The principal operations of the Company and its subsidiaries are conducted from owned property consisting of approximately 430,000 square feet of space on a 45 acre site located at 5400 University Avenue, West Des Moines, Iowa 50266. Approximately 59,000 square feet of this property are leased to an unaffiliated company under a lease expiring in 1998 and approximately 24,000 square feet are leased to the Iowa Farm Bureau Federation and affiliated companies under a lease which is expected to be continued from year to year indefinitely. The Company also leases office space of 29,000 square feet for a service center in Denver, Colorado. This lease is for a portion of the former home office building of Western Life and expires June 30, 1997. The service center will be relocating in June 1997 to facilities owned by Colorado Farm Bureau Mutual Insurance Company, a related party. Management considers the current facilities to be adequate for the foreseeable needs of the Company.
The following table sets forth selected financial and statutory data of the Company for the periods indicated. This information should be read in conjunction with the consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The selected data, with the exception of the information presented under the caption "Other Data", are derived from the Company's consolidated financial statements which have been audited by Ernst & Young LLP, independent auditors.
(5) Statutory data has been derived from the annual statements of the Company's insurance subsidiaries, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices.
(7) Net statutory premiums as presented for statutory reporting purposes include premiums collected from annuities and universal life-type products. For GAAP reporting, such premiums received are not reported as premium revenues.
(9) Expense ratio equals all statutory expenses, including policyholder dividends and excluding loss and loss adjustment expenses, divided by statutory net written premiums.
THE FOLLOWING ANALYSIS OF THE CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE SELECTED CONSOLIDATED FINANCIAL DATA AND CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE HEREIN. UNLESS NOTED OTHERWISE, ALL REFERENCES INCLUDED HEREIN TO THE COMPANY INCLUDE ALL OF ITS DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE SUBSIDIARIES, FARM BUREAU LIFE INSURANCE COMPANY (FARM BUREAU LIFE) AND WESTERN FARM BUREAU LIFE INSURANCE COMPANY (WESTERN LIFE) (COLLECTIVELY, THE LIFE COMPANIES) AND ITS PROPERTY-CASUALTY INSURANCE SUBSIDIARY, UTAH FARM BUREAU INSURANCE COMPANY (UTAH INSURANCE).
In accordance with generally accepted accounting principles, universal life insurance premiums and ordinary annuity considerations received are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for universal life and ordinary annuity products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Surrender benefits paid relating to universal life insurance and ordinary annuity policies are reflected as decreases in liabilities for policyholder account balances and not as expenses. Amounts for interest credited to universal life and ordinary annuity policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the consolidated financial statements. The Life Companies receive investment income earned from the funds deposited into account balances by universal life and annuity policyholders, a portion of which is passed through to these policyholders in the form of interest credited.
The costs related to acquiring new business, including certain costs of issuing policies and certain other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized and amortized into expense in proportion to expected profits or margins. This amortization is adjusted when the Life Companies revise their estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity. Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from period to period based on the level of claims incurred under insurance retention limits. The profitability of the Life Companies is primarily affected by expense levels, investment results and fluctuations in mortality and other policyholder benefits. The Company has the ability to mitigate adverse experience through adjustments to credited interest rates, policyholder dividends or cost of insurance charges.
PROPERTY-CASUALTY OPERATIONS. The Company's property-casualty product lines and the percentage of property-casualty premiums associated with such lines for 1996 were as follows: automobile (49.5%), homeowners (7.1%), farm and ranch owners (12.1%), workers' compensation (5.7%), crop (8.2%), reinsurance (12.8%) and other (4.6%).
Property-casualty business written by Utah Insurance is pooled with business written by several property-casualty affiliates. Through December 31, 1995, Utah Insurance's participation in the reinsurance pool was 8%. On June 30, 1996, Utah Insurance's share of the pool was increased to 20%, retroactive to January 1, 1996. In accordance with retrospective accounting for reinsurance assumed, the property-casualty operating results in the consolidated statement of operations pertaining to the first six months of 1996 include that amount applicable to 8% of the reinsurance pool and the operating results applicable to the increase in the pooling percentage for that period ($0.8 million loss before income taxes) was deferred and is being amortized over the premium paying period of the underlying policies (generally 6 to 12 months). For the six months ended December 31, 1996, Utah Insurance recorded 20% of the reinsurance pool results, with the exception of development on loss and loss adjustment expense reserves relating to claims incurred prior to January 1, 1996, of which Utah Insurance's participation remains at 8%.
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Premiums and product charges: Universal life and annuity product charges $43,654 $43,722 Traditional life insurance premiums 82,198 75,450 Accident and health premiums 10,582 10,161 Property-casualty premiums 32,975 18,709 -------- -------- Total $169,409 $148,042 ======== ========
Premiums and product charges increased $21.4 million, or 14.4%, to $169.4 million for 1996 compared to $148.0 million for 1995. This increase included a $7.2 million, or 8.4%, increase in traditional life insurance and accident and health premiums which, management believes, is principally attributable to implementation of a new incentive agent compensation program effective January 1, 1996, introduction of a uniform portfolio of life insurance and annuity products throughout the Company's marketing territory in March 1996 and more effective and increased training of its agency force. Universal life and annuity product charges decreased $0.1 million, or 0.2%, to $43.7 million for 1996 principally due to decreases in cost of insurance rates ranging from 4% to 12% (approximately $2.7 million) which took effect March 14, 1996, and a decrease in the amortization of unearned revenues. These decreases were partially offset by growth in the volume of business in force and a $0.8 million increase in fees on premium deposits as a result of an increase in receipts from interest sensitive products. Property-casualty premiums increased $14.3 million, or 76.3%, primarily due to the increase in Utah Insurance's reinsurance pool participation percentage from 8% to 20%, which resulted in $14.4 million of additional premiums during 1996. This increase was partially offset by the Company's nonrenewal of certain unaffiliated reinsurance assumed contracts and premium rate decreases on workers' compensation insurance which collectively totaled approximately $0.4 million. Although the life and property-casualty insurance industries are competitive, the Company has not experienced any unusual pricing pressures in its lines of business or in the states in which it conducts operations.
Commission expense increased $1.2 million, or 14.3%, to $9.2 million for 1996 compared to $8.0 million for 1995. This increase is primarily attributable to a change in the Company's incentive agent compensation program effective January 1, 1996, under which agency managers are paid overwrite commissions on first year and renewal premiums rather than a base salary. Also contributing to the increase in commission expense is a 5.9% increase in direct life insurance premiums collected in 1996 compared to 1995.
Interest expense was $0.9 million for 1996 compared to $1.0 million for 1995 due to relatively consistent average outstanding debt balances during the periods. The average outstanding debt is expected to be approximately $10 million higher in 1997 than in 1996 as a result of additional debt incurred during 1996.
Income taxes increased $5.7 million, or 17.8%, to $37.8 million for 1996 compared to $32.1 million for 1995. The effective tax rate for 1996 was 32.3% compared to 35.5% for 1995. The effective tax rate during 1996 was lower than the federal statutory rate of 35% due primarily to tax exempt interest and dividend income and other permanent differences between book and taxable income arising from investment transactions. During 1995, the effect of tax exempt interest and dividend income was more than offset by state income taxes primarily on realized gains attributable to noninsurance subsidiaries. The Company's effective tax rate should not, over the long term, be materially different from the effective statutory rate.
Net income applicable to common stock increased $21.0 million, or 35.2%, to $80.6 million for 1996 compared to $59.6 million for 1995. The increase was primarily the result of the changes in pretax income and effective tax rate discussed above. In addition, there was a $2.7 million increase in equity income principally arising from eight equity investments whose principal assets were sold or liquidated during 1996. Partially offsetting the increase in net income was $2.3 million in dividends paid during 1996 to the Company's preferred stockholder as a result of the exchange of 5.0 million shares of Class A Common Stock for 5.0 million shares of Series A Preferred Stock on July 18, 1996. See "Stockholders' Equity."
Net investment income increased $44.3 million, or 24.8%, to $223.1 million for 1995 compared to $178.8 million for 1994. The increase was predominantly the result of gains recognized on two private equity investments held by FBL Ventures. During 1995, this subsidiary recognized net investment income of $25.4 million compared to a loss of $0.2 million for 1994. See "Adjusted Operating Income." In addition, the Company's average invested assets (excluding invested assets of FBL Ventures) increased 7.8% to $2,496.3 million in 1995 from $2,327.6 million in 1994 and the yield on average invested assets (excluding yield attributable to FBL Ventures) increased to 7.88% in 1995 from 7.69% in 1994. The yield on average invested assets increased in 1995 despite a general decline in market interest rates during the period primarily because fixed maturity securities purchased in 1995 tended to have longer maturities than that of the existing fixed maturity portfolio and the Company increased its concentration of investments in investment grade mortgage-backed securities with higher yields.
Amortization of deferred policy acquisition costs increased $0.6 million, or 6.6%, to $10.7 million in 1995 from $10.1 million in 1994 principally due to an increase in amortization resulting from realized gains on investments.
Other underwriting, acquisition and insurance expenses increased $0.5 million, or 0.8%, to $54.7 million in 1995 from $54.2 million in 1994. Expenses were controlled by economies of scale gained from the consolidation of Western Life and another subsidiary's operations with Farm Bureau Life and a reengineering effort designed to increase efficiency of operations and improve customer service. As a result of these initiatives, over 160 job positions were eliminated during the past two years, the benefit of which was realized in 1995.
Income taxes increased $9.6 million, or 42.8%, to $32.1 million for 1995 compared to $22.5 million for 1994. The effective tax rate in 1995 was 35.5% compared to 37.5% in 1994. The effective tax rate in 1994 was higher than the statutory rate of 35% primarily as a result of provisions for possible adjustments from routine IRS examinations, offset partially by tax-exempt interest and dividend income. The Company's effective tax rate should not, over the long term, be materially different from the effective statutory rate.
The Company's total investment portfolio increased $243.0 million, or 9.2%, to $2,889.1 million at December 31, 1996 compared to $2,646.1 million at December 31, 1995. This increase is primarily the result of positive cash flows from operations and net deposits to policyholder account balances during 1996. In addition, $77.3 million of the increase is attributable to one equity investment from which the Company experienced significant realized and unrealized gains during 1996.
(1) Held in inventory includes equity securities owned by FBL Ventures totaling $13.8 million, $20.1 million and $15.9 million at December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996, the Company held $293.8 million or 10.2% of invested assets in mortgage loans. These mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. At December 31, 1996, mortgages more than 60 days delinquent accounted for 1.4% of the carrying value of the mortgage portfolio. The Company's mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. Regions with the largest concentration of the Company's mortgage loan portfolio at December 31, 1996 include: Pacific (26%) which includes California, Oregon and Washington; and Mountain (22%) which includes Arizona, Colorado, Idaho, New Mexico, Utah and Wyoming. Mortgage loans on real estate have also been analyzed by collateral types with office buildings (48%) and retail facilities (32%) representing the largest holdings at December 31, 1996.
The Company's investment portfolio at December 31, 1996, also included $68.4 million of short-term investments and $238.8 million in carrying value of U.S. Government and U.S. Government agency backed securities that could be readily converted to cash at or near carrying value.
The Company's asset-liability management program includes (i) designing and developing products which encourage persistency and, as a result, creating a stable liability structure; and (ii) structuring the investment portfolio with duration and cash flow characteristics consistent with the duration and cash flow characteristics of the Company's insurance liabilities. At December 31, 1996, the weighted average life of the fixed maturity portfolio, based on market values excluding convertible bonds, was approximately 8.3 years. Based on the fixed income analytical system utilized by the Company, including its mortgage backed prepayment assumptions, the effective duration of the fixed income portfolio was 4.6 as of December 31, 1996.
In March 1996, the Company's stockholders approved a change to the Company's capital structure and a related revision to the Company's Articles of Incorporation (the recapitalization). Pursuant to the recapitalization, each outstanding share of common stock prior to recapitalization was converted on a pro rata basis to 1,900 shares of Class A Common Stock and 100 shares of Class B Common Stock.
From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, new products, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experiences to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include the following:
* Changes to interest rate levels and stock market performance may impact the Company's lapse rates, market value of investment portfolio and the Company's ability to sell its life insurance products, notwithstanding product features to mitigate the financial impact of such changes.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FBL Financial Group, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
FBL FINANCIAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Note: Share amounts set forth in the above statement have not been restated to reflect the 2,000-for-1 stock split approved by the Company's Board of Directors on March 12, 1996 and effective March 19, 1996.
FBL Financial Group, Inc. (the Company) operates predominantly in the individual life and annuity area of the life insurance industry through its principal subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and Western Farm Bureau Life Insurance Company (Western Life). The Company markets its products to Farm Bureau members and other individuals and businesses in 15 midwestern and western states. Several subsidiaries support various functional areas of Farm Bureau Life, Western Life and other affiliates, by providing investment advisory, marketing and distribution, and leasing services. As these functions relate directly to the primary business activities, these entities have been included in the life insurance business segment.
The consolidated financial statements include the financial statements of the Company and its direct and indirect subsidiaries. All significant intercompany transactions have been eliminated.
Fixed maturity securities, comprised of bonds and redeemable preferred stocks, that the Company has the positive intent and ability to hold to maturity are designated as "held for investment". Held for investment securities are reported at cost adjusted for amortization of premiums and discounts. Changes in the market value of these securities, except for declines that are other than temporary, are not reflected in the Company's financial statements. Fixed maturity securities which may be sold are designated as "available for sale". Available for sale securities are reported at market value and unrealized gains and losses on these securities are included directly in stockholders' equity, net of certain adjustments (see Note 4). Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities' expected lives. Amortization/accrual of premiums and discounts on mortgage and asset-backed securities incorporates a prepayment assumption to estimate the securities' expected lives.
The Company's held in inventory portfolio includes securities with carrying values of $7.0 million and $18.6 million at December 31, 1996 and 1995, respectively, for which market quotations are not readily available and for which fair value is determined in good faith by the Board of Directors of FBL Ventures of South Dakota, Inc. (FBL Ventures), the venture capital investment company subsidiary holding the securities. In determining fair value for securities not readily marketable, investments are initially stated at cost until significant subsequent events require a change in valuation. Among the factors considered by the Board of Directors in determining fair value of investments are the cost of the investment, developments since the acquisition of the investment, the sale price of recently issued securities, the financial condition and operating results of the issuer, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded and other factors generally pertinent to the valuation of investments. The Board of Directors, in making its evaluation, has relied on financial data of investees provided by the management of the investee companies.
During 1996, the Company ceased making new venture capital investments and began selling the private equity investments held by FBL Ventures in an attempt to exit most aspects of the venture capital investment business. During 1996, 20 securities with a fair value of $9.7 million were sold including $6.0 million in securities to a subsidiary of Farm Bureau Mutual Insurance Company, an affiliate. At December 31, 1996, FBL Ventures had 13 private equity securities with a fair value of $13.8 million. It is anticipated that these securities will be sold to unaffiliated third parties or transferred to Farm Bureau Life during 1997.
The Company records transfers to or from FBL Ventures at fair value at the date of transfer, re-establishing a new cost basis for the security. Prior to 1996, transfers typically occurred when a previously private issue went public, or when a private equity security was purchased or otherwise received by another member of the consolidated group. During the year ended December 31, 1995, two securities with a total fair value of $27.6 million were transferred out of FBL Ventures. During the year ended December 31, 1994, two securities with a fair value of $1.4 million were transferred to FBL Ventures. A realized gain (recognized in net investment income) of $24.6 million was recognized on the 1995 transfers, although neither transfer had an impact on net income (as unrealized appreciation had been reported prior to the transfer), and no realized gains or losses were recognized on the 1994 transfers.
Investment real estate is reported at cost less allowances for depreciation. Real estate acquired through foreclosure, which is included with investment real estate in the consolidated balance sheet, is recorded at the lower of cost (which includes the balance of the mortgage loan, any accrued interest and any costs incurred to obtain title to the property) or fair value as determined at or before the foreclosure date. The carrying value of these assets is subject to regular review. If the fair value, less estimated sales costs, of real estate owned decreases to an amount lower than its carrying value, a valuation allowance is established for the difference. This valuation allowance can be reduced or eliminated should the fair value of the property increase. Changes in this valuation allowance are recognized as realized gains or losses on investments. At December 31, 1996 and 1995, the Company had valuation allowances totaling $0.3 million and $0.2 million, respectively.
Market values of publicly traded fixed maturity securities are as reported by an independent pricing service. Market values of conventional mortgage-backed securities not actively traded in a liquid market are estimated using a matrix calculation assuming a spread over U. S. Treasury bonds based upon the expected average lives of the securities. Market values of private placement bonds are estimated using a matrix that assumes a spread (based on interest rates and a risk assessment of the bonds) over U. S. Treasury bonds. Market values of redeemable preferred stock and equity securities are based on the latest quoted market prices, or for those not readily marketable, at values which are representative of the market values of issues of comparable yield and quality.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE ACQUIRED
For participating traditional life insurance and universal life insurance and investment products, these costs are being amortized generally in proportion to expected gross profits (after dividends to policyholders, if applicable) from surrender charges and investment, mortality, and expense margins. That amortization is adjusted retrospectively when estimates of current or future gross profits/margins (including the impact of investment gains and losses) to be realized from a group of products are revised. The deferred policy acquisition costs for property-casualty insurance are amortized over the effective period of the related insurance policies; deferred policy acquisition costs for these policies are charged to expense when such costs are deemed not to be recoverable from the related unearned premiums and any related investment income.
The liabilities for future policy benefits for accident and health insurance are computed using a net level or two-year preliminary term method, including assumptions as to morbidity, mortality and interest and to include provisions for possible unfavorable deviations. Policy benefit claims are charged to expense in the period that the claims are incurred.
The unearned revenue reserve reflects the unamortized balance of the excess of first year administration charges over renewal period administration charges (policy initiation fees) on universal life products. These excess charges have been deferred and are being recognized in income over the period benefited using the same assumptions and factors used to amortize deferred policy acquisition costs.
Salvage and subrogation recoverables are estimated using statistical analysis. The salvage and subrogation recoverable amounts, which have been offset against reserves on property-casualty policies in the accompanying consolidated balance sheets, were $1.2 million and $0.7 million at December 31, 1996 and 1995, respectively.
Revenues for universal life and annuity products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances during the period. Expenses related to these products include interest credited to policyholder account balances and benefit claims incurred in excess of policyholder account balances.
All insurance-related revenues, benefits, losses and expenses are reported net of reinsurance ceded.
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 include revenue and expenses generated by the Company's various non-insurance subsidiaries for services related to investment advisory, marketing and distribution, and leasing. A portion of these activities are performed on behalf of affiliates of the Company. In addition, certain revenue generated by the Company's insurance subsidiaries (including Farm Bureau Life and Western Life) have been classified as other income. During the years ended December 31, 1996, 1995 and 1994, revenues of the insurance subsidiaries included as other income aggregated $3.2 million, $9.8 million and $12.6 million, respectively. Lease income from leases with affiliates totaled $2.4 million for each of the years ended December 31, 1996 and 1995 and $2.3 million for the year ended December 31, 1994.
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.
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 SFAS No. 107:
In January 1994, the Boards of Directors of Farm Bureau Life and Western Life approved an agreement, pursuant to which, effective January 1, 1994, the acquisition of Western Life was consummated through Farm Bureau Multi-State Services, Inc., a holding company which was incorporated in the State of Iowa on October 13, 1993. In March 1996, Farm Bureau Multi-State Services, Inc. was renamed FBL Financial Group, Inc. Under the agreement, 100% of the common stock of Farm Bureau Life and Western Life was exchanged for stock in the holding company. In addition, in 1994, the minority interests of FBL Insurance Company and Rural Security Life Insurance Company (Rural Security Life) were exchanged for equivalent value in the holding company and, in 1995, FBL Insurance Company and Rural Security Life were liquidated.
Holders of the Class A Common Stock and Series A Preferred Stock, together as a group, and Class B Common Stock vote as separate classes on all issues. Only holders of the Class A Common Stock and Series A Preferred Stock vote for the election of Class A Directors (three to five) and only holders of the Class B Common Stock vote for the election of Class B Directors (ten to twenty). Voting for the Directors is noncumulative. In addition, various ownership aspects of the Company's Class B Common Stock are governed by a Class B Shareholder Agreement which results in the Iowa Farm Bureau Federation, which owns 63.9% of the Company's voting stock as of December 31, 1996, maintaining control of the Company. Holders of Class A Common Stock and Class B Common Stock are entitled to share ratably on a share-for-share basis with respect to common stock dividends.
The following tables contain amortized cost and market value information on fixed maturities and equity securities at December 31, 1996 and 1995:
Short-term investments have been excluded from the above schedules as amortized cost approximates market value for these securities.
The carrying value and estimated market value of the Company's portfolio of fixed maturity securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Realized gains (losses) and the change in unrealized appreciation/depreciation on investments, excluding amounts attributed to investments held in inventory discussed above, are summarized below:
Income taxes during the years ended December 31, 1996, 1995 and 1994 include a provision of $18.5 million, $2.1 million and $3.3 million, respectively, for the tax effect of realized gains.
At December 31, 1996, affidavits of deposits covering bonds with a carrying value of $1,578.4 million, preferred stocks with a carrying value of $20.0 million, mortgage loans (including those made to related parties) with an unpaid balance of $262.0 million, real estate with a book value of $25.3 million and policy loans with an unpaid balance of $88.9 million were on deposit with state agencies to meet regulatory requirements.
Amortization of the value of insurance in force acquired (based on expected future gross profits/margins) for the next five years and thereafter is expected to be as follows: 1997 - $1.0 million; 1998 - $1.1 million; 1999 - $1.2 million; 2000 - $1.3 million; 2001 - $1.2 million; and thereafter, through 2023 - $13.0 million.
Reserves for unpaid claims are developed using industry mortality and morbidity data. One year development on prior year reserves represents Company experience being more or less favorable than that of the industry. Over time, the Company expects its experience with respect to disability income business to be comparable to that of the industry. A certain level of volatility in development is inherent in these reserves since the underlying block of business is relatively small.
Utah Insurance is a participant with Farm Bureau Mutual Insurance Company and South Dakota Farm Bureau Mutual Insurance Company, another affiliate, in a reinsurance pooling agreement (the Farm Bureau Mutual pool). Under the terms of the agreement, Utah Insurance and South Dakota Farm Bureau Mutual Insurance Company cede to Farm Bureau Mutual Insurance Company all of their insurance business and assume back from Farm Bureau Mutual Insurance Company an amount equal to their participation in the pooling agreement. Also, losses, loss adjustment expenses, and other underwriting and administrative expenses are prorated among the companies on the basis of their participation in the pooling agreement. For the years ended December 31, 1995 and 1994, Utah Insurance's participation in the reinsurance pool was 8%. On June 30, 1996, Utah Insurance's share of the pool was increased to 20%, retroactive to January 1, 1996. In accordance with retrospective accounting for reinsurance assumed, the property-casualty operating results for the first six months of 1996 attributable to the increase in the reinsurance pool percentage ($0.8 million loss) has been deferred and is being amortized over the premium paying period of the underlying policies (generally 6 to 12 months). As a result of the increase in the reinsurance pool participation percentage, the Company recorded additional investments ($13.5 million), deferred policy acquisition costs ($1.6 million), other assets ($1.3 million), reserves and unearned premiums on property-casualty policies ($16.8 million) and other liabilities ($0.4 million). At December 31, 1996, the deferred loss totaled $0.1 million.
Property-casualty premiums earned and losses and loss adjustment expenses incurred, reflect the following reinsurance amounts:
The difference between premiums on a written and on an earned basis is not significant.
The activity in the reserves on property-casualty policies, net of reinsurance and salvage and subrogation recoverables, is summarized as follows:
The Company files a consolidated federal income tax return with Utah Insurance, Farm Bureau Life and most of its subsidiaries and FBL Financial Services, Inc. and its subsidiaries. The companies included in the consolidated federal income tax return each report current income tax expense as allocated under a consolidated tax allocation agreement. Generally, this allocation results in profitable companies recognizing a tax provision as if the individual company filed a separate return and loss companies recognizing benefits to the extent their losses contribute to reduce consolidated taxes. The Company files a separate state income tax return. Western Life files a separate federal income tax return.
Deferred income taxes have been established based upon the temporary differences, the reversal of which will result in taxable or deductible amounts in future years when the related asset or liability is recovered or settled, within each entity.
The tax effect of temporary differences giving rise to the Company's deferred income tax assets and liabilities at December 31, 1996 and 1995, is as follows:
DECEMBER 31, ------------------------ 1996 1995 --------- --------- (DOLLARS IN THOUSANDS) Deferred income tax liabilities: Fixed maturity and equity securities $ 25,402 $ 35,533 Deferred policy acquisition costs 48,367 36,634 Value of insurance in force acquired 6,961 4,889 Deferred investment gains 10,177 9,521 Other 19,672 13,537 --------- --------- 110,579 100,114 Deferred income tax assets: Future policy benefits (44,030) (39,237) Accrued dividends (3,209) (2,593) Accrued pension costs (13,290) (12,140) Other (9,438) (6,499) --------- --------- (69,967) (60,469) --------- --------- Deferred income tax liability $ 40,612 $ 39,645 ========= =========
Deferred income taxes were also reported on equity income (loss) and income from discontinued operations during these periods. These taxes arise from the recognition of income and losses differently for purposes of filing federal income tax returns than for financial reporting purposes.
As an investor in the Federal Home Loan Bank (FHLB), the Company has the right to borrow up to $48.2 million from the FHLB as of December 31, 1996. As of December 31, 1996, the Company had no outstanding debt under this credit arrangement.
Certain of the assets related to these plans are on deposit with the Company and amounts relating to these plans are included in the financial statements herein. In addition, certain amounts included in the liability for deferred compensation and other employee benefits relate to deposit administration funds maintained by the Company on behalf of affiliates offering substantially the same benefit programs as the Company.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related Interpretations in accounting for its stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Under the alternative accounting method provided by SFAS No. 123, compensation expense is recognized in an amount equal to the estimated fair value of stock options on the date of grant. The Company has not adopted the accounting provisions of SFAS No. 123 because the valuation of non traded stock options is highly subjective and, in management's opinion, the existing pricing models do not necessarily provide a reliable single measure of the fair value of the Company's options.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 6.5%; dividend yield of 1.6%; volatility factor of the expected market price of the Company's Class A Common Stock of 0.12; and a weighted-average expected life of 5.1 years. With these assumptions and amortization of the compensation expense over the options' vesting period, pro forma net income and net income per common share for 1996 are $82.5 million and $3.72, respectively. The weighted average grant-date fair value of options granted during 1996 was $3.53 per share.
The financial statements of the Company's insurance subsidiaries included herein differ from related statutory-basis financial statements principally as follows: (a) the bond portfolio is segregated into held-for-investment (carried at amortized cost), available-for-sale (carried at fair value), and trading (reported at fair value) classifications rather than generally being carried at amortized cost; (b) acquisition costs of acquiring new business are deferred and amortized over the life of the policies rather than charged to operations as incurred; (c) future policy benefit reserves for participating traditional life insurance products are based on net level premium methods and guaranteed cash value assumptions which may differ from statutory reserves; (d) future policy benefit reserves on certain universal life and annuity products are based on full account values, rather than discounting methodologies utilizing statutory interest rates; (e) deferred income taxes are provided for the difference between the financial statement and income tax bases of assets and liabilities; (f) net realized gains or losses attributed to changes in the level of interest rates in the market are recognized as gains or losses in the statement of income when the sale is completed rather than deferred and amortized over the remaining life of the fixed maturity security or mortgage loan; (g) declines in the estimated realizable value of investments are charged to the statement of income when such declines are judged to be other than temporary rather than through the establishment of a formula-determined statutory investment reserve (carried as a liability), changes in which are charged directly to surplus; (h) agents' balances and certain other assets designated as "non-admitted assets" for statutory purposes are reported as assets rather than being charged to surplus; (i) revenues for universal life and annuity products consist of policy charges for the cost of insurance, policy administration charges, amortization of policy initiation fees and surrender charges assessed rather than premiums received; (j) pension income or expense is recognized in accordance with SFAS No. 87, "Employers' Accounting for Pensions" rather than in accordance with rules and regulations permitted by the Employee Retirement Income Security Act of 1974; (k) adjustments to federal income taxes of prior years are reported as a component of expense in the statement of income rather than as charges or credits to surplus; (l) the financial statements of subsidiaries are consolidated with those of the insurance subsidiary; and (m) assets and liabilities are restated to fair values when a change in ownership occurs that is accounted for as a purchase, with provisions for goodwill and other intangible assets, rather than continuing to be presented at historical cost.
The Company's insurance subsidiaries reported the following statutory amounts to regulatory agencies, after appropriate eliminations of intercompany accounts:
The National Association of Insurance Commissioners currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. That project, which is expected to be completed in the near future, will likely change, to some extent, statutory accounting practices. The codification may result in changes to the accounting practices that the Company's insurance subsidiaries use to prepare their statutory-basis financial statements.
In connection with an investment in a limited real estate partnership in 1996, the Company has agreed to pay any cash flow deficiencies of a medium-sized shopping center owned by the partnership through January 1, 2001. At December 31, 1996, the Company assessed the probability and amount of future cash flows from the property and determined that no accrual was necessary. During 1996, the limited partnership obtained a $5.4 million mortgage loan, secured by the shopping center, from Farm Bureau Mutual Insurance Company.
The Company currently operates in two principal segments - life insurance (including traditional and universal life, annuity and accident and health coverages) and property-casualty insurance. Prior to 1995, the Company was also involved in cable television operations.
On December 23, 1994, the Company sold substantially all operating assets and certain liabilities of its cable television subsidiary, Vantage Cable Associates, L.P., to Galaxy Telecom, L.P. for $38.4 million, of which $32.0 million was paid in cash and $6.4 million was represented by a Class D limited partnership interest in Galaxy Telecom, L.P. The Company recognized a gain on the sale of approximately $15.4 million, after expenses, closing adjustments and post-closing adjustments of approximately $1.4 million.
Net income per common share for each quarter is computed independently of net income per common share for the year. As a result, the sum of the quarterly net income per share may not equal the net income per share for the year due primarily to transactions affecting the number of weighted average common shares outstanding in each quarter. Net investment income during 1995 fluctuated during the year due to net investment income (loss) from FBL Ventures which totaled $(0.1) million in the first quarter, $3.2 million in the second quarter, $6.4 million in the third quarter and $15.9 million in the fourth quarter.