10-K 1 fbl10k2012.htm 10-K FBL 10K 2012

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark one)
[X]
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2012
or
[ ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from____________________ to____________________
Commission File Number: 1-11917
(Exact name of registrant as specified in its charter)
Iowa
 
42-1411715
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
5400 University Avenue, West Des Moines, Iowa
 
50266-5997
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(515) 225-5400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Class A common stock, without par value
 
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of June 30, 2012, the aggregate market value of the registrant's Class A and B Common Stock held by non-affiliates of the registrant was $296,608,898 based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date:
 Title of each class
 
Outstanding at February 12, 2013
Class A Common Stock, without par value
 
24,260,022
Class B Common Stock, without par value
 
1,141,291
DOCUMENTS INCORPORATED BY REFERENCE
Document
 
Parts Into Which Incorporated
Proxy statement for annual shareholders meeting on May 16, 2013
 
Part III
















(This page has been left blank intentionally.)



FBL FINANCIAL GROUP, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2012
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
















(This page has been left blank intentionally.)




Cautionary Statement Regarding Forward Looking Information

This Form 10-K includes 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. A variety of factors could cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our business include but are not limited to the following.

Difficult conditions in the financial markets and the economy may materially adversely affect our business and results of operations.
Adverse financial market conditions may significantly affect our liquidity, access to capital and cost of capital.
Our valuation of fixed maturity securities may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition.
Our investment portfolio is subject to credit quality risks which may diminish the value of our invested assets and affect our profitability and reported book value per share.
Changing interest rates, market volatility and general economic conditions affect the risks and the returns on both our products and our investment portfolio.
We face competition from companies having greater financial resources, more advanced technology systems, broader arrays of products, higher ratings and stronger financial performance, which may impair our ability to retain existing customers, attract new customers and maintain our profitability and financial strength.
As a holding company, we depend on our subsidiaries for funds to meet our obligations, but our life insurance subsidiaries' ability to make distributions to us is limited by law, and could be affected by minimum risk-based capital requirements.
A significant ratings downgrade may have a material adverse effect on our business.
All segments of our business are highly regulated and these regulations or changes in them could affect our profitability.
Inaccuracies in assumptions regarding future persistency, mortality and interest rates used in pricing our products and calculating reserve amounts and deferred acquisition costs could have a material adverse impact on our financial results.
We may be required to accelerate the amortization of deferred acquisition costs, which could adversely affect our results of operations or financial condition.
Our earnings are influenced by our claims experience, which is difficult to estimate. If our future claims experience does not match our pricing assumptions or past results, our earnings could be materially adversely affected.
Our reinsurance program involves risks because we remain liable with respect to the liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them.
Our business is highly dependent on our relationships with Farm Bureau organizations and could be adversely affected if those relationships became impaired.
Our relationship with Farm Bureau organizations could result in conflicts of interests.
Changes in federal tax laws may affect sales of our products and profitability.
Our ability to maintain competitive costs is dependent upon the level of new sales and persistency of existing business.
If we are unable to attract and retain agents, sales of our products and services may be reduced.
Attracting and retaining employees who are key to our business is critical to our growth and success.
Success of our business depends in part on effective information technology systems and on continuing to develop and implement improvements.
We face risks relating to litigation, including the costs of such litigation, management distraction and the potential for damage awards, which may adversely impact our business.

See Part 1A, Risk Factors, for additional information.


1


PART I

ITEM 1. BUSINESS

General

FBL Financial Group, Inc. (we or the Company) sells individual life insurance and annuity products principally under the consumer brand name Farm Bureau Financial Services. This brand identity is represented by the distribution channel of our subsidiary Farm Bureau Life Insurance Company (Farm Bureau Life). As of December 31, 2012, this distribution channel consisted of 1,853 exclusive agents and agency managers. These agents and agency managers sell our products in the Midwestern and Western sections of the United States.

FBL Financial Group, Inc. was incorporated in Iowa in October 1993. Its life insurance subsidiary, Farm Bureau Life, began operations in 1945. Greenfields Life Insurance Company, a subsidiary of Farm Bureau Life, is being launched in early 2013 to offer life and annuity products in the state of Colorado. Several other subsidiaries support various functional areas and affiliates by providing investment advisory and marketing and distribution services. In addition, we manage all aspects of two Farm Bureau affiliated property-casualty insurance companies (Farm Bureau Property & Casualty Insurance Company and Western Agricultural Insurance Company) which operate predominately in eight states in the Midwest and West.

FBL Financial Group, Inc. Business and Distribution Channels

FBL Financial Group, Inc.
COMPANY
Farm Bureau Life
Insurance Company
 
Greenfields Life Insurance Company
 
Farm Bureau Property & Casualty Insurance Company and Western Agricultural
Insurance Company
RELATIONSHIP
Wholly-owned subsidiary
 
Subsidiary of Farm Bureau Life
 
Managed by FBL Financial Group. Underwriting results do not impact FBL Financial Group's results
BRAND
 
 
DISTRIBUTION
1,853 exclusive
Farm Bureau agents
and agency managers
 
New company; Distribution being developed
 
1,166 exclusive Farm Bureau agents and agency managers (included under the
1,853 Farm Bureau Life
agents)
PRODUCTS
A comprehensive line of life insurance, annuity and investment products
 
A comprehensive line of life insurance, annuity and investment products
 
A full line of personal and commercial property-casualty insurance products
TERRITORY
14 Midwestern and
 Western states
 
Colorado
 
Arizona, Iowa, Kansas, Minnesota, Nebraska, New Mexico, South Dakota and Utah, and other states for nonstandard auto insurance

Investor information, including electronic versions of periodic reports filed on Forms 10-K, 10-Q and 8-K, and proxy material, are available free of charge through the Investor Relations section of our website at www.fblfinancial.com. These documents are posted to our website immediately after they are filed. Also available on our website are many corporate governance documents including a code of ethics for the Chief Executive Officer and senior financial officers, committee charters, corporate governance guidelines, director profiles and more. Product information may be found on our consumer website, www.fbfs.com.


2


Business Strategy

Our core business strategies are defined by our target market, which is served by our principal life insurance subsidiary, Farm Bureau Life.

Our 1,853 Farm Bureau Life agents are multi-line agents who sell both property-casualty insurance products and life insurance and investment products under the Farm Bureau name. Having multi-line agents enhances our ability to develop a more comprehensive relationship with our customers and increases our ability to cross sell our life insurance and annuity products to the pool of Farm Bureau property-casualty customers.

The Farm Bureau business and distribution channel is our foundation and we are defined by our service to this niche marketplace. We capitalize on the Farm Bureau brand to grow our business and build upon our agricultural and rural market leadership. We focus on needs-based selling and have a broad portfolio of life insurance and annuity products so that we have products available to satisfy the needs of our agents and customers.

Because of their multi-line nature, our Farm Bureau Life agents focus on cross selling life insurance products to Farm Bureau members who already own a property-casualty policy issued by Farm Bureau affiliated property-casualty companies. For example, in the eight-state region where we manage the affiliated property-casualty insurance companies and related field force (Arizona, Iowa, Kansas, Minnesota, Nebraska, New Mexico, South Dakota and Utah), 23% of our property-casualty policyholders also own a Farm Bureau Life annuity or life product. We are considered among the best-in-industry in cross-sell rates. This percentage is and has historically been higher than the industry average for multi-line exclusive agents, which is 12% according to the most recent research by Life Insurance and Market Research Association (LIMRA). We believe there is further opportunity for growth from cross-selling as 71% of the Farm Bureau members in the eight-state region have a Farm Bureau property-casualty insurance product, while only 21% of Farm Bureau members in the eight-state region have a life insurance product with us.

We provide our agents with sales materials, the necessary training and a high level of sales support. In addition, throughout our marketing territory, certain agents are life and investment specialists who work as a resource to help their fellow agents with cross selling techniques and client needs analysis.

Our sales model is designed so that our agents act like entrepreneurial business owners with a retail financial services business. Under this model our agents have sales and service associates who assist them and provide a variety of support for insurance sales and clients.

While we underwrite the majority of the products available for sale by the Farm Bureau agents, we broker products sold by other carriers when we do not have the expertise, ratings or scale to compete efficiently in the marketplace. Examples of brokered products include variable products, long-term care insurance, health insurance and last survivor life policies. We earn fees from the sale of brokered products, a portion of which is passed on to the agents as commissions for the underlying sales.

Farm Bureau Life's growth has been augmented by our long and successful history of being a consolidator among Farm Bureau affiliated insurance companies. This has allowed us to grow to an operation covering 14 states in the Midwest and West. While we believe further consolidation makes sense, this is a long-term strategy. By focusing on maintaining solid relationships with the leaders of these companies and the Farm Bureau organizations, we are prepared to react when opportunities arise.

Marketing and Distribution

Market Area

Sales through our distribution channel are currently conducted in 14 states which we characterize as follows: multi-line states (we own the Farm Bureau affiliated life company and manage the Farm Bureau affiliated property-casualty companies) - Arizona, Iowa, Kansas, Minnesota, Nebraska, New Mexico, South Dakota and Utah; and life partner states (we own the Farm Bureau affiliated life company and non-owned/non-managed Farm Bureau affiliated property-casualty companies manage the exclusive multi-line agents) - Idaho, Montana, North Dakota, Oklahoma, Wisconsin and Wyoming.

Our target market is Farm Bureau members and "Middle America" in our 14-state territory. We traditionally have been very strong in rural and small town markets and also have a presence in many small and mid-metro markets. This target market represents a relatively financially conservative and stable customer base. The financial needs of our target market tend to focus on security, insurance needs and retirement savings.

3


Affiliation with Farm Bureau

Many of our customers are members of Farm Bureau organizations affiliated with the American Farm Bureau Federation (American Farm Bureau). The American Farm Bureau is the nation's largest grass roots farm and ranch organization and has a current membership of 6.2 million member families. In order to market insurance products in a given state using the "Farm Bureau" and "FB" designations, related trademarks and service marks, a company must have an agreement with the state's Farm Bureau organization. Generally, these marketing rights have only been granted to companies owned by or closely affiliated with Farm Bureau organizations. For each of the states in our Farm Bureau marketing territory, we have the right to use the "Farm Bureau" name and "FB" logo for marketing life insurance and investment products.

All of the state Farm Bureau organizations in our 14-state marketing area are associated with the American Farm Bureau. The primary goal of the American Farm Bureau is to be the unified national voice of agriculture, working through its grassroots organization to enhance and strengthen the lives of rural Americans and to build strong, prosperous agricultural communities. There are currently Farm Bureau organizations in all 50 states and Puerto Rico, each with their own distinctive mission and goals. Within each state, Farm Bureau is organized at the county level. Farm Bureau programs include policy development, government relations activities, leadership development and training, communications, market education classes, commodity conferences and young farmer activities. Member services provided by Farm Bureau vary by state but often include programs such as risk management, alternative energy development and guidance on enhancing profitability. Other benefits of membership include newspaper and magazine subscriptions, as well as savings in areas such as health care, entertainment and automobile rebates. In addition, members have access to theft and arson rewards, accidental death insurance, banking services, credit card programs, computerized farm accounting services, electronic information networks, feeder cattle procurement services, health care insurance, property-casualty insurance and financial services.

The American Farm Bureau may terminate our right to use the "Farm Bureau" and "FB" designations in our states (i) in the event of a material breach of the trademark license that we do not cure within 60 days, (ii) immediately in the event of termination by the American Farm Bureau of the state Farm Bureau's membership in the American Farm Bureau or (iii) in the event of a material breach of the state Farm Bureau organization's membership agreement with the American Farm Bureau, including by reason of the failure of the state Farm Bureau to cause us to adhere to the American Farm Bureau's policies.

We have royalty agreements with each state Farm Bureau organization in our Farm Bureau marketing territory giving us the right to use the Farm Bureau and FB designations in that particular state. Each state Farm Bureau organization in our Farm Bureau territory could terminate our right to use the Farm Bureau designations in that particular state without cause at the conclusion of the royalty agreements. The royalties paid to a particular state Farm Bureau organization are based on the sale of our products in the respective state. For 2012, royalty expense totaled approximately $2.0 million.

Our relationship with Farm Bureau provides a number of advantages. Farm Bureau organizations in our marketing territory tend to be well known and long established, have active memberships and provide a number of member benefits other than financial services. The strength of these organizations provides enhanced prestige and brand awareness for our products and increased access to Farm Bureau members, which results in a competitive advantage for us.

Our life insurance and investment products are available for sale to both members and non-members. Property-casualty products sold by the property-casualty insurance companies affiliated with Farm Bureau are available for sale to Farm Bureau members. Annual Farm Bureau memberships in our marketing territory average $60 and are available to individuals, families, partnerships or corporations.

We have service agreements with all of the Farm Bureau-affiliated property-casualty companies in our marketing area, pursuant to which the property-casualty companies provide certain services, which include recruiting and training the shared agency force that sells both property-casualty products for that company and life products for us. The service agreements have expiration dates through December 31, 2021. In 2012, we paid $10.0 million for the services provided under these agreements.

Our Advisory Committee, which consists of executives of the Farm Bureau property-casualty insurance companies in our marketing territory, assists us in our relationships with the property-casualty organizations and the Farm Bureau organization leaders in their respective states. The Advisory Committee meets on a regular basis to coordinate efforts and issues involving the agency force and other matters. The Advisory Committee is an important contributor to our success in marketing products through our Farm Bureau distribution system.


4


Royalty and property-casualty agreements vary in term and expiration date as shown below.

Royalty and Property-Casualty Service Agreements by State
 
 
State
Property-Casualty Service Agreement Expiration Date
 
Royalty Agreement
Expiration Date
 
Percent of
Farm Bureau Life 2012
First Year
Premiums Collected
Iowa
December 31, 2015
 
December 31, 2033
 
31.1
%
Kansas
December 31, 2015
 
December 31, 2033
 
20.2

Wyoming
December 31, 2021
 
December 31, 2021
 
8.6

Nebraska
December 31, 2015
 
December 31, 2033
 
7.6

Oklahoma
December 31, 2022
 
December 31, 2022
 
5.3

Minnesota
December 31, 2015
 
December 31, 2033
 
5.0

Utah
December 31, 2015
 
December 31, 2033
 
4.5

Idaho
December 31, 2021
 
December 31, 2021
 
3.5

Montana
December 31, 2021
 
December 31, 2021
 
3.4

South Dakota
December 31, 2015
 
December 31, 2033
 
2.5

Arizona
December 31, 2015
 
December 31, 2033
 
2.5

New Mexico
December 31, 2015
 
December 31, 2033
 
2.5

Wisconsin
December 31, 2020
 
December 31, 2020
 
2.2

North Dakota
December 31, 2021
 
December 31, 2021
 
1.1

 
 
 
 
 
100.0
%


Agency Force

Our life insurance and annuity products are currently marketed throughout Farm Bureau Life's 14-state marketing territory by an exclusive Farm Bureau agency force. We have a written contract with each member of our agency force. The contracts cover a number of topics including privacy, compensation payments and reserving our ownership of customer lists.

Sales activities of our agents focus on personal contact and on cross selling the multiple lines of products available through Farm Bureau affiliated companies. The Farm Bureau name recognition and access to Farm Bureau membership leads to additional customers, cross selling of additional insurance products and increased retention.

Our Farm Bureau Life agents are independent contractors and exclusive agents. In the multi-line states where we manage the Farm Bureau affiliated property-casualty companies, our agents are supervised by agency managers employed by the property-casualty companies which are under our direction. There are 1,166 agents and managers in our multi-line states. These agents market a full range of our life insurance and annuity products. They also market products for the property-casualty companies that we manage.

In our life partner states, our life insurance and annuity products are marketed by agents that we share with the property-casualty company affiliated with the Farm Bureau organization in that state. There are 687 agents and managers in our life partner states. These agents market our life and annuity products and market the property-casualty products of that state's affiliated property-casualty companies. Agents, as well as agency managers, are independent contractors.

We are responsible for product and sales training for all lines of business in our multi-line states, and for training the agency force in life insurance products and sales methods in our life partner states.

We structure our agents' life products compensation system to encourage production and persistency. Agents receive commissions for new life insurance and annuity sales and service fees on premium payments in subsequent years. Production bonuses are paid based on the premium level of new life business written in the prior 12 months and the persistency of the business written by the agent. Persistency is a common measure used in life insurance, which measures the quality and the consistent payment of premiums, and is included in calculating the bonus to either increase or decrease (or even eliminate) the

5


agent's production bonus. We are willing to pay added incentives for higher volumes of business only as long as the business is profitable. Production bonuses allow agents to increase their compensation significantly.

The focus of agency managers is to recruit, train, supervise and retain agents to achieve high production levels of profitable business. Managers receive overwrite commissions on each agent's life insurance commissions which vary according to that agent's productivity level and persistency of business. Agent development is encouraged through a bonus structure that rewards goal attainment and agency growth. New agent development is also encouraged through financing arrangements and the annualization of commissions paid when a life policy is sold.

We have a variety of incentives and recognition programs to focus agents on production of quality life insurance business. Some recognition programs and incentives are jointly conducted with the property-casualty companies. These programs provide significant incentives for the most productive agents. Approximately 16% of our agents and agency managers qualify for our annual incentive trip. Agent recruiting, training, financing and compensation programs are designed to develop a productive agent for the long term. The four-year agency force retention rate for 2012 in our 14 states was approximately 28%. With the goal of increasing agent loyalty and retention, we are currently reviewing our agent hiring and retention practices, training programs and compensation.

Segmentation of Our Business

We analyze operations by reviewing financial information regarding our primary products that are aggregated into the Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes various support operations, corporate capital and other product lines that are not currently underwritten by the Company.

See Note 15 to our consolidated financial statements included in Item 8 and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Segment Information" included in Item 7 for additional information regarding our financial results by operating segment. Included in the following discussion of our segments are details regarding premiums. We use premiums collected to measure the productivity of our exclusive agents. Premiums collected is not a measure used in financial statements prepared according to U.S. generally accepted accounting principles (GAAP). Note 15 also includes a discussion of the most comparable GAAP financial measures and, as applicable, a reconciliation to such GAAP measures.

Annuity Segment

We sell a variety of traditional annuity products through our exclusive agency force. The Annuity segment primarily consists of fixed rate annuities and supplementary contracts (some of which involve life contingencies). Traditional annuities provide for tax-deferred savings and supplementary contracts provide for the systematic repayment of funds that accumulate interest.

Premiums Collected - Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
2012
 
2011
 
2010
 
(Dollars in thousands)
First year - individual
$
166,230

 
$
216,713

 
$
170,609

Renewal - individual
138,191

 
136,534

 
136,208

Group
11,923

 
15,909

 
9,819

Total Annuity
$
316,344

 
$
369,156

 
$
316,636


We intentionally decreased the amount of annuity premiums in 2012 by suspending sales of certain products and reducing agent commission rates on certain products where it was difficult to achieve profitability targets due to the extremely low interest rate environment. The amount of traditional annuity premiums collected is highly dependent upon the relationship between the current crediting rates on our products and the perceived security of our products compared to those of competing products. Average crediting rates on our individual deferred annuity contracts were 3.15% in 2012, 3.36% in 2011 and 3.62% in 2010, while the average three-month U.S. Treasury rate was 0.08% in 2012, 0.06% in 2011 and 0.13% in 2010. Traditional annuity premiums collected in our Farm Bureau market territory in 2012 are concentrated primarily in the following states: Iowa (32%), Kansas (29%) and Wyoming (8%).

6


Fixed Rate Annuities

We offer annuities that are marketed to individuals in anticipation of retirement. We offer traditional annuities in the form of flexible premium deferred annuities (FPDA) that allow policyholders to make contributions over a number of periods. For traditional annuity products, policyholder account balances are credited interest at rates that we determine. Approximately 36% of our existing individual traditional annuity business, based on account balances, is held in qualified retirement plans. To further encourage persistency, a surrender charge against the policyholders' account balance is imposed for early termination of the annuity contract within a specified period after its effective date. The surrender charge rate varies by product, but typically starts at 6% to 10% and decreases 1% per year for the first ten years the contract is in force. The annuitant may elect to take the proceeds of the annuity either in a single payment or in a series of payments for life, for a fixed number of years, or a combination of these options.

In addition to FPDAs, we also market single premium deferred annuities (SPDA) and single premium immediate annuity (SPIA) products which feature a single premium paid when the contract is issued. Benefit payments and the surrender charge structure on SPDA contracts are similar to other fixed rate annuities. Benefit payments on SPIAs begin immediately after the issuance of the contract. Sales of the single premium fixed rate annuities are currently suspended due to the low interest rate environment.

We invest the premiums we receive from fixed rate annuities and the investments reside in our general account. Acquisition costs are paid from the general account as they arise. The difference between the yield we earn on our investment portfolio and the interest we credit on our fixed rate annuities is known as the investment spread. The investment spread is a major driver of the profitability for all of our traditional annuity products.

Withdrawal Rates

Withdrawal rates (excluding death benefits) for our individual deferred annuities were 4.8% for 2012, 4.6% for 2011 and 5.0% for 2010. We believe the competitive environment, due to the low level of market interest rates discussed above, has favorably impacted the level of withdrawal rates in these periods.

Interest Crediting Policy

We have a rate setting committee that meets monthly, or more frequently if required, to review and establish current period interest rates based upon existing and anticipated investment opportunities. This applies to new sales and to annuity products after an initial guaranteed period. We examine earnings on assets by portfolio. We then establish rates based on each product's target interest spread and competitive market conditions at the time. Most of our annuity contracts have guaranteed minimum crediting rates. These rates range from 1.00% to 5.50%, with a weighted average guaranteed crediting rate of 2.59% at 2012 and 2.66% at December 31, 2011. The weighted average interest rate guarantees on annuity contracts issued during 2012 was 1.00%.

Index Annuities

In the fourth quarter of 2012, Farm Bureau Life began selling index annuities. With an index annuity, the policyholder may choose from a traditional fixed rate strategy or an index strategy, with the underlying index being the S&P 500®. The product requires crediting of interest and a reset of the index annually. The computation of the index credit is based upon either a point-to-point calculation (i.e., the gain in the index from the beginning of the contract year to the next reset date) or a monthly averaging of the index during the period, subject to a cap. This product allows contract holders to transfer funds among the index accounts and a traditional fixed rate strategy at the end of each reset period.

The index annuity contract value is equal to the premiums paid plus interest credited to the fixed portion of the contract and index credits on the indexed portion of the contract, less partial withdrawals taken from the contract.

The minimum guaranteed contract values are equal to 87.5% of the premium collected plus interest credited at an annual rate of 1.0% compounded annually.

We purchase one-year call options on the S&P 500 to fund the index credits due to the index annuity contract holders. On the respective anniversary dates of the index annuity contracts, the index used to compute the index credits is reset, and subsequently new call options are purchased to fund the next index credit. The cost of the options is managed through the terms of the index annuities, which permit changes to caps, subject to minimum guarantees.


7


We invest index premiums and the investments reside in our general account. We then purchase call options and pay acquisition costs from the general account. With respect to that portion of the index account value allocated to an index crediting strategy, our spread is measured as the difference between the aggregate yield on the relevant portion of our invested assets, less the aggregate option costs and the costs associated with minimum guarantees. If the minimum guaranteed value of an index product exceeds the index value (computed on a cumulative basis over the life of the contract), the general account earnings are available to satisfy the minimum guarantees. If there were little or no gains in the entire series of options purchased over the life of an index annuity, we would incur expenses for credited interest over and above our option costs. In addition, if we are not successful in matching the terms of call options purchased with the terms of the index annuities, index credits could exceed call option proceeds. This would cause our spreads to tighten and reduce our profits.

Interest Crediting Rates Compared to Guarantees - Annuity Segment
 
 
 
Liabilities at
 
December 31, 2012
 
(Dollars in thousands)
Fixed rate annuities:
 
Greater than or equal to 100 basis points over guarantee
$
671,672

50 basis points to 99 basis points over guarantee
114,204

1 basis point to 49 basis points over guarantee
124,277

At guaranteed rate
1,601,908

Other annuities
13,483

Non-discretionary rate setting products
523,253

Total interest sensitive product liabilities
$
3,048,797


In Force - Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2012
 
2011
 
2010
 
(Dollars in thousands)
Number of contracts
53,757

 
53,894

 
53,428

Interest sensitive reserves
$
3,048,797

 
$
2,812,666

 
$
2,582,791

Other insurance reserves
383,340

 
378,319

 
370,114


Life Insurance Segment

We sell a variety of traditional and universal life insurance products through our exclusive agency force. The Life Insurance segment consists of whole life, term life and universal life policies. These policies provide benefits upon the death of the insured and may also allow the customer to build cash value on a tax-deferred basis.


8


Premiums Collected - Life Insurance Segment
 
 
 
 
 
 
 
For the year ended December 31,
 
2012
 
2011
 
2010
 
(Dollars in thousands)
Universal life:
 
 
 
 
 
First year
$
30,217

 
$
14,888

 
$
8,753

Renewal
51,325

 
47,311

 
43,552

     Total
81,542

 
62,199

 
52,305

Participating whole life:
 
 
 
 
 
First year
11,202

 
11,463

 
11,839

Renewal
96,738

 
96,242

 
95,591

    Total
107,940

 
107,705

 
107,430

Term life and other:
 
 
 
 
 
First year
11,242

 
11,244

 
12,834

Renewal
74,292

 
68,623

 
61,183

         Total
85,534

 
79,867

 
74,017

Total Life Insurance
275,016

 
249,771

 
233,752

Reinsurance ceded
(19,307
)
 
(20,303
)
 
(20,307
)
Total Life Insurance, net of reinsurance
$
255,709

 
$
229,468

 
$
213,445


The increases in life premiums collected in 2012 and 2011 reflect the attractiveness of enhanced universal life and term life product offerings and the strong farm and energy subsectors of the economy in our marketplace, as well as Farm Bureau Life's emphasis on life insurance product sales. Life insurance premiums collected in our market territory in 2012 are concentrated primarily in the following states: Iowa (25%), Kansas (14%) and Oklahoma (10%).

Traditional Life Insurance

We offer traditional participating whole life insurance products. Participating whole life insurance provides benefits for the life of the insured. It provides level premiums and a level death benefit and requires payments in excess of mortality charges in early years to offset increasing mortality costs in later years. Under the terms of these policies, policyholders have a right to participate in our surplus to the extent determined by the Board of Directors, generally through annual dividends. Participating business accounted for 39% of life receipts from policyholders during 2012 and represented 13% of life insurance in force at December 31, 2012.

We also market non-participating term insurance policies that provide life insurance protection for a specified period. Term insurance is mortality based and generally has no accumulation value. However, we also offer a return of premium rider, which returns a percentage of premiums after a set number of years. For a portion of our business, we may change the premium scales at any time but may not increase rates above guaranteed levels.

Universal Life Insurance

Our universal life policies provide permanent life insurance protection with a flexible or fixed premium structure which allows the customer to pre-fund future insurance costs and accumulate savings on a tax-deferred basis. Premiums received, less policy assessments for administration expenses and mortality costs, are credited to the policyholder's account balance. Interest is credited to the cash value at rates that we periodically set.

Underwriting

We follow formal underwriting standards and procedures designed to properly assess and quantify life insurance risks before issuing policies to individuals. To implement these procedures, we employ an underwriting staff of 12 underwriters who have an average of 22 years of experience in the insurance industry. Our underwriters review each applicant's written application,

9


which is prepared under the supervision of our agents, and any required medical records. We generally employ blood, oral fluid or urine testing (including HIV antibody testing) to provide additional information whenever the applicant is age 18 or older and the face amount is $100,000 or greater. Based on the results of these tests, we may adjust the mortality charge or decline coverage completely. We also have an automated process for handling term policies for ages 18 to 60 with face amounts of $20,000 to $100,000 and whole life policies for ages 18 to 80 with face amounts of $25,000 to $50,000. We use our automated underwriting guidelines to evaluate the medical history provided by the applicant and information received from three service providers. Based on the evaluation against our automated underwriting guidelines, we may adjust the mortality charge or decline coverage. Generally, tobacco use by a life insurance applicant within the preceding one-year results in a substantially higher mortality charge. In accordance with industry practice, material misrepresentation on a policy application can result in the cancellation of the policy upon the return of any premiums paid.

Interest Crediting and Participating Dividend Policy

The interest crediting policy for our life insurance products is the same as for our traditional annuity products in the Annuity segment. See "Interest Crediting Policy" under the Annuity Segment discussion. We pay dividends, credit interest and determine other nonguaranteed elements on the individual insurance policies depending on the type of product. Some elements, such as dividends, are generally declared for a year at a time. Interest rates and other nonguaranteed elements are determined based on experience as it emerges and with regard to competitive factors. Average contractual credited rates on our universal life contracts were 4.14% in 2012, 4.19% in 2011 and 4.26% in 2010. Our universal life contracts have guaranteed minimum crediting rates that range from 3.00% to 4.50%, with a weighted average guaranteed crediting rate of 3.79% at December 31, 2012 and 3.82% at December 31, 2011.
Interest Crediting Rates of Interest Sensitive Life Products Compared to Guarantees - Life Insurance Segment
 
 
 
Liabilities at
 
December 31, 2012
 
(Dollars in thousands)
Discretionary rate setting products with minimum guarantees:
 
Greater than or equal to 100 basis points over guarantee
$
23,577

50 basis points to 99 basis points over guarantee
214,861

1 basis point to 49 basis points over guarantee
34,169

At guaranteed rate
392,692

Non-discretionary rate setting products
20,768

Total interest sensitive product liabilities
$
686,067


Policyholder dividends are currently being paid and will continue to be paid as declared on participating policies. Policyholder dividend scales are generally established annually and are based on the performance of assets supporting these policies, the mortality experience of the policies and expense levels. Other factors, such as changes in tax law, may be considered as well. Our participating business does not have minimum guaranteed dividend rates.

In Force - Life Insurance Segment
 
 
 
 
 
 
 
December 31,
 
2012
 
2011
 
2010
 
(Dollars in thousands, except face amounts in millions)
Number of policies - traditional life
355,519

 
352,274

 
349,009

Number of policies - universal life
59,833

 
58,115

 
56,835

Face amounts - traditional life
$
40,333

 
$
38,235

 
$
36,201

Face amounts - universal life
5,807

 
5,482

 
5,204

Traditional insurance reserves
1,615,088

 
1,549,886

 
1,489,858

Interest sensitive reserves
686,067

 
647,711

 
630,956



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Corporate and Other Segment

The Corporate and Other segment includes (i) advisory services for the management of investments and other companies; (ii) marketing and distribution services for the sale of mutual funds and insurance products not issued by us; (iii) leasing services, primarily with affiliates; (iv) closed blocks of variable annuity, variable life and accident and health products; (v) interest expense and (vi) investments and related investment income not specifically allocated to our product segments.

We discontinued underwriting new sales of variable products during 2010 and terminated new sales with our variable alliance partners in 2010 and 2011. We continue to receive premiums from sales that occurred prior to this change. Variable premiums collected were $73.8 million in 2012, $79.9 million in 2011 and $104.0 million in 2010. During 2010, we began selling variable products underwritten by a large well-known insurance company with variable product expertise. We earn fees from the sale of brokered products, which are reported as other income. A portion of these revenues are passed on to the agents as commissions for the underlying sales. The decision to discontinue underwriting variable products was made because we lacked the scale necessary to generate acceptable returns and be competitive in this product line over time. The existing in force business remains on our books and we continue to administer this business.

Reinsurance

We reinsure a portion of our life insurance exposure with unaffiliated insurance companies under traditional indemnity reinsurance agreements. New sales of life products are reinsured above prescribed limits and do not require the reinsurer's prior approval within certain guidelines. We do not use financial or surplus relief reinsurance. We enter into indemnity reinsurance arrangements to assist in diversifying our risks and to limit our maximum loss on risks that exceed our policy retention limits. Our maximum retention limit on an insured life ranges up to $1.5 million depending on when the policy was issued.

Reinsurance contracts do not fully discharge our obligation to pay claims on the reinsured business. As the ceding insurer, we remain responsible for policy claims to the extent the reinsurer fails to pay claims. No reinsurer of business ceded by us has failed to pay any material policy claims (either individually or in the aggregate) with respect to our ceded business. We continually evaluate the financial strength of our reinsurers and monitor concentrations of credit risk. If for any reason reinsurance coverages would need to be replaced, we believe that replacement coverages from financially responsible reinsurers would be available.

Primary Reinsurers as of December 31, 2012
Reinsurer
A.M. Best
Rating
 
Amount of
In Force Ceded
 
Reserve Credit
 
 
 
(Dollars in millions)
Swiss Re Life & Health America Inc.
A+
 
$
4,655.9

 
$
16.4

RGA Reinsurance Company
A+
 
3,631.4

 
24.3

Generali USA Life Reassurance Company
A-
 
2,442.9

 
9.8

All other (11 reinsurers)*
A- to A++
 
1,269.1

 
6.5

Total
 
 
$
11,999.3

 
$
57.0


* All other includes Scottish Re, which is not rated by A.M. Best. New business with Scottish Re was terminated in early 2007, following difficulties at that company and related ratings downgrades. As of December 31, 2012, $313.0 million of in force was ceded to Scottish Re. Scottish Re continues to meet its reinsurance obligation with us in a normal fashion.

In addition, we have an annual 100% quota share accidental death reinsurance agreement. Coverage includes all acts of terrorism including those of a nuclear, chemical or biological origin. Coverage is subject to an annual aggregate retention of $13.0 million.


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Ratings and Competition

Financial strength ratings are an important factor in establishing the competitive position of insurance companies. Insurer financial strength ratings represent the opinions of rating agencies regarding the ability of an insurance company to meet its financial obligations to policyholders and contract holders. Credit ratings represent the opinions of rating agencies regarding an issuer's ability to repay its indebtedness. Ratings are subject to revision or withdrawal at any time by the rating agency, and therefore, no assurance can be given that a rating will be maintained.

As of the date of this filing, Farm Bureau Life's A.M. Best financial strength rating is A- (Excellent) with a positive outlook and FBL Financial Group's A.M. Best issuer credit rating is bbb- with a positive outlook.

A.M. Best has 16 financial strength ratings assigned to insurance companies, which currently range from A++ (Superior) to S (Suspended). A.M. Best's long-term credit ratings range from aaa (exceptional) to d (in default). A + or - may be appended to ratings from aa to ccc to indicate relative position within a category. A rating of bbb- or above is considered investment grade. As of the date of this filing, A.M. Best has the life/health industry on a stable rating outlook.

We operate in a highly competitive industry. Insurers compete based primarily upon price, service level and the financial strength of the company. The operating results of companies in the insurance industry historically have been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings from rating agencies and other factors. We believe our ability to compete with other insurance companies is dependent upon, among other things, our ability to attract and retain agents to market our insurance products, our ability to develop competitive and profitable products and our ability to maintain good or better ratings from rating agencies. In connection with the development and sale of our products, we encounter significant competition from other insurance companies, and other financial institutions, such as banks and broker/dealers, many of which have financial resources substantially greater than ours.

Regulation

Our insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. This regulatory authority is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including rates, policy forms and capital adequacy, and is concerned primarily with the protection of policyholders rather than stockholders. Our variable insurance products, investment advisor, broker/dealer and certain licensed agents are also subject to regulation by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and state agencies.

Legislation has been introduced in Congress in the past which could result in the federal government assuming regulation of all or part of the insurance industry. In light of ongoing legislative developments, the National Association of Insurance Commissioners (NAIC) and state insurance regulators continue to reexamine existing laws and regulations, accounting policies and procedures, specifically focusing on insurance company investments and solvency issues, market conduct, risk-adjusted capital guidelines, enterprise risk management guidelines, interpretations of existing laws, the development of new laws, the implementation of non-statutory guidelines and the circumstances under which dividends may be paid. We do not believe the adoption of any of the current NAIC initiatives will have a material adverse impact on us; however, we cannot predict the form of any future proposals or regulation.

The insurance regulatory framework has been under examination, and certain state legislatures have considered or enacted laws that alter, and in many cases increase, state authority to regulate insurance companies and insurance holding company systems.

Although Dodd-Frank legislation has been in place for more than two years, many key rules have yet to be formalized, some of which might have an impact on insurers. The Federal Insurance Office (FIO) has been established to collect information about the insurance industry and its mandate covers a wide variety of topics.

The Affordable Care Act was designed to provide universal health care to everyone in the United States. While the Affordable Care Act has a substantial impact on the health care industry, it does not directly affect our life insurance and annuity business. Our exclusive agents sell health insurance, but the products are manufactured by unrelated third parties. Implementation of state-based health insurance exchanges in 2014 will likely impact our agents and their relationships with customers purchasing these health insurance products. This could impact the sale of our life insurance and annuity products to these customers. To date, the impact on our organization as an employer has been minimal.

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Employees

At December 31, 2012, we had 1,582 employees. A majority of our employees, including the executive officers, also provide services to Farm Bureau Property & Casualty Insurance Company and other affiliates pursuant to management agreements. None of our employees are members of a collective bargaining unit.

ITEM 1A. RISK FACTORS

Risk Factors

The performance of our company is subject to a variety of risks which you should review. Occurrence of these risks could materially affect our business, results of operations or financial condition, cause the trading price of our common stock to decline materially or cause our actual results to differ materially from those expected or those expressed in any forward looking statements made by or on behalf of the Company.

Difficult conditions in the financial markets and the economy may materially adversely affect our business and results of operations.
Our results of operations are materially affected by conditions in the financial markets and the economy. The U.S. economy and financial markets continue to challenge the life insurance and annuity industries. While recent economic data indicates growth, future growth could be impacted by U.S. fiscal policies to address significant national budget deficits and debt levels. In the financial markets, strong liquidity, strong corporate profitability and modest economic growth continue to support fundamental credit quality. While there were positive economic signs during 2012, the U.S. economy continues to face a number of challenges.
Our business benefits from moderate to strong economic expansion. Conversely, a lackluster economic recovery characterized by higher unemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future. We also may experience a higher incidence of claims, lapses or surrenders of policies. We cannot predict whether or when such actions may occur, or what impact such actions could have on our business, results of operations, cash flows or financial condition.
Adverse financial market conditions may significantly affect our liquidity, access to capital and cost of capital.
As described in "Item 7. Liquidity and Capital Resources" of this Form 10-K, Farm Bureau Life has historically generated positive cash flow as measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. At December 31, 2012, we believe the probability we would have to sell investments in an unrealized loss position to meet cash flow needs is remote. See "Item 7. Financial Condition" and Note 3 to our consolidated financial statements included in Item 8 for details regarding the unrealized gains and losses on our fixed maturity securities.
Capital requirements depend on factors including Farm Bureau Life's accumulated statutory earnings, statutory capital and surplus, the rate of sales growth of our products, aggregate reserve levels and the levels of credit risk and/or interest rate risk in our invested assets. In order to support these capital requirements, we may need to increase or maintain Farm Bureau Life's statutory capital and surplus through additional financings, which could include debt, equity or other transactions.
Adverse capital market conditions may affect the availability and cost of borrowed funds and could impact our ability to refinance existing borrowings, thereby ultimately impacting our profitability and ability to support or grow our businesses. Without sufficient capital, we could be forced to curtail certain of our operations, and our business could suffer. Actions we might take to access financing may in turn cause rating agencies to reevaluate our ratings.
We manage our capital level to be consistent with statutory and rating agency requirements. As of December 31, 2012, we estimate that Farm Bureau Life has sufficient capital to meet our rating objectives. However, this capital may not be sufficient if significant future losses are incurred and access to additional capital is limited.


13


Our valuation of fixed maturity securities may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition.
During periods of market disruption, it may be difficult to value certain securities if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the financial environment or market conditions.
Certain market sectors may become dislocated following periods of volatile and illiquid market conditions, as has occurred over the past several years, increasing the difficulty in valuing certain instruments, as trading has been less frequent and/or market data less observable. As a result, certain valuations require greater estimation and judgment as well as more complex valuation methods. These values may not ultimately be realizable in a market transaction, and such values may change rapidly as market conditions change and valuation assumptions are modified.
The decision on whether to record an other-than-temporary impairment is determined in part by our assessment of the financial condition and prospects of a particular issuer, projections of future cash flows and recoverability of the particular security as well as an evaluation of our intent to sell and whether it is more likely than not that we would be required to sell prior to recovery. Our conclusions regarding the recoverability of a particular security's fair value may ultimately prove to be incorrect as facts and circumstances change.
Our investment portfolio is subject to credit quality risks which may diminish the value of our invested assets and affect our profitability and reported book value per share.

We are subject to the risk that the issuers of fixed maturity securities and other debt securities in our portfolio, and borrowers on our commercial mortgages, will default on principal and interest payments, particularly in the event of a major downturn in economic activity. As of December 31, 2012, we held $6.3 billion of fixed income securities, $0.3 billion of which represented below-investment grade holdings. Of these below-investment grade holdings, 93.3% were acquired as investment grade holdings but, as of December 31, 2012, had been downgraded to below investment grade. An increase in defaults on our fixed maturity securities and commercial mortgage loan portfolios could harm our financial strength and reduce our profitability.

The concentration of our investment portfolios in any particular industry, group of related industries or geographic sector could have an adverse effect on our investment portfolios and, consequently, on our results of operations and financial position. As of December 31, 2012, we held $0.3 billion of fixed income securities in European countries, representing 5% of our investment portfolio. Our largest European exposures are in the United Kingdom and the Netherlands, with 48% and 20% of the balance, respectively.

Changing interest rates, market volatility and general economic conditions affect the risks and the returns on both our products and our investment portfolio.
The fair value of our investments and our investment performance, including yields and realization of gains or losses, may vary depending on economic and market conditions. Such conditions include the shape of the yield curve, level of interest rates and recognized equity and bond indices. Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can materially affect the profitability of our products, the fair value of our investments and the reported value of stockholders' equity.
A key component of our financial results is the investment spread. A narrowing of investment spreads would adversely affect operating results. Although we have the right to adjust interest crediting rates on a substantial portion of our business in force, changes to crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market environments. Our ability to lower crediting rates is subject to minimum crediting rates filed with and approved by state regulators. In addition, competition and other factors, including the potential for increases in surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at levels necessary to avoid the narrowing of spreads under certain market conditions.
See "Item 7. Market Risks of Financial Instruments" for further discussion of our interest rate risk exposure and information regarding our asset-liability management program to help mitigate our exposure to interest rate risk.

14


We face competition from companies having greater financial resources, more advanced technology systems, broader arrays of products, higher ratings and stronger financial performance, which may impair our ability to retain existing customers, attract new customers and maintain our profitability and financial strength.
See "Item 1. Business - Ratings and Competition" for information regarding risks relating to competition.
As a holding company, we depend on our subsidiaries for funds to meet our obligations, but our life insurance subsidiaries' ability to make distributions to us is limited by law, and could be affected by minimum risk-based capital requirements.
As a holding company, we rely on dividends from subsidiaries to assist in meeting our obligations. The ability of our subsidiaries to pay dividends or to make other cash payments in the future may materially affect our ability to satisfy our parent company payment obligations, including debt service and dividends on our common stock.
The ability of our life insurance subsidiary, Farm Bureau Life, to pay dividends to the parent company 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. The annual dividend limitation is defined under the Iowa Insurance Holding Company Act as any dividend or distribution of cash or other property whose fair value, together with that of other dividends made within the preceding 12 months, exceeds the greater of (i) 10% of adjusted policyholders' surplus as of the preceding year-end, or (ii) the statutory net gain from operations of the insurer for the preceding calendar year. During 2013, the maximum amount legally available for distribution to FBL Financial Group, Inc., without further regulatory approval, is $93.0 million from Farm Bureau Life.
 
In addition, Farm Bureau Life is subject to the risk-based capital (RBC) requirement of the NAIC set forth in the Risk-Based Capital for Insurers Model Act (the Model Act). The main purpose of the Model Act is to provide a tool for insurance regulators to evaluate the capital of insurers relative to the risks assumed by them and determine whether there is a need for possible corrective action. U.S. insurers and reinsurers are required to report the results of their RBC calculations as part of the statutory annual statements filed with state insurance regulatory authorities.
The Model Act provides for four different levels of regulatory actions based on annual statements, each of which may be triggered if an insurer's total adjusted capital, as defined in the Model Act, is less than a corresponding RBC.
The company action level is triggered if an insurer's total adjusted capital is less than 200% of its authorized control level RBC, as defined in the Model Act. At the company action level, the insurer must submit a plan to the regulatory authority that discusses proposed corrective actions to improve its capital position.
The regulatory action level is triggered if an insurer's total adjusted capital is less than 150% of its authorized control level RBC. At the regulatory action level, the regulatory authority will perform a special examination of the insurer and issue an order specifying corrective actions that must be followed.
If an insurer's total adjusted capital is less than its authorized control level RBC, the regulatory authority is authorized (although not mandated) to take regulatory control of the insurer.
The mandatory control level is triggered if an insurer's total adjusted capital is less than 70% of its authorized control level RBC, and at that level the regulatory authority must take regulatory control of the insurer. Regulatory control may lead to rehabilitation or liquidation of an insurer.
Our current capital levels are well above any action level. Failure to maintain adequate capital levels could lead to ratings downgrades and liquidity issues which could adversely affect our business and financial condition.
A significant ratings downgrade may have a material adverse effect on our business.
Ratings are an important factor in establishing the competitive position of insurance companies. If our ratings were lowered, our ability to market products to new customers could be harmed and existing policyholders might cancel their policies or withdraw the cash values of their policies. These events, in turn, could have a material adverse effect on our financial results and liquidity. Our ratings reflect the agency's opinions as to the financial strength, operating performance and ability to meet obligations to Farm Bureau Life's policyholders. There is no assurance that a credit rating will remain in effect for any given period of time or that a rating will not be reduced, suspended or withdrawn entirely by the rating agency, if in the rating agency's judgment, circumstances so warrant. See "Item 1. Business - Ratings and Competition" for a summary of our current ratings.

15


All segments of our business are highly regulated and these regulations or changes in them could affect our profitability.
We are subject to regulation under applicable insurance statutes and regulations in the various states in which our life subsidiaries operate. Insurance regulation is intended to provide safeguards for policyholders, insurance companies and their holding companies. Regulators oversee matters relating to sales practices, policy forms, claims practices, types and amounts of investments, reserve adequacy, insurer solvency, minimum amounts of capital and surplus, transactions with related parties, changes in control and payment of dividends. State insurance regulators continually reexamine existing laws and regulations, and may make changes in the future.
As noted above, our life subsidiaries are subject to the NAIC's RBC requirements which are used by state insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action.
Although the federal government does not directly regulate the business of insurance, federal laws which include pension regulation, discrimination, financial services regulation, securities regulation and federal taxation, can significantly affect the insurance business. In addition, various forms of direct and indirect federal regulation of insurance have been proposed from time to time, including proposals for the establishment of an optional federal charter for insurance companies. Dodd-Frank established the Federal Insurance Office within the Department of Treasury to collect information about the insurance industry, recommend prudential standards and represent the U.S. in dealings with foreign insurance regulators. The regulatory framework at the state and federal level applicable to our insurance products is evolving and could affect the design of such products and our ability to sell certain products. Any changes in these laws and regulations could materially and adversely affect our business, financial condition or results of operations.
The Affordable Care Act was designed to provide universal health care to everyone in the United States. While the Affordable Care Act has a substantial impact on the health care industry, it does not directly affect our life insurance and annuity business. Our exclusive agents sell health insurance, but the products are manufactured by unrelated third parties. Implementation of state-based health insurance exchanges in 2014 will likely impact our agents and their relationships with customers purchasing these health insurance products. This could impact the sale of our life insurance and annuity products to these customers. To date, the impact on our organization as an employer has been minimal. The extent of any impact of Dodd-Frank on our industry or on us as an employer will depend primarily on regulations that have not yet been adopted. Captive agents who are also registered representatives of our affiliated broker-dealer may be affected by proposed rules that would create an as-yet undefined fiduciary relationship between the registered representative and their customers. It is too early to tell what effect there will be until the rule making process has been completed.
Our investment management subsidiary is an SEC registered investment adviser. This entity manages funds for affiliated entities and non-affiliated organizations. In addition, the investment adviser manages our separate accounts, which are registered as investment companies under the Investment Company Act. Our registered separate accounts are themselves highly regulated under the Investment Company Act. In addition, our broker-dealer subsidiary is registered with the SEC and is subject to regulation under the Exchange Act and various state laws, and is a member of and subject to regulation by FINRA. Registered representatives sell variable products and mutual funds through our broker/dealer subsidiary and are regulated by the SEC and FINRA and are further subject to applicable state laws. We cannot predict the effect that any proposed or future legislation or rule making by the SEC, FINRA or the states will have on our financial condition or operational flexibility.
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. From time to time, we are required to adopt new or revised accounting standards. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our financial condition and results of operations. The impact of accounting pronouncements that have been issued but not yet implemented is discussed in Note 1 to our consolidated financial statements included in Item 8.
Inaccuracies in assumptions regarding future persistency, mortality and interest rates used in pricing our products and calculating reserve amounts and deferred acquisition costs could have a material adverse impact on our financial results.
The process of pricing products and calculating reserve amounts and deferred acquisition costs for an insurance organization involves the use of a number of assumptions including those related to persistency (how long a contract stays with the company), mortality (the relative incidence of death in a given time) and interest rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts). Actual results could differ significantly from those assumed. Inaccuracies in one or more of these assumptions could have a material adverse impact on our results of operations.

16


We may be required to accelerate the amortization of deferred acquisition costs, which could adversely affect our results of operations or financial condition.
Deferred acquisition costs (DAC) represents the costs that vary with and are related primarily to the acquisition of new and renewal insurance and annuity contracts, and we amortize these costs over the expected lives of the contracts. We test the DAC recorded on our consolidated balance sheet to determine if these amounts are recoverable under current assumptions. In addition, we regularly review the estimates and assumptions underlying DAC for those products for which we amortize DAC in proportion to gross profits. Given changes in facts and circumstances, these tests and reviews could lead to reductions in DAC that could have an adverse effect on the results of our operations and our financial condition. Increases in actual or expected future withdrawals or surrenders and investment losses, which are more likely in a severe economic recession, would result in an acceleration of DAC amortization. In addition, significant or sustained equity and bond market declines could result in an acceleration of DAC amortization related to variable annuity and variable universal life contracts.
Our earnings are influenced by our claims experience, which is difficult to estimate. If our future claims experience does not match our pricing assumptions or past results, our earnings could be materially adversely affected.
Our earnings are significantly influenced by the claims paid under our insurance contracts and will vary from period to period depending upon the amount of claims incurred. There is only limited predictability of claims experience within any given quarter or year. The liability that we have established for future insurance and annuity policy benefits is based on assumptions concerning a number of factors, including interest rates, expected claims, persistency and expenses. In the event our future experience does not match our pricing assumptions or our past results, our operating results could be materially adversely affected.
Our reinsurance program involves risks because we remain liable with respect to the liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them.
We reinsure a portion of our life insurance exposure with unaffiliated insurance companies under traditional indemnity reinsurance agreements. New sales of life products are reinsured above prescribed limits and do not require the reinsurer's prior approval within certain guidelines. We enter into indemnity reinsurance arrangements to assist in diversifying our risks and to limit our maximum loss on risks that exceed our policy retention limits. Our maximum retention limit on an insured life ranges up to $1.5 million depending upon when the policy was issued.
Indemnity reinsurance does not fully discharge our obligation to pay claims on the reinsured business. As the ceding insurer, we remain responsible for policy claims to the extent the reinsurer fails to pay claims. Should any reinsurer fail to meet the obligations assumed under such reinsurance, we remain liable, and payment of these obligations could result in losses. To limit the possibility of such losses, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk.
Our business is highly dependent on our relationships with Farm Bureau organizations and could be adversely affected if those relationships became impaired.
Farm Bureau Life's business relies significantly upon the maintenance of our right to use the Farm Bureau and FB trade names and related trademarks and service marks which are controlled by the American Farm Bureau Federation and state Farm Bureau organizations. See discussion under "Item 1. Business - Marketing and Distribution - Affiliation with Farm Bureau" for information regarding these relationships and circumstances under which our access to the Farm Bureau membership base and use of the Farm Bureau and FB designations could be terminated. We believe our relationship with the Farm Bureau organizations provides a number of advantages. Farm Bureau organizations in our marketing territory tend to be well known and long established, have active memberships and provide a number of member benefits other than financial services. The strength of these organizations provides enhanced prestige and brand awareness for our products and increased access to Farm Bureau members. The loss of the right to use these designations in a key state or states could have a material adverse effect on operating results.
Our relationship with Farm Bureau organizations could result in conflicts of interests.
Our business and operations are interrelated to a degree with that of the American Farm Bureau Federation, its affiliates, and state Farm Bureau organizations. The overlap of the business, including service of certain common executive officers and directors of the Company and the state Farm Bureau organizations, may give rise to conflicts of interest among these parties. Conflicts could arise, for example, with respect to business dealings among the parties, the use of a common agency force, the sharing of employees, space and other services and facilities under intercompany agreements, and the allocation of business opportunities between them. Conflicts of interest could also arise between the Company and the various state Farm Bureau organizations in our life-only states, some of whose presidents serve as directors of the Company, and which control their state

17


affiliated property-casualty insurance company, with respect to the use of the common agency force. We have adopted a conflict of interest policy which requires a director to disclose to the Board of Directors and any appropriate committee of the Board, the existence of any transaction or proposed transaction in which the Director has a direct or indirect interest, and the material facts relating thereto.
Changes in federal tax laws may affect sales of our products and profitability.
The annuity and life insurance products that we market offer tax advantages to the policyholders, as compared to other savings instruments such as certificates of deposit and taxable bonds. Tax preferences include the deferral of income tax on the earnings during the accumulation period of the annuity or insurance policy as opposed to the current taxation of other savings instruments and the tax-free status of death benefit proceeds. In addition, life insurance companies receive a tax deduction for dividends received by separate accounts.
Legislation eliminating this tax deferral and dividends received deduction could have a material adverse effect on our ability to sell life insurance and annuities. Congress has from time to time considered legislation which would reduce or eliminate the benefits to policyholders of the deferral of taxation on the growth of value within certain insurance products or might otherwise affect the taxation of insurance products and insurance companies relative to other investments. To the extent that the Internal Revenue Code of 1986, as amended, is revised to reduce the tax-deferred status of insurance products, to reduce the taxation of competing products, or to eliminate the dividends received deduction, our financial position and results of operations could be adversely affected.
Our ability to maintain competitive costs is dependent upon the level of new sales and persistency of existing business.
Maintaining competitive costs depends upon numerous factors, including the level of new sales, persistency of existing business and expense management. A decrease in sales or persistency without a corresponding reduction in expenses could affect our business and results of operations.
If we are unable to attract and retain agents, sales of our products and services may be reduced.
We compete to attract and retain exclusive agents for Farm Bureau Life. Intense competition exists for persons with demonstrated ability. We compete primarily on the basis of our reputation, products, compensation, support services, rating agency ratings and financial position. Sales and our results of operations and financial condition could be materially adversely affected if we are unsuccessful in attracting and retaining agents.
Attracting and retaining employees who are key to our business is critical to our growth and success.
The success of our business and the ability to reach goals is dependent, to a large extent, on our ability to attract and retain key employees. Competition is intense in the job market for certain positions, such as actuaries and other insurance professionals with demonstrated ability, particularly with our headquarters being located in central Iowa, a hub of insurance company home offices, where we compete with other insurance and financial institutions.
Our employees are not subject to employment contracts, except for a retention agreement with our Chief Executive Officer. Although none of our named executive officers have indicated that they intend to terminate their employment, there can be no certainty regarding the length of time they will remain with us. Our inability to retain our key employees, or attract and retain additional qualified employees, could materially adversely affect our sales, results of operations and financial condition.
Success of our business depends in part on effective information technology systems and on continuing to develop and implement improvements.
Our business is dependent upon the ability to keep up to date with effective, secure and advanced technology systems for interacting with employees, agents, policyholders, vendors, agents, third parties and investors. It is crucial to our business to reach a large number of people, provide sizable amounts of information, and secure and store information through our technology systems. If we do not maintain adequate systems to reflect technological advancements, we could experience adverse consequences, including inadequate information on which to base pricing, underwriting and reserving decisions, regulatory problems, security breaches, litigation exposure or increases in administrative expenses. This could adversely affect our relationships and ability to do business with our clients and make it difficult to attract new customers.
Our information technology systems and software require an ongoing commitment of resources to maintain current standards. Our business strategy involves providing customers with easy-to-use products and systems to meet their needs. We are continuously enhancing and updating our systems to keep pace with changes in information processing technology, evolving industry and regulatory standards and customer demands. Our success is largely dependent on protecting, maintaining and

18


enhancing the effectiveness of existing systems, as well as continuing to reuse, buy or build information systems that support our business processes in a cost-effective manner.
In the event of a disaster or catastrophic event, a computer system or information technology failure could occur and potentially disrupt our business, damage our reputation and adversely affect our profitability. Disruptions or breaches could occur as a result of natural disasters, man-made disasters, epidemic/pandemic, industrial accident, blackout, computer virus, criminal activity, technological changes or events, terrorism, or other unanticipated events beyond our control. While the company has obtained insurance and has implemented a variety of preventative security measures such as risk management, information protection, disaster recovery and business continuity plans, no predictions of specific scenarios can be made. Unanticipated problems with our business continuity systems and plans could have a material adverse impact on our ability to conduct business and on our results of operations and financial position, particularly if those problems affect our computer-based processing, transmission, storage and retrieval systems and destroy valuable data.
We face risks relating to litigation, including the costs of such litigation, management distraction and the potential for damage awards, which may adversely impact our business.
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state regulatory bodies, such as state insurance departments, the SEC, FINRA, the Department of Labor and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, the Employee Retirement Income Security Act of 1974 and laws governing the activities of broker-dealers. Companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. Moreover, we are subject to the risks of errors and misconduct by our appointed agents, such as fraud, non-compliance with policies and recommending transactions that are not suitable. While we are not a party to any lawsuit that we believe will have a material adverse effect on our business, financial condition or results of operations, there can be no assurance that such litigation, or any future litigation, will not have such an effect, whether financially, through distraction of our management or otherwise.
ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal operations are conducted from property leased from a subsidiary of the Iowa Farm Bureau Federation under a 10 year operating lease that expires in 2021, with automatic five-year extensions unless terminated by one of the parties at least six months prior to the expiration date. Currently, the property leased primarily consists of approximately 174,000 square feet of a 400,000 square foot office building in West Des Moines, Iowa. We consider the current facilities to be adequate for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

Information required for Item 3 is incorporated by reference from the discussion in Note 12 to our consolidated financial statements included in Item 8.

ITEM 4. MINE AND SAFETY DISCLOSURES

None.



19


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Market and Dividend Information

The Class A common stock of FBL Financial Group, Inc. is traded on the New York Stock Exchange under the symbol FFG. The following table sets forth the cash dividends per common share and the high and low prices of FBL Financial Group Class A common stock as reported in the consolidated transaction reporting system for each quarter of 2012 and 2011.

Class A Common Stock Data (per share)
1st Qtr.
 
2nd Qtr.
 
3rd Qtr.
 
4th Qtr.
2012
 
 
 
 
 
 
 
High
$
36.65

 
$
33.93

 
$
35.05

 
$
34.59

Low
32.23

 
24.70

 
27.60

 
29.27

Dividends declared and paid
0.1000

 
0.1000

 
0.1000

 
0.1000

2011
 
 
 
 
 
 
 
High
$
31.92

 
$
32.30

 
$
33.32

 
$
36.93

Low
27.25

 
28.36

 
24.60

 
24.50

Dividends declared and paid
0.0625

 
0.0625

 
0.0625

 
0.1000


There is no established market for purchasing our Class B common stock, although it is convertible upon demand into Class A common stock on a share for share basis. As of January 18, 2013, there were approximately 5,200 holders of Class A common stock and 21 holders of record of Class B common stock.

Class B common stockholders receive dividends at the same rate as that declared on Class A common stock. We intend to declare regular quarterly cash dividends in the future, subject to the discretion of the Board of Directors, which depends in part upon general business conditions, legal restrictions and other factors the Board of Directors deems relevant. It is anticipated the quarterly dividend rate for the first quarter of 2013 will increase to $0.11 per common share.

For restrictions on dividends, see "Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources" included in Item 7.


20


Comparison of Five-Year Total Return

 
Period Ending
 
12/31/2007
 
12/31/2008
 
12/31/2009
 
12/31/2010

 
12/31/2011
 
12/31/2012
FBL Financial Group, Inc.
$
100.00

 
$
45.95

 
$
58.37

 
$
91.27

 
$
109.33

 
$
111.34

S&P 500 Index
100.00

 
63.00

79.6

79.68

 
91.68

 
93.61

 
108.59

S&P 500 Life & Health Insurance Index
100.00

 
51.68

 
59.73

 
74.82

 
59.32

 
67.98


Source: SNL Financial LC

The performance graph shows a comparison of the cumulative total return over the past five years of our Class A common stock, the S&P 500 Index and the S&P 500 Life and Health Insurance Index. The graph plots the changes in value of an initial $100 investment, assuming reinvestment of dividends.


21


Issuer Purchases of Equity Securities

The following table sets forth issuer purchases of equity securities for the quarter ended December 31, 2012.

Period
 
(a) Total Number of Shares (or Units) Purchased (1)
 
(b) Average Price Paid per Share (or Unit) (1)
 
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
October 1, 2012 through October 31, 2012
 
141,639

 
$
33.56

 
141,639
 
$17,457,146
November 1, 2012 through November 30, 2012
 
162,039

 
31.75

 
162,039
 
$42,312,356
December 1, 2012 through December 31, 2012
 
234,010

 
33.42

 
234,010
 
$34,491,095
Total
 
537,688

 
$
32.96

 
 
 
 

(1)
Activity in this table represents Class A common shares repurchased by the Company in connection with the repurchase plans announced on October 7, 2011 and November 15, 2012. The plans authorize us to make up to $230.0 million in repurchases of Class A common stock in the open market or through privately negotiated transactions, with the timing and terms of the purchases to be determined by management based on market conditions. Completion of the program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares, if any, that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice.


22


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

 
As of or for the year ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(Dollars in thousands, except per share data)
Consolidated Statement of Income Data (1)
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
101,410

 
$
97,103

 
$
93,881

 
$
88,757

 
$
88,138

Traditional life insurance premiums
175,086

 
168,519

 
162,056

 
154,154

 
145,851

Net investment income
361,324

 
343,310

 
324,540

 
303,486

 
287,273

Realized gains (losses) on investments
452

 
(8,296
)
 
11,576

 
(30,660
)
 
(68,662
)
Total revenues
655,540

 
618,337

 
606,342

 
533,209

 
477,772

 
 
 
 
 
 
 
 
 
 
Income from continuing operations
82,796

 
52,209

 
80,993

 
46,285

 
(3,140
)
Income (loss) from discontinued operations
(2,939
)
 
(11,464
)
 
34,587

 
18,375

 
(21,436
)
Net income (loss)
$
79,857

 
$
40,745

 
$
115,580

 
$
64,660

 
$
(24,576
)
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
3.01

 
$
1.69

 
$
2.66

 
$
1.54

 
$
(0.11
)
Income (loss) from discontinued operations
(0.11
)
 
(0.37
)
 
1.14

 
0.61

 
(0.71
)
Earnings (loss) per common share
$
2.90

 
$
1.32

 
$
3.80

 
$
2.15

 
$
(0.82
)
Earnings (loss) per common share - assuming dilution:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
2.97

 
$
1.67

 
$
2.63

 
$
1.53

 
$
(0.11
)
Income (loss) from discontinued operations
(0.10
)
 
(0.37
)
 
1.13

 
0.61

 
(0.71
)
Earnings (loss) per common share - assuming dilution
$
2.87

 
$
1.30

 
$
3.76

 
$
2.14

 
$
(0.82
)
 
 
 
 
 
 
 
 
 
 
Cash dividends
$
0.4000

 
$
0.2875

 
$
0.2500

 
$
0.3125

 
$
0.5000

Weighted average common shares outstanding - assuming dilution
27,838,548

 
31,215,023

 
30,718,616

 
30,201,476

 
29,893,909

 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data (1)
 
 
 
 
 
 
 
 
 
Total investments
$
7,160,650

 
$
6,397,195

 
$
5,853,341

 
$
5,024,876

 
$
4,657,154

Assets held in separate accounts
618,809

 
603,903

 
675,586

 
630,094

 
516,438

Total assets
8,417,726

 
8,109,368

 
15,177,657

 
14,079,220

 
13,851,683

Long-term debt
147,000

 
146,968

 
271,168

 
371,084

 
371,005

Total liabilities
7,205,479

 
6,906,939

 
14,132,931

 
13,325,024

 
13,729,157

Total stockholders' equity (2)
1,212,247

 
1,202,429

 
1,044,725

 
754,198

 
122,526

Book value per common share (2)
47.47

 
39.13

 
33.66

 
24.64

 
3.96


Notes to Selected Consolidated Financial Data
(1)
Certain amounts from 2009 through 2011 have been restated due to the retroactive adoption of guidance issued by the Financial Accounting Standards Board (FASB) related to accounting for costs associated with acquiring or renewing insurance contracts as discussed in Note 1 to our consolidated financial statements.
(2)
Amounts are impacted by accumulated other comprehensive income (loss) totaling $289.9 million in 2012, $177.8 million in 2011, $51.6 million in 2010, ($127.4) million in 2009 and ($682.3) million in 2008. These amounts are net of deferred income taxes and other adjustments for assumed changes in the amortization of deferred acquisition costs, unearned revenue reserve and value of insurance in force acquired.


23


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When reading the following Management's Discussion and Analysis of Financial Condition and Results of Operations, please refer to our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data," of this report. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its life insurance subsidiary Farm Bureau Life Insurance Company (Farm Bureau Life).

In this discussion and analysis, we explain our consolidated results of operations, financial condition and where appropriate, factors that management believes may affect future performance, including:

factors which affect our business,
our revenues and expenses in the periods presented,
changes in revenues and expenses between periods,
sources of earnings and changes in stockholders' equity,
impact of these items on our overall financial condition and
expected sources and uses of cash.

We have organized our discussion and analysis as follows:

First, we discuss our business and drivers of profitability.
We then describe the business environment in which we operate including factors that affect operating results.
We highlight significant events that are important to understanding our results of operations and financial condition.
We then review the results of operations beginning with an overview of the total Company results, followed by a more detailed review of those results by operating segment.
Finally, we discuss critical accounting policies and recently issued accounting standards. The critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult or complex judgment.

Overview and Profitability

We operate predominantly in the life insurance industry through our principal subsidiary, Farm Bureau Life. Farm Bureau Life markets individual life insurance policies and annuity contracts to Farm Bureau members and other individuals and businesses in the Midwestern and Western sections of the United States through an exclusive agency force. Several subsidiaries support various functional areas of Farm Bureau Life and other affiliates by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage two Farm Bureau affiliated property-casualty companies.

We analyze operations by reviewing financial information regarding our primary products that are aggregated in Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes various support operations, corporate capital and other product lines that are not currently underwritten by the Company. We analyze our segment results based on pre-tax operating income, which excludes the impact of certain items that are included in net income. See Note 15 to our consolidated financial statements for further information regarding how we define our segments and operating income.

We also include within our analysis “premiums collected” which is not a measure used in financial statements prepared in accordance with GAAP, but is a common industry measure of agent productivity. See Note 15 to our consolidated financial statements for further information regarding this measure and its relationship to GAAP revenues.

On December 30, 2011, we completed the sale of our wholly-owned subsidiary, EquiTrust Life Insurance Company (EquiTrust Life). As a result of the sale, certain lines of business are considered discontinued operations, and unless otherwise indicated, have been removed from the discussion that follows. See Note 2 to our consolidated financial statements for additional information related to the sale.



24


Our profitability is primarily a factor of:

The volume of our life insurance and annuity business in force, which is driven by the level of our sales and the persistency of the business written.
The amount of spread (excess of net investment income earned over interest credited) we earn on contract holders' general account balances.
Our ability to price our life insurance products to earn acceptable margins over the cost of providing benefits and the expenses of acquiring and administering the products. Competitive conditions, mortality experience, persistency, investment results and our ability to maintain expenses in accordance with pricing assumptions drive our margins on the life products. On many products, we have the ability to mitigate adverse experience through adjustments to credited interest rates, policyholder dividends or cost of insurance charges.
Our ability to manage our investment portfolio to maximize investment returns while providing adequate liquidity for obligations to policyholders and minimizing the risk of defaults or impairments of invested assets.
Our ability to manage the level of our operating expenses.
Actual experience and changes in assumptions for expected surrender and withdrawal rates, mortality and spreads used in the amortization of deferred acquisition costs.

Our profitability is also impacted by changes in accounting guidance that impact the timing of profit recognition. During the first quarter of 2012, we adopted new guidance that reduced the deferral of costs associated with the issuance of life insurance and annuity products which increased the amount of such expenses recognized in the current year and reduced the amount of amortization in future years. See Note 1 to our Consolidated Financial Statements for more information on this change.

In addition to the impact from the adoption of the guidance above, the accounting standards setting bodies are currently working on a project evaluating the accounting for insurance contracts, which may significantly impact the timing of profit emergence for those products. It is uncertain what the outcome of that project will be or when it will be completed.

Impact of Recent Business Environment

Our business generally benefits from moderate to strong economic expansion. Conversely, a lackluster economic recovery characterized by higher unemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future. We also may experience a higher incidence of claims, lapses or surrenders of policies. We cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations, cash flows or financial condition.

While there were positive economic signs during 2012, the U.S. economy continues to face a number of challenges. Pertinent recent economic events include, but are not limited to the following:

Gross Domestic Product increased approximately 2.0% during 2012 based on early estimates.
Market yields on fixed maturity securities remained low with the 10-year U.S. Treasury at 1.76% at December 31, 2012.
Unemployment remains high at 7.8% in the United States.
Personal income growth remains relatively modest.
Midwest farmers have experienced rising incomes and land values in recent years, but drought conditions during the summer of 2012 have reduced production yields and farm incomes. However, many farmers have mitigated losses through effective use of crop insurance.
The European debt crisis continues to cause stress within the markets.
Middle-east unrest continues to add uncertainty to the supply and cost of oil.
Continued uncertainty as to actions the United States Congress will take to address the national debt, including potential actions to change the tax advantages of life insurance

Fixed maturity security yields generally finished lower for 2012 as both credit spreads and U.S. Treasury yields declined over the period. The yield curve remained moderately steep at year end, but low overall interest rates create a challenging environment for sales of new money fixed annuity products. Strong liquidity and favorable corporate profitability continue to support fundamental credit quality. In the securitized markets, yields for asset-backed securities generally declined for the year given continued strong investor demand and improving consumer fundamentals. Yields for residential mortgage-backed securities and high quality commercial mortgage-backed securities also declined during the year.


25


We intentionally decreased the amount of annuity sales in 2012 by suspending sales of certain products and reducing agent commission rates on certain products where it was difficult to achieve profitability targets due to the extremely low interest rate environment. Our life sales have increased, reflecting the attractiveness of enhanced universal life and term life product offerings and the strong farm and energy subsectors of the economy in our marketplace, as well as Farm Bureau Life's emphasis on life insurance product sales given the headwinds within the annuity market due to the low interest rates.
 
Results of Operations for the Three Years Ended December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2012
 
2011
 
2010
 
2012
 
2011
 
 
 
 
 
 
 
 
Pre-tax operating income:
 
 
 
 
 
 
 
 
 
Annuity segment
$
55,910

 
$
58,263

 
$
49,683

 
(4
)%
 
17
 %
Life Insurance segment
43,741

 
50,502

 
53,732

 
(13
)%
 
(6
)%
Corporate and Other segment
16,856

 
2,293

 
5,561

 
635
 %
 
(59
)%
Total pre-tax operating income
116,507

 
111,058

 
108,976

 
5
 %
 
2
 %
Income taxes on operating income
(33,748
)
 
(32,240
)
 
(36,688
)
 
5
 %
 
(12
)%
Operating income
82,759

 
78,818

 
72,288

 
5
 %
 
9
 %
 
 
 
 
 
 
 
 
 
 
Realized gains/losses on investments (1)
(477
)
 
(5,983
)
 
6,491

 
(92
)%
 
(192
)%
Change in net unrealized gains/losses on derivatives (1)
619

 
932

 
2,292

 
(34
)%
 
(59
)%
Loss on debt redemption (1)
(22
)
 
(21,564
)
 

 
(100
)%
 
NA
Net impact of discontinued operations (1)
(2,939
)
 
(11,464
)
 
34,587

 
(74
)%
 
(133
)%
Net income attributable to FBL Financial Group, Inc.
$
79,940

 
$
40,739

 
$
115,658

 
96
 %
 
(65
)%
 
 
 
 
 
 
 
 
 
 
Operating income per common share - assuming dilution
$
2.97

 
$
2.52

 
$
2.35

 
18
 %
 
7
 %
 
 
 
 
 
 
 
 
 
 
Earnings per common share - assuming dilution:
 
 
 
 
 
 
 
 
 
Continuing operations
$
2.97

 
$
1.67

 
$
2.63

 
 
 
 
Discontinued
(0.10
)
 
(0.37
)
 
1.13

 
 
 
 
Earnings per common share - assuming dilution
$
2.87

 
$
1.30

 
$
3.76

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate on operating income
29
%
 
29
%
 
34
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average invested assets
$
6,343,284

 
$
5,887,520

 
$
5,460,512

 
8
 %
 
8
 %
Annualized yield on average invested assets
5.87
%
 
6.01
%
 
6.10
%
 
 
 
 
Impact on operating income of unlocking deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve
$
(3,413
)
 
$
(1,201
)
 
$
1,484

 
184
 %
 
(181
)%

(1)
Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs, value of insurance in force acquired and income taxes attributable to these items.

Net income attributable to FBL Financial Group increased in 2012 and decreased in 2011 primarily due to the impact of discontinued operations and operating income adjustments. Operating income increased in 2012 and 2011 due primarily to the impact of an increase in the volume of business in force and increased spreads. These increases were partially offset by increases in the amortization of deferred acquisition costs and the value of insurance in force in 2012 compared to 2011 and an increase in mortality in 2011 compared to 2010. Both 2011 and 2010 earnings benefitted from the impact of refining actuarial estimates that reduced the value of insurance in force and deferred acquisition costs by $7.4 million in 2011 and decreased reserves by $4.9 million in 2010.


26


Earnings per share from continuing operations and operating income per common share benefited from the repurchase of 5.5 million Class A common shares during the twelve months ended December 31, 2012. Details regarding the share repurchases are included in Note 9 to the consolidated financial statements. If the repurchase activity would have been completed on January 1, 2012, the earnings per share amounts, assuming dilution, would have been $0.23 higher for net income and $0.25 higher for operating income.

We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve for participating life insurance, variable and interest sensitive products, as applicable, through an “unlocking” process. These assumptions typically consist of withdrawal and lapse rates, earned spreads and mortality with revisions based on historical results and our best estimate of future experience. The impact of unlocking is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlocking process can take place at any time, as needs dictate, the process typically takes place annually. See the discussion that follows for further details of the unlocking impact to our operating segments.

Annuity Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2012
 
2011
 
2010
 
2012
 
2011
 
(Dollars in thousands)
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
Interest sensitive product charges and other income
$
790

 
$
666

 
$
567

 
19
 %
 
17
 %
Net investment income
191,211

 
181,974

 
166,932

 
5
 %
 
9
 %
Total operating revenues
192,001

 
182,640

 
167,499

 
5
 %
 
9
 %
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
102,961

 
100,487

 
98,880

 
2
 %
 
2
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
Commissions net of deferrals
2,504

 
3,428

 
2,966

 
(27
)%
 
16
 %
Amortization of deferred acquisition costs
9,327

 
8,916

 
6,044

 
5
 %
 
48
 %
Amortization of value of insurance in force
2,473

 
244

 
(1,018
)
 
914
 %
 
(124
)%
Other underwriting expenses
18,826

 
11,302

 
10,944

 
67
 %
 
3
 %
Total underwriting, acquisition and insurance expenses
33,130

 
23,890

 
18,936

 
39
 %
 
26
 %
Total benefits and expenses
136,091

 
124,377

 
117,816

 
9
 %
 
6
 %
Pre-tax operating income
$
55,910

 
$
58,263

 
$
49,683

 
(4
)%
 
17
 %

27


Annuity Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2012
 
2011
 
2010
 
2012
 
2011
 
(Dollars in thousands)
 
 
 
 
Other data
 
 
 
 
 
 
 
 
 
Annuity premiums collected, direct
$
316,344

 
$
369,156

 
$
316,636

 
(14
)%
 
17
 %
Policy liabilities and accruals, end of period
3,432,137

 
3,190,985

 
2,952,905

 
8
 %
 
8
 %
Average invested assets
3,435,090

 
3,184,619

 
2,858,917

 
8
 %
 
11
 %
Investment fee income included in net investment income (1)
4,355

 
4,283

 
730

 
2
 %
 
487
 %
Average individual annuity account value
2,260,801

 
2,078,753

 
1,887,496

 
9
 %
 
10
 %
 
 
 
 
 
 
 
 
 
 
Earned spread on individual annuity products:
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
6.06
%
 
6.24
%
 
6.22
%
 
 
 
 
Weighted average interest crediting rate
3.15
%
 
3.36
%
 
3.62
%
 
 
 
 
Spread
2.91
%
 
2.88
%
 
2.60
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individual annuity withdrawal rate
4.8
%
 
4.6
%
 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact on operating income of unlocking deferred acquisition costs and value of insurance in force acquired
234

 
631

 
1,320

 
(63
)%
 
(52
)%

(1)
Includes prepayment fee income and net discount of accretion on mortgage and asset-backed securities resulting from changing payment speed assumptions at the end of the period.

Pre-tax operating income for the Annuity segment decreased in 2012 and increased in 2011 compared to prior periods. The decrease in 2012 was primarily due an increase in expense allocations as discussed in the Corporate and Other segment and an increase in the amortization of the value of insurance in force, partially offset by an increase in spread income earned from a larger volume of business in force and a slight increase in spreads earned. The increase in 2011 was primarily due to increases in spread income earned from an increase in the volume of business in force and investment fee income, partially offset by increases in the amortization of deferred acquisition costs and the value of insurance in force.

Amortization of deferred acquisition costs and the value of insurance in force changed over the three year period primarily due to changes in actual profits on the underlying business and the impact of unlocking. During 2012, 2011 and 2010, amortization was impacted by unlocking deferred acquisition costs and the value of insurance in force acquired due to updating our amortization models for assumptions relating to withdrawal rates and earned spreads. During 2012, we incurred additional amortization through unlocking as a result of our analysis of the impact of a continued low interest rate environment on projected investment and spread income, as well as withdrawal rates. Amortization of deferred acquisition costs also increased $1.4 million in 2012 due to refining the projected credited rate assumption in the amortization model.

The average aggregate account value for individual annuity contracts in force increased in 2012 and 2011 due to continued sales. Premiums collected were lower in 2012 as sales of certain New Money products were suspended in the third quarter of 2011 due to the extremely low interest rate environment. The amount of traditional annuity premiums collected is highly dependent upon the relationship between the current crediting rate and perceived security of our products compared to those of competing products.

Also included within our policy liabilities are advances on our funding agreements with the Federal Home Loan Bank (FHLB). Outstanding funding agreements totaled $328.5 million at December 31, 2012, $268.0 million at December 31, 2011 and $268.5 million at December 30, 2010.
The weighted average yield on cash and invested assets for individual annuities decreased in 2012 primarily due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. The 2012 decrease was partially offset by continued higher investment fee income. The 2011 weighted average yield was slightly higher than 2010 average yields due to higher investment fee income and a lower cost of an interest rate swap we held during a portion of 2011, offsetting the impact of relative lower yields on new investment acquisitions. See the "Financial Condition" section which follows for additional information regarding the yields obtained on

28


investment acquisitions. Decreases in the weighted average interest crediting rates are due to crediting rate actions taken on a significant portion of our annuity portfolio during 2012, 2011 and 2010 in response to the declining portfolio yield.

Life Insurance Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2012
 
2011
 
2010
 
2012
 
2011
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
Interest sensitive product charges and other income
$
54,691

 
$
49,438

 
$
45,655

 
11
 %
 
8
 %
Traditional life insurance premiums
175,086

 
168,519

 
162,056

 
4
 %
 
4
 %
Net investment income
138,076

 
134,999

 
132,414

 
2
 %
 
2
 %
Total operating revenues
367,853

 
352,956

 
340,125

 
4
 %
 
4
 %
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits:
 
 
 
 
 
 
 
 
 
Interest credited
29,252

 
29,719

 
29,444

 
(2
)%
 
1
 %
Death benefits
33,324

 
32,645

 
26,343

 
2
 %
 
24
 %
Total interest sensitive product benefits
62,576

 
62,364

 
55,787

 
 %
 
12
 %
Traditional life insurance benefits:
 
 
 
 
 
 
 
 
 
Death benefits
67,331

 
69,479

 
58,780

 
(3
)%
 
18
 %
Surrender and other benefits
36,554

 
35,860

 
37,166

 
2
 %
 
(4
)%
Increase in traditional life future policy benefits
52,395

 
43,627

 
41,223

 
20
 %
 
6
 %
Total traditional life insurance benefits
156,280

 
148,966

 
137,169

 
5
 %
 
9
 %
Distributions to participating policyholders
14,275

 
17,030

 
17,571

 
(16
)%
 
(3
)%
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
Commission expense, net of deferrals
17,476

 
16,074

 
15,452

 
9
 %
 
4
 %
Amortization of deferred acquisition costs
21,216

 
18,042

 
16,252

 
18
 %
 
11
 %
Amortization of value of insurance in force
2,984

 
(4,948
)
 
2,601

 
(160
)%
 
(290
)%
Other underwriting expenses
49,305

 
44,926

 
41,561

 
10
 %
 
8
 %
Total underwriting, acquisition and insurance expenses
90,981

 
74,094

 
75,866

 
23
 %
 
(2
)%
Total benefits and expenses
324,112

 
302,454

 
286,393

 
7
 %
 
6
 %
Pre-tax operating income
$
43,741

 
$
50,502

 
$
53,732

 
(13
)%
 
(6
)%


29


Life Insurance Segment - continued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2012
 
2011
 
2010
 
2012
 
2011
 
(Dollars in thousands)
 
 
 
 
Other data
 
 
 
 
 
 
 
 
 
Life premiums collected, net of reinsurance
$
255,709

 
$
229,468

 
$
213,445

 
11
 %
 
8
%
Policy liabilities and accruals, end of period
2,301,155

 
2,197,597

 
2,120,814

 
5
 %
 
4
%
Life insurance in force, end of period
46,139,999

 
43,717,077

 
41,404,530

 
6
 %
 
6
%
Average invested assets
2,258,593

 
2,187,603

 
2,105,938

 
3
 %
 
4
%
Investment fee income included in net investment income (1)
2,831

 
548

 
446

 
417
 %
 
23
%
Average interest sensitive life account value
650,821

 
631,443

 
626,917

 
3
 %
 
1
%
 
 
 
 
 
 
 
 
 
 
Interest sensitive life insurance spread:
 
 
 
 
 
 
 
 
 
Weighted average yield on cash and invested assets
6.36
%
 
6.49
%
 
6.61
%
 
 
 
 
Weighted average interest crediting rate
4.14
%
 
4.19
%
 
4.26
%
 
 
 
 
Spread
2.22
%
 
2.30
%
 
2.35
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life insurance lapse and surrender rates
6.1
%
 
6.8
%
 
6.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Death benefits, net of reinsurance and reserves released
$
65,624

 
$
67,284

 
$
61,629

 
(2
)%
 
9
%
Impact on income of unlocking deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve
(3,762
)
 
(1,554
)
 
(1,102
)
 
142
 %
 
41
%

(1)
Includes prepayment fee income and net discount of accretion on mortgage and asset-backed securities resulting from changing payment speed assumptions at the end of the period.

Pre-tax operating income for the Life Insurance segment decreased in 2012, compared to the prior period, primarily due to the impact of refining valuation estimates during 2011 and an increase in expense allocations as discussed in the Corporate and Other segment, partially offset by an increase in investment fee income and business in force. The decrease in 2011 was primarily due to increased mortality experience and an increase in expenses allocated to the segment, partially offset by an increase in our business in force and refinements to valuation estimates.

Certain reserve refinements made in 2012, including the impact of updates to mortality tables and lapse assumptions, increased life insurance reserves $1.8 million. The impact of refining methods and assumptions relating to the value of insurance in force, deferred acquisition costs and certain traditional life insurance reserves decreased benefits and expenses $7.4 million in 2011 and $4.9 million in 2010.

Unlocking of deferred acquisition costs, value of insurance in force and unearned revenue reserve resulted in a decrease in operating income in 2012 and 2011 compared to prior periods. Each year, unlocking reflected changes in projected policy lapses and mortality assumptions used in the estimate of future expected gross profits. During 2012, we incurred additional amortization through unlocking as a result of our analysis of the impact of a continued low interest rate environment on projected investment and spread income, as well as withdrawal rates.

The weighted average yield on cash and invested assets for interest sensitive life insurance products decreased in 2012 and 2011 due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield, partially offset by an increase in investment fee income in 2012. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. The changes in the weighted average interest crediting rates on our interest sensitive life insurance products are due to crediting rate actions taken on various products in 2012, 2011 and 2010 in response to the declining portfolio yield.


30


Corporate and Other Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
Change over prior year
 
2012
 
2011
 
2010
 
2012
 
2011
 
(Dollars in thousands)
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
Interest sensitive product charges
$
45,722

 
$
47,283

 
$
47,936

 
(3
)%
 
(1
)%
Net investment income
30,259

 
25,890

 
21,228

 
17
 %
 
22
 %
Other income
17,462

 
17,407

 
13,963

 
 %
 
25
 %
Total operating revenues
93,443

 
90,580

 
83,127

 
3
 %
 
9
 %
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
Interest sensitive product benefits
30,721

 
29,229

 
22,330

 
5
 %
 
31
 %
Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
Commission expense, net of deferrals
3,732

 
4,449

 
3,987

 
(16
)%
 
12
 %
Amortization of deferred acquisition costs
5,326

 
7,967

 
7,371

 
(33
)%
 
8
 %
Other underwriting expenses
6,850

 
17,846

 
19,929

 
(62
)%
 
(10
)%
Total underwriting, acquisition and insurance expenses
15,908

 
30,262

 
31,287

 
(47
)%
 
(3
)%
Interest expense
7,952

 
8,532

 
9,566

 
(7
)%
 
(11
)%
Other expenses
20,513

 
20,652

 
19,782

 
(1
)%
 
4
 %
Total benefits and expenses
75,094

 
88,675

 
82,965

 
(15
)%
 
7
 %
 
18,349

 
1,905

 
162

 
863
 %
 
1,076
 %
Net loss attributable to noncontrolling interest
83

 
(6
)
 
78

 
(1,483
)%
 
(108
)%
Equity income (loss), before tax
(1,576
)
 
394

 
5,321

 
(500
)%
 
(93
)%
Pre-tax operating income
$
16,856

 
$
2,293

 
$
5,561

 
635
 %
 
(59
)%
 
 
 
 
 
 
 
 
 
 
Other data
 
 
 
 
 
 
 
 
 
Average invested assets
$
649,602