(2) Adjusted operating income equals net income adjusted to eliminate certain items which management believes are not indicative of operating trends because they are unusual and/or nonrecurring in nature, including the impact of realized gains (losses) on investments, gain on sale of discontinued operations and net income (loss) from a venture capital investment company subsidiary. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(3) 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.
In accordance with generally accepted accounting principles, premiums and considerations received for interest sensitive products such as universal life insurance and ordinary annuities are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for interest sensitive products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses. The Life Companies receive investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited. Amounts for interest credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the consolidated financial statements.
On March 31, 1998, the Company sold its wholly-owned subsidiary, Utah Farm Bureau Insurance Company (Utah Insurance), to Farm Bureau Mutual Insurance Company (Farm Bureau Mutual), an affiliate. As a result of the sale, which was approved by the Company's Board of Directors on March 17, 1998, the Company no longer has property-casualty operations. Results of the property-casualty operations have been reported separately as "discontinued" and applicable amounts for 1997 and 1996 have been restated.
The Company's revenues and income from continuing operations are primarily derived from its life insurance segment. Revenues and expenses of the Company's other segments, which consist of investment advisory, marketing and distribution, leasing and management operations, are principally recorded in the other income and other expense line items on the Consolidated Statements of Income. See Note 15 of the Notes to Consolidated Financial Statements (page 61) for additional information regarding segment information.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1998
The adjustment for realized gains and losses on investments noted in the table above is net of adjustments for that portion of amortization of deferred policy acquisition costs, unearned revenue reserve, value of insurance in force acquired and income taxes attributable to such gains and losses. FBL Ventures was a wholly owned investment company subsidiary which invested in start-up and mezzanine level venture capital investments in various sectors. FBL Ventures was dissolved on June 30, 1997.
A summary of the Company's premiums and product charges is as follows:
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH PREMIUMS increased 1.0% in 1998, to $93.5 million, and decreased 0.3% in 1997, to $92.5 million. Management believes the relatively flat sales of traditional life insurance products is the result of a marketing emphasis placed on the sale of variable universal life insurance contracts. Premiums collected on variable universal life insurance products increased 19.7% to $37.8 million in 1998 and increased 21.7% to $31.6 million in 1997.
OTHER INCOME increased 6.5% in 1998, to $20.8 million, and 22.7% in 1997, to $19.5 million. These increases are attributable to an increase in the level of leasing, investment advisory and other financial services provided to affiliates and third parties. In addition, during 1997 the Company increased the investment advisory rate charged for certain types of investments. The increases for 1998 are partially offset by a $2.4 million decrease in rental income due to the exchange of home office properties on March 30, 1998. See "Exchange of Home Office Properties."
INTEREST SENSITIVE PRODUCT BENEFITS decreased 0.2% in 1998, to $122.5 million, and increased 3.0% in 1997, to $122.7 million. The components of interest sensitive product benefits, along with selected average interest crediting rates, are as follows:
TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH BENEFITS, INCLUDING THE RELATED CHANGES IN RESERVES, decreased 7.7% in 1998, to $77.1 million, and increased 4.8% in 1997, to $83.5 million. Death and surrender benefits on traditional products increased 3.6% in 1998, to $48.2 million, and 4.7% in 1997, to $46.5 million. Accident and health benefits decreased $2.1 million in 1998 and increased $0.9 million in 1997. A $5.9 million decrease in the change in reserves in 1998 compared to 1997 is attributable primarily to a $4.0 million decrease in the change in accident and health reserves resulting from fewer disability income claims. Traditional life insurance and accident and health benefits can tend to fluctuate from year to year as a result of changes in mortality and morbidity experience.
COMMISSION EXPENSE increased 1.0% in 1998, to $9.1 million, and decreased 1.7% in 1997, to $9.0 million. Changes in the level of commission expense have been small due primarily to relative consistency in the amount of direct life and accident and health insurance premiums earned.
OTHER UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 1.4% in 1998, to $44.7 million, and 11.8% in 1997, to $44.1 million. During 1998 and 1997, expenses totaling $2.2 million and $0.7 million, respectively, were incurred relating to modifying the Company's computer systems to prepare for the Year 2000 date conversion. See "Impact of Year 2000". Expenses also increased during 1998 as a result of start-up activities relating to the sale of variable products through alternative distribution channels. The increases in 1998 were partially offset by a $2.6 million decrease in home office real estate expense due to the exchange of home office properties on March 30, 1998. See "Exchange of Home Office Properties". Changes in the amounts and timing of estimated guaranty fund assessments resulted in a related credit of $1.2 million in 1998, while the adoption of a new accounting pronouncement in 1997 resulted in an increase in guaranty fund expense of $1.6 million in 1997. Also effecting expenses in 1997 was a $1.6 million increase in the amortization of value of insurance in force due to the impact of realized gains and losses on investments.
INCOME TAXES decreased 31.2% in 1998, to $26.4 million, and 0.8% in 1997, to $38.4 million. The effective tax rate was 31.8% for 1998, 33.5% for 1997 and 32.5% for 1996. The effective tax rates were lower than the federal statutory rate of 35% due primarily to (i) a tax benefit in 1998 and 1997 associated with the payment of dividends on mandatorily redeemable preferred stock of subsidiary trust, (ii) tax-exempt interest and (iii) tax-exempt dividend income. In addition, in 1996, other permanent differences between book and taxable income primarily relating to investment transactions reduced the effective tax rate.
DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED STOCK OF SUBSIDIARY TRUST increased to $4.9 million in 1998 from $2.8 million in 1997. The underlying securities were issued on May 30, 1997. The increase in 1998 is offset by a corresponding decrease in dividends on series preferred stock.
EQUITY INCOME, NET OF RELATED INCOME TAXES, decreased 39.8% in 1998, to $1.3 million, and 52.0% in 1997, to $2.1 million. Equity income includes the Company's proportionate share of gains and losses on investments owned by the underlying partnerships and joint ventures. The level of these gains and losses is subject to fluctuation from year to year depending on the prevailing economic environment and the timing of the sale of investments held by the partnerships and joint ventures.
Income (loss) from discontinued operations totaled $0.3 million for 1998, $0.7 million for 1997 and ($1.2) million for 1996. Revenues from discontinued operations totaled $12.9 million through the date of sale in 1998, $53.2 million in 1997 and $35.7 million in 1996.
During 1997, the Company completed a comprehensive assessment of the Year 2000 issue and developed a plan to address the issue in a timely manner. The plan consists of the following four phases: (1) identification of all information technology and non-information technology systems that have time-sensitive software, (2) modification or replacement of the software/systems, (3) testing the modified or new software/systems and (4) development of a contingency plan to address any critical system that may malfunction. In addition, the Company has ongoing formal communications with all of its significant vendors to keep abreast of the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues.
The total incremental cost of the Year 2000 project (those costs which would not have been incurred had the Year 2000 issue not existed) is estimated to be $4.1 million and is being funded through operating cash flows. Year 2000 modification costs incurred and charged to expense totaled $2.4 million (including $0.2 million attributable to discontinued operations) for 1998 and $1.0 million (including $0.3 million attributable to discontinued operations) for 1997. It is anticipated the project costs to be charged to expense during 1999 will total approximately $0.7 million. The Company has also incurred internal costs associated with the Year 2000 project. These costs, which are principally payroll related expenses for information systems personnel, have not been separately accounted for and, therefore, are not available.
availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties.
- --------------- (1) Private placement securities are generally rated by the Securities Valuation Office of the NAIC. Comparisons between NAIC designations and S & P ratings are published by the NAIC. S & P has not rated some of the fixed maturity securities in the Company's portfolio.
The following table sets forth the par value, amortized cost and carrying value of the Company's mortgage and asset-backed securities at December 31, 1998, summarized by type of security.
Other liabilities increased 90.2% to $85.5 million at December 31, 1998 due primarily to an increase in payables for securities purchased and the deferral of the gain on the exchange of home office properties for Class A common stock. Liabilities of discontinued operations decreased $79.1 million as a result of the sale of Utah Insurance. At December 31, 1998, the Company had total liabilities of $2,965.9 million, a 2.5% increase from total liabilities at December 31, 1997.
Stockholders' equity decreased 3.6%, to $583.6 million at December 31, 1998 compared to $605.3 million at December 31, 1997. This decrease is principally attributable to the exchange of home office properties for Class A common stock and stock repurchases which, collectively, resulted in a $70.7 million decrease in equity. These decreases were partially offset by net income during 1998 and net unrealized appreciation of securities classified as available for sale.
For a majority of the Company's traditional insurance products, profitability is significantly affected by the spreads between interest yields on investments and rates credited on insurance liabilities. For variable products, profitability on the portion, if any, of the policyholder's account balance invested in the Company's general account is also affected by the spreads earned. The variable policyholder assumes essentially all the investment earnings risk for the portion of the account balance invested in the separate accounts.
For approximately 93% of the policy liabilities, the Company has the ability to adjust interest or dividend crediting rates in reaction to changes in portfolio yield. However, the ability to adjust these rates is limited by competitive factors. Surrender rates could increase and new sales could be negatively impacted if the crediting rates are not competitive with the rates on similar products offered by other insurance companies and financial service institutions. In addition, if market rates were to decrease substantially and stay at a low level for an extended period of time, the Company's spread could be lowered due to interest rate guarantees on many of its interest sensitive products. At December 31, 1998, interest rate guarantees on interest sensitive products ranged from 3.0% to 5.5%, with a weighted average guarantee of 3.7%.
If interest rates were to increase 10% from levels at December 31, 1998, the Company's fixed maturity securities and short-term investments, net of corresponding changes in the values of deferred policy acquisition costs, value of insurance in force acquired and unearned revenue reserves, would decrease approximately $49.3 million. This hypothetical change in value does not take into account any offsetting change in the value of insurance liabilities for investment contracts since the Company estimates such value to be the cash surrender value of the underlying contracts. If interest rates were to decrease 10% from levels at December 31, 1998, the fair value of the Company's debt, mandatorily redeemable preferred stock of subsidiary trust and preferred stock issued by Western Life would increase $3.1 million.
Equity price risk is not material to the Company due to the relatively small equity portfolio held at December 31, 1998. However, the Company does earn investment management fees (on those investments managed by the Company) and mortality and expense fee income based on the value of the Company's separate accounts. On an annualized basis, the investment management fee rates range from 0.20% to 0.45% and the mortality and expense fee rates range from 0.90% to 1.40%. As a result, revenues from these sources do fluctuate with changes in the market value of the equity, fixed maturity and other securities held by the separate accounts.
In November 1998, the Company's Board of Directors approved a $25.0 million Class A common stock repurchase plan. In connection with the plan, the Company entered into a $25.0 million short-term line of credit with a bank to fund any repurchases. The line of credit, which expires on June 30, 1999, requires the Company to maintain minimum tangible net worth and risk-based capital ratios and limits the Company's ability to incur additional indebtedness. As of December 31, 1998, no repurchases had been made under the plan and no related draws were made on the line of credit. It is anticipated that any draws on the line of credit will be repaid during 1999 with dividends from subsidiaries.
For the life insurance operations, cash outflow requirements for operations are typically met from the year's normal premium and deposit cash inflows. This has been the case for all reported years as the Life Companies' continuing operations and financing activities relating to interest sensitive products provided funds amounting to $121.5 million in 1998, $99.3 million in 1997 and $156.6 million in 1996. These funds were primarily used to increase the insurance companies' short-term and fixed maturity investment portfolios. In developing their investment strategy, the Life Companies establish a level of cash and securities which, combined with expected net cash inflows from operations, maturities of fixed maturity investments and principal payments on mortgage and asset-backed securities and mortgage loans, are believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations.
The Company has a $12.0 million line of credit with Farm Bureau Mutual in the form of a revolving demand note. Borrowings on the note, which totaled $8.6 million at December 31, 1998, are being used to acquire assets that will be leased to certain affiliates, including Farm Bureau Mutual. Interest is payable at a rate equal to the prime rate of a national bank (7.75% at December 31, 1998).
In March 1998, Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", was issued. The Company plans to adopt the SOP effective on January 1, 1999. The SOP requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company currently capitalizes external software development costs and charges internal costs, primarily payroll and related items, to expense as they are incurred. Under the SOP, these internal costs will be capitalized. The Company has not yet determined the impact of adopting this SOP.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Accounting for gains or losses resulting from changes in the values of those derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. Statement No. 133 also allows companies to transfer securities classified as held to maturity 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.
FBL FINANCIAL GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The management of FBL Financial Group, Inc. is responsible for the integrity of the financial information contained in this annual report. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles appropriate in the circumstances. Certain financial information presented depends on management's estimates and judgments regarding the ultimate outcome of transactions which are not yet complete. Management believes these estimates and judgements are fair and reasonable based upon available information.
The Audit Committee of the Board of Directors, composed solely of nonmanagement directors, meets periodically with management, internal auditors and Ernst & Young LLP to review internal accounting control, audit activities, auditor independence and financial reporting matters. The internal auditors and Ernst & Young LLP have free access to the Audit Committee, with and without the presence of management, to discuss the adequacy of internal control and to review the quality of financial reporting. The Audit Committee is also responsible for making recommendations to the Board of Directors concerning the selection of independent auditors.
FBL Financial Group, Inc. (the Company) operates predominantly in the life insurance industry through its principal subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life), Western Farm Bureau Life Insurance Company (Western Life) and EquiTrust Life Insurance Company (EquiTrust) (collectively, the Life Companies). The Company currently markets individual life insurance policies and annuity contracts to Farm Bureau members and other individuals and businesses in 14 midwestern and western states. Variable insurance and annuity contracts are also marketed in other states through alliances with other insurance companies and a regional broker/dealer. Several subsidiaries support various functional areas of the Life Companies and other affiliates, by providing investment advisory, marketing and distribution, and leasing services.
On March 31, 1998, the Company sold its wholly-owned subsidiary, Utah Farm Bureau Insurance Company (Utah Insurance), to Farm Bureau Mutual Insurance Company (Farm Bureau Mutual), an affiliate. As a result of the sale, the Company no longer has property-casualty operations. Financial information herein has been restated to reflect the operations of Utah Insurance as discontinued. See Note 14, "Discontinued Operations."
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 as a component of accumulated other comprehensive income. The unrealized gains and losses included in accumulated other comprehensive income are reduced by a provision for deferred income taxes and adjustments to deferred policy acquisition costs, value of insurance in force acquired and unearned revenue reserve that would have been required as a charge or credit to income had such amounts been realized. Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities' expected lives. Amortization/accrual of premiums and discounts on mortgage and asset-backed securities incorporates prepayment assumptions to estimate the securities' expected lives.
Equity securities, comprised of common and non-redeemable preferred stocks, are reported at market value. The change in unrealized appreciation and depreciation of equity securities is included directly in stockholders' equity, net of any related deferred income taxes, as a component of accumulated other comprehensive income.
Mortgage loans on real estate are reported at cost adjusted for amortization of premiums and accrual of discounts. If the value of any mortgage loan is determined to be impaired (i.e., when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to its fair value, which may be based upon the present value of expected future cash flows from the loan (discounted at the loan's effective interest rate), or the fair value of the underlying collateral. The carrying value of impaired loans is reduced by the establishment of a valuation allowance, changes to which are recognized as realized gains or losses on investments. Interest income on impaired loans is recorded on a cash basis.
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Property and equipment, comprised primarily of home office properties (prior to March 30, 1998, see Note 2), furniture, equipment and capitalized software costs, are reported at cost less allowances for depreciation and amortization. Depreciation and amortization expense are computed primarily using the straight-line method over the estimated useful lives of the assets. Depreciation and amortization expense for 1998, 1997 and 1996 was $11.4 million, $11.0 million and $10.0 million, respectively.
The liability for future policy benefits for participating traditional life insurance is based on net level premium reserves, including assumptions as to interest, mortality, and other assumptions underlying the guaranteed policy cash values. Reserve interest assumptions are level and range from 2.5% to 6.0%. The average rate of assumed investment yields used in estimating gross margins was 8.03% in 1998, 8.15% in 1997 and 8.34% in 1996. Accrued dividends for participating business are established for anticipated amounts earned to date for the period through the policy's next anniversary and are provided for as a separate liability. The declaration of future dividends for participating business is at the discretion of the Board of Directors. Participating business accounted for 41% of
Interest crediting rates for interest sensitive products ranged from 4.00% to 6.50% in 1998, from 4.00% to 7.00% in 1997 and from 4.00% to 7.50% in 1996.
From time to time assessments are levied on the Company's insurance subsidiaries by guaranty associations in most states in which the subsidiaries are licensed. These assessments are to cover losses of policyholders of insolvent or rehabilitated companies. In some states, these assessments can be partially recovered through a reduction in future premium taxes. During 1997, the Company adopted Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments", which requires the accrual of such assessments. Prior to 1997, the Company recognized its obligation for guaranty fund assessments when such assessments were received and an asset was recorded for future premium tax offsets on assessments paid. The impact of adopting SOP 97-3 was not separately reported as a change in accounting principles because the impact of adoption was not material to the Company.
Other income and other expenses include revenue and expenses generated by the Company's various non-insurance subsidiaries for investment advisory, marketing and distribution, and leasing services. A portion of these activities are performed on behalf of affiliates of the Company. In addition, certain revenue generated by the Company's insurance subsidiaries have been classified as other income. During 1998, 1997 and 1996, revenues of the insurance subsidiaries included as other income aggregated $1.4 million, $4.0 million and $2.9 million, respectively. Lease income from leases with affiliates totaled $5.8 million, $3.0 million and $2.4 million for 1998, 1997 and 1996, respectively. Investment advisory fee income from affiliates totaled $1.3 million, $1.2 million and $0.9 million for 1998, 1997 and 1996, respectively.
Other comprehensive income excludes net investment gains (losses) included in net income which merely represent transfers from unrealized to realized gains and losses. These amounts totaled ($0.9) million in 1998, $26.5 million in 1997 and $38.1 million in 1996. Such amounts, which have been measured through the date of sale, are net of income taxes and adjustments to deferred policy acquisition costs, value of insurance inforce acquired and unearned revenue reserve totaling $0.5 million in 1998, ($15.3) million in 1997 and ($19.5) million in 1996.
At December 31, 1998, the Company adopted Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information." Statement No. 131 establishes standards for reporting information about operating segments, products and markets. Generally, Statement No. 131 requires financial information to be reported on the basis on which it is used internally for evaluating segment performance and deciding how to allocate resources to segments. Adoption of Statement No. 131 increased the number of the Company's reportable segments. See Note 15, "Segment Information."
In March 1998, SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", was issued. The Company plans to adopt the SOP effective on January 1, 1999. The SOP requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company currently capitalizes external software development costs and charges internal costs, primarily payroll and related items, to expense as they are incurred. Under the SOP, these internal costs will be capitalized. The Company has not yet determined the impact of adopting this SOP.
On April 29, 1996, the Company designated 5,000,000 shares of its preferred stock as Series A preferred stock and on July 18, 1996, such shares were issued in exchange for 5,000,000 shares of Class A common stock. The Series A preferred stock paid quarterly cash dividends of $0.25 per share and had voting rights identical to that of Class A common stock. As described below, the Series A preferred stock was redeemed during 1997.
On May 30, 1997, FBL Financial Group Capital Trust (the Trust), a consolidated wholly-owned subsidiary of the Company, issued $97.0 million of 5% Preferred Securities to the Company's majority stockholder, the Iowa Farm Bureau Federation. In connection with the Trust's issuance of the 5% Preferred Securities and the related purchase by the Company of all of the Trust's common securities, the Company issued to the Trust $100.0 million principal amount of its 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the Notes). The sole assets of the Trust are and will be the Notes and any interest accrued thereon. The interest payment dates on the Notes correspond to the distribution dates on the 5% Preferred Securities. The 5% Preferred Securities, which have a liquidation value of $1,000.00 per share plus accrued and unpaid distributions, mature simultaneously with the Notes. As of December 31, 1998, 97,000 shares of 5% Preferred Securities were outstanding, all of which are unconditionally guaranteed by the Company.
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 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. 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. A gain on the transaction of approximately $21.0 million was deferred by the Company and is being amortized over the term of the operating lease. The transaction was accounted for as a noncash financing activity for purposes of the 1998 statement of cash flows.
Holders of the Class A common stock and Series preferred stock, together as a group, and Class B common stock vote as separate classes on all issues. Only holders of the Class A common stock and Series preferred stock vote for the election of Class A Directors (three to five) and only holders of the Class B common stock vote for the election of Class B Directors (ten to twenty). Voting for the Directors is noncumulative. In addition, various ownership aspects of the Company's Class B common stock are governed by a Class B Shareholder Agreement which results in the Iowa Farm Bureau Federation, which owns 65.3% of the Company's voting stock as of December 31, 1998, 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 carrying value and estimated market value of the Company's portfolio of fixed maturity securities at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Net unrealized investment gains on equity securities and fixed maturity securities classified as available for sale were comprised of the following:
Realized losses totaling $2.8 million in 1998 and $0.5 million in 1996 were incurred as a result of writedowns for other than temporary impairment of fixed maturity securities. No such writedowns were recorded during 1997.
Income taxes (credits) during 1998, 1997 and 1996 include a provision of ($1.7) million, $14.3 million and $18.5 million, respectively, for the tax effect of realized gains.
In December 1997, the Company acquired a 35% interest in an unaffiliated life insurance company for $25.0 million. The excess (approximately $5.9 million) of the carrying amount of the investment, which is classified as securities and indebtedness of related parties on the consolidated balance sheets, over the amount of underlying equity in net assets on the acquisition date is attributable to goodwill and is being amortized over a 20 year period. The investment is being accounted for using the equity method. The insurance company underwrites and markets life insurance and annuity products throughout the United States.
Also in December 1997, the Company acquired all of the common stock of EquiTrust Life Insurance Company for $9.7 million. EquiTrust Life Insurance Company is a life insurance company licensed in 38 states. Goodwill totaling $1.5 million was recorded in connection with the acquisition and is being amortized over 20 years.
In February 1996, an equity investee of the Company completed an initial public offering which resulted in an increase of $4.9 million, net of $2.6 million in taxes, in the Company's share of the investee's stockholders' equity. This increase was credited directly to common stock, allocated proportionately among Class A common stock and Class B common stock based on shares outstanding. Subsequent to the public offering, the Company reclassified the investment to equity securities. The Company has sold its holdings in this investment and realized gains of $2.4 million, $24.3 million and $50.4 during 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company had committed to provide additional funding for mortgage loans on real estate aggregating $11.9 million. These commitments arose in the normal course of business at terms which are comparable to similar investments.
The carrying value of investments which have been non-income producing for the twelve months preceding December 31, 1998, include: fixed maturities - $3.7 million; mortgage loans on real estate - $1.0 million; and other long-term investments - $1.6 million.
No investment in any person or its affiliates (other than bonds issued by agencies of the United States Government) exceeded ten percent of stockholders' equity at December 31, 1998.
Statement No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 also excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements and allows companies to forego the disclosures when those estimates can only be made at excessive cost. Accordingly, the aggregate fair value amounts presented herein are limited by each of these factors and do not purport to represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments.
OTHER LONG-TERM INVESTMENTS: The fair values for nontraditional debt instruments and investment deposits are estimated by discounting expected cash flows using interest rates currently being offered for similar investments. The fair values for investments held by broker-dealer subsidiaries are based on quoted market prices, where available. For holdings that are not actively traded, fair values are determined in good faith by the Board of Directors of the subsidiary holding the security.
OTHER PREFERRED STOCK: The carrying amount reported in the consolidated balance sheets, which equals redemption value, approximates fair value.
An analysis of the value of insurance in force acquired for 1998, 1997 and 1996 is as follows:
Net amortization of the value of insurance in force acquired, based on expected future gross profits/margins, for the next five years and thereafter is expected to be as follows: 1999 - $1.0 million; 2000 - $1.1 million; 2001 - $1.1 million; 2002 - $1.0 million; 2003 - $1.0 million; and thereafter, through 2023 - $10.6 million.
In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers. Reinsurance coverages for life insurance vary according to the age and risk classification of the insured with retention limits ranging up to $0.5 million of coverage per individual life. The Company does not use financial or surplus relief reinsurance. Life insurance in force ceded on a consolidated basis totaled $1,298.7 million (6.6% of total life insurance in force) at December 31, 1998 and $1,248.6 million (6.8% of total life insurance in force) at December 31, 1997.
No allowance for uncollectible amounts has been established against the Company's asset for reinsurance recoverable since none of the receivables are deemed to be uncollectible. Insurance premiums and product charges have been reduced by $5.9 million, $6.0 million and $5.7 million and insurance benefits have been reduced by $2.2 million, $6.6 million and $5.1 million during 1998, 1997 and 1996, respectively, as a result of cession agreements.
During 1998, the Company entered into a $12.0 million line of credit with Farm Bureau Mutual in the form of a revolving demand note. Borrowings on the note, which totaled $8.6 million at December 31, 1998, are being used to acquire assets that are leased to certain affiliates, including Farm Bureau Mutual. Interest is payable at a rate equal to the prime rate of a national bank (7.75% at December 31, 1998). Rental income from the related leases includes a provision for interest on the carrying value of the assets.
Also during 1998, the Company entered into a $25.0 million short-term line of credit. The line of credit expires on June 30, 1999 and requires the Company to maintain minimum tangible net worth and risk-based capital ratios. The agreement also limits the Company's ability to incur additional indebtedness. As of December 31, 1998, the Company had no outstanding debt under this credit arrangement.
The Company's short-term debt consists of a lease-backed note payable with an outstanding balance of $24.5 million at December 31, 1998 and 1997. Interest on the note is charged at a variable rate equal to LIBOR plus 0.31% (5.37% at December 31, 1998) with a maximum rate of 14.0% per annum. The note is due August 1999, and is secured by rentals to be received under certain operating leases with members of the consolidated group and other affiliates.
The Company participates with several affiliates in a 401(k) defined contribution plan which covers substantially all employees. Beginning in 1998, the Company contributes FBL Financial Group, Inc. stock in amounts equal to 50 percent of employee contributions up to four percent of the annual salary contributed by the employees. Costs are allocated among the affiliates on a basis of time incurred by the respective employees for each employer. Related expense totaled $0.3 million for 1998.
Information relating to stock options during 1998, 1997 and 1996 is as follows:
Information regarding stock options outstanding at December 31, 1998 is as follows:
At December 31, 1998 and 1997, shares of Class A common stock available for grant as additional awards under the Plan totaled 1,658,763 and 1,759,750, respectively.
Pro forma information regarding net income and earnings per common share is required by Statement No. 123, and has been determined as if the Company had accounted for its stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996:
The ability of Farm Bureau Life and Western Life to pay dividends to the parent company is restricted because prior approval of insurance regulatory authorities is required for payment of dividends to the stockholder which exceed an annual limitation. During 1999, Farm Bureau Life and Western Life could pay dividends to the parent company of approximately $41.0 million and $14.6 million, respectively, without prior approval of insurance regulatory authorities.
The financial statements of the Company's insurance subsidiaries included herein differ from related statutory-basis financial statements principally as follows: (a) the bond portfolio is segregated into held-for-investment (carried at amortized cost) and available-for-sale (carried at fair value) classifications rather than generally being carried at amortized cost; (b) acquisition costs of acquiring new business are deferred and amortized over the life of the policies rather than charged to operations as incurred; (c) future policy benefit reserves for participating traditional life insurance products are based on net level premium methods and guaranteed cash value assumptions which may differ from statutory reserves; (d) future policy benefit reserves on certain interest sensitive products are based on full account values, rather than discounting methodologies utilizing statutory interest rates; (e) deferred income taxes are provided for the difference between the financial statement and income tax bases of assets and liabilities; (f) net realized gains or losses attributed to changes in the level of market interest rates are recognized as gains or losses in the statements of income when the sale is completed rather than deferred and amortized over the remaining life of the fixed maturity security or mortgage loan; (g) declines in the estimated realizable value of investments are charged to the statements of income when such declines are judged to be other than temporary rather than through the establishment of a formula-determined statutory investment reserve (carried as a liability), changes in which are charged directly to surplus; (h) agents' balances and certain other assets designated as "non-admitted assets" for statutory purposes are reported as assets rather than being charged to surplus; (i) revenues for interest sensitive and variable products consist of policy charges for the cost of insurance, policy administration charges, amortization of policy initiation fees and surrender charges assessed rather than premiums received; (j) pension income or expense is recognized in accordance with Statement No. 87, "Employers' Accounting for Pensions" rather than in accordance
with rules and regulations permitted by the Employee Retirement Income Security Act of 1974; (k) the financial statements of subsidiaries are consolidated with those of the insurance subsidiary; and (l) assets and liabilities are restated to fair values when a change in ownership occurs that is accounted for as a purchase, with provisions for goodwill and other intangible assets, rather than continuing to be presented at historical cost.
Net income of the life insurance subsidiaries, as determined in accordance with statutory accounting practices, was $52.5 million, $85.3 million and $83.0 million for 1998, 1997 and 1996, respectively. Statutory net gain from operations for the life insurance subsidiaries, which excludes realized gains and losses, totaled $56.0 million, $46.9 and $43.3 million for 1998, 1997 and 1996, respectively. Statutory capital and surplus, after appropriate elimination of intercompany accounts, totaled $376.9 million at December 31, 1998 and $360.8 million at December 31, 1997.
The Company shares certain office facilities and services with the Iowa Farm Bureau Federation and its affiliated companies. These expenses are allocated by the Company on the basis of cost and time studies that are updated annually and consist primarily of salaries and related expenses, travel, and other operating costs.
The Company has marketing agreements with the property-casualty companies operating within its marketing territory, including Farm Bureau Mutual and other affiliates. Under the marketing agreements, the property-casualty companies are responsible for development and management of the Company's agency force for a fee equal to a percentage of commissions on first year life insurance premiums and annuity deposits. During 1998, 1997 and 1996, the Company paid $4.5 million, $3.9 million and $3.6 million, respectively, to the property-casualty companies under these arrangements.
The Company is licensed by the Iowa Farm Bureau Federation to use the "Farm Bureau" and "FB" designations in Iowa. In connection with this license, royalties of $0.7 million, $0.5 million and $0.4 million were paid to the Iowa Farm Bureau Federation for 1998, 1997 and 1996, respectively. The Company has similar arrangements with Farm Bureau organizations in other states in its market territory. Total royalties paid to Farm Bureau organizations other than the Iowa Farm Bureau Federation for 1998, 1997 and 1996 were $1.0 million, $1.1 million and $0.8 million, respectively.
On March 31, 1998, the Company sold its wholly-owned subsidiary, Utah Insurance, to Farm Bureau Mutual. The Company recorded a gain on the sale of $1.0 million, consisting of $0.2 million on the transaction date and $0.8 million accrued in connection with an earn-out provision included in the underlying sales agreement. The gain is net of an income tax benefit of $0.5 million resulting from the reversal of cumulative temporary differences between the book and income tax bases of Utah Insurance's assets and liabilities.
The Company may earn additional consideration during each of the four years in the period ended December 31, 2002 in accordance with the earn-out provision. Under the earn-out arrangement, the Company and Farm Bureau Mutual share equally in the dollar amount by which the incurred losses on Utah Insurance's direct business, net of reinsurance ceded, is less than the incurred losses assumed in the valuation model used to derive the initial acquisition price. The earn-out calculation is performed and any settlement (subject to a maximum of $2.0 million per year) is made on a calendar year basis. The Company has not accrued any contingent consideration for the four year period ending December 31, 2002 as such amounts, if any, cannot be reasonably estimated as of December 31, 1998. Receipts as a result of the earn-out provision are recorded as an adjustment to the gain on the disposal of the discontinued segment.
SEGMENT SOURCE OF REVENUES Investment advisory........... Fee income from the management of investments Marketing and distribution.... Commissions and distribution fee income from the sale of mutual funds and insurance products not issued by the Company Leasing....................... Income from operating leases Corporate..................... Fees from management and administrative services
As noted above, the Company also had a property-casualty insurance segment prior to March 31, 1998. Revenues from this segment were derived from the sale of property and casualty insurance policies. See Note 14, "Discontinued Operations", for additional information regarding this segment.
The Company's investment in equity method investees and the related equity income are attributable to the life insurance segment. The exchange of the Company's home office properties for Class A common stock described in Note 2 is attributable to the life insurance segment.