred stock
dividends totaling $2.8 million. We also paid common and preferred stock
dividends totaling $2.7 million during the corresponding 1999 period. It is
anticipated dividend requirements for the remainder of 2000 will be $0.09 per
quarter per common share and $0.0075 per quarter per preferred share, or
approximately $8.4 million. In addition, interest payments on the parent company
debt issued to a subsidiary are estimated to be $3.8 million for the remainder
of 2000.
FBL Financial Group, Inc. expects to rely on available cash resources and on
dividends from Farm Bureau Life to make any dividend payments to its
stockholders and interest payments on its Notes. The ability of Farm Bureau Life
to pay dividends to FBL Financial Group, Inc. is limited by law to earned
profits (statutory unassigned surplus) as of the date the dividend is paid, as
determined in accordance with accounting practices prescribed by insurance
regulatory authorities of the State of Iowa. In addition, under the Iowa
Insurance Holding Company Act, Farm Bureau Life may not pay an "extraordinary"
dividend without prior notice to and approval by the Iowa insurance
commissioner. An "extraordinary" dividend is defined under the Iowa Insurance
Holding Company Act as any dividend or distribution of cash or other property
whose fair market value, together with that of other dividends or distributions
made within the preceding 12 months, exceeds the greater of (i) 10% of
policyholders' surplus (total statutory capital stock and statutory surplus) as
of December 31 of the preceding year, or (ii) the statutory net gain from
operations of the insurer for the 12-month period ending December 31 of the
preceding year. During the remainder of 2000, the maximum amount legally
available for distribution to FBL Financial Group, Inc. without further
regulatory approval is approximately $40.6 million.
On September 22, 1999, Farm Bureau Life paid an extraordinary dividend totaling
$75.0 million, consisting of cash and fixed maturity securities, to FBL
Financial Group, Inc. Because of this dividend, Farm Bureau Life would need
further regulatory approval to pay any additional dividends to FBL Financial
Group, Inc. during 12-month period ending September 22, 2000. However,
management believes that, due to the financial strength of Farm Bureau Life,
such regulatory approval would be granted to fund FBL Financial Group's regular
quarterly interest and dividend (subject to Board approval) requirements.
Primarily as a result of the $75.0 million dividend, FBL Financial Group, Inc.
has cash and investments totaling $61.7 million at March 31, 2000. Except for
the potential acquisition of approximately $14.4 million worth of the Company's
common stock to complete the current stock repurchase plan, management does not
have any immediate plans to deploy this capital and is currently evaluating
capital management and investment options. We may from time to time review
potential acquisition opportunities. It is anticipated that funding for any such
acquisition would be provided from available cash resources, debt or equity
financing. As of March 31, 1999, we had no material commitments for capital
expenditures.
INSURANCE OPERATIONS
The Life Companies' cash inflows consist primarily of premium income, deposits
to policyholder account balances, product charges on variable products, income
from investments, sales, maturities and calls of investments and repayments of
investment principal. The Life Companies' cash outflows are primarily related to
withdrawals of policyholder account balances, investment purchases, payment of
policy acquisition costs, policyholder benefits, income taxes, dividends and
current operating expenses. Life insurance companies generally produce a
positive cash flow which may be measured by the degree to which cash inflows are
adequate to meet benefit obligations to policyholders and normal operating
expenses as they are incurred. The remaining cash flow is generally used to
increase the asset base to provide funds to meet the need for future policy
benefit payments and for writing new business. The Life Companies' liquidity
positions continued to be favorable in the three months ended March 31, 2000,
with cash inflows at levels sufficient to provide the funds necessary to meet
their obligations.
For the life insurance operations, cash outflow requirements for operations are
typically met from normal premium and deposit cash inflows. This has been the
case for all reported periods as the Life Companies' continuing operations and
financing activities relating to interest sensitive products provided funds
amounting to $1.6 million million in the three months ended March 31, 2000 and
$21.1 million in the three months ended March 31, 1999. These funds were
primarily used to increase the insurance companies' fixed maturity investment
portfolio. 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
19
<PAGE>
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 (FHLB), Farm
Bureau Life is eligible to establish and borrow on a collateralized line of
credit to provide it additional liquidity. The line of credit available is based
on the amount of capital stock of the FHLB owned by Farm Bureau Life, which
supported a collateralized borrowing capacity of $199.1 million as of March 31,
2000. At March 31, 2000, Farm Bureau Life had outstanding borrowings of $40.0
million under this arrangement, leaving a collateralized borrowing capacity of
$159.1 million. The outstanding debt is due September 17, 2003, and interest on
the debt is charged at a variable rate equal to the London Interbank Offered
Rate less 0.0475% (6.08% at March 31, 2000). Fixed maturity securities with a
carrying value of $32.3 million are on deposit with the FHLB as collateral for
the note.
We also have a $12.0 million line of credit with Farm Bureau Mutual in the form
of a revolving demand note. Borrowings on the note, which totaled $11.7 million
at March 31, 2000, are being used to acquire assets that will be leased to
certain affiliates, including Farm Bureau Mutual. Interest is payable at a rate
equal to the prime rate of a national bank (9.00% at March 31, 2000).
We anticipate that funds to meet our short-term and long-term capital
expenditures, cash dividends to stockholders and operating cash needs will come
from existing capital and internally generated funds. We believe 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 our anticipated
cash obligations for the foreseeable future. Our investment portfolio at March
31, 2000, included $49.6 million of short-term investments and $281.4 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.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
From time to time, we may publish statements relating to anticipated financial
performance, business prospects, new products, and similar matters. These
statements and others which include words such as "expect", "anticipate",
"believe", "intend", and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
these types of statements. In order to comply with the terms of the safe harbor,
please note that a variety of factors could cause our actual results and
experiences to differ materially from the anticipated results or other
expectations expressed in our forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of our business include but are not limited to the following:
* Changes to interest rate levels and stock market performance may
impact our lapse rates, market value of our investment portfolio and
our ability to sell life insurance products, notwithstanding product
features to mitigate the financial impact of such changes.
* The degree to which our products are accepted by customers and agents
(including the agents of our alliance partners) will impact our future
growth rate.
* Extraordinary acts of nature or man may result in higher than expected
claim activity.
* Changes in federal and state income tax laws and regulations may
affect the relative tax advantage of our products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There have been no material changes in the market risks of our financial
instruments since December 31, 1999.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended March 31, 2000:
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 3, 2000
FBL FINANCIAL GROUP, INC.
By /s/ William J. Oddy
-----------------------------------------
William J. Oddy
Chief Executive Officer (Principal Executive
Officer)
By /s/ James W. Noyce
-----------------------------------------
James W. Noyce
Chief Financial Officer (Principal Financial
and Accounting Officer)
22
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<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<DEFERRED-ACQUISITION> 241,368
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<POLICY-OTHER> 37,635
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0
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<INCOME-TAX> 5,537
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