<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
FILE NO. 333-46595
FILE NO. 811-08667
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 2
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 3
---------------------
FARM BUREAU LIFE ANNUITY ACCOUNT II
(Exact Name of Registrant)
FARM BUREAU LIFE INSURANCE COMPANY
(Name of Depositor)
------------------------
5400 UNIVERSITY AVENUE
WEST DES MOINES, IOWA 50266
(Address of Principal Executive Office)
1-515-225-5400
STEPHEN M. MORAIN, ESQUIRE
5400 UNIVERSITY AVENUE
WEST DES MOINES, IOWA 50266
(Name and Address of Agent for Service of Process)
------------------------
COPY TO:
STEPHEN E. ROTH, ESQUIRE
SUTHERLAND ASBILL & BRENNAN LLP
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2415
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
SECURITIES BEING OFFERED: FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
CONTRACTS
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE
BOX):
/X/ IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b) OF RULE 485;
/ / ON (DATE) PURSUANT TO PARAGRAPH (b) OF RULE 485;
/ / DAYS AFTER FILING PURSUANT TO PARAGRAPH (a) OF RULE 485;
/ / ON (DATE) PURSUANT TO PARAGRAPH (a) OF RULE 485.
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<PAGE>
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FARM BUREAU LIFE ANNUITY ACCOUNT II
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED
VARIABLE ANNUITY CONTRACT
------------------------------------------------------------------------
PROSPECTUS
May 1, 1999
Farm Bureau Life Insurance Company (the "Company") is offering the individual
flexible premium deferred variable annuity contract (the "Contract") described
in this prospectus. The Company sells the Contract to retirement plans,
including those that qualify for special federal tax treatment under the
Internal Revenue Code.
The Owner of a Contract ("you" or "your") may allocate premiums and Accumulated
Value to 1) the Declared Interest Option, an account that provides a specified
rate of interest, and/or 2) Subaccounts of Farm Bureau Life Annuity Account II,
each of which invests in one of the following Investment Options:
<TABLE>
<S> <C>
Value Growth Portfolio High Grade Bond Portfolio
High Yield Bond Portfolio Money Market Portfolio
Blue Chip Portfolio Equity Income Portfolio
Mid-Cap Growth Portfolio New America Growth Portfolio
Personal Strategy Balanced Portfolio International Stock Portfolio
Growth Portfolio Overseas Portfolio
Contrafund Portfolio Index 500 Portfolio
Growth & Income Portfolio
</TABLE>
The accompanying prospectus for each Investment Option describes the investment
objectives and attendant risks of each Investment Option. If you allocate
premiums to the Subaccounts, the amount of the Contract's Accumulated Value
prior to the retirement date will vary to reflect the investment performance of
the Investment Options you select.
You may find additional information about your Contract and the Account in the
Statement of Additional Information. To obtain a copy of this document, please
contact us at the address or phone number shown on the cover of this prospectus.
Please read this prospectus carefully and retain it for future reference. A
prospectus for each Investment Option must accompany this prospectus and you
should read it in conjunction with this prospectus.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE SECURITIES
OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRSENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Issued By
Farm Bureau Life Insurance Company
5400 University Avenue
West Des Moines, Iowa 50266
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
DEFINITIONS................................................................................................... 3
EXPENSE TABLES................................................................................................ 5
SUMMARY OF THE CONTRACT....................................................................................... 9
CONDENSED FINANCIAL INFORMATION............................................................................... 11
THE COMPANY, ACCOUNT AND INVESTMENT OPTIONS................................................................... 11
Farm Bureau Life Insurance Company...................................................................... 11
Iowa Farm Bureau Federation............................................................................. 11
Farm Bureau Life Annuity Account II..................................................................... 11
Investment Options...................................................................................... 11
Addition, Deletion or Substitution of Investments....................................................... 14
DESCRIPTION OF ANNUITY CONTRACT............................................................................... 15
Issuance of a Contract.................................................................................. 15
Premiums................................................................................................ 15
Free-Look Period........................................................................................ 15
Allocation of Premiums.................................................................................. 15
Variable Accumulated Value.............................................................................. 16
Transfer Privilege...................................................................................... 17
Partial Withdrawals and Surrenders...................................................................... 17
Special Transfer and Withdrawal Options................................................................. 18
Death Benefit Before the Retirement Date................................................................ 19
Death Benefit After the Retirement Date................................................................. 20
Proceeds on the Retirement Date......................................................................... 21
Payments................................................................................................ 21
Modification............................................................................................ 21
Reports to Owners....................................................................................... 22
Inquiries............................................................................................... 22
THE DECLARED INTEREST OPTION.................................................................................. 22
Minimum Guaranteed and Current Interest Rates........................................................... 22
Transfers From Declared Interest Option................................................................. 23
Payment Deferral........................................................................................ 23
CHARGES AND DEDUCTIONS........................................................................................ 23
Surrender Charge (Contingent Deferred Sales Charge)..................................................... 23
Annual Administrative Charge............................................................................ 24
Transfer Processing Fee................................................................................. 24
Mortality and Expense Risk Charge....................................................................... 24
Investment Option Expenses.............................................................................. 25
Premium Taxes........................................................................................... 25
Other Taxes............................................................................................. 25
PAYMENT OPTIONS............................................................................................... 25
Election of Options..................................................................................... 25
Description of Options.................................................................................. 26
YIELDS AND TOTAL RETURNS...................................................................................... 26
FEDERAL TAX MATTERS........................................................................................... 28
Introduction............................................................................................ 28
Tax Status of the Contract.............................................................................. 28
Taxation of Annuities................................................................................... 29
Transfers, Assignments or Exchanges of a Contract....................................................... 31
Withholding............................................................................................. 32
Multiple Contracts...................................................................................... 32
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Taxation of Qualified Plans............................................................................. 32
Possible Charge for the Company's Taxes................................................................. 34
Other Tax Consequences.................................................................................. 34
DISTRIBUTION OF THE CONTRACTS................................................................................. 34
LEGAL PROCEEDINGS............................................................................................. 35
VOTING RIGHTS................................................................................................. 35
YEAR 2000..................................................................................................... 36
FINANCIAL STATEMENTS.......................................................................................... 36
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS......................................................... 37
</TABLE>
The Contract may not be available in all jurisdictions.
This prospectus constitutes an offering or solicitation only in those
jurisdictions where such offering or solicitation may lawfully be made.
2
<PAGE>
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DEFINITIONS
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ACCOUNT: Farm Bureau Life Annuity Account II.
ACCUMULATED VALUE: The total amount invested under the Contract, which is the
sum of the values of the Contract in each Subaccount of the Account plus the
value of the Contract in the Declared Interest Option.
ANNUITANT: The person or persons whose life (or lives) determines the annuity
benefits payable under the Contract and whose death determines the death
benefit.
BENEFICIARY: The person to whom the Company pays the proceeds on the death of
the owner/annuitant.
BUSINESS DAY: Each day that the New York Stock Exchange is open for trading,
except the day after Thanksgiving, the weekdays before and after Christmas (in
1999), the weekday after New Year's Day (in 2000) and any day on which the Home
Office is closed because of a weather-related or comparable type of emergency
and is unable to segregate orders and redemption requests received on that day.
THE CODE: The Internal Revenue Code of 1986, as amended.
THE COMPANY ("WE", "US" OR "OUR"): Farm Bureau Life Insurance Company.
CONTRACT: The individual flexible premium deferred variable annuity contract we
offer and describe in this prospectus, which term includes the Contract
described in this prospectus, the Contract application, and any supplemental
applications and any endorsements.
CONTRACT ANNIVERSARY: The same date in each Contract Year as the Contract Date.
CONTRACT DATE: The date on which the Company receives a properly completed
application at the Home Office. It is the date set forth on the data page of the
Contract which the Company uses to determine Contract Years and Contract
Anniversaries.
CONTRACT YEAR: A twelve-month period beginning on the Contract Date or on a
Contract Anniversary.
DECLARED INTEREST OPTION: An investment option under the Contract funded by the
Company's General Account. It is not part of, nor dependent upon, the investment
performance of the Account.
DUE PROOF OF DEATH: Satisfactory documentation provided to the Company verifying
proof of death. This documentation may include the following:
(a) a certified copy of the death certificate;
(b) a certified copy of a court decree reciting a finding of death; or
(c) any other proof satisfactory to the Company.
FUND: An open-end diversified management investment company in which the Account
invests.
GENERAL ACCOUNT: The assets of the Company other than those allocated to the
Account or any other separate account of the Company.
HOME OFFICE: The principal offices of the Company at 5400 University Avenue,
West Des Moines, Iowa 50266.
INVESTMENT OPTION: A separate investment portfolio of a Fund.
NET ACCUMULATED VALUE: The Accumulated Value less any applicable Surrender
Charge.
NON-QUALIFIED CONTRACT: A Contract that is not a Qualified Contract.
3
<PAGE>
OWNER ("YOU" OR "YOUR"): The person who owns the Contract and who is entitled to
exercise all rights and privileges provided in the Contract.
QUALIFIED CONTRACT: A Contract the Company issues in connection with plans that
qualify for special federal income tax treatment under Sections 401, 403(b), 408
or 408A of the Code.
RETIREMENT DATE: The date when the Company applies the Accumulated Value under a
payment option, if the annuitant is still living.
SEC: The U.S. Securities and Exchange Commission.
SUBACCOUNT: A subdivision of the Account which invests its assets in a
corresponding Investment Option.
VALUATION PERIOD: The period that starts at the close of business (3:00 p.m.
central time) on one Business Day and ends at the close of business on the next
succeeding Business Day.
WRITTEN NOTICE: A written request or notice signed by the owner in a form
satisfactory to the Company which the Company receives at the Home Office.
4
<PAGE>
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EXPENSE TABLES
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The following expense information assumes that the entire accumulated value
is variable accumulated value.
OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Charge Imposed on Premiums None
</TABLE>
Surrender Charge (contingent deferred sales charge) as a percentage of the
amount surrendered:
<TABLE>
<CAPTION>
CONTRACT YEAR* SURRENDER CHARGE
<S> <C>
1 6%
2 5
3 4
4 3
5 2
6 1
7 and after 0
</TABLE>
* In each Contract Year after the first Contract Year, you may withdraw up
to 10% of the Accumulated Value on your most recent Contract Anniversary
without incurring a Surrender Charge. If you subsequently surrender your
Contract during the Contract Year, the Company will apply a Surrender
Charge to any partial withdrawals taken. The amount that you may withdraw
without incurring a Surrender Charge is not cumulative from Contract Year
to Contract Year.
<TABLE>
<S> <C>
Transfer Processing Fee None*
</TABLE>
* Fees are waived for the first twelve transfers during a Contract Year,
although the Company may charge $25 for each subsequent transfer during
the Contract Year.
<TABLE>
<S> <C>
Annual Administrative Charge $ 30
<CAPTION>
Annual Account Expenses (as a percentage of average net assets)
<S> <C>
Mortality and Expense Risk Charge 1.40%
Other Account Expenses None
Total Account Expenses 1.40%
</TABLE>
5
<PAGE>
ANNUAL INVESTMENT OPTION EXPENSES (as a percentage of average net assets)
<TABLE>
<CAPTION>
OTHER TOTAL
EXPENSES EXPENSES
(AFTER WAIVER (AFTER WAIVER
ADVISORY OR OR
INVESTMENT OPTION FEE REIMBURSEMENT) REIMBURSEMENT)
EquiTrust Variable Insurance Series Fund
<S> <C> <C> <C>
Value Growth 0.45% 0.11% 0.56%
High Grade Bond 0.30% 0.20% 0.50%
High Yield Bond 0.45% 0.16% 0.61%
Money Market 0.25% 0.27% 0.52%
Blue Chip 0.20% 0.10% 0.30%
<CAPTION>
T. Rowe Price Equity Series, Inc.
<S> <C> <C> <C>
Equity Income 0.85% 0.00% 0.85%(1)
Mid-Cap Growth 0.85% 0.00% 0.85%(1)
New America Growth 0.85% 0.00% 0.85%(1)
Personal Strategy Balanced 0.90% 0.00% 0.90%(1)
<CAPTION>
T. Rowe Price International Series, Inc.
<S> <C> <C> <C>
International Stock 1.05% 0.00% 1.05%(1)
<CAPTION>
Fidelity Variable Insurance Products Funds
<S> <C> <C> <C>
VIP Growth 0.59% 0.07% 0.66%(2)
VIP Overseas 0.74% 0.15% 0.89%(2)
VIP II Contrafund 0.59% 0.07% 0.66%(2)
VIP II Index 500 0.24% 0.04% 0.28%(3)
VIP III Growth & Income 0.49% 0.11% 0.60%(2)
</TABLE>
(1) Total annual investment option expenses are an all-inclusive fee and
pay for investment management services and other operating costs.
(2) A portion of the brokerage commissions that certain Investment Options
pay is used to reduce Fund expenses. In addition, certain Investment
Options have entered into arrangements with their custodian whereby
credits realized as a result of uninvested cash balances are used to
reduce custodian expenses. Including these reductions, the total
Investment Option operating expenses presented in the preceding table
would have been: Growth 0.68%, Overseas 0.91%, Contrafund 0.70% and
Growth & Income 0.61%.
(3) The investment advisor has voluntarily agreed to reimburse the Index
500 Investment Option to the extent that total operating expenses (with
the exceptions noted in the prospectus for the Investment Option) as a
percentage of its average net assets exceed 0.28%. If this agreement
had not been in effect, total operating expenses for the fiscal year
ended December 31, 1998, as a percentage of the Index 500 Investment
Option's average net assets would have been 0.35%.
The above tables are intended to assist you in understanding the costs and
expenses that you will bear directly or indirectly. The tables reflect the
expenses for the Account based on the actual expenses for each Investment Option
for the 1998 fiscal year. For a more complete description of the various costs
and expenses see "Charges and Deductions" and the prospectus for each Investment
Option which accompanies this Prospectus.
6
<PAGE>
EXAMPLES: You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets:
1. If you surrender or annuitize the Contract at the end of the applicable time
period:
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
EquiTrust Variable Insurance Series Fund
<S> <C> <C> <C> <C>
Value Growth $ 111 $ 195 $ 278 $ 525
High Grade Bond 111 193 275 519
High Yield Bond 112 196 280 530
Money Market 111 193 276 521
Blue Chip 109 187 265 498
<CAPTION>
T. Rowe Price Equity Series, Inc.
<S> <C> <C> <C> <C>
Equity Income 114 203 292 555
Mid-Cap Growth 114 203 292 555
New America Growth 114 203 292 555
Personal Strategy Balanced 115 204 295 560
<CAPTION>
T. Rowe Price International Series, Inc.
<S> <C> <C> <C> <C>
International Stock 116 209 302 574
<CAPTION>
Fidelity Variable Insurance Products Funds
<S> <C> <C> <C> <C>
VIP Growth 113 198 284 537
VIP Overseas 115 205 295 561
VIP II Contrafund 113 199 285 539
VIP II Index 500 109 186 264 496
VIP III Growth & Income 112 196 280 530
</TABLE>
7
<PAGE>
2. If you do not surrender or annuitize the Contract at the end of the
applicable time period:
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
EquiTrust Variable Insurance Series Fund
<S> <C> <C> <C> <C>
Value Growth $ 50 $ 151 $ 255 $ 525
High Grade Bond 49 149 252 519
High Yield Bond 50 153 257 530
Money Market 49 150 253 521
Blue Chip 47 143 242 498
<CAPTION>
T. Rowe Price Equity Series, Inc.
<S> <C> <C> <C> <C>
Equity Income 53 160 270 555
Mid-Cap Growth 53 160 270 555
New America Growth 53 160 270 555
Personal Strategy Balanced 53 162 272 560
<CAPTION>
T. Rowe Price International Series, Inc.
<S> <C> <C> <C> <C>
International Stock 55 166 280 574
<CAPTION>
Fidelity Variable Insurance Products Funds
<S> <C> <C> <C> <C>
VIP Growth 51 155 261 537
VIP Overseas 53 162 273 561
VIP II Contrafund 51 155 262 539
VIP II Index 500 47 143 241 496
VIP III Growth & Income 50 153 257 530
</TABLE>
The examples provided above assume that no transfer charges or premium taxes
have been assessed. The examples also assume that the annual administrative
charge is $30 and that the accumulated value per contract is $10,000, which
translates the administrative charge into an assumed .30% charge for the
purposes of the examples based on a $1,000 investment.
Please do not consider the examples a representation of past or future expenses.
The assumed 5% annual rate of return is hypothetical and is a representation of
past or future annual returns, which may be greater or less than this assumed
rate.
8
<PAGE>
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SUMMARY OF THE CONTRACT
- --------------------------------------------------------------------------------
ISSUANCE OF A CONTRACT. The Contract is an individual flexible premium
deferred variable annuity contract with no maximum age required of owners on
the Contract Date (see "DESCRIPTION OF ANNUITY CONTRACT--Issuance of a
Contract"). The Contracts are:
- "flexible premium" because you do not have to pay premiums according to
a fixed schedule, and
- "variable" because, to the extent Accumulated Value is attributable to
the Account, Accumulated Value will increase and decrease based on the
investment performance of the Investment Options corresponding to the
Subaccounts to which you allocate your premiums.
FREE-LOOK PERIOD. You have the right to return the Contract within 20 days
after you receive it (see "DESCRIPTION OF ANNUITY CONTRACT--Free-Look
Period"). If you return the Contract, it will become void and you will receive
either the greater of:
- premiums paid, or
- the Accumulated Value on the date the Company receives the returned
Contract at the Home Office, plus administrative charges and charges
deducted from the Account.
PREMIUMS. The minimum initial premium amount the Company accepts is $1,000.
You may make subsequent premium payments (minimum $50 each) at any time. (See
"DESCRIPTION OF ANNUITY CONTRACT--Premiums.")
ALLOCATION OF PREMIUMS. You can allocate premiums to one or more Subaccounts,
the Declared Interest Option, or both (see "DESCRIPTION OF ANNUITY
CONTRACT--Allocation of Premiums").
- The Company will allocate the initial premium to the Money Market
Subaccount for 10 days.
- At the end of that period, the Company will allocate those monies among
the Subaccounts and the Declared Interest Option according to the
instructions in your application.
TRANSFERS. You may transfer monies in a Subaccount or the Declared Interest
Option to another Subaccount or the Declared Interest Option on or before the
retirement date (see "DESCRIPTION OF ANNUITY CONTRACT--Transfer Privilege").
- The mimimum amount of each transfer is $100 or the entire amount in the
Subaccount, if less.
- Transfers out of the Declared Interest Option must be for no more than
25% of the Accumulated Value in that option.
- The Company waives fees for the first twelve transfers during a Contract
Year.
- The Company may assess a transfer processing fee of $25 for the 13th and
each subsequent transfer during a Contract Year.
PARTIAL WITHDRAWAL. You may withdraw part of the Accumulated Value upon
written notice at any time before the retirement date (see "DESCRIPTION OF
ANNUITY CONTRACT--Partial Withdrawals and Surrenders--PARTIAL WITHDRAWALS").
SURRENDER. You may surrender your Contract upon written notice on or before
the retirement date (see "DESCRIPTION OF ANNUITY CONTRACT--Partial Withdrawals
and Surrenders--SURRENDERS").
CHARGES AND DEDUCTIONS
Your Contract will be assessed the following charges and deductions:
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE). We apply a charge if you
make a partial withdrawal from or surrender your Contract during the first six
Contract Years (see "CHARGES AND
9
<PAGE>
DEDUCTIONS--Surrender Charge (Contingent Deferred Sales Charge)--CHARGE FOR
PARTIAL WITHDRAWAL OR SURRENDER"). We deduct this charge from the amount
surrendered.
<TABLE>
<CAPTION>
YEAR CHARGE
<S> <C>
1 6%
2 5
3 4
4 3
5 2
6 1
7 and
after 0
</TABLE>
In each Contract Year after the first Contract Year, you may withdraw up to
10% of the Accumulated Value on your most recent Contract Anniversary without
a Surrender Charge. If you subsequently surrender your Contract during the
Contract Year, we will apply a Surrender Charge to any partial withdrawals
you've taken. (See "CHARGES AND DEDUCTIONS--Surrender Charge (Contingent
Deferred Sales Charge)--AMOUNTS NOT SUBJECT TO SURRENDER CHARGE.")
We reserve the right to waive the Surrender Charge as provided in the
Contract. (See "CHARGES AND DEDUCTIONS--Surrender Charge (Contingent Deferred
Sales Charge)--WAIVER OF SURRENDER CHARGE.")
ANNUAL ADMINISTRATIVE CHARGE. We charge an annual administrative charge of $30
on the Contract Date and on each Contract Anniversary prior to the retirement
date (see "CHARGES AND DEDUCTIONS--Annual Administrative Charge"). We
currently waive this charge:
- with an initial premium payment of $50,000, or
- if you have a Net Accumulated Value of $50,000 on your Contract
Anniversary.
MORTALITY AND EXPENSE RISK CHARGE. We apply a daily mortality and expense risk
charge (calculated at an annual rate of 1.40% (approximately 1.01% for
mortality risk and 0.39% for expense risks)) (see "CHARGES AND
DEDUCTIONS--Mortality and Expense Risk Charge").
INVESTMENT OPTION EXPENSES. The assets of the Account will reflect the
investment advisory fee and other operating expenses incurred by each
Investment Option. The table on page 6 titled "Annual Investment Option
Expenses" lists these fees.
ANNUITY PROVISIONS
On your retirement date, you may choose to have the Net Accumulated Value
distributed to you as follows:
- under a payment option, or
- in a lump sum (see "PAYMENT OPTIONS").
FEDERAL TAX MATTERS
You may be subject to adverse tax consequences if you take a distribution from
your Contract (see "FEDERAL TAX MATTERS").
OTHER CONTRACTS
We offer other variable annuity contracts that invest in the same Investment
Options of the Funds. These contracts may have different charges that could
affect Subaccount performance, and may offer different benefits more suitable
to your needs. You may contact the Company to obtain more information about
these contracts.
10
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The Account commenced operations on July 1, 1998; however, as of the date of
this prospectus, no Contracts have been sold, therefore no financial
information is presented.
- --------------------------------------------------------------------------------
THE COMPANY, ACCOUNT AND INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
FARM BUREAU LIFE INSURANCE COMPANY
The Company was incorporated on October 30, 1944 as a stock life insurance
company in the State of Iowa and is principally engaged in the offering of
life insurance policies, disability income insurance policies and annuity
contracts. One hundred percent of our outstanding voting shares are owned by
FBL Financial Group, Inc., of which Iowa Farm Bureau Federation owned 54.30%
of the outstanding voting stock at December 31, 1998. We are admitted to do
business in fifteen states: Arizona, Colorado, Idaho, Iowa, Kansas,
Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, South
Dakota, Utah, Wisconsin and Wyoming. Our Home Office is at 5400 University
Avenue, West Des Moines, Iowa 50266.
- --------------------------------------------------------------------------------
IOWA FARM BUREAU FEDERATION
Iowa Farm Bureau Federation is an Iowa not-for-profit corporation, the
members of which are county Farm Bureau organizations and their individual
members. Iowa Farm Bureau Federation is primarily engaged, through various
divisions and subsidiaries, in the formulation, analysis and promotion of
programs (at local, state, national and international levels) that are
designed to foster the educational, social and economic advancement of its
members. The principal offices of Iowa Farm Bureau Federation are at 5400
University Avenue, West Des Moines, Iowa 50266.
- --------------------------------------------------------------------------------
FARM BUREAU LIFE ANNUITY ACCOUNT II
On January 6, 1998, we established the Account pursuant to the laws of the
State of Iowa. The Account:
- will receive and invest premiums paid to it under the Contract;
- will receive and invest premiums for other variable annuity
contracts we issue;
- meets the definition of a "separate account" under the federal
securities laws;
- is registered with the SEC as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does
not involve supervision by the SEC of the management or investment
policies or practices of the Account, us or the Funds.
We own the Account's assets. However, we cannot charge the Account with
liabilities arising out of any other business we may conduct. The Account's
assets are available to cover the general liabilities of the Company only to
the extent that the Account's assets exceed its liabilities. We may transfer
assets which exceed these reserves and liabilities to our General Account.
All obligations arising under the Contracts are general corporate
obligations of the Company.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS
There are currently fifteen Subaccounts available under the Account, each of
which invests exclusively in shares of a single corresponding Investment
Option. Each of the Investment Options was formed as an investment vehicle
for insurance company separate accounts. Each Investment Option has its own
investment objectives and separately determines the income and losses for
that Investment Option. While you may be invested in all Subaccounts, we
only permit you to "actively participate" in a maximum of 10 Investment
Options at any one time.
11
<PAGE>
The investment objectives and policies of certain Investment Options are
similar to the investment objectives and policies of other portfolios that
the same investment adviser, sub-investment adviser or manager may manage.
The investment results of the Investment Options, however, may be higher or
lower than the results of such other portfolios. There can be no assurance,
and no representation is made, that the investment results of any of the
Investment Options will be comparable to the investment results of any other
portfolio, even if the other portfolio has the same investment adviser,
sub-investment adviser or manager.
We have summarized below the investment objectives and policies of each
Investment Option. There is no assurance that any Investment Option will
achieve its stated objectives. You should also read the prospectus for each
Investment Option, which must accompany or precede this Prospectus, for more
detailed information, including a description of risks and expenses.
EQUITRUST VARIABLE INSURANCE SERIES FUND. EquiTrust Investment Management
Services, Inc. is the investment adviser to the Fund which is comprised of six
portfolios, the following five of which are available under the Contract:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Value Growth Portfolio - This Portfolio seeks long-term capital appreciation. The
Portfolio pursues this objective by investing primarily in
equity securities of companies that the investment adviser
believes have a potential to earn a high return on capital
and/or in equity securities that the investment adviser
believes are undervalued by the market place. Such equity
securities may include common stock, preferred stock and
securities convertible or exchangeable into common stock.
High Grade Bond Portfolio - This Portfolio seeks as high a level of current income as is
consistent with an investment in a high grade portfolio of
debt securities. The Portfolio will pursue this objective by
investing primarily in debt securities rated AAA, AA or A by
Standard & Poor's or Aaa, Aa or A by Moody's Investors
Service, Inc. and in securities issued or guaranteed by the
United States government or its agencies or
instrumentalities.
High Yield Bond Portfolio - This Portfolio seeks as a primary objective, as high a level
of current income as is consistent with investment in a
portfolio of fixed-income securities rated in the lower
categories of established rating services (commonly known as
"junk bonds"). As a secondary objective, the Portfolio seeks
capital appreciation when consistent with its primary
objective. The Portfolio pursues these objectives by
investing primarily in fixed-income securities rated Baa or
lower by Moody's Investors Service, Inc. and/or BBB or lower
by Standards & Poor's, or in unrated securities of
comparable quality. AN INVESTMENT IN THIS PORTFOLIO MAY
ENTAIL GREATER THAN ORDINARY FINANCIAL RISK. (See the Fund
Prospectus "HIGHER RISK SECURITIES AND INVESTMENT
STRATEGIES--Lower Rated Debt Securities.")
Money Market Portfolio - This Portfolio seeks maximum current income consistent with
liquidity and stability of principal. The Portfolio will
pursue this objective by investing in high quality
short-term money market instruments. AN INVESTMENT IN THE
MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT AND ITS AGENCIES. THERE CAN BE NO
ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Blue Chip Portfolio - This Portfolio seeks growth of capital and income. The
Portfolio pursues this objective by investing primarily in
common stocks of well-capitalized, established companies.
Because this Portfolio may be invested heavily in particular
stocks or industries, an investment in this Portfolio may
entail relatively greater risk of loss.
</TABLE>
12
<PAGE>
T. ROWE PRICE EQUITY SERIES, INC. T. Rowe Price Associates, Inc. is the
investment adviser to the Fund.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Equity Income Portfolio - This Portfolio seeks to provide substantial dividend income
and long-term capital appreciation by investing primarily in
established companies considered by the adviser to have
favorable prospects for both increasing dividends and
capital appreciation.
Mid-Cap Growth Portfolio - This Portfolio seeks long-term capital appreciation by
investing primarily in common stocks of medium-sized
(mid-cap) growth companies which offer the potential for
above-average earnings growth.
New America Growth Portfolio - This Portfolio seeks long-term capital growth by investing
primarily in common stocks of U.S. growth companies
operating in service industries.
Personal Strategy Balanced - This Portfolio seeks the highest total return over time
Portfolio consistent with an emphasis on both capital appreciation and
income.
</TABLE>
T. ROWE PRICE INTERNATIONAL SERIES, INC. Rowe Price-Fleming International, Inc.
is the investment adviser to the Fund.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
International Stock Portfolio - This Portfolio seeks to provide capital appreciation through
investments primarily in established companies based outside
the United States.
</TABLE>
FIDELITY VARIABLE INSURANCE PRODUCTS FUNDS. Fidelity Management & Research
Company serves as the investment adviser to these Funds. Bankers Trust Company
serves as sub-investment adviser to the Index 500 Portfolio. The following
portfolios are available under the Policy.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Fidelity VIP Growth Portfolio - This Portfolio seeks capital appreciation by investing
primarily in common stocks. The Portfolio, however, is not
restricted to any one type of security and may pursue
capital appreciation through the purchase of bonds and
preferred stocks. The Portfolio does not place any emphasis
on dividend income from its investments, except when the
adviser believes this income will have a favorable influence
on the market value of the security. Growth may be measured
by factors such as earnings or gross sales.
Fidelity VIP Overseas - This Portfolio seeks long-term growth of capital by
Portfolio investing primarily in foreign securities. The Portfolio
defines foreign securities as securities of issuers whose
principal activities are located outside the United States.
Normally, at least 65% of the Portfolio's total assets will
be invested in foreign securities. The Portfolio may also
invest in U.S. issuers.
Fidelity VIP II Contrafund - This Portfolio seeks capital appreciation by investing in
Portfolio securities of companies whose value the adviser believes is
not fully recognized by the public. The Portfolio normally
invests primarily in common stocks and securities
convertible into common stock, but it has the flexibility to
invest in other types of securities.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Fidelity VIP II Index 500 - This Portfolio seeks to provide investment results that
Portfolio correspond to the total return of a broad range of common
stocks publicly traded in the United States. To achieve this
objective, the Portfolio attempts to duplicate the
composition and total return of the S&P 500.
Fidelity VIP III Growth & - This Portfolio seeks high total return through a combination
Income Portfolio of current income and capital appreciation by investing
mainly in equity securities. The Portfolio expects to invest
the majority of its assets in domestic and foreign equity
securities, with a focus on those that pay current dividends
and show potential earnings growth. However, the Portfolio
may buy debt securities as well as equity securities that
are not currently paying dividends, but offer prospects for
capital appreciation or future income.
</TABLE>
The Funds currently sell shares: (a) to the Account as well as to separate
accounts of insurance companies that may or may not be affiliated with the
Company or each other; and (b) to separate accounts to serve as the
underlying investment for both variable insurance policies and variable
annuity contracts. We currently do not foresee any disadvantages to owners
arising from the sale of shares to support variable annuity contracts and
variable life insurance policies, or from shares being sold to separate
accounts of insurance companies that may or may not be affiliated with the
Company. However, we will monitor events in order to identify any material
irreconcilable conflicts that might possibly arise. In that event, we would
determine what action, if any, should be taken in response to the conflict.
In addition, if we believe that a Fund's response to any of those events or
conflicts insufficiently protects owners, we will take appropriate action on
our own, which may include withdrawing the Account's investment in that
Fund. (See the Fund prospectuses for more detail.)
We may receive compensation from an affiliate(s) of one or more of the Funds
based upon an annual percentage of the average assets we hold in the
Investment Options. These amounts are intended to compensate us for
administrative and other services we provide to the Funds and/or
affiliate(s).
Each Fund is registered with the SEC as an open-end, diversified management
investment company. Such registration does not involve supervision of the
management or investment practices or policies of the Fund by the SEC.
- --------------------------------------------------------------------------------
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to compliance with applicable law, to make
additions to, deletions from or substitutions for the shares that are held
in the Account or that the Account may purchase. We reserve the right to
eliminate the shares of any Investment Option and to substitute any shares
of another Investment Option. We will not substitute any shares attributable
to your interest in a Subaccount without notice and prior approval of the
SEC and state insurance authorities, to the extent required by the 1940 Act
or other applicable law.
We also reserve the right to establish additional subaccounts of the
Account, each of which would invest in a new Investment Option, or in shares
of another investment company with a specified investment objective. We may
establish new subaccounts when, in our sole discretion, marketing needs or
investment conditions warrant, and we will make any new subaccounts
available to existing Contract Owners on a basis we determine. We may also
eliminate one or more Subaccounts if, in our sole discretion, marketing,
tax, regulatory requirements or investment conditions warrant.
In the event of any such substitution, deletion or change, we may make
appropriate changes in this and other contracts to reflect such
substitution, deletion or change. If you allocated all or a portion of your
premiums to any of the current Subaccounts that are being substituted for or
deleted, you may surrender the portion of the Accumulated Value funded by
such Subaccount without paying the
14
<PAGE>
associated Surrender Charge. You may also transfer the portion of the
Accumulated Value affected without paying a transfer charge.
If we deem it to be in the best interest of persons having voting rights
under the Contracts, we may:
- operate the Account as a management investment company under the
1940 Act,
- deregister the Account under that Act in the event such registration
is no longer required, or
- combine the Account with our other separate accounts.
In addition, we may, when permitted by law, restrict or eliminate your
voting rights under the Contract.
- --------------------------------------------------------------------------------
DESCRIPTION OF ANNUITY CONTRACT
- --------------------------------------------------------------------------------
ISSUANCE OF A CONTRACT
You must complete an application in order to purchase a Contract, which can
be obtained through a licensed representative of the Company, who is also a
registered representative of EquiTrust Marketing Services, LLC ("EquiTrust
Marketing"), a broker-dealer having a selling agreement with EquiTrust
Marketing or a broker-dealer having a selling agreement with such
broker-dealer. Your Contract Date will be the date the properly completed
application is received at our Home Office. (If this date is the 29th, 30th
or 31st of any month, the Contract Date will be the 28th of such month.) The
Company sells the Contract to retirement plans that qualify for special
federal tax treatment under the Code. We do not apply a maximum age for
owners on the Contract Date.
- --------------------------------------------------------------------------------
PREMIUMS
The minimum initial premium amount the Company will accept is $1,000. You
may make mimimum subsequent premium payments of $50 at any time during the
annuitant's lifetime and before the retirement date.
You may select to receive a premium reminder notice schedule based on an
annual, semi-annual or quarterly payment, for which you may change the
amount and frequency of the notice at any time. Also, under the Automatic
Payment Plan, you can select a monthly payment schedule for premium payments
to be automatically deducted from a bank account or other source. Your
Contract will not necessarily lapse even if premiums are not paid.
- --------------------------------------------------------------------------------
FREE-LOOK PERIOD
We provide for an initial "free-look" period during which time you have the
right to return the Contract within 20 days after you receive it. If you
return the Contract, it will become void and you will receive the greater
of:
- premiums paid, or
- the Accumulated Value on the date we receive the returned Contract
at the Home Office, plus administrative charges and charges deducted
from the Account.
- --------------------------------------------------------------------------------
ALLOCATION OF PREMIUMS
Upon receipt at our Home Office of your properly completed Contract
application and initial premium payment, we will allocate the initial
premium to the Money Market Subaccount within two business days. If your
application is not properly completed, we reserve the right to retain your
initial premium for up to five business days while we attempt to complete
the application. At the end of this
15
<PAGE>
5-day period, if the application is not complete, we will inform you of the
reason for the delay and we will return the initial premium immediately,
unless you specifically provide us your consent to retain the premium until
the application is complete.
You can allocate premiums paid to one or more Subaccounts, the Declared
Interest Option, or both. Each allocation must be in whole percentages for a
minimum of 10% of your premium payment.
- We will allocate the initial premium to the Money Market Subaccount
for 10 days.
- At the end of that period, we will allocate those monies among the
Subaccounts and the Declared Interest Option according to the
instructions in your application.
- We will allocate subsequent premiums in the same manner at the end
of the valuation period when we receive them at our Home Office,
unless the allocation percentages are changed.
- If you change your allocation percentages, we will allocate
subsequent premium payments in accordance with the allocation
schedule in effect.
- You may, however, direct individual payments to a specific
Subaccount, the Declared Interest Option, or any combination
thereof, without changing the existing allocation schedule.
You may change your allocation schedule at any time by sending written
notice to the Home Office. Changing your allocation schedule will not alter
the allocation of your existing Accumulated Values among the Subaccounts or
the Declared Interest Option.
Because the Accumulated Values in each Subaccount will vary with that
Subaccount's investment experience, you bear the entire investment risk. You
should periodically review your premium allocation schedule in light of
market conditions and your overall financial objectives.
- --------------------------------------------------------------------------------
VARIABLE ACCUMULATED VALUE
The variable accumulated value of your Contract will reflect the investment
experience of your selected Subaccounts, any premiums paid, surrenders or
partial withdrawals, transfers and charges assessed. The Company does not
guarantee a minimum variable accumulated value, and, because your Contract's
variable accumulated value on any future date depends upon a number of
variables, it cannot be predetermined.
CALCULATION OF VARIABLE ACCUMULATED VALUE. Your Contract's variable
accumulated value is determined at the end of each valuation period and is
the aggregate of the values in each of the Subaccounts under your Contract.
These values are determined by multiplying each Subaccount's unit value by
the number of units allocated to that Subaccount.
DETERMINATION OF NUMBER OF UNITS. The amounts you allocate to your selected
Subaccounts are converted into Subaccount units. The number of units
credited to each Subacount in your Contract is calculated at the end of the
valuation period by dividing the dollar amount allocated by the unit value
for that Subaccount. At the end of the valuation period, we will increase
the number of units in each Subaccount by:
- any premiums paid, and
- any amounts transferred from another Subaccount or the Declared
Interest Option.
We will decrease the number of units in each Subaccount by:
- any amounts withdrawn,
- applicable charges assessed, and
- any amounts transferred to another Subaccount.
16
<PAGE>
DETERMINATION OF UNIT VALUE. We have set the unit value for each
Subaccount's first valuation period at $10. We calculate the unit value for
a Subaccount for each subsequent valuation period by dividing (a) by (b)
where:
(a) is the net result of:
1. the value of the net assets in the Subaccount at the end
of the preceding valuation period; plus
2. the investment income, dividends and capital gains,
realized or unrealized, credited to the Subaccount during
the current valuation period; minus
3. the capital losses, realized or unrealized, charged
against the Subaccount during the current valuation
period; minus
4. any amount charged for taxes or any amount set aside
during the valuation period as a provision for taxes
attributable to the Subaccount; minus
5. the daily amount charged for mortality and expense risks
for each day of the current valuation period.
(b) is the number of units outstanding at the end of the preceding
valuation period.
- --------------------------------------------------------------------------------
TRANSFER PRIVILEGE
You may transfer monies in a Subaccount or the Declared Interest Option to
another Subaccount or the Declared Interest Option on or before the
retirement date. We will process all transfers as of the Business Day on or
next following receipt of your written request at the Home Office.
- The minimum amount of each transfer is $100 or the entire amount in
that Subaccount, if less.
- Transfers out of the Declared Interest Option must be for no more
than 25% of the Accumulated Value in that option.
- If a transfer would reduce the Accumulated Value in the Declared
Interest Option below $1,000, you may transfer the entire amount in
that option.
- The Company waives fees for the first twelve transfers during a
Contract Year.
- The Company will assess a transfer processing fee of $25 for the
13th and each subsequent transfer during a Contract Year.
- We allow an unlimited number of transfers among or between the
Subaccounts or the Declared Interest Option. (See "DECLARED INTEREST
OPTION--Transfers from Declared Interest Option.")
All transfer requests received in a valuation period will be considered to
be one transfer, regardless of the Subaccounts or Declared Interest Option
affected. We will deduct the transfer processing fee on a pro-rata basis
from the Subaccounts or Declared Interest Option to which the transfer is
made unless it is paid in cash.
You may also transfer monies via telephone request if you selected this
option on your initial application or have provided us with proper
authorization. We reserve the right to suspend telephone transfer privileges
at any time.
- --------------------------------------------------------------------------------
PARTIAL WITHDRAWALS AND SURRENDERS
PARTIAL WITHDRAWALS. You may withdraw part of the Accumulated Value upon
written notice at any time before the retirement date.
- The minimum amount which you may partially withdraw is $500.
17
<PAGE>
- The maximum amount which you may partially withdraw is that which
would leave the remaining Accumulated Value equal to or less than
$2,000.
If your partial withdrawal reduces your Accumulated Value to $2,000 or less,
it will be treated as a full surrender of the Contract. We will process your
partial withdrawal as of the Business Day on or next following receipt of
your written request at the Home Office. You may elect to have any
applicable Surrender Charge deducted from your remaining Accumulated Value
or the amount partially withdrawn. (See "Surrender Charge.")
You may specify the amount of the partial withdrawal to be made from
selected Subaccounts or the Declared Interest Option. If you do not so
specify, or if the amount in the designated Subaccount(s) or Declared
Interest Option is insufficient to comply with your request, we will make
the partial withdrawal from each Subaccount and the Declared Interest Option
based on the proportion that each Subaccount's value bears to the total
Accumulated Value on the date we receive your request at the Home Office.
SURRENDER. You may surrender your Contract upon written notice on or before
the retirement date. We will determine your Net Accumulated Value as of the
Business Day on or next following receipt of your written request at the
Home Office, which must be accompanied by your Contract. You may choose to
have the Net Accumulated Value distributed to you as follows:
- under a payment option, or
- in a lump sum.
SURRENDER AND PARTIAL WITHDRAWAL RESTRICTIONS. Your right to make partial
withdrawals and surrenders is subject to any restrictions imposed by
applicable law or employee benefit plan and you may realize adverse federal
income tax consequences, including a penalty tax, upon utilization of these
features. (See "Taxation of Annuities.")
RESTRICTIONS ON DISTRIBUTIONS FROM CERTAIN TYPES OF CONTRACTS. Surrenders
and partial withdrawals of Contracts which are used as funding vehicles for
Code Section 403(b) retirement plans are subject to certain restrictions.
(See "FEDERAL TAX MATTERS--Taxation of Qualified Plans--TAX SHELTERED
ANNUITIES.")
- --------------------------------------------------------------------------------
SPECIAL TRANSFER AND WITHDRAWAL OPTIONS
You may elect the following options on your initial application or at a
later date by completing the applicable Request Form and returning it to the
Home Office. The options selected will remain in effect until we receive a
written termination request from you at the Home Office. The use of
Automatic Rebalancing or Dollar Cost Averaging does not guarantee profits,
nor protect you against losses.
AUTOMATIC REBALANCING. You may automatically reallocate your Accumulated
Value among the Subaccounts and Declared Interest Option.
- We will reallocate monies according to the percentage allocation
schedule in effect on your Contract Anniversary.
- The maximum number of Subaccounts which you may select at any one
time is ten.
- Rebalancing will occur on the fifth Business Day of the month
following your Contract Anniversary.
- This feature is not considered in the twelve free transfers during a
Contract Year.
- This feature cannot be utilized in combination with Dollar Cost
Averaging.
18
<PAGE>
DOLLAR COST AVERAGING. You may periodically transfer a specified amount
among the Subaccounts or the Declared Interest Option.
- The minimum amount of each transfer is $100.
- The maximum number of Subaccounts which you may select at any one
time is ten, including the Declared Interest Option.
- You select the date to implement this program which will occur on
the same date each month, or on the next Business Day.
- We will terminate this option when monies in the source account are
inadequate.
- This feature is considered in the twelve free transfers during a
Contract Year.
- This feature cannot be utilized in combination with Automatic
Rebalancing or Systematic Withdrawals.
SYSTEMATIC WITHDRAWALS. You may elect to receive automatic partial
withdrawals.
- You specify the amount of the partial withdrawals to be made from
selected Subaccounts or the Declared Interest Option.
- You specify the allocation of the withdrawals among the Subaccounts
and Declared Interest Option, and the frequency (monthly, quarterly,
semi-annually or annually).
- The minimum amount which you may withdraw is $500.
- The maximum amount which you may withdraw is that which would leave
the remaining Accumulated Value equal to or less than $2,000.
- You may annually withdraw a maximum of 10% of Accumulated Value
without incurring a Surrender Charge.
- Distributions will take place on the same date each month as the
Contract Date.
- You may change the amount and frequency upon written request to the
Home Office.
- This feature cannot be utilized in combination with Dollar Cost
Averaging.
We may terminate these privileges at any time.
- --------------------------------------------------------------------------------
DEATH BENEFIT BEFORE THE RETIREMENT DATE
DEATH OF OWNER. If an owner dies prior to the retirement date, any surviving
owner becomes the sole owner. If there is no surviving owner, the annuitant
becomes the new owner unless the deceased owner was also the annuitant. If
the deceased owner was also the annuitant, then the provisions relating to
the death of an annuitant (described below) will govern unless the deceased
owner was one of two joint annuitants. (In the latter event, the surviving
annuitant becomes the owner.)
The surviving owners or new owners are afforded the following options:
1. If the sole surviving owner or the sole new owner is the spouse
of the deceased owner, he or she may continue the Contract as
the new owner.
2. If the surviving owner or the new owner is not the spouse of
the deceased owner:
(a) he or she may elect to receive the Net Accumulated Value
in a single sum within 5 years of the deceased owner's
death, or
(b) he or she may elect to receive the Net Accumulated Value
paid out under one of the annuity payment options, with
payments beginning within one year after the date of the
owner's death and with payments being made over the
lifetime
19
<PAGE>
of the owner, or over a period that does not exceed the
life expectancy of the owner.
Under either of these options, surviving owners or new owners may exercise
all ownership rights and privileges from the date of the deceased owner's
death until the date that the net accumulated value is paid.
Other rules may apply to a Qualified Contract.
DEATH OF AN ANNUITANT. If the annuitant dies before the retirement date, we
will pay the death benefit under the Contract to the beneficiary. If there
is no surviving beneficiary, we will pay the death benefit to the owner or
the owner's estate. If the annuitant's age on the Contract Date was less
than 76, the death benefit is equal to the greater of:
- the sum of the premiums paid, less the sum of all partial withdrawal
reductions (including applicable surrender charges), plus the
Accumulated Value on the date we receive due proof of the
annuitant's death, or
- the Accumulated Value on the most recent Contract Anniversary (plus
subsequent premiums paid and less subsequent partial withdrawals).
If the annuitant's age on the Contract Date was 76 or older, the death
benefit will be determined as of the date we receive due proof of death and
is equal to the greater of:
- the sum of the premiums paid, less the sum of all partial withdrawal
reductions (including applicable Surrender Charges), or
- the Accumulated Value.
A partial withdrawal reduction is defined as (a) times (b) divided by (c)
where:
(a) is the death benefit immediately prior to withdrawal;
(b) is the amount of the partial withdrawal (including applicable
surrender charges); and
(c) is the Accumulated Value immediately prior to withdrawal.
We will pay the death benefit to the beneficiary in a lump sum unless the
owner or beneficiary elects a payment option. We do not pay a death benefit
if the annuitant dies after the retirement date.
If the annuitant who is also the owner dies, the provisions described
immediately above apply except that the beneficiary may only apply the death
benefit payment to an annuity payment option if:
- payments under the option begin within 1 year of the annuitant's
death, and
- payments under the option are payable over the beneficiary's life or
over a period not greater than the beneficiary's life expectancy.
If the owner's spouse is the designated beneficiary, the Contract may be
continued with such surviving spouse as the new owner.
Other rules may apply to a Qualified Contract.
- --------------------------------------------------------------------------------
DEATH BENEFIT AFTER THE RETIREMENT DATE
If an owner dies on or after the retirement date, any surviving owner
becomes the sole owner. If there is no surviving owner, the payee receiving
annuity payments becomes the new owner and retains the rights provided to
owners during the annuity period, including the right to name successor
payees if the deceased owner had not previously done so. On or after the
retirement date, if any owner dies before the entire interest in the
Contract has been distributed, the remaining portion of such interest will
be distributed at least as quickly as under the method of distribution being
used as of the date of death.
20
<PAGE>
If the annuitant dies before 120 payments have been received, we will make
any remaining payments to the beneficiary. There is no death benefit payable
if the annuitant dies after the retirement date.
Other rules may apply to a Qualified Contract.
- --------------------------------------------------------------------------------
PROCEEDS ON THE RETIREMENT DATE
You select the retirement date. For Non-Qualified Contracts, the retirement
date may not be after the later of the annuitant's age 70 or 10 years after
the Contract Date. For Qualified Contracts, the retirement date must be no
later than the annuitant's age 70 1/2 or such other date as meets the
requirements of the Code.
On the retirement date, we will apply the proceeds under the life income
annuity payment option with ten years guaranteed, unless you choose to have
the proceeds paid under another option or in a lump sum. (See "Payment
Options.") If a payment option is elected, we will apply the Accumulated
Value less any applicable Surrender Charge. If a lump sum payment is chosen,
we will pay the net accumulated value on the retirement date.
You may change the retirement date subject to these limitations:
- we must receive a written notice at the Home Office at least 30 days
before the current retirement date;
- the requested retirement date must be a date that is at least 30
days after receipt of the written notice; and
- the requested retirement date must be no later than the annuitant's
70th birthday or any earlier date required by law.
- --------------------------------------------------------------------------------
PAYMENTS
We will usually pay any surrender, partial withdrawal or death benefit
within seven days of receipt of a written request at the Home Office. We
also require any information or documentation necessary to process the
request, and in the case of a death benefit, we must receive Due Proof of
Death. We may postpone payments if:
- the New York Stock Exchange is closed, other than customary weekend
and holiday closings, or trading on the exchange is restricted as
determined by the SEC;
- the SEC permits by an order the postponement for the protection of
owners; or
- the SEC determines that an emergency exists that would make the
disposal of securities held in the Account or the determination of
the value of the Account's net assets not reasonably practicable.
If you have submitted a recent check or draft, we have the right to delay
payment until we are assured that the check or draft has been honored.
We have the right to defer payment of any surrender, partial withdrawal or
transfer from the Declared Interest Option for up to six months. If payment
has not been made within 30 days after receipt of all required
documentation, or such shorter period as necessitated by a particular
jurisdiction, we will add interest at the rate of 3% (or a higher rate if
required by a particular state) to the amount paid from the date all
documentation was received.
- --------------------------------------------------------------------------------
MODIFICATION
Upon notification to you, we may modify your Contract if:
- necessary to make your Contract or the Account comply with any law
or regulation issued by a governmental agency to which the Company
is subject;
21
<PAGE>
- necessary to assure continued qualification of your Contract under
the Code or other federal or state laws relating to retirement
annuities or variable annuity contracts;
- necessary to reflect a change in the operation of the Account; or
- the modification provides additional Subaccount and/or fixed
accumulation options.
We will make the appropriate endorsement to your Contract in the event of
most such modifications.
- --------------------------------------------------------------------------------
REPORTS TO OWNERS
We will mail to you, at least annually, a report containing the Accumulated
Value of your Contract (reflecting each Subaccount and the Declared Interest
Option), premiums paid, withdrawals taken and charges deducted since your
last report, and any other information required by any applicable law or
regulation.
- --------------------------------------------------------------------------------
INQUIRIES
You may contact the Company in writing at our Home Office if you have any
questions regarding your Contract
- --------------------------------------------------------------------------------
THE DECLARED INTEREST OPTION
- --------------------------------------------------------------------------------
You may allocate some or all of your premium payments, and transfer some or
all of your Accumulated Value, to the Declared Interest Option, which is
part of the General Account and pays interest at declared rates guaranteed
for each Contract Year (subject to a minimum guaranteed interest rate of
3%).
IN COMPLIANCE WITH SPECIFIC STATE INSURANCE REGULATIONS, THE DECLARED
INTEREST OPTION IS NOT AVAILABLE IN ALL STATES. A REGISTERED REPRESENTATIVE
CAN PROVIDE INFORMATION ON THE AVAILABILITY OF THIS INVESTMENT OPTION.
The Declared Interest Option has not been, and is not required to be,
registered with the SEC under the Securities Act of 1933 (the "1933 Act"),
and neither the Declared Interest Option nor the Company's General Account
has been registered as an investment company under the 1940 Act. Therefore,
neither the Company's General Account, the Declared Interest Option, nor any
interests therein are generally subject to regulation under the 1933 Act or
the 1940 Act. The disclosures relating to these accounts, which are included
in this Prospectus, are for your information and have not been reviewed by
the SEC. However, such disclosures may be subject to certain generally
applicable provisions of Federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
The portion of your Accumulated Value allocated to the Declared Interest
Option (the "Declared Interest Option accumulated value") will be credited
with rates of interest, as described below. Since the Declared Interest
Option is part of the General Account, we assume the risk of investment gain
or loss on this amount. All assets in the General Account are subject to the
Company's general liabilities from business operations.
- --------------------------------------------------------------------------------
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Declared Interest Option accumulated value is guaranteed to accumulate
at a minimum effective annual interest rate of 3%. While we intend to credit
the Declared Interest Option accumulated value with current rates in excess
of the minimum guarantee, we are not obligated to do so. These current
interest rates are influenced by, but do not necessarily correspond to,
prevailing general market interest rates, and any interest credited on your
amounts in the Declared Interest Option in excess of the minimum guaranteed
rate will be determined in the sole discretion of the Company. You,
therefore, assume the risk that interest credited may not exceed the
guaranteed rate.
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<PAGE>
Occasionally, we establish new current interest rates for the Declared
Interest Option. The rate applicable to your Contract is the rate in effect
on your most recent Contract Anniversary. This rate will remain unchanged
until your next Contract Anniversary (i.e., for your entire Contract Year).
During each Contract Year, your entire Declared Interest Option accumulated
value (including amounts allocated or transferred to the Declared Interest
Option during the year) is credited with the interest rate in effect for
that period and becomes part of your Declared Interest Option accumulated
value.
We reserve the right to change the method of crediting interest, provided
that such changes do not have the effect of reducing the guaranteed interest
rate below 3% per annum, or shorten the period for which the current
interest rate applies to less than a Contract Year.
CALCULATION OF DECLARED INTEREST OPTION ACCUMULATED VALUE. The Declared
Interest Option accumulated value is equal to:
- amounts allocated and transferred to it, plus
- interest credited, less
- amounts deducted, transferred or withdrawn.
- --------------------------------------------------------------------------------
TRANSFERS FROM DECLARED INTEREST OPTION
You may make an unlimited number of transfers from the Declared Interest
Option to any or all of the Subaccounts in each Contract Year. The amount
you transfer may not exceed 25% of the Declared Interest Option accumulated
value on the date of transfer. However, if the balance after the transfer is
less than $1,000, you may transfer the entire amount.
- --------------------------------------------------------------------------------
PAYMENT DEFERRAL
We have the right to defer payment of any surrender, partial withdrawal or
transfer from the Declared Interest Option for up to six months.
- --------------------------------------------------------------------------------
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
CHARGE FOR PARTIAL WITHDRAWAL OR SURRENDER. We apply a charge if you make a
partial withdrawal from or surrender your Contract during the first six
Contract years.
<TABLE>
<CAPTION>
CONTRACT YEAR IN WHICH CHARGE AS PERCENTAGE OF
SURRENDER OCCURS AMOUNT SURRENDERED
<S> <C>
1 6%
2 5
3 4
4 3
5 2
6 1
7 and after 0
</TABLE>
If Surrender Charges are not sufficient to cover sales expenses, the loss
will be borne by the Company; conversely, if the amount of such charges
proves more than enough, the Company will
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<PAGE>
retain the excess. In no event will the total Surrender Charges assessed
under a Contract exceed 8.5% of the total premiums paid under that Contract.
If the Contract is being surrendered, the Surrender Charge is deducted from
the Accumulated Value in determining the Net Accumulated Value. For a
partial withdrawal, the Surrender Charge may, at the election of the owner,
be deducted from the Accumulated Value remaining after the amount requested
is withdrawn or be deducted from the amount of the withdrawal requested.
AMOUNTS NOT SUBJECT TO SURRENDER CHARGE. In each Contract Year after the
first Contract Year, you may withdraw up to 10% of the Accumulated Value on
your most recent Contract Anniversary without a Surrender Charge. If you
subsequently surrender your Contract during the Contract Year, we will apply
a Surrender Charge to any partial withdrawals you've taken during the
Contract Year. (This right is not cumulative from Contract Year to Contract
Year.)
SURRENDER CHARGE AT THE RETIREMENT DATE. A Surrender Charge will be assessed
against your Accumulated Value at the retirement date if you select a
payment option other than options 2-5 described below (see "Payment
Options"). We do not apply a Surrender Charge if you select payment options
3 or 5. If you select payment options 2 or 4, we assess a Surrender Charge
by adding the number of years for which payments will be made to the number
of Contract Years since your Contract inception and applying this sum in the
table of Surrender Charges.
WAIVER OF SURRENDER CHARGE. We reserve the right to waive the Surrender
Charge after your first Policy Year if the annuitant is terminally ill (as
defined in your Contract), stays in a qualified nursing center for 90 days,
or is required to satisfy minimum distribution requirements in accordance
with the Code. We must receive written notification, before the retirement
date, at the Home Office in order to activate this waiver.
- --------------------------------------------------------------------------------
ANNUAL ADMINISTRATIVE CHARGE
We apply an annual administrative charge of $30 on the Contract Date and on
each Contract Anniversary prior to the retirement date. We deduct this
charge from your Accumulated Value and use it to reimburse us for
administrative expenses relating to your Contract. We will make the
withdrawal from each Subaccount and the Declared Interest Option based on
the proportion that each Subaccount's value bears to the total Accumulated
Value. We do not assess this charge during the annuity payment period.
We currently waive the annual administrative charge:
- with an initial premium payment of $50,000, or
- upon a Net Accumulated Value of $50,000 on your Contract
Anniversary.
We may terminate this privilege at any time.
- --------------------------------------------------------------------------------
TRANSFER PROCESSING FEE
We waive the transfer processing fee for the first twelve transfers during a
Contract Year, but may assess a $25 charge for each subsequent transfer. We
will deduct this fee on a pro-rata basis from the Subaccounts or Declared
Interest Option to which the transfer is made unless it is paid in cash.
- --------------------------------------------------------------------------------
MORTALITY AND EXPENSE RISK CHARGE
We apply a daily mortality and expense risk charge at an annual rate of
1.40% (daily rate of 0.0038091%) (approximately 1.01% for mortality risk and
0.39% for expense risk). This charge is used to compensate the Company for
assuming mortality and expense risks.
The mortality risk we assume is that annuitants may live for a longer period
of time than estimated when the guarantees in the Contract were established.
Through these guarantees, each payee is
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<PAGE>
assured that longevity will not have an adverse effect on the annuity
payments received. The mortality risk also includes a guarantee to pay a
death benefit if the owner/annuitant dies before the retirement date. The
expense risk we assume is that the annual administrative and transfer
processing fees may be insufficient to cover actual future expenses.
We may realize a profit from this charge and we may use such profit for any
lawful purpose including paying distribution expenses.
- --------------------------------------------------------------------------------
INVESTMENT OPTION EXPENSES
The assets of the Account will reflect the investment advisory fee and other
operating expenses incurred by each Investment Option. (See the Expense
Tables in this prospectus and the accompanying Investment Option
prospectuses.)
- --------------------------------------------------------------------------------
PREMIUM TAXES
Currently, we do not charge for premium taxes levied by various states and
other governmental entities on annuity contracts issued by insurance
companies. These taxes range up to 3.5% and are subject to change. We
reserve the right, however, to deduct such taxes from Accumulated Value.
- --------------------------------------------------------------------------------
OTHER TAXES
Currently, we do not charge for any federal, state or local taxes incurred
by the Company which may be attributable to the Account or the Contracts. We
reserve the right, however, to make such a charge in the future.
- --------------------------------------------------------------------------------
PAYMENT OPTIONS
- --------------------------------------------------------------------------------
Your Contract ends on the retirement date. At that time, your Net
Accumulated Value will be applied under a payment option, unless you elect
to receive this amount in a single sum. Should you not elect a payment
option on the retirement date, proceeds will be paid as a life income
annuity with payments guaranteed for ten years.
Prior to the retirement date, you may have your Net Accumulated Value
applied under a payment option, or a beneficiary can have the death benefit
applied under a payment option. In either case, the Contract must be
surrendered for a lump sum payment to be made, or a supplemental contract to
be issued for the payment option.
We have provided a description of the available payment options below. The
term "payee" means a person who is entitled to receive payment under that
option. All payment options offer a fixed and guaranteed amount to be paid
during the annuity payment period, independent of the investment experience
of the Account.
- --------------------------------------------------------------------------------
ELECTION OF OPTIONS
While the annuitant is living, you may elect, revoke or change a payment
option at any time before the retirement date. Upon an annuitant's death, if
a payment option is not in effect or if payment will be made in one lump sum
under an existing option, the beneficiary may elect one of the options after
the death of the owner/annuitant.
We will initiate an election, revocation or change of a payment option upon
receipt of your written request at the Home Office.
We reserve the right to refuse the election of a payment option, other than
in a lump sum, if:
1) the total payments would be less than $2,000;
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<PAGE>
2) each payment would be less than $20; or
3) the payee is an assignee, estate, trustee, partnership,
corporation or association.
- --------------------------------------------------------------------------------
DESCRIPTION OF OPTIONS
OPTION 1--INTEREST INCOME. The proceeds are left with the Company to earn a
set interest rate. The payee may elect to have the interest paid monthly,
quarterly, semi-annually or annually. Under this option, the payee may
withdraw part or all of the proceeds at any time.
OPTION 2--INCOME FOR A FIXED TERM. The proceeds are paid in equal
installments for a fixed number of years.
OPTION 3--LIFE INCOME OPTION WITH TERM CERTAIN. The proceeds are paid in
equal amounts (at intervals elected by the payee) during the payee's
lifetime with the guarantee that payments will be made for a specified
number of years. Under this option, at the death of a payee having no
beneficiary (or where the beneficiary died prior to the payee), the present
value of the dollar amount of any remaining guaranteed payments will be paid
in one lump sum to the executors or administrators of the payee's estate.
Also under this option, if any beneficiary dies while receiving payment, the
present value of the dollar amount of any remaining guaranteed payments will
be paid in one lump sum to the executors or administrators of the
beneficiary's estate. The amount to be paid is calculated as of the date of
death of the payee, or beneficiary if applicable, and the calculation of
present value shall be no less than 3%.
OPTION 4--INCOME FOR FIXED AMOUNT. The proceeds are paid in equal
installments (at intervals elected by the payee) for a specific amount and
will continue until all the proceeds plus interest are exhausted.
OPTION 5--JOINT AND TWO-THIRDS TO SURVIVOR MONTHLY LIFE INCOME. The proceeds
are paid in equal installments while two joint payees live. When one payee
dies, future proceeds equal to two-thirds of the initial payment will be
made to the survivor for their lifetime.
The amount of each payment is calculated from the tables in the Contract
which apply to that particular option using the payee's age and sex. Age is
determined as the last birthday at the date of the first payment.
ALTERNATE PAYMENT OPTION. The Company may make available an alternative
payment option.
- --------------------------------------------------------------------------------
YIELDS AND TOTAL RETURNS
- --------------------------------------------------------------------------------
We may advertise, or include in sales literature, yields, effective yields
and total returns for the Subaccounts. THESE FIGURES ARE BASED ON HISTORICAL
EARNINGS AND DO NOT INDICATE OR PROJECT FUTURE PERFORMANCE. Each Subaccount
may also advertise, or include in sales literature, performance relative to
certain performance rankings and indices compiled by independent rating
organizations. You may refer to the Statement of Additional Information for
more detailed information relating to performance.
The effective yield and total return calculated for each Subaccount is based
on the investment performance of the corresponding Investment Option, which
includes the Investment Option's total operating expenses. (See the
accompanying Investment Option prospectuses.)
The yield of a Subaccount (except the Money Market Subaccount) refers to the
annualized income generated by an investment in the Subaccount over a
specified 30-day or one-month period. This yield is calculated by assuming
that the income generated during that 30-day or one-month period is
generated each period over 12-months and is shown as a percentage of the
investment.
26
<PAGE>
The yield of the Money Market Subaccount refers to the annualized income
generated by an investment in the Subaccount over a specified seven-day
period. This yield is calculated by assuming that the income generated for
that seven-day period is generated each period for 52-weeks and is shown as
a percentage of the investment. The effective yield is calculated similarly
but, when annualized, the income earned by an investment in the Subaccount
is assumed to be reinvested. The effective yield will be slightly higher
than the yield because of the compounding effect of this assumed
reinvestment.
The total return of a Subaccount refers to return quotations of an
investment in a Subaccount for various periods of time. Total return figures
are provided for each Subaccount for one, five and ten year periods,
respectively. For periods prior to the date the Account commenced
operations, performance information is calculated based on the performance
of the Investment Options and the assumption that the Subaccounts were in
existence for those same periods, with the level of Contract charges which
were in effect at inception of the Subaccounts.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
to the redemption value of that investment as of the last day of each of the
periods for which total return quotations are provided. Average annual total
return information shows the average percentage change in the value of an
investment in the Subaccount from the beginning date of the measuring period
to the end of that period. This standardized version of average annual total
return reflects all historical investment results less all charges and
deductions applied against the Subaccount (including any surrender charge
that would apply if you terminated your Contract at the end of each period
indicated, but excluding any deductions for premium taxes).
In addition to standardized average annual total return, non-standardized
total return information may be used in advertisements or sales literature.
Non-standardized return information will be computed on the same basis as
described above, but does not include a surrender charge. In addition, the
Company may disclose cumulative total return for Contracts funded by
Subaccounts.
Each Investment Option's yield, and standardized and non-standardized
average annual total returns may also be disclosed, which may include
investment periods prior to the date the Account commenced operations.
Non-standardized performance data will only be disclosed if standardized
performance data is also disclosed. Please refer to the Statement of
Additional Information for additional information regarding the calculation
of other performance data.
In advertising and sales literature, Subaccount performance may be compared
to the performance of other issuers of variable annuity contracts which
invest in mutual fund portfolios with similar investment objectives. Lipper
Analytical Services, Inc. ("Lipper") and the Variable Annuity Research Data
Service ("VARDS") are independent services which monitor and rank the
performance of variable annuity issuers according to investment objectives
on an industry-wide basis.
The rankings provided by Lipper include variable life insurance issuers as
well as variable annuity issuers, whereas the rankings provided by VARDS
compare only variable annuity issuers. The performance analyses prepared by
Lipper and VARDS each rank such issuers on the basis of total return,
assuming reinvestment of distributions, but do not take sales charges,
redemption fees or certain expense deductions at the separate account level
into consideration. In addition, VARDS prepares risk rankings, which
consider the effects of market risk on total return performance. This type
of ranking provides data as to which funds provide the highest total return
within various categories of funds defined by the degree of risk inherent in
their investment objectives.
Advertising and sales literature may also compare the performance of each
Subaccount to the Standard & Poor's Index of 500 Common Stocks, a widely
used measure of stock performance. This unmanaged index assumes the
reinvestment of dividends but does not reflect any deductions for operating
expenses. Other independent ranking services and indices may also be used as
a source of performance comparison.
27
<PAGE>
We may also report other information including the effect of tax-deferred
compounding on a Subaccount's investment returns, or returns in general,
which may be illustrated by tables, graphs or charts. All income and capital
gains derived from Subaccount investments are reinvested and can lead to
substantial long-term accumulation of assets, provided that the underlying
Portfolio's investment experience is positive.
- --------------------------------------------------------------------------------
FEDERAL TAX MATTERS
- --------------------------------------------------------------------------------
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
This discussion is based on the Company's understanding of the present
federal income tax laws as they are currently interpreted by the Internal
Revenue Service. No representation is made as to the likelihood of the
continuation of these current tax laws and interpretations. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
A Contract may be purchased on a non-qualified basis ("Non-Qualified
Contract") or purchased and used in connection with plans qualifying for
favorable tax treatment ("Qualified Contract"). A Qualified Contract is
designed for use by individuals whose premium payments are comprised solely
of proceeds from and/or contributions under retirement plans which are
intended to qualify as plans entitled to special income tax treatment under
Sections 401(a), 403(b), 408 or 408A of the Internal Revenue Code of 1986,
as amended (the "Code"). The effect of federal income taxes on amounts held
under a Contract or annuity payments, and on the economic benefit to the
owner, the annuitant or the beneficiary depends on the type of retirement
plan, the tax and employment status of the individual concerned, and the
Company's tax status. In addition, an individual must satisfy certain
requirements in connection with:
- purchasing a Qualified Contract with proceeds from a tax-qualified
plan, and
- receiving distributions from a Qualified Contract
in order to continue to receive favorable tax treatment.
Therefore, purchasers of Qualified Contracts are encouraged to seek
competent legal and tax advice regarding the suitability and tax
considerations specific to their situation. The following discussion assumes
that Qualified Contracts are purchased with proceeds from and/or
contributions under retirement plans that qualify for the intended special
federal income tax treatment.
- --------------------------------------------------------------------------------
TAX STATUS OF THE CONTRACT
The Company believes that the Contract will be subject to tax as an annuity
contract under the Code, which generally means that any increase in
Accumulated Value will not be taxable until monies are received from the
Contract, either in the form of annuity payments or in some other form. The
following Code requirement must be met in order to be subject to annuity
contract treatment for tax purposes:
DIVERSIFICATION REQUIREMENTS. Section 817(h) of the Code provides that
separate account investments must be "adequately diversified" in accordance
with Treasury regulations in order for the Contract to qualify as an annuity
contract for federal tax purposes. The Account, through each Investment
Option, intends to comply with the diversification requirements prescribed
in regulations under Section 817(h) of the Code, which affect how the assets
in each Subaccount may be invested. Although the investment adviser of
EquiTrust Variable Insurance Series Fund is an affiliate of the Company, we
do not have control over the Fund or its investments. Nonetheless, the
Company believes that each Investment Option in which the Account owns
shares will meet the diversification requirements.
28
<PAGE>
OWNER CONTROL. In certain circumstances, owners of variable annuity
contracts may be considered the owners, for federal income tax purposes, of
the assets of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable annuity contract owner's gross income. The IRS
has stated in published rulings that a variable annuity contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department also
announced, in connection with the issuance of regulations concerning
investment diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of
a segregated asset account may cause the investor (i.e., the contract
owner), rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular subaccounts without
being treated as owners of the underlying assets."
The ownership rights under the Contracts are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets.
For example, the contract owner has additional flexibility in allocating
premium payments and Accumulated Values. These differences could result in a
contract owner being treated as the owner of a pro rata potion of the assets
of the Account. In addition, the Company does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Company therefore reserves
the right to modify the Contract as necessary to attempt to prevent the
contract owner from being considered the owner of the assets of the Account.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires any
Non-Qualified Contract to provide that:
- if any owner dies on or after the retirement date but before the
interest in the contract has been fully distributed, the remaining
portion of such interest will be distributed at least as rapidly as
under the method of distribution being used as of the date of that
owner's death; and
- if any owner dies prior to the date annuity payments begin, the
interest in the Contract will be distributed within five years after
the date of the owner's death.
These requirements will be considered satisfied as to any portion of the
owner's interest which is payable to or for the benefit of a designated
beneficiary and which is distributed over the life of such beneficiary or
over a period not extending beyond the life expectancy of that beneficiary,
provided that such distributions begin within one year of that owner's
death. The owner's designated beneficiary is the person designated by such
owner as a beneficiary and to whom ownership of the contract passes by
reason of death and must be a natural person. However, if the designated
beneficiary is the surviving spouse of the owner, the Contract may be
continued with the surviving spouse as the new owner.
Non-Qualified Contracts contain provisions which are intended to comply with
the requirements of Section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. The Company intends to
review such provisions and modify them if necessary to assure that they
comply with the requirements of Code Section 72(s) when clarified by
regulation or otherwise.
Other rules may apply to Qualified Contracts.
- --------------------------------------------------------------------------------
TAXATION OF ANNUITIES
THE FOLLOWING DISCUSSION ASSUMES THAT THE CONTRACTS WILL QUALIFY AS ANNUITY
CONTRACTS FOR FEDERAL INCOME TAX PURPOSES.
IN GENERAL. Section 72 of the Code governs taxation of annuities in general.
The Company believes that an owner who is a natural person is not taxed on
increases in the value of a Contract until
29
<PAGE>
distribution occurs through a partial withdrawal, surrender or annuity
payment. For this purpose, the assignment, pledge, or agreement to assign or
pledge any portion of the Accumulated Value (and in the case of a Qualified
Contract, any portion of an interest in the qualified plan) generally will
be treated as a distribution. The taxable portion of a distribution (in the
form of a single sum payment or payment option) is taxable as ordinary
income.
NON-NATURAL OWNER. A non-natural owner of an annuity contract generally must
include any excess of cash value over the "investment in the contract" as
income during the taxable year. However, there are some exceptions to this
rule. Certain Contracts will generally be treated as held by a natural
person if:
- the nominal owner is a trust or other entity which holds the
contract as an agent for a natural person (but not in the case of
certain non-qualified deferred compensation arrangements);
- the Contract is acquired by an estate of a decedent by reason of the
death of the decedent;
- the Contract is issued in connection with certain Qualified Plans;
- the Contract is purchased by an employer upon the termination of
certain Qualified Plans;
- the Contract is used in connection with a structured settlement
agreement; or
- the Contract is purchased with a single payment within a year of the
annuity starting date and substantially equal periodic payments are
made, not less frequently than annually, during the annuity period.
A prospective owner that is not a natural person should discuss these
exceptions with their tax adviser.
THE FOLLOWING DISCUSSION GENERALLY APPLIES TO CONTRACTS OWNED BY NATURAL
PERSONS.
PARTIAL WITHDRAWALS. Under Section 72(e) of the Code, if a partial
withdrawal is taken from a Qualified Contract, a ratable portion of the
amount received is taxable, generally based on the ratio of the investment
in the contract to the participant's total accrued benefit or balance under
the retirement plan. The "investment in the contract" generally equals the
portion, if any, of any premium payments paid by or on behalf of the
individual under a Contract which was not excluded from the individual's
gross income. For Contracts issued in connection with qualified plans, the
investment in the contract can be zero. Special tax rules may be available
for certain distributions from Qualified Contracts, and special rules apply
to distributions from Roth IRAs.
Under Section 72(e) of the Code, if a partial withdrawal is taken from a
Non-Qualified Contract, amounts received are generally first treated as
taxable income to the extent that the Accumulated Value immediately before
the partial withdrawal exceeds the investment in the contract at that time.
Any additional amount withdrawn is not taxable.
In the case of a surrender under a Qualified or Non-Qualified Contract, the
amount received generally will be taxable only to the extent it exceeds the
investment in the contract.
Section 1035 of the Code provides that no gain or loss shall be recognized
on the exchange of one annuity contract for another and the contract
received is treated as a new contract for purposes of the penalty and
distribution-at-death rules. Special rules and procedures apply to Section
1035 transactions and prospective owners wishing to take advantage of
Section 1035 should consult their tax adviser.
ANNUITY PAYMENTS. Although tax consequences may vary depending on the
payment option elected under an annuity contract, under Code Section 72(b),
generally (prior to recovery of the investment in the contract) gross income
does not include that part of any amount received as an annuity under an
annuity contract that bears the same ratio to such amount as the investment
in the contract bears to the expected return at the annuity starting date.
Stated differently, prior to recovery of the investment in the contract,
generally, there is no tax on the amount of each payment which represents
30
<PAGE>
the same ratio that the investment in the contract bears to the total
expected value of the annuity payments for the term of the payment; however,
the remainder of each income payment is taxable. After the investment in the
contract is recovered, the full amount of any additional annuity payments is
taxable. Special rules apply to distributions from Roth IRAs.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a
Contract because of the death of the owner. Generally, such amounts are
includible in the income of the recipient as follows:
- if distributed in a lump sum, they are taxed in the same manner as a
surrender of the contract, or
- if distributed under a payment option, they are taxed in the same
way as annuity payments.
For these purposes, the investment in the Contract remains the amount of any
purchase payments which were not excluded from gross income.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution from a
Non-Qualified Contract, a 10% federal tax penalty may be imposed. However,
generally, there is no penalty applied on distributions:
- made on or after the taxpayer reaches age 59 1/2;
- made on or after the death of the holder (or if the holder is not an
individual, the death of the primary annuitant);
- attributable to the taxpayer becoming disabled;
- as part of a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of the
taxpayer and his or her designated beneficiary;
- made under certain annuities issued in connection with structured
settlement agreements;
- made under an annuity contract that is purchased with a single
premium when the retirement date is no later than a year from
purchase of the annuity and substantially equal periodic payments
are made, not less frequently than annually, during the annuity
payment period; and
- any payment allocable to an investment (including earnings thereon)
made before August 14, 1982 in a contract issued before that date.
Other tax penalties may apply to certain distributions under a Qualified
Contract. Contract owners should consult their tax adviser.
- --------------------------------------------------------------------------------
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
Certain tax consequences may result upon:
- a transfer of ownership of a Contract,
- the designation of an annuitant, payee or other beneficiary who is
not also the owner,
- the selection of certain retirement dates, or
- the exchange of a Contract.
An owner contemplating any of these actions should consult their tax
adviser.
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WITHHOLDING
Generally, distributions from a Contract are subject to withholding of
federal income tax at a rate which varies according to the type of
distribution and the owner's tax status.
Eligible rollover distributions from section 401(a) plans and section 403(b)
tax-sheltered annuities are subject to a mandatory federal income tax
withholding of 20%. An "eligible rollover distribution" is the taxable
portion of any distribution from such a plan, except certain distributions
such as distributions required by the Code or distributions in a specified
annuity form. The 20% withholding does not apply, however, if the owner
chooses a "direct rollover" from the plan to another tax-qualified plan or
IRA.
- --------------------------------------------------------------------------------
MULTIPLE CONTRACTS
All non-qualified deferred annuity contracts entered into after October 21,
1988 that are issued by the Company (or its affiliates) to the same owner
during any calendar year are treated as one annuity Contract for purposes of
determining the amount includible in gross income under Section 72(e). This
rule could affect the time when income is taxable and the amount that might
be subject to the 10% penalty tax described above. In addition, the Treasury
Department has specific authority to issue regulations that prevent the
avoidance of Section 72(e) through the serial purchase of annuity contracts
or otherwise. There may also be other situations in which the Treasury may
conclude that it would be appropriate to aggregate two or more annuity
contracts purchased by the same owner. Accordingly, a Contract owner should
consult a competent tax adviser before purchasing more than one annuity
contract.
- --------------------------------------------------------------------------------
TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans.
The tax rules applicable to participants in these qualified plans vary
according to the type of plan and the terms and conditions of the plan
itself. Special favorable tax treatment may be available for certain types
of contributions and distributions. Adverse tax consequences may result
from:
- contributions in excess of specified limits;
- distributions prior to age 59 1/2 (subject to certain exceptions);
- distributions that do not conform to specified commencement and
minimum distribution rules; and
- other specified circumstances.
Therefore, no attempt is made to provide more than general information about
the use of the Contracts with the various types of qualified retirement
plans. Contract owners, the annuitants, and beneficiaries are cautioned that
the rights of any person to any benefits under these qualified retirement
plans may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract, but the Company
shall not be bound by the terms and conditions of such plans to the extent
such terms contradict the Contract, unless the Company consents. Some
retirement plans are subject to distribution and other requirements that are
not incorporated into our Contract administration procedures. Owners,
participants and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Contracts comply with applicable law. For qualified plans under Section
401(a), 403(a), 403(b) and 457, the Code requires that distributions
generally must commence no later than April 1 of the calendar year following
the calendar year in which the owner (or plan participant) (i) reaches age
70 1/2 or (ii) retires, and must be made in a specified form or manner. If
the plan participant is a "5 percent owner" (as defined in the Code),
distributions generally must begin no later than April 1 of the calendar
year following the calendar year in which the owner (or plan participant)
reaches age 70 1/2. For IRAs described in Section 408, distributions
generally must commence no later than April 1
32
<PAGE>
of the calendar year following the calendar year in which the owner (or plan
participant) reaches age 70 1/2. For Roth IRAs under Section 408A,
distributions are not required during the owner's (or plan participant's)
lifetime. Brief descriptions follow of the various types of qualified
retirement plans available in connection with a Contract. The Company will
amend the Contract as necessary to conform it to the requirements of the
Code.
CORPORATE PENSION AND PROFIT SHARING PLANS AND H.R. 10 PLANS. Section 401(a)
of the Code permits corporate employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
establish these plans for themselves and their employees. These retirement
plans may permit the purchase of the Contracts to accumulate retirement
savings under the plans. Adverse tax or other legal consequences to the
plan, to the participant or both may result if this Contract is assigned or
transferred to any individual as a means to provide benefit payments, unless
the plan complies with all legal requirements applicable to such benefits
prior to transfer of the Contract. Employers intending to use the Contract
with such plans should seek competent advice.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA". These IRAs are subject to limits
on the amount that may be contributed, the persons who may be eligible and
on the time when distributions may commence. Also, distributions from
certain other types of qualified retirement plans may be "rolled over" on a
tax-deferred basis into an IRA. Sales of the Contract for use with IRAs may
be subject to special requirements of the Internal Revenue Service. Earnings
in an IRA are not taxed until distribution. IRA contributions are limited
each year to the lesser of $2,000 or 100% of the owner's adjusted gross
income and may be deductible in whole or in part depending on the
individual's income. The limit on the amount contributed to an IRA does not
apply to distributions from certain other types of qualified plans that are
"rolled over" on a tax-deferred basis into an IRA. Amounts in the IRA (other
than nondeductible contributions) are taxed when distributed from the IRA.
Distributions prior to age 59 1/2 (unless certain exceptions apply) are
subject to a 10% penalty tax.
Employers may establish Simplified Employee Pension (SEP) Plans to provide
IRA contributions on behalf of their employees. In addition to all of the
general Code rules governing IRAs, such plans are subject to certain Code
requirements regarding participation and amounts of contributions.
SIMPLE IRAS. Section 408(p) of the Code permits small employers to establish
SIMPLE IRAs under which employees may elect to defer a percentage of their
compensation up to $6,000 (as increased for cost of living adjustments). The
sponsoring employer is required to make a matching contribution on behalf of
contributing employees. Distributions from a SIMPLE IRA are subject to the
same restrictions that apply to IRA distributions and are taxed as ordinary
income. Subject to certain exceptions, premature distributions prior to age
59 1/2 are subject to a 10% penalty tax, which is increased to 25% if the
distribution occurs within the first two years after the commencement of the
employee's participation in the plan.
ROTH IRAS. Section 408A of the Code permits certain eligible individuals to
contribute to a Roth IRA. Contributions to a Roth IRA, which are subject to
certain limitations, are not deductible and must be made in cash or as a
rollover or transfer from another Roth IRA or other IRA. A rollover from or
conversion of an IRA to a Roth IRA may be subject to tax and other special
rules may apply. You should consult a tax adviser before combining any
converted amounts with any other Roth IRA contributions, including any other
conversion amounts from other tax years. Distributions from a Roth IRA
generally are not taxed, except that, once aggregate distributions exceed
contributions to the Roth IRA, income tax and a 10% penalty tax may apply to
distributions made:
- before age 59 1/2 (subject to certain exceptions), or
- during the five taxable years starting with the year in which the
first contribution is made to any Roth IRA.
33
<PAGE>
TAX SHELTERED ANNUITIES. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from
their gross income the premiums paid, within certain limits, on a Contract
that will provide an annuity for the employee's retirement. These premiums
may be subject to FICA (social security) tax. Code section 403(b)(11)
restricts the distribution under Code section 403(b) annuity contracts of:
- elective contributions made in years beginning after December 31,
1988;
- earnings on those contributions; and
- earnings in such years on amounts held as of the last year beginning
before January 1, 1989.
Distribution of those amounts may only occur upon:
- death of the employee,
- attainment of age 59 1/2,
- separation from service,
- disability, or
- financial hardship.
In addition, income attributable to elective contributions may not be
distributed in the case of hardship.
RESTRICTIONS UNDER QUALIFIED CONTRACTS. Other restrictions with respect to
the election, commencement or distribution of benefits may apply under
Qualified Contracts or under the terms of the plans in respect of which
Qualified Contracts are issued.
- --------------------------------------------------------------------------------
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
The Company currently makes no charge to the Subaccounts for any Federal,
state or local taxes that the Company incurs which may be attributable to
such Subaccounts or the Contracts. We reserve the right in the future to
make a charge for any such tax or other economic burden resulting from the
application of the tax laws that it determines to be properly attributable
to the Subaccounts or to the Contracts.
- --------------------------------------------------------------------------------
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences
under these Contracts are not exhaustive, and special rules are provided
with respect to other tax situations not discussed in the Prospectus.
Further, the Federal income tax consequences discussed herein reflect our
understanding of current law. Although the likelihood of legislative changes
is uncertain, there is always the possibility that the tax treatment of the
Contract could change by legislation or otherwise. Federal estate and state
and local estate, inheritance and other tax consequences of ownership or
receipt of distributions under a Contract depend on the individual
circumstances of each owner or recipient of the distribution. You should
consult your tax adviser for further information.
- --------------------------------------------------------------------------------
DISTRIBUTION OF THE CONTRACTS
- --------------------------------------------------------------------------------
The Contracts will be offered to the public on a continuous basis. We do not
anticipate discontinuing the offering of the Contracts, but reserve the
right to do so. Applications for Contracts are solicited by agents, who in
addition to being licensed by applicable state insurance authorities to sell
the variable annuity contracts and/or variable life insurance policies for
the Company, are also registered representatives of EquiTrust Marketing,
broker-dealers having selling agreements with EquiTrust Marketing or
broker-dealers having selling agreements with such broker-dealers. EquiTrust
34
<PAGE>
Marketing is registered with the SEC under the Securities Exchange Act of
1934 as a broker-dealer and is a member of the National Association of
Securities Dealers, Inc.
EquiTrust Marketing serves as the Principal Underwriter, as defined in the
1940 Act, of the Contracts for the Account pursuant to an Underwriting
Agreement between the Company and EquiTrust Marketing and is not obligated
to sell any specific number of Contracts. EquiTrust Marketing's principal
business address is the same as that of the Company.
The Company may pay sales representatives commissions up to an amount equal
to 4% of the premiums paid under a Contract during the first six Contract
years and 1% of the premiums paid in the seventh and subsequent Contract
years. Managers of sales representatives may also receive commission
overrides of up to 30% of the sales representatives' commissions. We may
also pay other distribution expenses such as production incentive bonuses,
agent's insurance and pension benefits, and agency expense allowances. These
distribution expenses do not result in any additional charges against the
Contracts that are not described under "CHARGES AND DEDUCTIONS."
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The Company, like other life insurance companies, is involved in lawsuits.
Currently, there are no class action lawsuits naming the Company as a
defendant or involving the Account. In some lawsuits involving other
insurers, substantial damages have been sought and/or material settlement
payments have been made. Although the outcome of any litigation cannot be
predicted with certainty, the Company believes that at the present time,
there are no pending or threatened lawsuits that are reasonably likely to
have a material adverse impact on the Account or the Company.
- --------------------------------------------------------------------------------
VOTING RIGHTS
- --------------------------------------------------------------------------------
To the extent required by law, the Company will vote the Fund shares held in
the Account at regular and special shareholder meetings of the Funds, in
accordance with instructions received from persons having voting interests
in the corresponding Subaccounts. If, however, the 1940 Act or any
regulation thereunder should be amended, or if the present interpretation
thereof should change, and, as a result, the Company determines that it is
permitted to vote the Fund shares in its own right, it may elect to do so.
The number of votes you have the right to instruct will be calculated
separately for each Subaccount to which you have Accumulated Value, and may
include fractional votes. (You only have voting interest prior to the
retirement date.) The number of votes attributable to a Subaccount is
determined by dividing your Accumulated Value in that Subaccount by the net
asset value per share of the Investment Option of the corresponding
Subaccount.
The number of votes of an Investment Option which are available to you is
determined as of the date coincident with the date established by that
Investment Option for determining shareholders eligible to vote at the
relevant meeting for that Fund. Voting instructions will be solicited by
written communication prior to such meeting in accordance with procedures
established by each Fund. For each Subaccount in which you have a voting
interest, you will receive proxy materials and reports relating to any
meeting of shareholders of the Investment Option in which that Subaccount
invests.
The Company will vote Fund shares attributable to Contracts as to which no
timely instructions are received (as well as any Fund shares held in the
Account which are not attributable to Contracts) in proportion to the voting
instructions received with respect to all Contracts participating in each
Investment Option. Voting instructions to abstain on any item to be voted
upon will be applied on a pro rata basis to reduce the votes eligible to be
cast on a matter.
35
<PAGE>
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
Like other investment funds, financial and business organizations and
individuals around the world, the Account could be adversely affected if the
computer systems used by the Company and other service providers do not
properly process and calculate date-related information and data from and
after January 1, 2000. We have completed a comprehensive assessment of the
Year 2000 issue and developed a plan to address the issue in a timely
manner. We have and will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. We
anticipate completing the Year 2000 project prior to any anticipated impact
on our operating systems.
The Company believes it will complete the Year 2000 modifications based on
management's best estimates, which were derived utilizing numerous
assumptions of future events. We also recognize there are outside influences
and dependencies relative to its Year 2000 effort, over which we have little
or no control. However, we are putting effort into ensuring these
considerations will have minimal impact. These would include the continued
availability of certain resources, third party modification plans and many
other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ from those anticipated.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The audited consolidated balance sheets of the Company as of December 31,
1998 and 1997, and the related consolidated statements of income, changes in
stockholder's equity and cash flows for each of the three years in the
period ended December 31, 1998, as well as the related Report of Independent
Auditors are contained in the Statement of Additional Information. At
December 31, 1998, there are no contracts outstanding; accordingly, no
financial statements for the Account are available or presented herein.
36
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ADDITIONAL CONTRACT PROVISIONS........................................... 1
The Contract....................................................... 1
Incontestability................................................... 1
Misstatement of Age or Sex......................................... 1
Non-Participation.................................................. 1
CALCULATION OF YIELDS AND TOTAL RETURNS.................................. 1
Money Market Subaccount Yields..................................... 1
Other Subaccount Yields............................................ 2
Average Annual Total Returns....................................... 3
Other Total Returns................................................ 5
Effect of the Administrative Fee on Performance Data............... 5
LEGAL MATTERS............................................................ 5
EXPERTS.................................................................. 6
OTHER INFORMATION........................................................ 6
FINANCIAL STATEMENTS..................................................... 6
</TABLE>
37
<PAGE>
If you would like a copy of the Statement of Additional Information, please
complete the information below and detach and mail this card to the Company at
the address shown on the cover of this prospectus.
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City, State, Zip
- -------------------------------------------------------------------------------
38
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FARM BUREAU LIFE INSURANCE COMPANY
5400 University Avenue
West Des Moines, Iowa 50266
1-800-247-4170
FARM BUREAU LIFE ANNUITY ACCOUNT II
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
This Statement of Additional Information contains additional information to the
Prospectus for the flexible premium deferred variable annuity contract (the
"Contract") offered by Farm Bureau Life Insurance Company (the "Company"). This
Statement of Additional Information is not a Prospectus, and it should be read
only in conjunction with the Prospectuses for the Contract, and the selected
Investment Options of EquiTrust Variable Insurance Series Fund, T. Rowe Price
Equity Series, Inc., T. Rowe Price International Series, Inc. and Fidelity
Variable Insurance Products Funds. The Prospectus for the Contract is dated the
same as this Statement of Additional information. You may obtain a copy of the
Prospectuses by writing or calling us at our address or phone number shown
above.
May 1, 1999
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
ADDITIONAL CONTRACT PROVISIONS............................................. 1
The Contract......................................................... 1
Incontestability..................................................... 1
Misstatement of Age or Sex........................................... 1
Non-Participation.................................................... 1
CALCULATION OF YIELDS AND TOTAL RETURNS.................................... 1
Money Market Subaccount Yields....................................... 1
Other Subaccount Yields.............................................. 2
Average Annual Total Returns......................................... 3
Other Total Returns.................................................. 5
Effect of the Administrative Fee On Performance Data................. 5
LEGAL MATTERS.............................................................. 5
EXPERTS.................................................................... 6
OTHER INFORMATION.......................................................... 6
FINANCIAL STATEMENTS....................................................... 6
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
ADDITIONAL CONTRACT PROVISIONS
- --------------------------------------------------------------------------------
THE CONTRACT
The Contract includes the application and all other attached papers. The
statements made in the application are deemed representations and not
warranties. We will not use any statement in defense of a claim or to void
the Contract unless it is contained in the application.
- --------------------------------------------------------------------------------
INCONTESTABILITY
We will not contest the Contract from its Contract Date.
- --------------------------------------------------------------------------------
MISSTATEMENT OF AGE OR SEX
If the age or sex of the annuitant has been misstated, we will pay that
amount which the proceeds would have purchased at the correct age and sex.
- --------------------------------------------------------------------------------
NON-PARTICIPATION
The Contracts are not eligible for dividends and will not participate in the
Company's divisible surplus.
- --------------------------------------------------------------------------------
CALCULATION OF YIELDS AND TOTAL RETURNS
- --------------------------------------------------------------------------------
The Company may disclose yields, total returns and other performance data
for a Subaccount. Such performance data will be computed, or accompanied by
performance data computed, in accordance with the standards defined by the
SEC.
- --------------------------------------------------------------------------------
MONEY MARKET SUBACCOUNT YIELDS
Advertisements and sales literature may quote the current annualized yield
of the Money Market Subaccount for a seven-day period. This figure is
computed by determining the net change (exclusive or realized gains and
losses on the sale of securities, unrealized appreciation and depreciation
and income other than investment income) at the end of the seven-day period
in the value of a hypothetical account under a Contract with a balance of 1
unit at the beginning of the period, dividing this net change by the value
of the hypothetical account at the beginning of the period to determine the
base period return, and annualizing this quotient on a 365-day basis.
The net change in account value reflects:
- net income from the Investment Option attributable to the
hypothetical account; and
- charges and deductions imposed under the Contract attributable to
the hypothetical account.
The charges and deductions include per unit charges for the hypothetical
account for:
- the annual administrative fee and
- the mortality and expense risk charge.
1
<PAGE>
For purposes of calculating current yields for a Contract, an average per
unit administrative fee is used based on the $30 administrative fee deducted
at the beginning of each Contract Year. Current yield will be calculated
according to the following formula:
<TABLE>
<S> <C><C>
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = the net change in the value of the Investment Option (exclusive of
realized gains or losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment income)
for the seven-day period attributable to a hypothetical account having a
balance of 1 subaccount unit.
ES = per unit expenses attributable to the hypothetical account for the
seven-day period.
UV = the unit value for the first day of the seven-day period.
Effective Yield = (1 + ((NCS - ES)/UV))365/7 - 1
Where:
NCS = the net change in the value of the Investment Option (exclusive of
realized gains or losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment income)
for the seven-day period attributable to a hypothetical account having a
balance of 1 subaccount unit.
ES = per unit expenses attributable to the hypothetical account for the
seven-day period.
UV = the unit value for the first day of the seven-day period.
</TABLE>
The yield for the Money Market Subaccount will be lower than the yield for
the Money Market Investment Option due to the charges and deductions imposed
under the Contract.
The current and effective yields of the Money Market Subaccount normally
fluctuate on a daily basis and SHOULD NOT ACT AS AN INDICATION OR
REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. The actual yield is
affected by:
- changes in interest rates on money market securities,
- the average portfolio maturity of the Money Market Investment
Option,
- the quality of portfolio securities held by this Investment Option,
and
- the operating expenses of the Money Market Investment Option.
Yields may also be presented for other periods of time.
- --------------------------------------------------------------------------------
OTHER SUBACCOUNT YIELDS
Advertisements and sales literature may quote the current annualized yield
of one or more of the subaccounts (except the Money Market Subaccount) for a
Contract for 30-day or one month periods. The annualized yield of a
Subaccount refers to income generated by that Subaccount during a 30-day or
one-month period which is assumed to be generated each period over a
12-month period.
The yield is computed by:
1) dividing net investment income of the Investment Option attributable
to the subaccount units less subaccount expenses for the period; by
2
<PAGE>
2) the maximum offering price per unit on the last day of the period
times the daily average number of units outstanding for the period;
by
3) compounding that yield for a six-month period; and by
4) multiplying that result by 2.
The annual administrative fee (deducted at the beginning of each Contract
Year) and mortality and expense risk charge are included in expenses of the
Subaccounts. For purposes of calculating the 30-day or one-month yield, an
average administrative fee per dollar of Contract value is used to determine
the amount of the charge attributable to the Subaccount for the 30-day or
one-month period. The 30-day or one-month yield is calculated according to
the following formula:
<TABLE>
<S> <C><C>
Yield = 2 X ((NI - ES)/(U X UV)) + 1) (to the power of "6") - 1
Where:
NI = net income of the Investment Option for the 30-day or one-month period
attributable to the subaccount's units.
ES = expenses of the subaccount for the 30-day or one-month period.
U = the average number of units outstanding.
UV = the unit value at the close of the last day in the 30-day one-month
period.
</TABLE>
The yield for each Subaccount will be lower than the yield for the
corresponding Investment Option due to the various charges and deductions
imposed under the Contract.
The yield for each Subaccount normally will fluctuate over time and SHOULD
NOT ACT AS AN INDICATION OR REPRESENTATION OF FUTURE YIELDS OR RATES OF
RETURN. A Subaccount's actual yield is affected by the quality of portfolio
securities held by the corresponding Investment Option and its operating
expenses.
The Surrender Charge is not considered in the yield calculation.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
Advertisements and sales literature may also quote average annual total
returns for the Subaccounts for various periods of time, including periods
before the Subaccounts were in existence. Total return figures are provided
for each Subaccount for one, five and ten year periods. Average annual total
returns may also be disclosed for other periods of time.
Adjusted historic average annual total return quotations represent the
average annual compounded rates of return that would equate an initial
investment of $1,000 to the redemption value of that investment as of the
last day of each of the periods for which total return quotations are
provided. The last date of each period is the most recent month-end
practicable.
Adjusted historic average annual total returns for each Subaccount are
calculated based on the assumption that they were in existence during the
stated periods with the level of Contract charges which were in effect at
the inception of each Subaccount. For purposes of calculating average annual
total return, an average annual administrative fee per dollar of Contract
value is used. The
3
<PAGE>
calculation also assumes surrender of the Contract at the end of the period.
The total return will then be calculated according to the following formula:
<TABLE>
<S> <C><C>
TR = ((ERV/P)/N) - 1
Where:
TR = the average annual total return net of subaccount recurring charges.
ERV = the ending redeemable value (net of any applicable surrender charge) of
the hypothetical account at the end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
</TABLE>
The adjusted historic average annual total return information for the
Subaccounts is as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE PERIOD
1-YEAR 5-YEAR 10-YEAR FROM DATE OF
PERIOD PERIOD PERIOD INCEPTION OF
ENDED ENDED ENDED INVESTMENT OPTION
SUBACCOUNT 12/31/98 12/31/98 12/31/98 TO 12/31/98
EquiTrust Variable Insurance Series Fund
<S> <C> <C> <C> <C>
Value Growth(1) (32.13)% 0.50% 6.14% 3.98%
High Grade Bond(1) (0.19) 5.33 7.49 7.72
High Yield Bond(1) (0.82) 6.89 9.17 9.46
Money Market(2) (2.70) 2.72 -- 3.07
Blue Chip(3) 11.21 18.09 -- 17.78
<CAPTION>
T. Rowe Price Equity Series, Inc.
<S> <C> <C> <C> <C>
Equity Income(4) 1.37 -- -- 18.42
Mid-Cap Growth(5) 14.38 -- -- 15.73
New America Growth(4) 10.81 -- -- 20.50
Personal Strategy Balanced(6) 6.62 -- -- 16.07
<CAPTION>
T. Rowe Price International Series, Inc.
<S> <C> <C> <C> <C>
International Stock(4) 8.16 -- -- 7.54
<CAPTION>
Fidelity Variable Insurance Products
Funds
<S> <C> <C> <C> <C>
VIP Growth(7) 29.29 19.21 17.71 15.67
VIP Overseas(8) 2.61 6.23 8.39 6.89
VIP II Contrafund(9) 19.78 -- -- 25.87
VIP II Index 500(10) 18.11 21.24 -- 19.01
VIP III Growth & Income(11) 19.39 -- -- 24.07
</TABLE>
4
<PAGE>
(1) The Value Growth, High Grade Bond and High Yield Bond Portfolios
commenced operations on October 17, 1987.
(2) The Money Market Portfolio commenced operations on February 20,
1990.
(3) The Blue Chip Portfolio commenced operations on October 15, 1990.
(4) The Equity Income, New America Growth and International Stock
Portfolios commenced operations on March 31, 1994.
(5) The Mid-Cap Growth Portfolio commenced operations on December 31,
1996.
(6) The Personal Strategy Balanced Portfolio commenced operations on
December 30, 1994.
(7) The Growth Portfolio commenced operations on October 9, 1986.
(8) The Overseas Portfolio commenced operations on January 28, 1987.
(9) The Contrafund Portfolio commenced operations on January 3, 1995.
(10) The Index 500 Portfolio commenced operations on August 27, 1992.
(11) The Growth & Income Portfolio commenced operations on December 31,
1996.
- --------------------------------------------------------------------------------
OTHER TOTAL RETURNS
Advertisements and sales literature may also quote average annual total
returns which do not reflect the Surrender Charge. These figures are
calculated in the same manner as average annual total returns described
above, however, the Surrender Charge is not taken into account at the end of
the period.
We may disclose cumulative total returns in conjunction with the standard
formats described above. The cumulative total returns will be calculated
using the following formula:
<TABLE>
<S> <C><C>
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of subaccount recurring charges for the
period.
ERV = The ending redeemable value of the hypothetical investment at the end of
the period.
P = A hypothetical single payment of $1,000.
</TABLE>
- --------------------------------------------------------------------------------
EFFECT OF THE ADMINISTRATIVE FEE ON PERFORMANCE DATA
We apply an annual administrative charge of $30 on the Contract Date and on
each Contract Anniversary prior to the retirement date. This charge is
deducted from each Subaccount and the Declared Interest Option based on the
proportion that each Subaccount's value bears to the total Accumulated
Value. For purposes of reflecting the administrative fee in yield and total
return quotations, this annual charge is converted into a per-dollar per-day
charge based on the average value of all contracts in the Account on the
last day of the period for which quotations are provided. The per-dollar
per-day average charge is then adjusted to reflect the basis upon which the
particular quotation is calculated.
- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------
All matters relating to Iowa law pertaining to the Contracts, including the
validity of the Contracts and the Company's authority to issue the
Contracts, have been passed upon by Stephen M. Morain, Esquire, Senior Vice
President and General Counsel of the Company. Sutherland Asbill & Brennan
LLP, Washington D.C. has provided advice on certain matters relating to the
federal securities laws.
5
<PAGE>
- --------------------------------------------------------------------------------
EXPERTS
- --------------------------------------------------------------------------------
The consolidated balance sheets of the Company at December 31, 1998 and 1997
and the related consolidated statements of income, changes in stockholder's
equity and cash flows for each of the three years in the period ended
December 31, 1998, appearing herein, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their respective reports thereon
appearing elsewhere herein, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
A registration statement has been filed with the SEC under the Securities
Act of 1933 as amended, with respect to the Contract discussed in this
Statement of Additional Information. Not all the information set forth in
the registration statement, amendments and exhibits thereto has been
included in this Statement of Additional Information. Statements contained
in this Statement of Additional Information as to the contents of the
Contract and other legal instruments are summaries. For a complete statement
of the terms of these documents, reference is made to such instruments as
filed.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company's financial statements included in this Statement of Additional
Information should be considered only as bearing on the Company's ability to
meet its obligations under the Contracts. They should not be considered as
bearing on the investment performance of the assets held in the Account.
6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Farm Bureau Life Insurance Company
We have audited the accompanying consolidated balance sheets of Farm Bureau Life
Insurance Company as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in stockholder's equity, and cash flows for each
of the three years in the period ended December 31, 1998. 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 Farm
Bureau Life Insurance Company at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 15, 1999
1
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held for investment, at amortized cost
(market: 1998--$422,617; 1997-- $541,332) $ 403,306 $ 522,411
Available for sale, at market (amortized cost:
1998--$1,404,145; 1997-- $1,218,469) 1,471,172 1,286,169
Equity securities, at market (cost:
1998--$36,183; 1997--$54,861) 31,980 51,268
Mortgage loans on real estate 227,335 253,093
Investment real estate, less allowances for
depreciation of $4,064 in 1998 and $2,507 in
1997 39,812 38,774
Policy loans 89,325 90,052
Other long-term investments 6,236 9,989
Short-term investments 70,090 23,853
------------- -------------
Total investments 2,339,256 2,275,609
Cash and cash equivalents 1,609 1,678
Securities and indebtedness of related parties 64,570 63,394
Accrued investment income 25,666 25,340
Accounts and notes receivable 331 703
Amounts receivable from affiliates 3,635 6,686
Reinsurance recoverable 2,178 3,934
Deferred policy acquisition costs 172,610 157,096
Property and equipment, less allowances for
depreciation of $2,871 in 1998 and $18,330 in
1997 9,953 32,518
Current income taxes recoverable 9,660 10,349
Goodwill, less accumulated amortization of $3,484
in 1998 and $2,792 in 1997 9,948 10,640
Other assets 4,529 7,443
Assets held in separate accounts 190,111 138,409
------------- -------------
Total assets $ 2,834,056 $ 2,733,799
------------- -------------
------------- -------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Interest sensitive products $ 1,183,052 $ 1,172,881
Traditional life insurance and accident and
health products 582,447 576,405
Unearned revenue reserve 25,053 23,341
Other policy claims and benefits 6,923 7,091
------------- -------------
1,797,475 1,779,718
Other policyholders' funds:
Supplementary contracts without life
contingencies 138,969 129,389
Advance premiums and other deposits 66,296 66,626
Accrued dividends 11,802 12,107
------------- -------------
217,067 208,122
Long-term debt 71 77
Amounts payable to affiliates 106 --
Deferred income taxes 47,593 45,123
Other liabilities 60,923 29,639
Liabilities related to separate accounts 190,111 138,409
------------- -------------
Total liabilities 2,313,346 2,201,088
Commitments and contingencies
Stockholder's equity:
Preferred stock, 7 1/2% cumulative, par value
$50.00 per share--authorized 6,000 shares -- --
Common stock, par value $50.00 per
share--authorized 994,000 shares, issued and
outstanding 50,000 shares 2,500 2,500
Additional paid-in capital 55,225 55,285
Accumulated other comprehensive income 38,548 38,719
Retained earnings 424,437 436,207
------------- -------------
Total stockholder's equity 520,710 532,711
------------- -------------
Total liabilities and stockholder's equity $ 2,834,056 $ 2,733,799
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Interest sensitive product charges $ 41,520 $ 37,802 $ 33,755
Traditional life insurance and accident and
health premiums 60,725 61,675 61,611
Net investment income 179,499 174,763 166,422
Realized gains (losses) on investments (5,646) 38,639 54,454
Realized gain on dividend of home office
properties 8,346 -- --
Other income 1,755 4,968 9,588
------------- ------------- -------------
Total revenues 286,199 317,847 325,830
Benefits and expenses:
Interest sensitive product benefits 94,456 95,052 90,720
Traditional life insurance and accident and
health benefits 44,987 42,121 42,370
Increase in traditional life and accident and
health future policy benefits 7,314 15,107 13,679
Distributions to participating policyholders 22,020 22,784 23,725
Underwriting, acquisition and insurance expenses 49,567 48,380 45,714
Interest expense 8 9 425
Other expenses 1,325 1,149 5,515
------------- ------------- -------------
Total benefits and expenses 219,677 224,602 222,148
------------- ------------- -------------
66,522 93,245 103,682
Income taxes (20,291) (31,579) (34,156)
Equity income, net of related income taxes 1,093 1,908 4,138
------------- ------------- -------------
Net income $ 47,324 $ 63,574 $ 73,664
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDER'S
STOCK CAPITAL INCOME EARNINGS EQUITY
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 2,500 $ 50,426 $ 34,146 $ 353,324 $ 440,396
Comprehensive income:
Net income for 1996 -- -- -- 73,664 73,664
Change in net unrealized investment gains/
losses -- -- (7,819) -- (7,819)
Total comprehensive income 65,845
Adjustment resulting from capital transaction of
equity investee -- 4,859 -- -- 4,859
Dividend of FBL Financial Services, Inc. to
parent -- -- -- (15,096) (15,096)
Cash dividend paid to parent -- -- -- (5,000) (5,000)
------ ------------- ------------- ------------- -------------
Balance at December 31, 1996 $ 2,500 $ 55,285 $ 26,327 $ 406,892 $ 491,004
Comprehensive income:
Net income for 1997 -- -- -- 63,574 63,574
Change in net unrealized investment gains/
losses -- -- 12,392 -- 12,392
Total comprehensive income 75,966
Cash dividends paid to parent -- -- -- (33,000) (33,000)
Other -- -- -- (1,259) (1,259)
------ ------------- ------------- ------------- -------------
Balance at December 31, 1997 $ 2,500 $ 55,285 $ 38,719 $ 436,207 $ 532,711
Comprehensive income:
Net income for 1998 -- -- -- 47,324 47,324
Change in net unrealized investment gains/
losses -- -- (171) -- (171)
-------------
Total comprehensive income 47,153
Adjustment resulting from capital transactions
of equity investee -- (60) -- -- (60)
Dividend of home office properties to parent -- -- -- (45,650) (45,650)
Cash dividends paid to parent -- -- -- (13,444) (13,444)
------ ------------- ------------- ------------- -------------
Balance at December 31, 1998 $ 2,500 $ 55,225 $ 38,548 $ 424,437 $ 520,710
------ ------------- ------------- ------------- -------------
------ ------------- ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 47,324 $ 63,574 $ 73,664
Adjustments to reconcile net income to net cash
provided by operating activities:
Adjustments related to interest sensitive
products:
Interest credited to account balances 80,885 82,821 80,867
Charges for mortality and administration (41,282) (38,134) (35,050)
Deferral of unearned revenues 2,464 2,266 1,825
Amortization of unearned revenue reserve (875) (779) (530)
Provision for depreciation and amortization (1,833) 3,088 5,906
Net gains related to investments held by
broker-dealer and investment company
subsidiaries -- (1,223) (3,125)
Realized losses (gains) on investments 5,646 (38,639) (54,454)
Realized gain on dividend of home office
properties (8,346) -- --
Increase in traditional life and accident and
health benefit accruals 7,241 15,198 13,646
Policy acquisition costs deferred (23,208) (22,334) (18,561)
Amortization of deferred policy acquisition
costs 8,747 7,760 7,271
Provision for deferred income taxes 2,596 (5,172) 6,310
Other 24,175 (12,545) 8,635
------------- ------------- -------------
Net cash provided by operating activities 103,534 55,881 86,404
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities--held for investment 122,549 40,460 33,212
Fixed maturities--available for sale 227,394 250,842 222,093
Equity securities 21,340 109,641 101,937
Mortgage loans on real estate 61,343 38,725 21,977
Investment real estate 1,088 6 4,829
Policy loans 22,118 21,002 20,092
Other long-term investments 278 52 10,404
Short-term investments--net -- 41,061 --
------------- ------------- -------------
456,110 501,789 414,544
Acquisition of investments:
Fixed maturities--held for investment -- -- (38,472)
Fixed maturities--available for sale (412,148) (363,560) (374,808)
Equity securities (4,998) (45,520) (28,824)
Mortgage loans on real estate (35,512) (56,571) (40,601)
Investment real estate (3,096) (10,142) (4,988)
Policy loans (21,391) (22,114) (20,506)
Other long-term investments -- (1,936) (535)
Short-term investments--net (46,237) -- (30,249)
------------- ------------- -------------
(523,382) (499,843) (538,983)
Proceeds from disposal, repayments of advances and
other distributions from equity investees 5,656 16,084 36,265
Investments in and advances to equity investees (5,505) (41,018) (10,396)
Net cash paid for acquisitions -- (9,694) --
Net purchases of property and equipment and other (3,180) (28) (7,062)
------------- ------------- -------------
Net cash used in investing activities (70,301) (32,710) (105,632)
</TABLE>
6
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
FINANCING ACTIVITIES
<S> <C> <C> <C>
Receipts from interest sensitive and variable
products credited to policyholder account
balances $ 223,989 $ 220,437 $ 181,148
Return of policyholder account balances on
interest sensitive and variable products (243,841) (210,728) (153,784)
Repayments of long-term debt (6) (4) (1,199)
Dividends paid (13,444) (33,000) (5,135)
------------- ------------- -------------
Net cash provided by (used in) financing
activities (33,302) (23,295) 21,030
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (69) (124) 1,802
Cash and cash equivalents at beginning of year 1,678 1,802 --
------------- ------------- -------------
Cash and cash equivalents at end of year $ 1,609 $ 1,678 $ 1,802
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 7 $ 8 $ 415
Income taxes 17,571 48,876 17,694
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Farm Bureau Life Insurance Company (the Company), a wholly-owned subsidiary of
FBL Financial Group, Inc., operates predominantly in the life insurance
industry. The Company currently markets individual life insurance policies and
annuity contracts to Farm Bureau members and other individuals and businesses in
14 midwestern and western states. Variable insurance and annuity contracts are
also marketed in other states through alliances with other insurance companies
and a regional broker/dealer.
Prior to May 31, 1996, the Company owned 100% of the outstanding common stock of
FBL Financial Services, Inc., a holding company which, through its subsidiaries,
provided investment advisory, marketing and distribution, and leasing services.
On May 31, 1996, the common stock of FBL Financial Services, Inc. was
transferred to FBL Financial Group, Inc. in the form of a dividend. FBL
Financial Services, Inc. had investments of $6.1 million, property and equipment
of $26.1 million, other assets of $3.3 million, long-term debt of $11.3 million
and other liabilities of $8.8 million on the date of the dividend.
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 stockholder's equity as
a component of accumulated other comprehensive income. The unrealized gains and
losses included in accumulated other comprehensive income are reduced by a
provision for deferred income taxes and adjustments to deferred policy
acquisition costs and unearned revenue reserve that would have been required as
a charge or credit to income had such amounts been realized. 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 stockholder's equity, net of any
related deferred income taxes, as a component of accumulated other comprehensive
income.
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.
8
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER INVESTMENTS
Investment real estate is reported at cost less allowances for depreciation.
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 a subsidiary engaged in the venture capital investment
company industry. Nontraditional investments include a debt-related instrument
and investment deposits which are reported at cost. In accordance with
accounting practices for the investment company industry, marketable securities
held by a subsidiary in this industry are valued at market value if readily
marketable or at fair value, as determined by the Board of Directors of the
subsidiary, 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,
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 an additional offering of stock,
are recorded directly to stockholder's 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.
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
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. For
participating traditional life insurance and interest sensitive products
(principally
9
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
PROPERTY AND EQUIPMENT
Property and equipment, comprised primarily of home office properties (prior to
March 30, 1998, see below), furniture, equipment and capitalized software costs,
are reported at cost less allowances for depreciation and amortization.
Depreciation and amortization expense are computed primarily using the
straight-line method over the estimated useful lives of the assets. Depreciation
and amortization expense for 1998, 1997 and 1996 were $1.8 million, $2.3 million
and $5.1 million, respectively.
On March 30, 1998, the Company transferred its home office properties to its
parent in the form of a dividend. The fair value of the properties, which served
as the basis for the transaction, was $45.7 million and the book value was $24.7
million. The Company is leasing a portion of the properties back from its parent
under a sublease arrangement. Of the $21.0 million gain on the transaction, $8.3
million was recognized in the 1998 statement of income and $12.7 million was
deferred and is being amortized over the term of the operating lease.
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 1998, 1997 or 1996.
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
8.03% in 1998, 8.15% in 1997 and 8.34% in 1996. 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 40% of receipts from policyholders during 1998 and represented 17%
of life insurance inforce at December 31, 1998. Participating business accounted
for 42% of receipts from policyholders during 1997 and represented 19% of life
insurance inforce at December 31, 1997.
The liabilities for future policy benefits for accident and health insurance are
computed using a net level premium (or an equivalent) 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.
10
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 5.00% to
6.50% in 1998, 5.25% to 6.90% in 1997 and 5.75% to 7.50% in 1996.
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.
GUARANTY FUND ASSESSMENTS
From time to time assessments are levied on the Company and its insurance
subsidiaries by guaranty associations in most states in which the companies 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
guaranty 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, 1998 and 1997, the Company had undiscounted reserves of $0.8
million and $1.8 million, respectively, to cover estimated future assessments on
known insolvencies. The Company had assets totaling $1.7 million and $2.3
million at December 31, 1998 and 1997, respectively, representing estimated
premium tax offsets on paid and future assessments. Expenses (credits) incurred
for guaranty fund assessments, net of related premium tax offsets, totaled
($0.8) million, $1.1 million (including $0.9 million related to the adoption of
SOP 97-3) and $0.1 million during 1998, 1997 and 1996, respectively. It is
estimated future guaranty fund assessments on known insolvencies will be paid
during the three year period ended December 31, 2001 and substantially all the
related future premium tax offsets will be realized during the six year period
ended December 31, 2004. The Company believes the reserve for guaranty fund
assessments is sufficient to provide for future assessments based upon known
insolvencies and projected premium levels.
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.
11
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF PREMIUM REVENUES AND COSTS
Revenues for interest sensitive and variable 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.
All insurance-related revenues, benefits 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.
OTHER INCOME AND OTHER EXPENSES
Prior to May 31, 1996 (the date FBL Financial Services, Inc. was transferred to
FBL Financial Group, Inc.), other income and other expenses included revenue and
expenses generated by various non-insurance subsidiaries for investment
advisory, marketing and distribution, and leasing services. A portion of these
activities were performed on behalf of affiliates of the Company. In addition,
certain revenue generated by the Company and its insurance subsidiaries have
been classified as other income. During 1998, 1997 and 1996, revenues of the
insurance companies included as other income aggregated $1.1 million, $3.7
million and $2.7 million, respectively.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standard (Statement) No. 130, "Reporting Comprehensive Income." Statement No.
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no impact on the
Company's net income or stockholder's equity. Statement No. 130 requires
unrealized gains and losses on the Company's available-for-sale securities,
which prior to adoption were reported separately in stockholder's equity, to be
included in other comprehensive income.
Other comprehensive income excludes net investment gains (losses) included in
net income which merely represent transfers from unrealized to realized gains
and losses. These amounts totaled ($1.4) million in 1998, $25.4 million in 1997
and $38.3 million in 1996. Such amounts, which have been measured through the
date of sale, are net of income taxes and adjustments to deferred policy
acquisition costs and unearned revenue reserve totaling $0.8 million in 1998,
($14.0) million in 1997 and ($20.4) million in 1996.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 consolidated financial statements have been
reclassified to conform to the 1998 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
12
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting periods. 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 CHANGE
In March 1998, SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", was issued. The Company plans to adopt
the SOP effective on January 1, 1999. The SOP requires the capitalization of
certain costs incurred after the date of adoption in connection with developing
or obtaining software for internal use. The Company currently capitalizes
external software development costs and charges internal costs, primarily
payroll and related items, to expense as they are incurred. Under the SOP, these
internal costs will be capitalized. The Company has not yet determined the
impact of adopting this SOP.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Statement No.
133 requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. 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 Company in the
year 2000, with earlier adoption encouraged. Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
13
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. 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, 1998 and 1997:
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
-----------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Bonds:
Corporate securities $ 5,008 $ 542 $ (8) $ 5,542
Mortgage-backed securities 398,298 19,554 (777) 417,075
-----------------------------------------------------
Total fixed maturities $ 403,306 $ 20,096 $ (785) $ 422,617
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
-----------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Bonds:
United States Government and agencies $ 13,229 $ 144 $ -- $ 13,373
State, municipal and other governments 46,879 1,915 (101) 48,693
Public utilities 83,934 5,908 (527) 89,315
Corporate securities 770,341 56,152 (14,145) 812,348
Mortgage and asset-backed securities 463,309 19,335 (1,100) 481,544
Redeemable preferred stock 26,453 726 (1,280) 25,899
-----------------------------------------------------
Total fixed maturities $ 1,404,145 $ 84,180 $ (17,153) $1,471,172
-----------------------------------------------------
-----------------------------------------------------
Equity securities $ 36,183 $ 479 $ (4,682) $ 31,980
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
14
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
HELD FOR INVESTMENT
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
-----------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
Corporate securities $ 5,008 $ 814 $ (8) $ 5,814
Mortgage-backed securities 517,403 19,575 (1,460) 535,518
-----------------------------------------------------
Total fixed maturities $ 522,411 $ 20,389 $ (1,468) $ 541,332
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
-----------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government and agencies $ 14,406 $ 18 $ (19) $ 14,405
State, municipal and other governments 37,986 1,012 (126) 38,872
Public utilities 80,071 4,637 (390) 84,318
Corporate securities 688,362 55,095 (6,089) 737,368
Mortgage and asset-backed securities 372,482 13,418 (1,283) 384,617
Redeemable preferred stock 25,162 1,533 (106) 26,589
-----------------------------------------------------
Total fixed maturities $ 1,218,469 $ 75,713 $ (8,013) $1,286,169
-----------------------------------------------------
-----------------------------------------------------
Equity securities $ 54,861 $ 3,635 $ (7,228) $ 51,268
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
Short-term investments have been excluded from the above schedules as amortized
cost approximates market value for these securities.
15
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT OPERATIONS (CONTINUED)
The carrying value and estimated market value of the Company's portfolio of
fixed maturity securities at December 31, 1998, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
HELD FOR INVESTMENT AVAILABLE FOR SALE
------------------------ --------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
----------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 12,714 $ 12,787
Due after one year through five years -- -- 159,029 161,991
Due after five years through ten years 5,008 5,542 280,064 295,390
Due after ten years -- -- 462,576 493,561
----------------------------------------------------
5,008 5,542 914,383 963,729
Mortgage and asset-backed securities 398,298 417,075 463,309 481,544
Redeemable preferred stocks -- -- 26,453 25,899
----------------------------------------------------
$ 403,306 $ 422,617 $ 1,404,145 $1,471,172
----------------------------------------------------
----------------------------------------------------
</TABLE>
Net unrealized investment gains on equity securities and fixed maturity
securities classified as available for sale were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unrealized appreciation on fixed maturity and equity securities available
for sale $ 62,824 $ 64,107
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs (4,198) (5,251)
Unearned revenue reserve 588 711
Provision for deferred income taxes (20,725) (20,848)
----------------------
38,489 38,719
Proportionate share of net unrealized investment gains of equity
investees 59 --
----------------------
Net unrealized investment gains $ 38,548 $ 38,719
----------------------
----------------------
</TABLE>
The change in net unrealized investment gains/losses are recorded net of
deferred income taxes and other adjustments for assumed changes in the
amortization pattern of deferred policy acquisition costs and unearned revenue
reserve totaling ($1.1) million in 1998, $9.4 million in 1997 and ($13.4)
million in 1996.
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.
16
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT OPERATIONS (CONTINUED)
The Company has provided an allowance for possible losses against its mortgage
loan portfolio. An analysis of this allowance, which consists of specific and
general reserves, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 523 $ 600 $ 600
Realized losses -- -- 2,527
Uncollectible amounts written off, net of recoveries -- (77) (2,527)
-------------------------------
Balance at end of year $ 523 $ 523 $ 600
-------------------------------
-------------------------------
</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 $0.4 million at December 31, 1998. There were no
impaired loans at December 31, 1997.
NET INVESTMENT INCOME
Components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
----------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ 40,495 $ 43,648 $ 45,744
Available for sale 105,017 97,044 85,722
Equity securities 1,820 1,259 1,345
Mortgage loans on real estate 20,256 21,027 20,297
Investment real estate 5,536 4,457 4,495
Policy loans 5,650 5,692 5,653
Other long-term investments 63 2,921 3,698
Short-term investments 2,678 3,691 3,166
Other 7,123 4,105 3,485
----------------------------------
188,638 183,844 173,605
Less investment expenses (9,139) (9,081) (7,183)
----------------------------------
Net investment income $ 179,499 $ 174,763 $ 166,422
----------------------------------
----------------------------------
</TABLE>
During 1997, 13 securities with a total fair value of $15.0 million were
transferred to the Company from its venture capital subsidiary, upon its
dissolution. Realized gains (recognized in net investment income) of $6.3
million were recognized on the transfers, although the transfers had no impact
on net income (as unrealized appreciation had been reported prior to the
transfer).
17
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT OPERATIONS (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 are summarized
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REALIZED
Fixed maturities--available for sale $ 111 $ 4,300 $ 2,199
Equity securities (2,336) 35,120 56,522
Mortgage loans on real estate -- -- (2,527)
Investment real estate 385 6 619
Other long-term investments -- (300) (154)
Securities and indebtedness of related parties (331) (487) (1,438)
Notes receivable and other (3,475) -- (767)
---------------------------------
Realized gains on investments $ (5,646) $ 38,639 $ 54,454
---------------------------------
---------------------------------
UNREALIZED
Fixed maturities:
Held for investment $ 390 $ 6,866 $ (12,225)
Available for sale (673) 35,292 (25,675)
Equity securities (610) (13,464) 4,429
---------------------------------
Change in unrealized appreciation/depreciation of investments $ (893) $ 28,694 $ (33,471)
---------------------------------
---------------------------------
</TABLE>
18
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT OPERATIONS (CONTINUED)
An analysis of sales, maturities and principal repayments of the Company's fixed
maturities portfolio for 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED REALIZED REALIZED
COST GAINS LOSSES PROCEEDS
----------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Scheduled principal repayments and calls:
Available for sale $ 163,853 $ 137 $ (208) $ 163,782
Held for investment 122,549 -- -- 122,549
Sales--available for sale 61,418 4,694 (2,500) 63,612
----------------------------------------------
Total $ 347,820 $ 4,831 $ (2,708) $ 349,943
----------------------------------------------
----------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Scheduled principal repayments and calls:
Available for sale $ 154,939 $ -- $ -- $ 154,939
Held for investment 40,460 -- -- 40,460
Sales--available for sale 91,603 6,313 (2,013) 95,903
----------------------------------------------
Total $ 287,002 $ 6,313 $ (2,013) $ 291,302
----------------------------------------------
----------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Scheduled principal repayments and calls:
Available for sale $ 148,299 $ -- $ -- $ 148,299
Held for investment 33,212 -- -- 33,212
Sales--available for sale 71,095 5,197 (2,498) 73,794
----------------------------------------------
Total $ 252,606 $ 5,197 $ (2,498) $ 255,305
----------------------------------------------
----------------------------------------------
</TABLE>
Realized losses totaling $2.0 million in 1998 and $0.5 million in 1996 were
incurred as a result of writedowns for other than temporary impairment of fixed
maturity securities. No such writedowns were recorded during 1997.
Income taxes (credits) during 1998, 1997 and 1996 include a provision of ($2.0)
million, $13.5 million and $19.1 million, respectively, for the tax effect of
realized gains and losses on investments.
OTHER
In December 1997, the Company acquired a 35% interest in an unaffiliated life
insurance company for $25.0 million. The excess (approximately $5.9 million) of
the carrying amount of the investment, which is classified as securities and
indebtedness of related parties on the consolidated balance sheets, over the
amount of underlying equity in net assets on the acquisition date 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
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.
19
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT OPERATIONS (CONTINUED)
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 additional paid-in capital. Subsequent to the
public offering, the Company reclassified the investment to equity securities.
The Company has sold its holdings in this investment and realized gains of $2.4
million, $24.3 million and $50.4 million during 1998, 1997 and 1996,
respectively.
At December 31, 1998, affidavits of deposits covering investments with a
carrying value totaling $2,137.8 million were on deposit with state agencies to
meet regulatory requirements.
At December 31, 1998, the Company had committed to provide additional funding
for mortgage loans on real estate aggregating $8.3 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, 1998, include: fixed maturities--$3.7
million; mortgage loans on real estate-- $0.4 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 stockholder's
equity at December 31, 1998.
3. 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 sheets, for which it is
practicable to estimate 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.
20
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
consolidated balance sheets 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.
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.
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,
------------------------------------------------------
1998 1997
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities:
Held for investment $ 403,306 $ 422,617 $ 522,411 $ 541,332
Available for sale 1,471,172 1,471,172 1,286,169 1,286,169
Equity securities 31,980 31,980 51,268 51,268
Mortgage loans on real estate 227,335 236,697 253,093 265,059
Policy loans 89,325 105,980 90,052 97,712
Other long-term investments 6,236 6,636 9,989 9,587
Cash and short-term investments 71,699 71,699 25,531 25,531
Securities and indebtedness of related parties 4,812 5,288 5,451 5,829
Assets held in separate accounts 190,111 190,111 138,409 138,409
LIABILITIES
Future policy benefits $ 793,028 $ 778,022 $ 782,933 $ 767,030
Other policyholders' funds 204,581 204,581 195,330 195,330
Long-term debt 71 75 77 83
Liabilities related to separate accounts 190,111 190,111 138,409 138,409
</TABLE>
4. REINSURANCE AND POLICY PROVISIONS
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 totaled $694.0 million
21
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REINSURANCE AND POLICY PROVISIONS (CONTINUED)
(5.0% of total life insurance in force) at December 31, 1998 and $663.4 million
(5.1% of total life insurance in force) at December 31, 1997.
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 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 $3.7 million, $3.7 million and $3.4 million and insurance benefits
have been reduced by $0.9 million, $2.9 million and $4.0 million during 1998,
1997 and 1996, respectively, as a result of cession agreements.
Prior to 1998, the amount of reinsurance assumed was not significant. In
December 1998, the Company assumed a block of ordinary annuity policies with
reserves totaling $22.0 million. In addition, beginning in 1998, the Company
began assuming variable annuity business from an equity investee through a
modified coinsurance arrangement. Product charges from this business were not
significant during 1998.
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,
-------------------------------
1998 1997 1996
-------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Unpaid claims liability, net of related reinsurance, at beginning of year $ 17,621 $ 13,812 $ 13,899
Add:
Provision for claims occurring in the current year 4,593 5,829 4,737
Increase (decrease) in estimated expense for claims occurring in the
prior years 140 2,236 (371)
-------------------------------
Incurred claim expense during the current year 4,733 8,065 4,366
Deduct expense payments for claims occurring during:
Current year 1,950 1,692 1,681
Prior years 2,943 2,564 2,772
-------------------------------
4,893 4,256 4,453
-------------------------------
Unpaid claims liability, net of related reinsurance, at end of year 17,461 17,621 13,812
Active life reserve 16,311 15,832 15,376
-------------------------------
Net accident and health reserves 33,772 33,453 29,188
Reinsurance ceded 538 1,721 1,483
-------------------------------
Gross accident and health reserves $ 34,310 $ 35,174 $ 30,671
-------------------------------
-------------------------------
</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
22
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REINSURANCE AND POLICY PROVISIONS (CONTINUED)
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.
5. INCOME TAXES
The Company files a consolidated federal income tax return with FBL Financial
Group, Inc. and a majority of its subsidiaries. FBL Financial Group, Inc. and
its direct and indirect subsidiaries 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.
Deferred income taxes have been established based upon the temporary differences
between the financial statement and income tax bases of assets and liabilities.
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.
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Taxes provided in consolidated statements of income on:
Income before equity income:
Current $ 17,774 $ 36,828 $ 28,400
Deferred 2,517 (5,249) 5,756
-------------------------------
20,291 31,579 34,156
Equity income:
Current 486 951 1,674
Deferred 79 77 554
-------------------------------
565 1,028 2,228
Taxes provided in consolidated statement of changes in stockholder's
equity:
Change in net unrealized investment gains/losses--deferred (93) 6,672 (4,211)
Adjustment resulting from capital transaction of equity
investee--deferred (33) -- 2,617
-------------------------------
(126) 6,672 (1,594)
-------------------------------
$ 20,730 $ 39,279 $ 34,790
-------------------------------
-------------------------------
</TABLE>
23
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The effective tax rate on income before income taxes and equity income is
different from the prevailing federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes and equity income $ 66,522 $ 93,245 $ 103,682
--------------------------------
--------------------------------
Income tax at federal statutory rate (35%) $ 23,283 $ 32,636 $ 36,289
Tax effect (decrease) of:
Gain on dividend of home office properties (2,921) -- --
Tax-exempt interest income (267) (323) (383)
Tax-exempt dividend income (211) (1,148) (1,246)
State income taxes 5 39 242
Other items 402 375 (746)
--------------------------------
Income tax expense $ 20,291 $ 31,579 $ 34,156
--------------------------------
--------------------------------
</TABLE>
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Fixed maturity and equity securities $ 22,764 $ 25,247
Deferred policy acquisition costs 50,387 46,944
Other 11,962 14,236
----------------------
85,113 86,427
Deferred income tax assets:
Future policy benefits (20,977) (21,320)
Accrued dividends (3,072) (3,273)
Accrued pension costs (8,607) (9,092)
Other (4,864) (7,619)
----------------------
(37,520) (41,304)
----------------------
Deferred income tax liability $ 47,593 $ 45,123
----------------------
----------------------
</TABLE>
Prior to 1984, a portion of current income of the Company 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, 1998 was $11.1 million. Should the
policyholders' surplus account of the Company exceed the limitation prescribed
by federal income tax law, or should distributions be made by the Company to its
stockholder in excess of $479.1 million, such excess would be subject to federal
income taxes at rates then effective. Deferred income taxes of $3.9 million have
not been provided on amounts included in this memorandum account.
6. CREDIT ARRANGEMENT
As an investor in the Federal Home Loan Bank (FHLB), the Company has the right
to borrow up to $54.0 million from the FHLB as of December 31, 1998. As of
December 31, 1998 and 1997, the Company had no outstanding debt under this
credit arrangement.
24
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. 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 $3.4 million, $4.2 million and $5.9 million for 1998,
1997 and 1996, respectively.
The Company participates with several affiliates in a 401(k) defined
contribution plan which covers substantially all employees. Beginning in 1998,
the Company contributes FBL Financial Group, Inc. stock in amounts equal to 50
percent of employee contributions up to four percent of the annual salary
contributed by the employees. Costs are allocated among the affiliates on a
basis of time incurred by the respective employees for each employer. Related
expense totaled $0.2 million for 1998.
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. Such allocations are reviewed annually. Postretirement benefit expense
aggregated $0.1 million for 1998, 1997 and 1996.
8. STATUTORY INFORMATION
STATUTORY LIMITATIONS ON DIVIDENDS
The ability of the Company 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 1999, the Company could pay dividends to the parent company of
approximately $41.0 million without prior approval of insurance regulatory
authorities.
STATUTORY ACCOUNTING POLICIES
The financial statements of the Company and its 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 the statements of income when such declines are
judged to be other
25
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STATUTORY INFORMATION (CONTINUED)
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 stockholder's equity; (i) revenues for
interest-sensitive and variable 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 Company;
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.
Net income for the Company determined in accordance with statutory accounting
practices was $38.2 million, $73.5 million and $75.0 million for 1998, 1997 and
1996, respectively. Statutory net gain from operations for the Company, which
excludes realized gains and losses, totaled $41.0 million, $37.8 million and
$34.9 million for 1998, 1997 and 1996, respectively. Total statutory capital and
surplus of the Company was $294.8 million at December 31, 1998 and $291.3
million at December 31, 1997.
Net income for the Company's insurance subsidiaries determined in accordance
with statutory accounting practices was $0.4 million, $0.1 million and $0.2
million for 1998, 1997 and 1996, respectively. Total statutory capital and
surplus for the Company's insurance subsidiaries was $36.4 million at December
31, 1998 and $13.1 million at December 31, 1997.
9. 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.
The Company participates in a management agreement with FBL Financial Group,
Inc., under which FBL Financial Group, Inc. provides general business,
administration and management services to the Company. In addition, Farm Bureau
Management Corporation, a wholly-owned subsidiary of the Iowa Farm Bureau
Federation, provides certain management services to the Company under a separate
arrangement. During 1998, 1997 and 1996, the Company incurred related expenses
totaling $0.7 million, $0.8 million and $2.4 million, respectively.
The Company has equipment and auto lease agreements with FBL Leasing Services,
Inc., a wholly-owned subsidiary of FBL Financial Services, Inc. The Company
incurred expenses totaling $2.0 million during 1998, $1.7 million during 1997
and $0.7 million during the seven month period ended December 31, 1996 (period
in 1996 subsequent to the dividend of FBL Financial Services, Inc. to FBL
Financial Group, Inc.) under these agreements.
EquiTrust Investment Management Services, Inc., a wholly-owned subsidiary of FBL
Financial Services, Inc., provides investment advisory services to the Company.
The related fees are based on the level of assets under management plus certain
out-of-pocket expenses. The Company incurred expenses totaling $3.4 million
during 1998, $4.1 million during 1997 and $1.6 million during the seven month
period ended December 31, 1996 relating to these services.
The Company has 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 are responsibile for development and management
26
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. MANAGEMENT AND OTHER AGREEMENTS (CONTINUED)
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 1998, 1997 and
1996, the Company paid $3.5 million, $3.3 million and $2.8 million,
respectively, to the property-casualty companies under these arrangements.
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 $0.7 million, $0.5 million and $0.4 million were paid to the Iowa
Farm Bureau Federation for 1998, 1997 and 1996, 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 were $0.4 million in 1998 and 1997 and $0.3
million in 1996.
Beginning in 1998, the Company has administrative services agreements with an
equity investee under which the Company provides underwriting, claim processing,
accounting, compliance and other administrative services relating to certain
variable insurance products underwritten by the affiliate. Fee income from
performing these services totaled $0.2 million during 1998.
10. COMMITMENTS AND CONTINGENCIES
IMPACT OF YEAR 2000 (UNAUDITED)
Many of the Company's computer programs were originally written using two digits
rather than four to define a particular year. As a result, these computer
programs have time-sensitive software that may recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions to operations, including, but not limited
to, a temporary inability to process transactions, send premium notices and
calculate policy reserves and accruals. To a lesser extent, the Company is
dependent on various non-information technology systems, such as telephone
switches. The Year 2000 could also cause these systems to fail or malfunction.
During 1997, the Company completed a comprehensive assessment of the Year 2000
issue and developed a plan to address the issue in a timely manner. The plan
consists of the following four phases: (1) identification of all information
technology and non-information technology systems that have time-sensitive
software, (2) modification or replacement of the software/systems, (3) testing
the modified or new software/systems and (4) development of a contingency plan
to address any critical system that may malfunction. In addition, the Company
has ongoing formal communications with all of its significant vendors to keep
abreast of 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. With
only a few exceptions, the Year 2000 modifications and testing have been
completed. The exceptions are limited to a few third-party software packages for
which the Year 2000 compliant version will become available in the first quarter
of 1999. It is anticipated that the Company will complete its system
modifications and testing prior to any material impact on its operating systems.
Non-information technology systems that are not Year 2000 compliant have been
replaced or have been identified and will be replaced by December 31, 1999.
The total incremental cost of the Year 2000 project (those costs which would not
have been incurred had the Year 2000 issue not existed) is estimated to be $2.8
million and is being funded through operating cash flows. Year 2000 modification
costs incurred and charged to expense totaled $1.7 million for 1998 and $0.6
million for 1997. It is anticipated the project costs to be charged to expense
during 1999 will total approximately $0.5 million. The Company has also incurred
internal costs associated with the Year 2000 project. These costs, which are
principally payroll-related expenses for information systems personnel, have not
been separately accounted for and, therefore, are not available.
27
<PAGE>
FARM BUREAU LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Despite the Company's extensive efforts to modify or replace computer programs
and information systems that are time-sensitive, the Company could experience a
disruption to its operations as a result of the Year 2000. The Company has a
detailed contingency plan to address any critical system that may malfunction
despite the testing being performed. The contingency plan provides for the
availability of staff, defines and prioritizes tasks and outlines procedures to
fix any systems that are malfunctioning.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantees that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
OTHER
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, 1998, management is not
aware of any claims for which a material loss is reasonably possible.
The Company's parent leases its home office properties under a 15-year operating
lease. The Company's expected share of future remaining minimum lease payments
under this lease as of December 31, 1998 are as follows: 1999--$1.0 million;
2000--$1.2 million; 2001--$1.2 million; 2002--$1.2 million; 2003-- $1.3 million
and thereafter, through 2013--$13.4 million. Rent expense for the lease during
1998 totaled $0.7 million, net of $0.6 million in amortization of the deferred
gain on the transfer of the home office properties (see Note 1).
The Company has extended a line of credit in the amount of $15.0 million to FBL
Leasing Services, Inc., a wholly-owned subsidiary of FBL Financial Group, Inc.
Interest on this agreement is equal to the prime rate of a national bank and
payable monthly. There was $11.3 million and $4.8 million outstanding on the
line of credit at December 31, 1998 and 1997, respectively.
The Company has extended a line of credit in the amount of $0.5 million to
Western Computer Services, Inc., an affiliate. Interest on this agreement is
equal to the prime rate of a national bank and payable monthly. There was $0.4
million and $0.1 million outstanding on the line of credit at December 31, 1998
and 1997, respectively.
The Company has guaranteed the payment of principal and interest on notes
totaling $24.5 million payable by FBL Leasing Services, Inc. to a bank. The
notes are due August 1999 and are collateralized by lease agreements primarily
with affiliates. The Company believes no losses will be recognized in connection
with this guarantee due to the creditworthiness of the lessees and the value of
the underlying collateral.
In connection with an investment in a limited real estate partnership, the
Company has agreed to pay any cash flow deficiencies of a medium-sized shopping
center owned by the partnership through January 1, 2001. At December 31, 1998,
the Company recorded a $0.3 million reserve for expected future cash flow
deficiencies. No reserves were recorded at December 31, 1997. At December 31,
1998, the limited partnership had a $5.3 million mortgage loan, secured by the
shopping center, with Farm Bureau Mutual Insurance Company.
28
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a)
<TABLE>
<C> <S>
(1) All Financial Statements are included in either the Prospectus or the
Statement of Additional Information as indicated therein.
(2) *Schedules I, IV.
</TABLE>
All required financial statements are included in Part B.
(b) Exhibits
<TABLE>
<C> <S>
(1) Certified resolution of the board of directors of Farm Bureau Life
Insurance Company (the "Company") establishing Farm Bureau Life Annuity
Account II (the "Account").(1)
(2) Not Applicable.
(3) Form of Underwriting agreement.(2)
(4) Contract Form.(1)
(5) Form of Contract Application.(2)
(6) (a) Articles of Incorporation of the Company.(1)
(b) By-Laws of the Company.(1)
(7) Not Applicable.
(8) (a) Participation agreement relating to EquiTrust Variable Insurance
Series Fund.(2)
(b)(1) Participation agreement relating to Fidelity Variable Insurance
Products Fund.(3)
(b)(2) Participation agreement relating to Fidelity Variable Insurance
Products Fund II.(3)
(b)(3) Participation agreement relating to Fidelity Variable Insurance
Products Fund III.(3)
(c) Participation agreement relating to T. Rowe Price Equity Series, Inc.
and T. Rowe Price International Series, Inc.(2)
(9) *Opinion and Consent of Stephen M. Morain, Esquire.
(10) *(a) Consent of Sutherland Asbill & Brennan LLP.
*(b) Consent of Ernst & Young LLP.
*(c) Opinion and Consent of Christopher G. Daniels, FSA, MSAA, Life
Product Development and Pricing Vice President.
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable.
(14) Powers of Attorney.(1)
</TABLE>
- ------------------------
* Attached as an exhibit.
(1) Incorporated herein by reference to the initial filing of this Registration
Statement (File No. 333-46595) on February 19, 1998.
(2) Incorporated herein by reference to pre-effective amendment No. 1 of this
Registration Statement (File No. 333-46595) filed on June 9, 1998.
(3) Incorporated herein by reference to post-effective amendment No. 1 of this
Registration Statement (File No. 333-46595) filed on September 30, 1998.
ITEM 25. DIRECTORS AND OFFICERS OF THE COMPANY
Incorporated herein by reference to the prospectus in the Form S-6 registration
statement (File No. 333-45805) for certain variable life insurance contracts
issued by the Company and filed with the Commission on April 30, 1999.
<PAGE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The registrant is a segregated asset account of the Company and is therefore
owned and controlled by the Company. All of the Company's outstanding voting
common stock is owned by FBL Financial Group, Inc. This Company and its
affiliates are described more fully in the prospectus included in this
registration statement. Various companies and other entities controlled by FBL
Financial Group, Inc., may therefore be considered to be under common control
with the registrant or the Company. Such other companies and entities, together
with the identity of the owners of their common stock (where applicable), are
set forth on the following diagram.
SEE ORGANIZATION CHART ON FOLLOWING PAGE
<PAGE>
FBL FINANCIAL GROUP, INC.
OWNERSHIP CHART
01/01/98
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
FBL Financial
Group, Inc.
/
/
- --------------------------------------------------------------
/ / / /
/ / / /
FBL Financial Farm Bureau Western FBL
Group Capital Life Insurance Farm Bureau Financial
Trust Company Life Insurance Services, Inc.
/ Company /
/ /
/ /
- ---------------------------------------------- /
/ / / /
/ / / /
EquiTrust FBL Universal /
Life Insurance Real Estate Assurors /
Company Ventures, Ltd. Life Ins Co /
----------------------------------------------------------------------------------------------
/ / / / / /
/ / / / / /
Western AG FBL FBL EquiTrust EquiTrust EquiTrust
Insurance Leasing Insurance Investment Market Assigned
Agency, Inc. Services, Inc. Brokerage, Management Services, LLC Benefit
Inc. Services, Inc. Company
.
.
.
.
.
..............................................
. . .
. . .
. . .
EquiTrust EquiTrust EquiTrust
Series Fund, Money Market Variable Ins
Inc. Fund Series Fund
</TABLE>
- ------------------------
.... Management Agreement
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of the date of the prospectus included in this Registration Statement, no
Contracts have been sold.
ITEM 28. INDEMNIFICATION
Article XII of the Company's By-Laws provides for the indemnification by the
Company of any person who is a party or who is threatened to be made a party to
any threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative (other than an action by or in the
right of the Company) by reason of the fact that he is or was a director or
officer of the Company, or is or was serving at the request of the Company as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or enterprise, against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. Article
XII also provides for the indemnification by the Company of any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the Company to procure a judgment
in its favor by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or another enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, except that no indemnification will be made in respect of any claim,
issue, or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the Company
unless and only to the extent that the court in which such action or suit was
brought determines upon application that, despite the adjudication of liability
but in view of all circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which such court shall deem
proper.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) EquiTrust Marketing Services, LLC is the registrant's principal underwriter
and also serves as the principal underwriter of certain variable annuity
contracts and variable life insurance policies issued by other separate accounts
of the Company or its life insurance company affiliates supporting other
variable products, or to variable annuity and variable life insurance separate
accounts of insurance companies not affiliated with the Company.
<PAGE>
(b) Officers and Managers of EquiTrust Marketing Services, LLC
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS
ADDRESS* POSITIONS AND OFFICES
<S> <C>
Stephen M. Morain General Counsel and Assistant Secretary, Iowa Farm Bureau
Senior Vice President, General Federation; General Counsel, Secretary and Director, Farm Bureau
Counsel and Manager Management Corporation; Senior Vice President, General Counsel and
Director, FBL Financial Group, Inc.
William J. Oddy Chief Operating Officer, FBL Financial Group, Inc.
Chief Operating Officer and
Manager
Dennis M. Marker Investment Vice President, Administration, FBL Financial Group, Inc.
Investment Vice President,
Administration, Secretary and
Manager
Thomas R. Gibson Chief Executive Officer and Director, FBL Financial Group, Inc.
Chief Executive Officer and
Manager
Timothy J. Hoffman Chief Property/Casualty Officer, FBL Financial Group, Inc.
Vice President and Manager
James W. Noyce Chief Financial Officer, FBL Financial Group, Inc.
Chief Financial Officer,
Treasurer and Manager
Thomas E. Burlingame Vice President--Associate General Counsel, FBL Financial Group, Inc.
Manager
F. Walter Tomenga Vice President--Corporate Affairs and Marketing Services, FBL
Manager Financial Group, Inc.
Lynn E. Wilson Vice President--Life Sales, FBL Financial Group, Inc.
President and Manager
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS
ADDRESS* POSITIONS AND OFFICES
<S> <C>
Lou Ann Sandburg Vice President--Investments and Assistant Treasurer, FBL Financial
Vice President, Investments, Group, Inc.
Assistant Treasurer and
Manager
Robert A. Simons Senior Counsel--Investments, FBL Financial Group, Inc.
Senior Counsel--Investments
James P. Brannen Controller and Vice President, FBL Financial Group, Inc.
Controller and Vice President
Sue A. Cornick Market Conduct and Mutual Funds Vice President and Assistant
Market Conduct and Mutual Secretary, EquiTrust Investment Management Services, Inc.,
Funds Vice President and EquiTrust Money Market Fund, Inc., EquiTrust Series Fund, Inc. and
Assistant Secretary EquiTrust Variable Insurance Series Fund.
Kristi Rojohn Assistant Mutual Funds Manager and Assistant Secretary, EquiTrust
Assistant Mutual Funds Manager Investment Management Services, Inc.; Assistant Secretary,
and Assistant Secretary EquiTrust Money Market Fund, Inc., EquiTrust Series Fund, Inc. and
EquiTrust Variable Insurance SeriesFund.
Elaine A. Followwill Compliance Assistant and Assistant Secretary, EquiTrust Investment
Compliance Assistant and Management Services, Inc.; Assistant Secretary, EquiTrust Money
Assistant Secretary Market Fund, Inc., EquiTrust Series Fund, Inc. and EquiTrust
Variable Insurance Series Fund
Roger F. Grefe Investment Management Vice President, FBL Financial Group, Inc.
Investment Management Vice
President
Robert Rummelhart Fixed Income Vice President, FBL Financial Group, Inc.
Fixed Income Vice President
Charles T. Happel Portfolio Manager, EquiTrust Investment Management Services, Inc.
Portfolio Manager
Laura Kellen Beebe Portfolio Manager, EquiTrust Investment Management Services, Inc.
Portfolio Manager
Larry J. Patterson Director, Financial Planning, United Farm Family.
Vice President
</TABLE>
* The principal business address of all of the persons listed above is 5400
University Avenue, West Des Moines, Iowa 50266.
ITEM 30. LOCATION BOOKS AND RECORDS
All of the accounts, books, records or other documents required to be kept by
Section 31(a) of the Investment Company Act of 1940 and rules thereunder, are
maintained by the Company at 5400 University Avenue, West Des Moines, Iowa
50266.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B of this registration
statement.
<PAGE>
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
(a) The registrant undertakes that it will file a post-effective amendment to
this registration statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement are never more than
16 months old for as long as purchase payments under the contracts offered
herein are being accepted.
(b) The registrant undertakes that it will include either as part of any
application to purchase a contract offered by the prospectus, a post card or
similar written communication affixed to or included in the prospectus that the
applicant can remove and send to the Company for a statement of additional
information.
(c) The registrant undertakes to deliver any statement of additional information
and any financial statements required to be made available under this Form N-4
promptly upon written or oral request to the Company at the address or phone
number listed in the prospectus.
(d) The Company represents that in connection with its offering of the contracts
as funding vehicles for retirement plans meeting the requirements of Section
403(b) of the Internal Revenue Code of 1986, it is relying on a no-action letter
dated November 28, 1988, to the American Council of Life Insurance (Ref. No.
IP-6-88) regarding Sections 22(e), 27(c)(1), and 27(d) of the Investment Company
Act of 1940, and that paragraphs numbered (1) through (4) of that letter will be
complied with.
(e) The Company represents that the aggregate charges under the Contracts are
reasonable in relation to the services rendered, the expenses expected to be
incurred and the risks assumed by the Company.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, Farm Bureau Life Annuity Account II certifies that it
meets the requirements of Securities Act Rule 485(b) for effectiveness of this
Registration Statement and has duly caused this Registration Statement to be
signed on its behalf by the undersigned thereunto duly authorized in the City of
West Des Moines, State of Iowa, on the 22nd day of April, 1999.
<TABLE>
<S> <C> <C>
FARM BUREAU LIFE INSURANCE COMPANY
FARM BUREAU LIFE ANNUITY ACCOUNT II
By: /s/ EDWARD M. WIEDERSTEIN
-----------------------------------------
Edward M. Wiederstein
PRESIDENT
Farm Bureau Life Insurance Company
Attest: /s/ RICHARD D. HARRIS
-----------------------------------------
Richard D. Harris
SENIOR VICE PRESIDENT AND
SECRETARY-TREASURER Farm Bureau Life
Insurance Company
</TABLE>
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities indicated on the dates set
forth below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ EDWARD M. WIEDERSTEIN President and Director
- ------------------------------ [Principal Executive April 22, 1999
Edward M. Wiederstein Officer]
Senior Vice President and
/s/ RICHARD D. HARRIS Secretary-Treasurer
- ------------------------------ [Principal Financial April 22, 1999
Richard D. Harris Officer]
/s/ JAMES W. NOYCE Chief Financial Officer
- ------------------------------ [Principal Accounting April 22, 1999
James W. Noyce Officer]
/s/ CRAIG A. LANG
- ------------------------------ Vice President and April 22, 1999
Craig A. Lang* Director
/s/ KENNETH R. ASHBY
- ------------------------------ Director April 22, 1999
Kenneth R. Ashby*
/s/ AL CHRISTOPHERSON
- ------------------------------ Director April 22, 1999
Al Christopherson*
/s/ ERNEST A. GLIENKE
- ------------------------------ Director April 22, 1999
Ernest A. Glienke*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ PHILIP A, HEMESATH
- ------------------------------ Director April 22, 1999
Philip A. Hemesath*
/s/ CRAIG D. HILL
- ------------------------------ Director April 22, 1999
Craig D. Hill*
/s/ DANIEL L. JOHNSON
- ------------------------------ Director April 22, 1999
Daniel L. Johnson*
/s/ RICHARD G. KJERSTAD
- ------------------------------ Director April 22, 1999
Richard G. Kjerstad*
/s/ LINDSEY D. LARSEN
- ------------------------------ Director April 22, 1999
Lindsey D. Larsen*
/s/ DAVID R. MACHACEK
- ------------------------------ Director April 22, 1999
David R. Machacek*
/s/ DONALD O. NARIGON
- ------------------------------ Director April 22, 1999
Donald O. Narigon*
/s/ BRYCE P. NEIDIG
- ------------------------------ Director April 22, 1999
Bryce P. Neidig*
/s/ CHARLES E. NORRIS
- ------------------------------ Director April 22, 1999
Charles E. Norris*
/s/ KEITH R. OLSEN
- ------------------------------ Director April 22, 1999
Keith R. Olsen*
/s/ BENNET M. OSMONSON
- ------------------------------ Director April 22, 1999
Bennett M. Osmonson*
/s/ HOWARD D. POULSON
- ------------------------------ Director April 22, 1999
Howard D. Poulson*
/s/ SALLY A. PUTTMANN
- ------------------------------ Director April 22, 1999
Sally A. Puttmann*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ BEVERLY L. SCHNEPEL
- ------------------------------ Director April 22, 1999
Beverly L. Schnepel*
/s/ F. GARY STEINER
- ------------------------------ Director April 22, 1999
F. Gary Steiner*
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ STEPHEN M. MORAIN
-------------------------
Stephen M. Morain
ATTORNEY-IN-FACT,
PURSUANT TO POWER OF
ATTORNEY.
</TABLE>
<PAGE>
Exhibit 24(a)(2)
The following consolidated financial statement schedules are included as part of
this Form N-4:
Schedule I -- Summary of Investments -- Other than Investments in Related
Parties
Schedule IV -- Reinsurance
All other schedules to the consolidated financial statements required by Article
7 of Regulation S-X are omitted because they are not applicable or because the
information is included elsewhere in the consolidated financial statements or
notes thereto.
<PAGE>
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER
THAN INVESTMENTS IN RELATED PARTIES
FARM BUREAU LIFE INSURANCE COMPANY
DECEMBER 31, 1998
<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 $ 5,542 $ 5,008
Mortgage-backed securities 398,298 417,075 398,298
--------- --------- -------------
Total 403,306 $ 422,617 403,306
---------
---------
Fixed maturity securities, available for sale:
Bonds:
United States Government and agencies 13,229 13,373 13,373
State, municipal and other governments 46,879 48,693 48,693
Public utilities 83,934 89,315 89,315
Corporate securities 756,347 799,027 799,027
Mortgage and asset-backed securities 463,309 481,544 481,544
Convertible bonds 13,994 13,321 13,321
Redeemable preferred stock 26,453 25,899 25,899
--------- --------- -------------
Total 1,404,145 $1,471,172 1,471,172
---------
---------
Equity securities, available-for-sale:
Common stocks:
Public utilities 2,834 2,775 2,775
Banks, trusts, and insurance companies 8,972 9,036 9,036
Industrial, miscellaneous, and all other 17,572 13,768 13,768
Nonredeemable preferred stocks 6,805 6,401 6,401
--------- --------- -------------
Total 36,183 $ 31,980 31,980
---------
---------
Mortgage loans on real estate 227,858 227,335(2)
Investment real estate 39,812 39,812
Policy loans 89,325 89,325
Other long-term investments 10,022 6,236(2)
Short-term investments 70,090 70,090
--------- -------------
$2,280,741 $ 2,339,256
--------- -------------
--------- -------------
</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.
S-1
<PAGE>
SCHEDULE IV--REINSURANCE
FARM BUREAU LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------------ ------------ ------------- ----------- ---------- -----------------
CEDED TO ASSUMED PERCENT OF
OTHER FROM OTHER AMOUNT
GROSS AMOUNT COMPANIES COMPANY NET AMOUNT ASSUMED TO NET
------------ ------------- ----------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Life insurance in force, at end of year $13,863,614 $ 694,027 $ -- $13,169,587 --
------------ ------------- ----------- ---------- ---
------------ ------------- ----------- ---------- ---
Insurance premiums and other
considerations:
Interest sensitive product charges $ 43,081 $ 1,562 $ 1 $ 41,520 --
Traditional life insurance and
accident and health premiums 62,850 2,125 -- 60,725 --
------------ ------------- ----------- ---------- ---
$ 105,931 $ 3,687 $ 1 $ 102,245 --%
------------ ------------- ----------- ---------- ---
------------ ------------- ----------- ---------- ---
Year ended December 31, 1997:
Life insurance in force, at end of year $12,951,268 $ 663,399 $ -- $12,287,869 --
------------ ------------- ----------- ---------- ---
------------ ------------- ----------- ---------- ---
Insurance premiums and other
considerations:
Interest sensitive product charges $ 39,373 $ 1,571 $ -- $ 37,802 --
Traditional life insurance and
accident and health premiums 63,852 2,177 -- 61,675 --
------------ ------------- ----------- ---------- ---
$ 103,225 $ 3,748 $ -- $ 99,477 --%
------------ ------------- ----------- ---------- ---
------------ ------------- ----------- ---------- ---
Year ended December 31, 1996:
Life insurance in force, at end of year $12,051,585 $ 594,942 $ -- $11,456,643 --
Insurance premiums and other
considerations:
Interest sensitive product charges $ 35,388 $ 1,633 $ -- $ 33,755 --
Traditional life insurance and
accident and health premiums 63,333 1,722 -- 61,611 --
------------ ------------- ----------- ---------- ---
$ 98,721 $ 3,355 $ -- $ 95,366 --%
------------ ------------- ----------- ---------- ---
------------ ------------- ----------- ---------- ---
</TABLE>
S-2
<PAGE>
Farm Bureau Life letterhead
April 28, 1999
Board of Directors
Farm Bureau Life Insurance Company
5400 University Avenue
West Des Moines, Iowa 50266
Gentlemen:
I hereby consent to the reference to my name under the caption "Legal
Matters" in the Statement of Additional Information filed as part of
Post-Effective Amendment No. 2 to the Registration Statement on Form N-4
filed by Farm Bureau Life Insurance Company and Farm Bureau Life Annuity
Account II with the Securities and Exchange Commission.
Very truly yours,
/s/ Stephen M. Morain
Stephen M. Morain
Senior Vice President & General Counsel
<PAGE>
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415
Tel: (202) 383-0100
Fax: (202) 637-3593
April 26, 1999
Farm Bureau Life Insurance Company
5400 University Avenue
West Des Moines, Iowa 50266
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the statement of additional information filed as part of the
Registration Statement on Form N-4 for Farm Bureau Life Annuity Account II
(File No. 333-46595). In giving this consent, we do not admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN LLP
By /s/ Stephen E. Roth
-------------------------------------
Stephen E. Roth, Esq.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Statements" in the Prospectus and "Experts" in Part B and to the use of our
report dated February 15, 1999 with respect to the financial statements of Farm
Bureau Life Insurance Company, in Post-Effective Amendment No. 2 to the
Registration Statement (Form N-4 No. 333-46595) and related Prospectus of
Farm Bureau Life Annuity Account II dated May 1, 1999.
Our audits also included the financial statement schedules of Farm Bureau
Life Insurance Company included in Item 24(a)(2). 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, present fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 26, 1999
<PAGE>
April 28, 1999
Farm Bureau Life Insurance Company
5400 University Avenue
West Des Moines, Iowa 50266
Gentlemen:
This opinion is furnished in connection with the registration by Farm Bureau
Life Insurance Company of a flexible premium deferred variable annuity contract
("Contract") under the Securities Act of 1933, as amended. The prospectus
included in Post-Effective Amendment No. 2 to the Registration Statement on Form
N-4 (File No. 333-46595) describes the Contract. I have provided actuarial
advice concerning the preparation of the contract form described in the
Registration Statement, and I am familiar with the Registration Statement and
exhibits thereto.
It is my professional opinion that the fees and charges deducted under the
Contract, in the aggregate, are reasonable in relation to the services rendered,
the expenses expected to be incurred and the risks assumed by the insurance
company.
I hereby consent to the use of this opinion as an exhibit to Post-Effective
Amendment No. 2 to the Registration Statement.
Sincerely,
/s/ Christopher G. Daniels
Christopher G. Daniels, FSA, MSAA
Life Product Development and Pricing Vice
President
Farm Bureau Life Insurance Company
