The principal operations of the Company and its subsidiaries are conducted from property leased from the Iowa Farm Bureau Federation under a 15 year operating lease which expires in 2013. The property leased currently consists of approximately 140,000 square feet of a 400,000 square foot office building located at 5400 University Avenue, West Des Moines, Iowa 50266. Effective in the fourth quarter of 1999, it is expected that the Company's lease will be extended to include up to 60,000 additional square feet of this building.
Management considers the current facilities to be adequate for the foreseeable needs of the Company.
(1) Excludes the effect of reporting certain fixed maturity securities at fair value.
(4) Net statutory premiums include premiums collected from annuities and universal life-type products. For GAAP reporting, such premiums received are not reported as revenues. Amounts include internal rollover premiums to variable universal life or variable annuity contracts totaling $29.5 million in 1998, $14.1 million in 1997, $3.6 million in 1996, $1.5 million in 1995 and $2.9 million in 1994.
THE FOLLOWING ANALYSIS OF THE CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE WITHIN THIS DOCUMENT. UNLESS NOTED OTHERWISE, ALL REFERENCES 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), WESTERN FARM BUREAU LIFE INSURANCE COMPANY (WESTERN LIFE) AND EQUITRUST LIFE INSURANCE COMPANY (EQUITRUST) (COLLECTIVELY, THE LIFE COMPANIES).
The Company sells universal life, variable universal life, traditional life and disability income insurance and traditional and variable annuity products. These products are principally marketed through a core distribution force consisting of approximately 1,600 exclusive Farm Bureau agents in 14 midwestern and western states. Variable universal life and variable annuity products are also marketed in other states through alliances with unaffiliated Farm Bureau companies. In addition, beginning in 1998, the Company started marketing variable products through alliances with a life insurance company and a regional broker-dealer not affiliated with Farm Bureau. Production from these alliances was minimal in 1998, as these operations were in the start-up phase throughout most of the year. Several subsidiaries support various functional areas of the Life Companies and other affiliates, by providing investment advisory, marketing and distribution, and leasing services.
The costs related to acquiring new business, including certain costs of issuing policies and certain other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized and amortized into expense. For nonparticipating traditional life and accident and health insurance products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits. For participating traditional life insurance and interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality, and expense margins. This amortization is adjusted when the Life Companies revise their estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity. Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to year based on the level of claims incurred under insurance retention limits. The profitability of the Life Companies is primarily affected by expense levels, interest spreads (i.e., the difference between interest earned on investments and interest credited to policyholders), persistency 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.
On March 17, 1998, the Company's Board of Directors approved a two-for-one common stock split payable in the form of a 100% stock dividend to stockholders of record as of April 6, 1998. The additional shares were distributed April 17, 1998. All references to the number of common shares and per share amounts in this report have been restated to reflect the effect of the stock dividend.
The change in earnings per common share from year to year is positively impacted by a decrease in the weighted average common shares outstanding during the three year period ended December 31, 1998. Weighted average common shares outstanding totaled 34.4 million in 1998, 37.0 million in 1997 and 43.3 million in 1996. These decreases are the result of acquisitions of common stock by the Company during 1998 and 1997, and the exchange of common stock for preferred stock in 1996.
INTEREST SENSITIVE PRODUCT CHARGES increased 8.7% in 1998, to $52.2 million, and 9.9% in 1997, to $48.0 million. These increases are due primarily to increased cost of insurance charges resulting from an increase in the volume and age of business in force. In addition, mortality and expense charges have increased as a result of growth in variable product account balances.
REALIZED GAINS (LOSSES) ON INVESTMENTS decreased 111.9% in 1998, to a loss of $4.9 million, and 22.4% in 1997, to a gain of $41.0 million. Net realized gains in 1997 and 1996 resulted primarily from the sale of equity securities. Realized gains (losses) include writedowns of investments that became other-than-temporarily impaired totaling $9.4 million in 1998, $23.8 million in 1997 and $1.4 million in 1996. These writedowns are the result of sustained operating losses, unsuccessful efforts to raise capital and various other operational or economic factors that became evident in the respective years. The level of realized gains (losses) is subject to fluctuation from year to year depending on the prevailing interest rate and economic environment and the timing of the sale of investments.
The Company decreased interest crediting rates on many of its products during 1998 and 1997 in response to the general decline in market interest rates during the same periods. During 1997, the impact of the decreases in interest crediting rates was more than offset by an increase in the volume of business in force.
DISTRIBUTIONS TO PARTICIPATING POLICYHOLDERS decreased 0.1% in 1998, to $25.8 million, and 1.1% in 1997, to $25.9 million. These decreases are primarily attributable to decreases in the average interest rate used in the dividend formula for these policies to 5.84% at December 31, 1998, from 5.89% at December 31, 1997 and 6.12% at December 31, 1996.
A summary of the Company's underwriting, acquisition and insurance expenses is as follows:
INTEREST EXPENSE increased 13.2% in 1998, to $1.7 million, and 63.7% in 1997, to $1.5 million due to an increase in the average debt outstanding.
OTHER EXPENSES increased 33.6% in 1998, to $15.5 million, and 3.0% in 1997, to $11.6 million. These increases are due principally to an increase in the level of leasing, management and financial services provided to affiliates and third parties.
The Company recorded a gain of $1.0 million, net of related income taxes, on the sale of Utah Insurance. In addition, the increase in net unrealized appreciation on securities classified as available for sale was reduced $1.4 million, net of related income taxes, as a result of the sale. The gain on the sale may be increased in future years in accordance with an earn-out provision included in the related sales agreement. See "Liquidity and Capital Resources - FBL Financial Group, Inc."
On March 30, 1998, the Company exchanged a subsidiary owning its home office properties for 2,536,112 unregistered shares of Class A common stock owned by the Iowa Farm Bureau Federation. The Company is leasing a portion of the properties back from a wholly-owned subsidiary of the Iowa Farm Bureau Federation under a 15-year operating lease. The value of the transaction, which was structured as a tax-free exchange of a real estate subsidiary, was $45.7 million, or $18.00 per common share. The book value of the properties was $24.7 million on the date of the exchange. A gain on the transaction of approximately $21.0 million was deferred and is being amortized over the term of the operating lease. The exchange did not have a significant impact on income from continuing operations for 1998, nor is it expected to have a significant impact in the future, as the increase in net expense associated with leasing the properties versus owning them directly is substantially offset by the amortization of the deferred gain on the transaction.
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
The Company's total investment portfolio increased 3.1% to $3,031.4 million at December 31, 1998 compared to $2,940.9 million at December 31, 1997. This increase is primarily the result of positive cash flows from operations, partially offset by net withdrawals of policyholder account balances on interest sensitive products.
Over the last several years, the mix of the Company's life insurance business has been shifting from traditional and interest sensitive products to variable products. In addition, in an attempt to enhance the Company's persistency rate, the Company has promoted an exchange program for the rollover of universal life policies to variable universal life policies. The Company expects the shift to variable products to continue due to this program and the continued popularity of the variable products. A majority of premiums received on variable products are typically invested in the Company's separate accounts as opposed to the general account investments. This trend is expected to impact the future growth rate of the Company's investment portfolio and separate account assets.
The Company's investment portfolio is managed by its internal investment professionals. The investment strategy is designed to achieve superior risk-adjusted returns consistent with the investment philosophy of maintaining a largely investment grade portfolio and providing adequate liquidity for obligations to policyholders and other requirements. Management continually reviews the returns on invested assets and changes the mix of invested assets as deemed prudent under the current market environment to help maximize current income.
As of December 31, 1998, 94.5% (based on carrying value) of the fixed maturity securities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. The Company regularly reviews the percentage of its portfolio which is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of December 31, 1998, the investment in non-investment grade debt was 5.5% of fixed maturity securities. At that time no single non-investment grade holding exceeded 0.3% of total investments.
Mortgage and other asset-backed securities constitute a significant portion of the Company's portfolio of securities. These securities were purchased at a time when, management believed, these types of investments provided superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securities are diversified as to collateral types, cash flow characteristics and maturity.
The mortgage-backed portfolio includes pass-through and collateralized mortgage obligation (CMO) securities. With a pass-through security, the Company receives a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" which provide sequential retirement of the bonds. The Company invests in sequential tranches, which provide cash flow stability in that principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, the Company invests in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. The Company does not purchase certain types of collateralized mortgage obligations which it believes would subject the investment portfolio to greater than average risk. These include, but are not limited to, interest only, principal only, floater, inverse floater, PAC II, Z and support tranches.
At December 31, 1998, the Company held $299.4 million or 9.9% of invested assets in mortgage loans. These mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. At December 31, 1998, mortgages more than 60 days delinquent accounted for 0.4% 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, 1998 include: Pacific (26.9%), which includes California, Oregon and Washington; and West South Central (25.2%), which includes Oklahoma and Texas. Mortgage loans on real estate are also diversified by collateral types with office buildings (37.4%) and retail facilities (37.2%) representing the largest holdings at December 31, 1998.
Deferred policy acquisition costs increased 11.9% to $203.6 million at December 31, 1998 due principally to the capitalization of costs incurred with new sales. Property and equipment decreased $8.2 million, or 13.0%, due principally to the exchange of home office properties for Class A common stock, partially offset by increases in leased assets and capitalized software costs. Assets of discontinued operations decreased $106.7 million as a result of the sale of Utah Insurance. Assets held in separate accounts increased $51.7 million, or 37.4%, to $190.1 million at December 31, 1998 due primarily to increased sales of variable products, partially offset by depreciation in the value of separate account investments. At December 31, 1998, the Company had total assets of $3,651.0 million, a 1.4% increase from total assets at December 31, 1997.
Policy liabilities and accruals increased 1.6% to $2,364.3 million at December 31, 1998. The relatively modest increase in policy liabilities is partially attributable to the Company's marketing emphasis on the sale of variable products. As noted under the "Investments" section above, the shift in sales to variable products will have an impact on the future growth rate of the Company's policy liabilities and accruals as well as the separate account liabilities.
At December 31, 1998, common stockholders' equity was $580.6 million, or $17.75 per share, compared to $602.3 million, or $16.77 per share at December 31, 1997. Included in stockholders' equity per common share is $1.61 at December 31, 1998 and $1.41 at December 31, 1997 attributable to unrealized investment gains resulting from marking the Company's fixed maturity securities classified as available for sale to market value. The change in unrealized appreciation of fixed maturity and equity securities classified as available for sale increased stockholders' equity $1.5 million during 1998, after related adjustments to deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and deferred income taxes.
A majority of the Company's insurance liabilities are backed by fixed maturity securities and mortgage loans. The fixed maturity securities have laddered maturities and a weighted average life of 7.0 years. Accordingly, the earned rate on the portfolio lags behind changes in market yields. The extent that the portfolio yield lags behind changes in market yields generally depends upon (i) the average life of the portfolio, (ii) the amount and speed at which market interest rates rise or fall, (iii) the amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and asset-backed securities accelerate during periods of declining interest rates and (iv) the amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and asset-backed securities decelerate during periods of increasing interest rates.
The Company designs its products and manages its investment portfolio in a manner to encourage persistency and to help ensure targeted spreads are earned. In addition to the ability to change interest crediting rates on its products, certain interest sensitive contracts have surrender and withdrawal penalty provisions. The following is a summary of the surrender and discretionary withdrawal characteristics of the Company's interest sensitive products and supplementary contracts without life contingencies as of December 31, 1998:
A major component of the Company's asset-liability management program is structuring the investment portfolio with cash flow characteristics consistent with the cash flow characteristics of the Company's insurance liabilities. The Company uses computer models to perform simulations of the cash flows generated from existing insurance policies under various interest rate scenarios. Information from these models is used in the determination of interest crediting rates and investment strategies. Effective duration is a common measure for the price sensitivity to changes in interest rates. It measures the approximate percentage change in the market value of a portfolio when interest rates change by 100 basis points. This measure includes the impact of estimated changes in portfolio cash flows from features such as bond calls and prepayments. When the estimated durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in the value of assets should be largely offset by a change in the value of liabilities. At December 31, 1998, the effective duration of the Company's fixed maturity portfolio was approximately 4.4 and the effective duration of the interest sensitive products was approximately 3.5.
The computer models used to estimate the impact of a 10% change in market interest rates use many assumptions and estimates which materially impact the fair value calculations. Key assumptions used by the models include an immediate and parallel shift in the yield curve and an acceleration of bond calls and principal prepayments on mortgage and other asset-backed securities. Due to the subjectivity of these assumptions, the actual impact of a 10% change in rates on the fair market values would likely be different from that estimated.
Parent company cash inflows from operations consists primarily of dividends from subsidiaries, if declared and paid, fees which it charges the various subsidiaries and affiliates for management of their operations and tax settlements between the parent company and its subsidiaries. Cash outflows are principally for salaries and other expenses related to providing these management services, dividends on outstanding stock and interest on holding company
debt issued to a subsidiary. In addition, the parent company will on occasion enter into capital transactions such as the acquisition of its common stock.
The Company received $25.0 million in cash on March 31, 1998 in connection with the sale of Utah Insurance. The Company will receive an additional $1.2 million (before applicable taxes) in the first quarter of 1999 and may receive additional consideration during each of the four years in the period ending December 31, 2003, in accordance with an earn-out provision included in the underlying sales agreement. Under the earn-out arrangement, the Company and Farm Bureau Mutual will share equally in the dollar amount by which the incurred losses on Utah Insurance's direct business, net of reinsurance ceded, is less than the incurred losses assumed in the valuation model used to derive the initial $25.0 million acquisition price. The earn-out calculation will be performed and any settlement (subject to a maximum of $2.0 million per year) will be made on a calendar year basis.
On May 30, 1997, FBL Financial Group Capital Trust (the Trust), a consolidated wholly-owned subsidiary of the Company, issued $97.0 million of 5% Preferred Securities to the Iowa Farm Bureau Federation. In connection with the Trust's issuance of the 5% Preferred Securities and the related purchase of all of the Trust's common securities, the parent company issued to the Trust $100.0 million principal amount of its 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the Notes). Concurrent with the issuance of the Notes, the Company purchased from the Iowa Farm Bureau Federation 5,000,000 shares of the parent company's Series A preferred stock at its liquidation value of $100.0 million. In addition, the parent company issued 5,000,000 shares of Series B preferred stock to the Iowa Farm Bureau Federation for $3.0 million.
The Company acquired Class A common shares totaling 3,497,648 in 1998 and 1,930,740 in 1997 as a result of the exchange of a subsidiary owning its home office properties and two stock repurchase programs. These transactions reduced stockholders' equity $70.7 million in 1998 and $24.8 million in 1997.
FBL Financial Group, Inc. paid common and preferred stock dividends totaling $10.2 million in 1998, $9.4 million in 1997 and $3.6 million in 1996. It is anticipated that dividend requirements for 1999 will be $0.0825 per quarter per common share and $0.0075 per quarter per preferred share, or approximately $11.0 million. In addition, interest payments on the Notes are estimated to be $5.0 million for 1999.
FBL Financial Group, Inc. relies primarily on dividends from Farm Bureau Life and Western Life to make any dividend payments to its stockholders and interest payments on its Notes. The ability of these companies to pay dividends to FBL Financial Group, Inc. is limited by law to earned profits (statutory unassigned surplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the State of Iowa for Farm Bureau Life and the State of Colorado for Western Life. In addition, under the Iowa and Colorado Insurance Holding Company Acts, the Life Companies may not pay an "extraordinary" dividend without prior notice to and approval by the respective insurance commissioner. An "extraordinary" dividend is defined under the Iowa and Colorado Insurance Holding Company Acts as any dividend or distribution of cash or other property whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceeds the greater of (i) 10% of policyholders' surplus (total statutory capital stock and statutory surplus) as of December 31 of the preceding year, or (ii) the statutory net gain from operations of the insurer for the 12-month period ending December 31 of the preceding year. During 1999, the maximum amount legally available for distribution to FBL Financial Group, Inc. without further regulatory approval is approximately $41.0 million from Farm Bureau Life and $14.6 million from Western Life.
The Life Companies' cash inflows consist primarily of premium income, deposits to policyholder account balances, product charges on variable products, income from investments, sales, maturities and calls of investments and repayments of investment principal. The Life Companies' cash outflows are primarily related to withdrawals of policyholder account balances, investment purchases, payment of policy acquisition costs, policyholder benefits, income taxes, dividends and current operating expenses. Life insurance companies generally produce a positive cash flow which may be measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. The Life Companies' liquidity positions continued to be favorable in 1998, with cash inflows at levels sufficient to provide the funds necessary to meet their obligations.
Management anticipates that funds to meet its short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally generated funds. Management believes that the current level of cash and available-for-sale and short-term securities, combined with expected net cash inflows from operations, maturities of fixed maturity investments, principal payments on mortgage and asset-backed securities, mortgage loans and its insurance products, are adequate to meet the Company's anticipated cash obligations for the foreseeable future. The Company's investment portfolio at December 31, 1998, included $80.2 million of short-term investments and $311.4 million in carrying value of U.S. Government and U.S. Government agency backed securities that could be readily converted to cash at or near carrying value. Notwithstanding the above, management currently anticipates refinancing the $24.5 million lease-backed note payable that is due August, 1999.
The Company may from time to time review potential acquisition opportunities. The Company anticipates that funding for any such acquisition may be provided from available cash resources, debt or equity financing. As of December 31, 1998, the Company had no material commitments for capital expenditures.
From time to time, the Company may publish statements relating to anticipated financial performance, business prospects, new products, and similar matters. These statements and others which include words such as "expect", "anticipate", "believe", "intend", and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for these types of statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experiences to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business, in addition to those identified under "Impact of Year 2000", include but are not limited to 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. * The degree to which the Company's products are accepted by customers and agents (including the agents of the Company's alliance partners) will impact the Company's future growth rate. * Extraordinary acts of nature or man may result in higher than expected claim activity. * Changes in federal and state income tax laws and regulations may affect the relative tax advantage of the Company's products.
Consolidated Balance Sheets................................................. 32 Consolidated Statements of Income........................................... 34 Consolidated Statements of Changes in Stockholders' Equity.................. 35 Consolidated Statements of Cash Flows....................................... 36 Notes to Consolidated Financial Statements.................................. 38
The Company engages Ernst & Young LLP as independent auditors to audit its financial statements and express their opinion thereon. Their audits include reviews and tests of the Company's internal controls to the extent they believe necessary to determine and conduct the audit procedures that support their opinion. A copy of Ernst & Young LLP's audit opinion follows this letter.
We have audited the accompanying consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 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.
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, 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.
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 sheets, 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. The Company had a valuation allowance on its investment real estate totaling $0.1 million at December 31, 1997. No allowance was recorded at December 31, 1998.
Other long-term investments include certain nontraditional investments and securities held by subsidiaries engaged in the broker-dealer or venture capital investment company industries. Nontraditional investments include a debt-related instrument and investment deposits which are reported at cost. In accordance with accounting practices for the broker-dealer and investment company industries, marketable securities held by subsidiaries in these industries are valued at market value if readily marketable or at fair value, as determined by the Board of Directors of the subsidiary holding the security, if not readily marketable. The resulting difference between cost and market is included in the statements of income as net investment income. Realized gains and losses are also reported as a component of net investment income. The Company recorded transfers from its venture capital subsidiary, which was dissolved during 1997, at fair value on the date of transfer, re-establishing a new cost basis for the security.
Securities and indebtedness of related parties include investments in partnerships and corporations over which the Company may exercise significant influence. Such investments are accounted for using the equity method. Changes in the value of the Company's investment in equity investees attributable to capital transactions of the investee, such as an additional offering of stock, are recorded directly to stockholders' equity. Securities and indebtedness of related parties also includes advances and loans to the partnerships and corporations which are principally reported at cost.
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.
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.
receipts from policyholders during the year ended December 31, 1998 and represented 18% of life insurance inforce at December 31, 1998. Participating business accounted for 42% of receipts from policyholders during the year ended December 31, 1997 and represented 19% of life insurance inforce at December 31, 1997.
At December 31, 1998 and 1997, the Company had undiscounted reserves of $1.3 million and $2.8 million, respectively, to cover estimated future assessments on known insolvencies. The Company had assets totaling $3.1 million and $3.9 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 ($1.2) million, $1.9 million (including $1.6 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.
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.
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 stockholders' 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 stockholders' equity, to be included in other comprehensive income.
Certain amounts in the 1997 and 1996 consolidated financial statements have been reclassified to conform to the 1998 financial statement presentation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting 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.
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.
Concurrent with the issuance of the 5% Preferred Securities, the Company purchased from the Iowa Farm Bureau Federation the Company's Series A preferred stock at its liquidation value of $100.0 million. In addition, the Company issued 5,000,000 shares of Series B preferred stock to the Iowa Farm Bureau Federation for $3.0 million. Each share of Series B preferred stock has a liquidation preference of $0.60 and voting rights identical to that of Class A common stock. The Series B preferred stock pays cumulative annual cash dividends of $0.03 per share, payable quarterly, and is redeemable by the Company, at the option of the Company, at $0.60 per share plus unpaid dividends if the stock ceases to be beneficially owned by a Farm Bureau organization. The purchase of Series A preferred stock and simultaneous issuance of Series B preferred stock and 5% Preferred Securities were treated as noncash transactions for purposes of the 1997 statement of cash flows.
During 1998 and 1997, the Company repurchased 961,536 and 1,930,740 shares, respectively, of Class A common stock in accordance with repurchase plans approved by the Board of Directors. The cost of the repurchases totaled $25.0 million in 1998 and $24.8 million in 1997. Of the shares repurchased, 2,701,476 were unregistered shares owned by various Farm Bureau entities. The purchase amounts were allocated partly to Class A common stock based on the average common stock balance per share on the acquisition dates with the remainder allocated to retained earnings.
During 1998, 1997 and 1996, the Company paid cash dividends totaling $0.30, $0.20 and $0.04 per common share, respectively.
The following tables contain amortized cost and market value information on fixed maturities and equity securities at December 31, 1998 and 1997:
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.
The Company has provided an allowance for possible losses against its mortgage loan portfolio. An analysis of this allowance, which consist of specific and general reserves, is as follows:
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 $1.0 million at December 31, 1998 and $0.3 million at December 31, 1997. A valuation allowance totaling $0.4 million at December 31, 1998 and $0.3 million at December 31, 1997 was established on the impaired loans.
An analysis of sales, maturities and principal repayments of the Company's fixed maturities portfolio for 1998, 1997, and 1996 is as follows:
At December 31, 1998, affidavits of deposits covering investments with a carrying value totaling $2,139.9 million were on deposit with state agencies to meet regulatory requirements.
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.
ASSETS AND LIABILITIES OF SEPARATE ACCOUNTS: Separate account assets and liabilities are reported at estimated fair value in the Company's consolidated balance sheets.
SHORT-TERM AND 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. For short-term debt, the carrying value approximates fair value.
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.
The Company files a consolidated federal income tax return with Utah Insurance, Farm Bureau Life and certain of its subsidiaries and FBL Financial Services, Inc. and its subsidiaries. The companies included in the consolidated federal income tax return each report current income tax expense as allocated under a consolidated tax allocation agreement. Generally, this allocation results in profitable companies recognizing a tax provision as if the individual company filed a separate return and loss companies recognizing benefits to the extent their losses contribute to reduce consolidated taxes. Western Life files a separate federal income tax return.
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:
Prior to 1984, a portion of current income of the Company's life insurance subsidiaries was not subject to current income taxation, but was accumulated, for tax purposes, in a memorandum account designated as "policyholders' surplus account." The aggregate accumulation in this account at December 31, 1998 was $11.1 million and $0.7 million for Farm Bureau Life and Western Life, respectively. Should the policyholders' surplus account of Farm Bureau Life and Western Life exceed the limitation prescribed by federal income tax law, or should distributions be made by Farm Bureau Life and Western Life to the parent company in excess of $479.1 million and $158.3 million, respectively, such excess would be subject to federal income taxes at rates then effective. Deferred income taxes of $4.2 million have not been provided on amounts included in this memorandum account.
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.
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 $5.7 million, $6.9 million and $8.6 million for 1998, 1997 and 1996, respectively.
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.
In addition to benefits offered under the aforementioned benefit plans, the Company and several other affiliates sponsor a plan that provides group term life insurance benefits to retired full-time employees who have worked ten years and attained age 55 while in service with the Company. Postretirement benefit expense is allocated in a manner consistent with pension expense discussed above. Postretirement pension expense aggregated $0.1 million, $0.3 million and $0.1 million for 1998, 1997 and 1996, respectively.
Western Life is authorized to issue up to 100,000 shares of redeemable preferred stock in series at $200.00 per share. There were 22,517 preferred shares outstanding at December 31, 1998 and 1997, all of which are currently redeemable at the option of Western Life. Dividends accrue at fixed or variable rates depending on the series and can range from 7.5% to 15.0%. Under certain circumstances and with respect to certain matters, the holders of redeemable preferred stock are entitled to vote separately as a class. The redeemable preferred stock and related dividends are reported as minority interest in subsidiaries in the consolidated financial statements.
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.
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.
In general, the Company is organized by the types of products and services it offers for sale. The Company's principal and only reportable operating segment is its life insurance segment. The life insurance segment includes activities related to the sale of life insurance, annuities and accident and health insurance products. Operations have been aggregated into the same segment due to the similarity of the products, including the underlying economic characteristics, the method of distribution and the regulatory environment. The Company also has several other operating segments that do not meet the quantitative threshold for separate segment reporting and, therefore, are aggregated herein. A summary of these segments, along with the related source of revenues, is as follows:
Financial information concerning the Company's operating segments for 1998, 1997 and 1996 is as follows: