10-K405 1 fbl021312_10k.txt FBL FINANCIAL GROUP, INC. FORM 10-K405 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, 2001 ----------------- 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 ------- FBL FINANCIAL GROUP, INC. ------------------------- (Exact name of registrant as specified in its charter) Iowa 42-1411715 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5400 University Avenue, West Des Moines, Iowa 50266 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (515) 225-5400 -------------- 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 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 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. |X| Yes |_| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 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 of this Form 10-K. [X] Aggregate market value of Class A Common Stock held by non-affiliates of the registrant (computed as of March 6, 2002): $192,358,332 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 26,291,550 shares of Class A Common Stock and 1,192,990 shares of Class B Common Stock as of March 6, 2002. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive proxy statement for the annual meeting of shareholders to be held May 14, 2002 are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS GENERAL FBL Financial Group, Inc. (we or the Company) sells universal life, variable universal life and traditional life insurance and traditional and variable annuity products. These products are principally marketed through a core distribution force consisting of approximately 1,980 exclusive Farm Bureau agents in the midwestern and western sections of the United States. Our variable universal life and variable annuity products are also marketed in other states through alliances with other life insurance companies and a regional broker-dealer. In addition to marketing our products through these channels, we also assume business through reinsurance arrangements with other companies. Our volume of business in force increased substantially during 2001 as a result of the following acquisition and reinsurance activity: o Effective January 1, 2001, we acquired the assets and liabilities of Kansas Farm Bureau Life Insurance Company, Inc. (Kansas Farm Bureau Life), a single-state life insurance company selling traditional life and annuity products in the state of Kansas. As a result, our geographic market territory expanded into the state of Kansas for our traditional products and our exclusive agency force increased by 336 agents. Assets acquired with this transaction totaled $695.4 million. Premiums collected on business issued in Kansas during 2001 totaled $77.3 million. o Effective May 1, 2001, we entered into a coinsurance agreement with National Travelers Life Company (NTL) whereby we assumed 90% of NTL's traditional life, universal life and annuity business in force. In addition, we agreed to assume 50% of NTL's traditional life, universal life and annuity business issued after May 1, 2001. Assets acquired on May 1, 2001 in connection with this transaction totaled $337.2 million. Collected premiums assumed during 2001 as a result of the NTL agreement totaled $13.3 million. o During the fourth quarter of 2001, we entered into a coinsurance agreement with American Equity Investment Life Insurance Company (American Equity) whereby we assumed 70% of certain American Equity annuity business issued during the period from August 1, 2001 to December 31, 2001. In addition, we agreed to assume 40% of certain American Equity annuity business issued during 2002 and 2003. Collected premiums assumed during 2001 as a result of the American Equity agreement totaled $280.0 million (excludes $138.3 million relating to business assumed that was issued during the third quarter of 2001). FBL Financial Group, Inc. was incorporated in Iowa in October 1993. Our principal insurance subsidiaries are Farm Bureau Life Insurance Company (Farm Bureau Life) and EquiTrust Life Insurance Company (EquiTrust). Farm Bureau Life commenced operations in 1945 and EquiTrust commenced operations in 1998. Several of our subsidiaries support various functional areas of the Company and affiliates, by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage all aspects of two Farm Bureau affiliated property-casualty insurance companies and provide certain management and other services to NTL. BUSINESS STRATEGY We have a three-pronged growth strategy that consists of (1) internal growth within our traditional Farm Bureau distribution network, (2) alliances and relationships with other companies and (3) consolidations. Our growth strategies are detailed below: GROWTH STRATEGY #1 - INTERNAL GROWTH WITHIN OUR TRADITIONAL FARM BUREAU DISTRIBUTION NETWORK. We are focused on growing our core business, which comes through our Farm Bureau distribution network, through new product introductions, sales initiatives and cross selling opportunities. During 2001, we continued to enhance the array of products available to agents and customers. In April, we introduced a new term product called Choice Term that has proven to be very popular. In May, we enhanced our variable products with the addition of a guaranteed death benefit rider on our variable universal life products and an incremental death benefit rider on our variable annuities. In October, we introduced a new traditional product portfolio and enhanced our variable products by expanding the number of subaccount options. We are committed to offering competitive and state-of-the art products and features. 1 Several programs targeted at increasing life insurance and annuity sales within our core distribution system built momentum in 2001. These programs include life and investment specialists, EquiTrust wholesalers and the BUILDING A PROFESSIONAL PRACTICE series. Life and investment specialists are hired by a multi-line manager to work as a resource within the agency for life and investment sales. Our EquiTrust wholesalers are responsible for increasing variable product and mutual fund sales within their own territory, and are available for agency training, case analysis support, and may have direct client involvement on large cases. Our BUILDING A PROFESSIONAL PRACTICE series teaches agents to examine the way they have their business structured, how they are spending their time, and encourages them to hire assistants so that they may spend more time with direct client contact. During 2001, we also expanded our direct mail programs, which represent policy conversion and upgrade opportunities to clients, and introduce new products and concepts to prospective clients. We continue to expand these programs to generate activity for our agents, resulting in incremental premium production. We have opportunities to increase our sales through cross selling life insurance products to Farm Bureau members who already own a property-casualty policy offered by Farm Bureau affiliated property-casualty companies. For example, in the six-state region where we manage the affiliated property-casualty insurance company and related field force (Arizona, Iowa, Minnesota, New Mexico, South Dakota and Utah), approximately 25% of the Farm Bureau members own at least one of our life products, 65% own at least one Farm Bureau property-casualty product and approximately 20% own both. GROWTH STRATEGY #2 - ALLIANCES AND RELATIONSHIPS WITH OTHER COMPANIES. Our alliance partner strategy began as variable product alliances with us providing our partner companies with their own brand-labeled competitive variable products. With this strategy, we obtain access to additional distribution systems and our partners are provided with access to variable products and share in the underwriting results without developing the infrastructure and know-how to underwrite and administer the business. Since December 1998, we have developed variable product alliances with the following companies: American Equity Investment Life Insurance Company Berthel Fisher & Company Country Life Insurance Company Farm Bureau Life Insurance Company of Missouri Modern Woodmen of America (scheduled to begin production in the Spring of 2002) National Travelers Life Company Southern Farm Bureau Life Insurance Company United Farm Family Life Insurance Company Variable sales by our alliance partners are generally underwritten by EquiTrust, but may be underwritten by our alliance partner. With respect to our alliances with insurance companies, the risks, costs and profits of the business are shared, generally on an equal basis, through reinsurance arrangements. For all of our alliance partners, we perform various administrative processing and other services with respect to the variable business written. Prior to 2001, our alliances had been for the sale of our variable products, but in 2001 our alliance strategy was refined to include other types of relationships with partner companies. This strategy now also includes our coinsurance and services agreement with NTL and coinsurance agreement with American Equity. We believe that our alliance strategy has significant growth potential from several perspectives. Growth can be achieved through our existing variable alliances with additional product offerings, an increased number of registered representatives, and a higher average production per registered representative. Our relationships with Kansas Farm Bureau Life, NTL and American Equity all began as variable alliance partnerships, but expanded as they got to know us and how we do business. We believe that by providing our current alliance partners with a high level of service as we work with them on daily basis, they may grow into further opportunities. We are also targeting additional alliance partners for variable product, traditional product, coinsurance and management relationships. 2 GROWTH STRATEGY #3 - CONSOLIDATIONS. In January 2001, we finalized our acquisition of Kansas Farm Bureau Life. Kansas Farm Bureau Life was a good strategic fit with our overall business strategy as they served the same niche marketplace, yet in a separate geographic territory. Consolidations expand our distribution systems, generate top-line revenue growth and provide us with a larger base over which to spread our fixed operating costs. These items, in turn, put us in a better position to offer competitive products and to invest in the infrastructure necessary to stay competitive in the maturing life insurance industry. We have a long and successful history of being a consolidator among Farm Bureau affiliated insurance companies and have grown over the years from being a single state Farm Bureau company to operating in 15 core states in the Midwest and West. In addition to our 2001 acquisition of Kansas Farm Bureau Life, we acquired Utah Farm Bureau Life Insurance Company in 1984, Rural Security Life Insurance Company in 1993 and Western Farm Bureau Life Insurance Company in 1994. Since 1984, we also have taken over the management of property-casualty companies operating in four states. We believe, as a publicly held company, we are well positioned to be the consolidator of choice among Farm Bureau companies should the opportunity arise. We are actively working to grow our operations via consolidations. We are focused on being a consolidator in the Farm Bureau network of insurance companies and, given the right set of circumstances, with other insurance companies that would be a compatible fit for FBL. We also continue to seek out consolidation opportunities that would increase our limited public float. As we seek to grow our operations via consolidation, we will only look at consolidation opportunities that are beneficial to our shareholders. MARKETING AND DISTRIBUTION MARKET AREA Our sales are principally conducted in the following core Farm Bureau marketing territory: multi-line states (we own the Farm Bureau affiliated life company and manage the Farm Bureau affiliated property-casualty company) - Arizona, Iowa, Minnesota, New Mexico, South Dakota and Utah; and life only states (we own the Farm Bureau affiliated life company only) - Colorado, Idaho, Kansas, Montana, Nebraska, North Dakota, Oklahoma, Wisconsin and Wyoming. Additionally, our variable alliance partners market throughout the United States. Our core target market consists primarily of farmers, ranchers, rural and suburban residents and related individuals and businesses. We believe that this target market represents a relatively financially conservative and stable customer base, which is generally familiar with Farm Bureau and the benefits of Farm Bureau membership. Many of our customers are self-employed individuals who are responsible for providing for their own insurance needs. Their financial planning needs tend to focus on security, primary insurance needs and retirement savings. AFFILIATION WITH FARM BUREAU Many of our customers are members of Farm Bureau organizations affiliated with the American Farm Bureau Federation, the nation's largest grass roots farm and ranch organization with over 5.1 million member families. In order to market insurance products in a given state using the "Farm Bureau" and "FB" designations and related trademarks and service marks, a company must have permission from the state's Farm Bureau federation. Generally, these marketing rights have only been granted to companies owned by or closely affiliated with Farm Bureau federations. For each of the states in our core Farm Bureau marketing territory, we have the exclusive right to use the "Farm Bureau" name and "FB" logo for marketing products in those states. The American Farm Bureau Federation has the right to terminate our right to use the "Farm Bureau" and "FB" designations in all of 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 Iowa Farm Bureau's membership in the American Farm Bureau or (iii) in the event of a material breach of the Iowa Farm Bureau Federation's membership agreement with the American Farm Bureau Federation, including by reason of the failure of the Iowa Farm Bureau Federation to cause us to adhere to the American Farm Bureau Federation's policies. Each state Farm Bureau federation in our trade territory could terminate our right to use the Farm Bureau designations in that particular state without cause subject to a notification requirement that ranges from 60 days to ten years, depending on the state. 3 We believe our relationship with Farm Bureau provides a number of advantages. Farm Bureau organizations in our current territory tend to be well known and long established, have active memberships and provide a number of 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. Additionally, Farm Bureau members provide a financially conservative and stable target market which has resulted in persistency for our products that exceeds industry averages. Our life insurance products are currently available for sale to both members and non-members. Property-casualty products sold by the property-casualty insurance companies affiliated with Farm Bureau are generally only available for sale to Farm Bureau members. Annual Farm Bureau memberships in our core marketing territory generally cost $24 to $112 and are available to individuals and families who are farmers and ranchers, and to the general public as well. To facilitate our working relationship with state Farm Bureau organizations, the Presidents of the state Farm Bureau federations in our core marketing territory are eligible to serve on our Board of Directors. Each state Farm Bureau federation, or its assignee, benefits from its relationship with us through receipt of royalties. The royalties paid to a particular federation are based on the sale of our products in the respective state. For 2001, total royalties paid to Farm Bureau organizations were approximately $1.5 million. We have marketing agreements with all of the Farm Bureau property-casualty companies in our core marketing area, pursuant to which the property-casualty companies develop and manage an agency force that sells both property-casualty products for that company and life products for us. We pay them a fee for this service in the nature of an overwrite commission based on first year life insurance premiums and annuity deposits. The overwrite commissions are generally equal to one-third of the first year commissions paid to the agent. We paid overwrite commissions totaling $6.2 million in 2001. Our Advisory Committee, which consists of certain executives of Farm Bureau property-casualty insurance companies in our marketing territory, assists us in our relationships with the property-casualty organizations. The Advisory Committee meets on a regular basis to coordinate efforts and issues relating to the agency force and other related matters. We view the Advisory Committee as an important contributor to our success in marketing products through the Farm Bureau system. All of the state Farm Bureau federations in our core marketing area are associated with the American Farm Bureau Federation. The primary goal of the American Farm Bureau Federation is to improve the financial well-being and quality of life of farmers, ranchers and other rural residents through education and representation with respect to public policy issues. There are currently Farm Bureau federations in all 50 states and Puerto Rico. Within each state, Farm Bureau is generally organized at the county level. Farm Bureau programs generally include policy development, state and national lobbying activities, leadership development, speaker corps, media relations, crime prevention, marketing clubs, women's activities, young farmers activities, promotion and education and commodity promotion activities. Member services provided by Farm Bureau vary by state but often include newspapers and magazines, theft and arson rewards, eye care programs, accidental death insurance, credit card programs, computerized farm accounting services, electronic information networks, feeder cattle procurement services, health care insurance and financial planning services. EXCLUSIVE AGENCY FORCE - CORE MARKETING TERRITORY Our life insurance, annuities and sponsored mutual funds are currently marketed throughout our core marketing territory by an exclusive Farm Bureau force of approximately 1,980 agents and agency managers. We have a written contract with each member of our agency force. The contracts do the following: o Specify and limit the authority of the agents to solicit insurance applications on our behalf; o Describe the nature of the independent contractor relationship between us and the agent; o Define the agent as an exclusive agent limited to selling insurance of the types sold on our behalf, or for certain products, on the behalf of other insurance companies approved by us; o Allow either party to immediately terminate the contract; o Specify the compensation payable to the agents; o Reserve our ownership of customer lists; and o Set forth all other terms and conditions of the relationship. 4 Sales activities of our agents focus on personal contact and on cross selling the multiple lines of products available through Farm Bureau affiliated companies. Agents' offices are often located in or serve as the Farm Bureau office for their community. We believe that Farm Bureau name recognition and access to Farm Bureau membership leads to additional customers and cross selling of additional insurance products. Our agents are independent contractors and exclusive agents. In the multi-line states where we manage the Farm Bureau affiliated property-casualty company, our agents are supervised by agency managers employed by the property-casualty companies which are under our direction. There are approximately 730 agents and managers in our multi-line states, all of whom market a full range of our life insurance products and our mutual funds. These agents and agency managers also market property-casualty products for the property-casualty companies that we manage. In our life only states, our life insurance products and sponsored mutual funds are marketed through agents managed by the property-casualty company affiliated with the Farm Bureau federation of that state. These agents, of which there are approximately 1,250, market our life and mutual fund products on an exclusive basis and market the property-casualty products of that state's affiliated property-casualty companies. Agents as well as agency managers in our life only states are independent contractors. Approximately 97% of the agents in our multi-line states are licensed with the National Association of Securities Dealers (NASD) to sell our variable life and annuity products and sponsored mutual funds. We continue to emphasize the training of agents for NASD licensing in our life only territories, where approximately 72% of the agents are NASD licensed. 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 only 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 volume of new life business written in the prior 12 months and on premium payments in the first three years after new business is written. Production bonuses allow agents to increase their compensation significantly. Persistency is a common measure of the quality of life business and is included in calculating the bonus to either increase or decrease (or even eliminate) the production bonuses earned, because we are willing to pay added incentives for higher volumes of business only as long as the business is profitable. In 2001, approximately 40% of agent compensation in our multi-line states was derived from the sale of life and annuity products. The focus of agency managers is to recruit and train agents to achieve high production levels of profitable business. Agency managers receive overwrite commissions on each agent's life insurance commissions which vary according to that agent's productivity level and persistency of business. During the first three years of an agent's relationship with us, the agent's manager receives additional overwrite commissions to encourage early agent development. Early agent development is also encouraged through financing arrangements and, at the option of the agent, the annualization of commissions paid when a life policy is sold. We have a variety of incentives and recognitions to focus agents on production of quality life insurance business. Some recognitions are jointly conducted with the property-casualty companies. We believe that these programs provide significant incentives for the most productive agents. Approximately 7% of our agents qualify for our annual incentive trip. Agent recruiting, training and financing programs are designed to develop a productive agent for the long term. The one-year agency force retention rate for 2001 in our multi-line states was approximately 91%. We believe retention of agents is enhanced because of their ability to sell both life and property-casualty insurance products, as well as mutual funds. 5 EXCLUSIVE AGENCY FORCE - EQUITRUST In addition to our exclusive Farm Bureau agents in our core marketing territory, on a pilot basis, we have expanded our distribution to include a small number of agents in select states who sell products under the EquiTrust name. The significance of this is our growing ability to distribute EquiTrust life insurance products beyond our core Farm Bureau territory, without the presence of an alliance partner. AGENCY FORCE - ALLIANCE PARTNERS Our Farm Bureau alliance partners have over 6,400 exclusive agents that are dedicated to selling insurance products using the Farm Bureau brand. The number of Farm Bureau alliance partner agents licensed to sell variable products has grown steadily from 3% at December 31, 1998 to approximately 31% at February 28, 2002. Our partners continue working with their other agents to license them to become registered representatives. Our Farm Bureau alliance partners have incentive programs, like ours, to promote the sale of life insurance and annuity products. The agents earn credit for these incentives by selling our variable products. Our alliance partners outside the Farm Bureau network have approximately 38,700 agents, most of which are independent agents that have access to outside variable products and are not limited solely to our variable products. While many of our alliance partners' agents are not currently licensed for the sale of variable life insurance and variable annuity products, the alliance partners are promoting the licensing of existing agents and the recruitment of agents that are licensed. Our variable product alliance partners are responsible for managing and training their own agency force. We provide each partner with assistance on how to train their agents in the sale of variable products. In addition to our variable product alliances, we assume new traditional life and traditional annuity business written by NTL and traditional and equity-indexed annuity business written by American Equity. NTL has approximately 3,800 independent agents and is licensed in 42 states. American Equity has approximately 33,900 independent agents and is licensed in 45 states. SEGMENTATION OF OUR BUSINESS Prior to January 1, 2001, our life insurance segment was our only reportable operating segment. The life insurance segment included activities related to the sale of life insurance, annuities and accident and health insurance products. Operations were aggregated into the same segment due to the similarity of the products, including the underlying economic characteristics, the method of distribution and the regulatory environment. During 2001, a financial reporting project to refine our line of business detail was completed. With the availability of more detailed line of business information, management now utilizes financial information regarding products that are aggregated into three product segments. These product segments are (1) traditional annuity, (2) traditional and universal life insurance and (3) variable. We also have a corporate and other segment that consists of the following corporate items and products/services that do not meet the quantitative threshold for separate segment reporting: o Investments and related investment income not specifically allocated to our product segments; o Interest expense and minority interest pertaining to distributions on trust preferred securities; o Accident and health insurance products, primarily long-term disability income insurance; o Advisory services for the management of investments and other companies; o Marketing and distribution services for the sale of mutual funds and insurance products not issued by us; and o Leasing services, primarily with affiliates. See Note 15 of the notes to consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Segment Information" for additional information regarding our financial results by operating segment. TRADITIONAL ANNUITY SEGMENT We sell a variety of traditional annuity products through our exclusive agency force in our core marketing territory. In addition, we assume annuity business from NTL and American Equity. The traditional annuity segment consists of traditional and equity-indexed annuities and supplementary contracts. Traditional and equity-indexed annuities provide for tax-deferred savings and supplementary contracts provide for the systematic repayment of funds that accumulate interest. The following table sets forth our annuity premiums collected for the years indicated: 6
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Traditional annuity: First year - individual .................... $ 67,721 $ 28,372 $ 31,471 $ 32,638 $ 32,168 Renewal - individual ....................... 35,692 13,853 19,440 19,137 21,834 Group ...................................... 3,539 2,730 1,227 1,022 7,241 ---------- ---------- ---------- ---------- ---------- Total traditional annuity .................... 106,952 44,955 52,138 52,797 61,243 Reinsurance assumed - NTL .................... 1,819 136 190 22,034 -- Reinsurance assumed - American Equity ........ 280,016 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total traditional annuity, net of reinsurance $ 388,787 $ 45,091 $ 52,328 $ 74,831 $ 61,243 ========== ========== ========== ========== ==========
Collected traditional annuity premiums during 2001 increased $48.6 million as a result of the acquisition of Kansas Farm Bureau Life. The coinsurance of in force business from NTL on May 1, 2001 and American Equity on October 1, 2001 is excluded from the above table. At the inception of the coinsurance agreements, related traditional annuity reserves totaled $114.2 million for the NTL business and $138.7 million for the American Equity business. For our direct annuity premiums collected in our core Farm Bureau market territory, premiums collected in 2001 are concentrated in the following states: Kansas (45%), Iowa (23%) and Oklahoma (9%). FIXED RATE ANNUITIES. We offer annuities which are generally marketed to individuals in anticipation of retirement. We offer traditional annuities principally in the form of flexible premium deferred annuities 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 54% of our existing individual direct 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. In addition to flexible premium deferred annuities, we also market single premium immediate annuity (SPIA) and single premium deferred annuity (SPDA) products. These products feature a single premium paid when the contract is issued and interest crediting similar to other traditional annuities. Benefit payments on SPIA contracts begin immediately after the issuance of the contract and, for SPDA, are similar to our other traditional annuity products. EQUITY-INDEXED ANNUITIES. Approximately 73% of the annuities that we assumed during 2001 from American Equity are equity-indexed annuities. These products allow purchasers to earn investment returns linked to the performance of a market index, without the risk of loss of their principal. The annuity contract value is equal to the premiums paid as increased for returns which are based upon minimum interest guarantees or a percentage (the "participation rate") of the annual appreciation (based in certain situations on monthly averages) in a recognized index such as the Standard and Poors 500. Some products apply an overall maximum limit (or "cap") on the amount of annual returns the contract holder may earn in any one contract year. In addition, the participation rate and cap may be adjusted annually subject to stated limits. American Equity purchases call options on the applicable indexes as an investment to provide the income needed to fund the amount of the annual appreciation required to be credited on the equity-index products. Through the underlying reinsurance contract, we participate in the cost and returns of the call options supporting the business we assume. INTEREST CREDITING AND PARTICIPATING DIVIDEND POLICY We have an asset/liability management 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 any initial guaranteed period. We examine earnings on assets by portfolio. We then establish rates based on each product's required interest spread and competitive market conditions at the time. Average credited rates on our direct annuity contracts were 5.83% in 2001, 5.75% in 2000 and 5.69% in 1999. 7 The following table sets forth in force information for our traditional annuity segment:
AS OF DECEMBER 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Number of direct contracts ........ 47,002 35,773 40,154 Interest sensitive reserves ....... $ 1,819,135 $ 962,614 $ 1,009,004 Other insurance reserves .......... 259,051 170,356 160,886
TRADITIONAL AND UNIVERSAL LIFE INSURANCE SEGMENT We sell a variety of traditional and universal life insurance products through our exclusive agency force in our core marketing territory. In addition, we assume traditional and universal life insurance from NTL. The traditional and universal 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. The following table sets forth our traditional and universal life insurance premiums collected for the years indicated:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Universal life: First year ................................. $ 1,806 $ 2,010 $ 2,747 $ 2,857 $ 3,522 Renewal .................................... 40,101 39,374 40,978 42,263 44,969 ---------- ---------- ---------- ---------- ---------- Total .................................... 41,907 41,384 43,725 45,120 48,491 Participating whole life: First year ................................. 5,871 2,616 3,003 3,226 3,646 Renewal .................................... 76,493 61,083 61,881 61,867 61,660 ---------- ---------- ---------- ---------- ---------- Total .................................... 82,364 63,699 64,884 65,093 65,306 Term life and other: First year ................................. 7,087 4,930 4,282 4,151 3,802 Renewal .................................... 28,666 19,394 18,122 16,676 15,513 ---------- ---------- ---------- ---------- ---------- Total .................................... 35,753 24,324 22,404 20,827 19,315 ---------- ---------- ---------- ---------- ---------- Total traditional and universal life .......... 160,024 129,407 131,013 131,040 133,112 Reinsurance assumed - NTL ..................... 11,482 -- -- -- -- Reinsurance ceded ............................. (7,822) (3,547) (4,184) (3,937) (3,979) ---------- ---------- ---------- ---------- ---------- Total traditional and universal life, net of reinsurance ................................ $ 163,684 $ 125,860 $ 126,829 $ 127,103 $ 129,133 ========== ========== ========== ========== ==========
Collected traditional and universal life insurance premiums during 2001 increased $26.0 million as a result of the acquisition of Kansas Farm Bureau Life. The coinsurance of in force business from NTL on May 1, 2001 is excluded from the above table. At the inception of this coinsurance agreement, related traditional and universal life insurance reserves totaled $209.1 million. For our direct traditional and universal life premiums collected in our core Farm Bureau market territory, premiums collected in 2001 are concentrated in the following states: Iowa (25%), Kansas (19%) and Oklahoma (12%). 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 40% of receipts from policyholders during 2001 and represented 16% of life insurance in force at December 31, 2001. 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 values. We may change the premium scales at any time but may not increase rates above guaranteed levels. In the past, we sold participating term insurance, but this product has been discontinued. 8 UNIVERSAL LIFE INSURANCE. Our universal life policies provide permanent life insurance protection with a flexible 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. Agents need not be registered with the NASD to offer this product. We also market a last survivor universal life policy designed especially for the estate planning market. 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 a professional underwriting staff of 15 underwriters who have an average of 16 years of experience in the insurance industry. Our underwriters review each applicant's written application, which is prepared under the supervision of our agents, and any required medical records. We employ blood and urine testing (including HIV antibody testing) to provide additional information whenever the applicant is 18 and 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. Any 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. LAPSE RATES Our persistency rate has historically exceeded industry averages. A summary of our individual life insurance lapse rates (for our direct traditional, universal life and variable life insurance products), compared to industry averages, is outlined in the following table:
LAPSE RATES FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- Our life insurance lapse rates ........... 6.4% 7.9% 8.1% 7.2% 7.0% Industry life insurance lapse rates ...... (A) 8.7 8.2 8.32 8.5 (A) The industry lapse rate for 2001 is not available as of the filing date of this Form 10-K.
REINSURANCE We reinsure a portion of our life insurance exposure with unaffiliated insurance companies under traditional indemnity reinsurance agreements. New insurance sales are reinsured above prescribed limits and do not require the reinsurer's prior approval within certain guidelines. These treaties are automatically renewed and nonterminable for the first 10 years with regard to cessions already made and are terminable after 90 days with regard to future cessions. After 10 years, we have the right to terminate and can generally discontinue the reinsurance on a block of business. This is normally done to increase our retention on older business to the same level as current cessions. Generally, 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 life policies issued after June 30, 1999 is $1,100,000. For policies issued prior to July 1, 1999, the maximum retention is generally limited to $600,000. In addition, we participate with various unaffiliated life insurance companies in a reinsurance pool to mitigate the impact of a catastrophic event on our financial position and results of operations. Members of the pool share in the eligible catastrophic losses based on their size and contribution to the pool. Under the pool arrangement, we are able to cede catastrophic losses after other reinsurance and a deductible of $0.4 million, subject to a pool cap of $125.0 million per event. 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. 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 monitor the financial strength of our reinsurers. If for any reason reinsurance coverages would need to be replaced, we believe that replacement coverages from financially responsible reinsurers would be available. 9 INTEREST CREDITING AND PARTICIPATING DIVIDEND POLICY The interest crediting and participating dividend policies for our traditional and universal life insurance products are the same as our traditional annuity products. See "Interest Crediting and Participating Dividend Policy" under the traditional 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 direct universal life contracts were 5.90% in 2001, 5.99% in 2000 and 6.01% in 1999. 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. The following table sets forth in force information for our traditional and universal life insurance segment:
AS OF DECEMBER 31, ------------------------------------------------ 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT FACE AMOUNTS IN MILLIONS) Number of direct policies - traditional life .... 320,232 258,789 262,363 Number of direct policies - universal life ...... 63,666 61,364 64,470 Direct face amounts - traditional life .......... $ 16,730 $ 11,649 $ 10,758 Direct face amounts - universal life ............ 4,916 4,821 5,043 Interest sensitive reserves ..................... 730,698 532,201 526,361 Other insurance reserves ........................ 1,161,372 840,745 829,430
VARIABLE SEGMENT We sell several variable products through our exclusive agency force in our core marketing territory. In addition, we receive variable business through our unique variable product alliances. The variable segment consists of variable universal life insurance and variable annuity contracts. These products are similar to universal life insurance and traditional annuity contracts, except the contract holder has the option to direct the cash value of the contract to a wide range of investment sub-accounts, thereby passing the investment risk to the contract holder. The following table sets forth our variable premiums collected for the years indicated:
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Variable annuities: First year - core distribution ....... $ 34,481 $ 30,916 $ 26,034 $ 24,891 $ 23,773 First year - alliance partners (1) ... 10,319 21,710 8,888 490 -- Renewal - core distribution .......... 8,861 6,763 5,135 4,616 3,641 Renewal - alliance partners (1) ...... 1,084 318 -- -- -- Internal rollover .................... 4,592 14,989 7,097 11,469 6,240 ------------ ------------ ------------ ------------ ------------ Total .................................. 59,337 74,696 47,154 41,466 33,654 Variable universal life: First year - core distribution ....... 13,186 14,594 13,385 15,272 12,427 First year - alliance partners (1) ... 1,272 1,462 1,468 98 -- Renewal - core distribution .......... 37,208 32,077 27,399 22,423 19,156 Renewal - alliance partners (1) ...... 464 216 -- -- -- Internal rollover .................... 5,616 10,024 10,052 18,032 7,824 ------------ ------------ ------------ ------------ ------------ Total .................................. 57,746 58,373 52,304 55,825 39,407 ------------ ------------ ------------ ------------ ------------ Total variable ......................... 117,083 133,069 99,458 97,291 73,061 Reinsurance ceded ...................... (746) (727) (657) (695) (702) ------------ ------------ ------------ ------------ ------------ Total variable, net of reinsurance ..... $ 116,337 $ 132,342 $ 98,801 $ 96,596 $ 72,359 ============ ============ ============ ============ ============ (1) Amounts are net of portion ceded to and include amounts assumed from alliance partners.
10 In 2001, as was the case across the industry, our variable sales decreased. We believe this decrease is due to the uncertain equity market environment during 2001. Prior to that time, our variable sales had increased due to our marketing emphasis on variable products coupled with a program for the rollover of universal life policies to variable universal life policies. Of the total variable premiums collected, collected premiums for 2001 are concentrated in Iowa (40%) and Minnesota (10%). VARIABLE UNIVERSAL LIFE INSURANCE. We offer variable universal life policies that are similar in design to the universal life policy, but the policyholder has the ability to direct the cash value of the policy to an assortment of variable sub-accounts and, in turn, assumes the investment risk passed through by those funds. Variable universal life policyholders can also elect a declared interest option under which the cash values are credited with interest as declared. See "Variable Sub-Accounts and Mutual Funds." VARIABLE ANNUITIES. For variable annuities, policyholders have the right to direct the cash value of the policy into an assortment of sub-accounts, thereby assuming the investment risk passed through by those sub-accounts. Policyholders can select from variable sub-accounts managed by us as well as sub-accounts that are managed by outside investment advisors. The sub-account options for variable annuity contracts are the same as those available for variable universal life policies. See "Variable Sub-Accounts and Mutual Funds." UNDERWRITING AND REINSURANCE Our underwriting standards and reinsurance programs for our variable life products are the same as our standards and programs for our traditional and universal life insurance products. See "Underwriting" and "Reinsurance" under the traditional and universal life insurance segment discussion. The following table sets forth in force information for our variable segment:
AS OF DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT FACE AMOUNTS IN MILLIONS) Number of direct contracts - variable annuity ......... 14,517 12,643 9,058 Number of direct policies - variable universal life ... 67,367 62,297 54,741 Direct face amounts - variable universal life ......... $ 6,798 $ 6,131 $ 5,224 Separate account assets ............................... 356,448 327,407 256,028 Interest sensitive reserves ........................... 129,254 104,143 90,630 Other insurance reserves .............................. 20,025 17,938 15,396
CORPORATE AND OTHER SEGMENT Effective September 1, 2001, we entered into a 100% coinsurance agreement to reinsure with an affiliated insurer our individual disability income business acquired in the Kansas Farm Bureau Life acquisition. Effective September 1, 2000, we entered into a similar arrangement with the same insurer to reinsure our individual disability income business in force at that time. At September 1, 2001, the related accident and health reserves totaled $14.4 million, deferred policy acquisition costs totaled $0.7 million and value of insurance in force acquired totaled $3.1 million. At September 1, 2000, the related accident and health reserves totaled $43.6 million and deferred acquisition costs totaled $11.8 million. We settled these transactions by transferring cash and investments equal to the reserves on the business. In addition, we received cash totaling $3.0 million in 2001 and $11.1 million in 2000 as consideration for the transactions. A loss of $0.8 million in 2001 and $0.7 million in 2000 on the transactions has been deferred and is being recognized over the term of the underlying policies. We have exited this business to focus on our life insurance and annuity product lines. VARIABLE SUB-ACCOUNTS AND MUTUAL FUNDS We sponsor the EquiTrust Series Fund, Inc. (the Series Fund) and EquiTrust Variable Insurance Series Fund (the Insurance Series Fund) (collectively, the EquiTrust Funds) which are open-end, diversified series management investment companies. The Series Fund is available to the general public. The Insurance Series Fund offers its shares, without a sales charge, only to our separate accounts and to our alliance partners' separate accounts as an investment medium for variable annuity contracts or variable life insurance policies. These Funds each currently issue shares in six investment series (a Portfolio or collectively the Portfolios) with the following distinct investment objectives: 11 (1) long-term capital appreciation by investing in equity securities which have a potential to earn a high return on capital or are undervalued by the marketplace; (2) as high a level of current income as is consistent with investment in a portfolio of debt securities deemed to be of high grade; (3) as high a level of current income as is consistent with investment in a portfolio of fixed-income securities rated in the lower categories of established rating services; (4) high total investment return of income and capital appreciation by investing in growth common stocks, high grade debt securities and preferred stocks and high quality short-term money market instruments; (5) high current income consistent with liquidity and stability of principal; and (6) an unmanaged index fund, which seeks growth of capital and income by investing primarily in common stocks of designated well-capitalized, established companies. The net assets of the EquiTrust Funds at December 31, 2001 aggregated $424.1 million. EquiTrust Investment Management Services, Inc. (the Advisor), a subsidiary, receives an annual fee based on the average daily net assets of each EquiTrust Portfolio that ranges from 0.25% to 0.60% for the Series Fund and from 0.20% to 0.45% for the Variable Insurance Series Fund. The Advisor also serves as distributor and principal underwriter for the EquiTrust Funds. The Advisor receives from the Series Fund a 0.50% annual distribution services fee, a 0.25% annual administration services fee and a 0.05% accounting fee, and receives directly any contingent deferred sales charge paid on the early redemption of shares. EquiTrust Marketing Services, LLC, another subsidiary, serves as the principal dealer for the Series Fund and receives commissions and service fees. Our variable products also include sub-accounts that invest in funds managed by outside investment advisors in addition to our proprietary funds. We receive an administrative service fee from the outside investment advisors ranging from 0.05% to 0.25% (annualized) of the sub-account values, generally once the sub-accounts meet a predetermined asset threshold. The outside investment advisors and related sub-accounts available to our variable contract holders include Fidelity Management & Research Company (7 sub-accounts), Dreyfus Corporation (6 sub-accounts), T. Rowe Price Associates, Inc. (5 sub-accounts), Franklin Advisers, Inc. (5 sub-accounts), Summit Investment Partners, Inc. (3 sub-accounts), American Century Investment Management Services, Inc. (2 sub-accounts), and JP Morgan Investment Management Inc. (2 sub-accounts). We also sponsor a money market fund, EquiTrust Money Market Fund, Inc. (Money Market Fund), which is a no-load open-end diversified management investment company with an investment objective of maximum current income consistent with liquidity and stability of principal. The Advisor acts as the investment advisor, manager and principal underwriter of the Money Market Fund and receives an annual management fee, accrued daily and payable monthly at 0.25%, and certain other fees. The net assets of the Money Market Fund were $26.9 million at December 31, 2001. EquiTrust Series Fund, Inc. and EquiTrust Money Market Fund, Inc. are offered through registered representatives of EquiTrust Marketing Services, LLC. For more complete information including fees, charges and other expenses, obtain a prospectus from EquiTrust Marketing Services, LLC, 5400 University Avenue, West Des Moines, Iowa 50266. Read the prospectus before you invest or pay money. RATINGS AND COMPETITION Ratings are an important factor in establishing the competitive position of insurance companies. Farm Bureau Life is rated "A+(Superior)" by A.M. Best, A.M. Best's second highest rating of 13 ratings assigned to solvent insurance companies, which currently range from "A++(Superior)" to "D (Poor)." Farm Bureau Life has maintained its existing "A+(Superior)" rating since A.M. Best first began using this rating methodology. EquiTrust is rated "A- (Excellent)" by A.M. Best. A.M. Best ratings consider claims paying ability and are not a rating of investment worthiness. We operate in a highly competitive industry. The operating results of companies in the insurance industry have been historically subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings from rating agencies such as A.M. Best 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 high ratings from A.M. Best. 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. 12 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, mutual funds, investment advisor and certain licensed broker-dealers and agents are also subject to regulation by the Securities and Exchange Commission, the NASD and state agencies. Increased scrutiny has been placed upon the insurance regulatory framework, 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. 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, risk-adjusted capital guidelines, interpretations of existing laws, the development of new laws, the implementation of nonstatutory guidelines and the circumstances under which dividends may be paid. We do not believe the adoption in any of our operating states 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. EMPLOYEES At February 1, 2002, we had approximately 1,340 employees. Many employees and the executive officers also provide services to Farm Bureau Mutual Insurance Company and other affiliates pursuant to management agreements. None of our employees are members of a collective bargaining unit. We believe that we have good employee relations. ITEM 2. PROPERTIES Our principal operations are conducted from property leased from a subsidiary of the Iowa Farm Bureau Federation under a 15 year operating lease which expires in 2013. The property leased currently consists of approximately 180,000 square feet of a 400,000 square foot office building in West Des Moines, Iowa. We also lease 22,000 square feet of an office building in Manhattan, Kansas under an operating lease that expires in 2006. We consider the current facilities to be adequate for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS We are a party to lawsuits arising in the normal course of business. We believe the resolution of these lawsuits will not have a material adverse effect on our financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 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 for each quarter of 2001 and 2000.
COMMON STOCK DATA (PER SHARE) 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. ---------- ---------- ---------- ---------- 2001 High ........................................ $ 17.620 $ 18.450 $ 19.500 $ 18.390 Low ......................................... 14.760 15.200 15.400 16.350 Dividends declared and paid ................. $ 0.10 $ 0.10 $ 0.10 $ 0.10 2000 High ........................................ $ 19.750 $ 16.875 $ 17.000 $ 17.875 Low ......................................... 12.375 12.625 12.125 12.500 Dividends declared and paid ................. $ 0.09 $ 0.09 $ 0.09 $ 0.09
There is no established public trading market for our Class B common stock. As of March 1, 2002, there were approximately 3,000 holders of Class A common stock, including participants holding securities under the name of a broker (i.e., in "street name"), and 26 holders of Class B 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 during 2002 will be $0.10 per common share. For restrictions on dividends, see "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity" and Notes 1 and 14 to the consolidated financial statements. On January 1, 2001, we acquired the assets and liabilities of Kansas Farm Bureau Life Insurance Company. As consideration for the purchase, we issued 3,411,000 shares of Series C cumulative voting mandatorily redeemable preferred stock with an estimated fair value of $80.0 million to The Kansas Farm Bureau. Each share of Series C preferred stock has a par value of $26.8404 and voting rights identical to that of Class A common stock. Dividends on the Series C preferred stock are payable quarterly at a rate equal to the regular cash dividends per share of common stock, as defined, then payable. The mandatory redemption is structured so that 49.5% of the Series C preferred stock will be redeemed at par value, or $45.3 million, on January 2, 2004 with the remaining 50.5% redeemed at par value, or $46.3 million, on January 3, 2006. In the event of a change in the control of the Company, at the option of the holder, each share of Series C preferred stock is convertible into one share of Class A common stock or redeemable for cash at par. The Series C preferred stock is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. 14 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (1)
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA Interest sensitive product charges ............. $ 70,492 $ 59,780 $ 55,363 $ 52,157 $ 47,979 Traditional life insurance premiums ............ 114,998 83,830 82,569 81,752 81,188 Accident and health premiums ................... 3,044 9,654 13,361 11,721 11,340 Net investment income .......................... 285,087 221,369 225,820 228,067 220,366 Realized gains (losses) on investments ......... (15,878) (25,960) (2,342) (4,878) 40,953 Total revenues ................................. 474,590 367,618 394,986 389,621 421,351 Income from continuing operations .............. 40,401 38,747 54,325 52,675 75,128 Cumulative effect of change in accounting for derivative instruments ....................... 344 -- -- -- -- Income/gain from discontinued operations ....... -- 600 1,385 1,265 699 Net income ..................................... 40,745 39,347 55,710 53,940 75,827 Net income applicable to common stock .......... 36,543 39,197 55,560 53,790 73,656 Per common share: Income from continuing operations ............ 1.32 1.27 1.68 1.56 2.01 Income from continuing operations - assuming dilution .......................... 1.30 1.25 1.65 1.52 1.97 Earnings ..................................... 1.33 1.29 1.72 1.60 2.03 Earnings - assuming dilution ................. 1.31 1.27 1.69 1.56 1.99 Cash dividends ............................... 0.40 0.36 0.33 0.30 0.20 Weighted average common shares outstanding - assuming dilution .............. 27,867,140 30,799,891 32,829,972 34,400,513 36,971,236 CONSOLIDATED BALANCE SHEET DATA Total investments .............................. $ 4,300,856 $ 2,870,659 $ 2,950,200 $ 3,031,436 $ 2,940,911 Assets held in separate accounts ............... 356,448 327,407 256,028 190,111 138,409 Total assets ................................... 5,629,189 3,704,046 3,662,331 3,650,960 3,601,526 Long-term debt ................................. 40,000 40,000 40,000 71 24,577 Total liabilities .............................. 4,883,574 3,130,101 3,060,178 2,965,869 2,894,708 Company-obligated mandatorily redeemable preferred stock of subsidiary trust .......... 97,000 97,000 97,000 97,000 97,000 Series C redeemable preferred stock ............ 82,691 -- -- -- -- Total stockholders' equity ..................... 565,793 476,803 505,008 583,588 605,315 Book value per common share .................... 20.53 17.35 15.94 17.75 16.77 Book value per common share, securities at cost ......................................... 19.10 18.13 17.46 16.14 15.36 OTHER DATA (UNAUDITED) Operating income applicable to common stock (2) .................................... $ 45,218 $ 54,332 $ 55,201 $ 55,998 $ 46,977 Operating income per common share - assuming dilution (2) ........................ 1.62 1.76 1.68 1.63 1.27 Statutory capital and surplus (3) .............. 378,226 311,901 301,542 376,929 360,782 Net statutory premiums collected (4) ........... 672,097 312,854 291,281 310,247 274,105 Life insurance in force, net ................... 27,456,025 20,544,870 19,198,748 18,367,078 17,132,235
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (1) Amounts for 2001 are impacted by the acquisition of Kansas Farm Bureau Life Insurance Company, Inc. effective January 1, 2001 and coinsurance transactions with National Travelers Life Insurance Company and American Equity Investment Life Insurance Company during 2001. (2) Operating income equals net income adjusted to eliminate certain items which we believe are not indicative of operating trends because they are unusual and/or nonrecurring in nature, including the impact of realized gains (losses) on investments, gain on sale of discontinued operations and cumulative effect of change in accounting for derivative instruments. (3) Statutory data has been derived from the annual statements of our insurance subsidiaries, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. (4) Net statutory premiums include premiums collected from annuities and universal life-type products. For GAAP reporting, such premiums received are not reported as revenues. Amounts include internal rollover premiums to variable universal life or variable annuity contracts totaling $10.2 million in 2001, $25.0 million in 2000, $17.1 million in 1999, $29.5 million in 1998 and $14.1 million in 1997. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING SECTIONS INCLUDE A SUMMARY OF FBL FINANCIAL GROUP, INC.'S CONSOLIDATED RESULTS OF OPERATIONS, FINANCIAL CONDITION AND WHERE APPROPRIATE, FACTORS THAT MANAGEMENT BELIEVES MAY AFFECT FUTURE PERFORMANCE. PLEASE READ THIS DISCUSSION IN CONJUNCTION WITH THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. UNLESS NOTED OTHERWISE, ALL REFERENCES TO FBL FINANCIAL GROUP, INC. (WE OR THE COMPANY) INCLUDE ALL OF ITS DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE SUBSIDIARIES, FARM BUREAU LIFE INSURANCE COMPANY (FARM BUREAU LIFE) AND EQUITRUST LIFE INSURANCE COMPANY (EQUITRUST) (COLLECTIVELY, THE LIFE COMPANIES). OVERVIEW We sell universal life, variable universal life, and traditional life insurance and traditional and variable annuity products. These products are principally marketed through a core distribution force consisting of approximately 1,980 exclusive Farm Bureau agents in the midwestern and western sections of the United States. Variable universal life and variable annuity products are also marketed in other states through alliances with unaffiliated Farm Bureau companies. We also market variable products through alliances with two life insurance companies and a regional broker/dealer not affiliated with Farm Bureau. In addition to writing direct insurance business, we assume through coinsurance agreements a percentage of certain business written by National Travelers Life Company (NTL) and American Equity Investment Life Insurance Company (American Equity). These coinsurance agreements utilize excess capital and increase our volume of business in force. Several subsidiaries support various functional areas of the Life Companies and other affiliates, by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage NTL and two Farm Bureau affiliated property-casualty insurance companies. We use both net income and operating income to measure our performance. Operating income represents net income excluding the impact of realized gains and losses on investments, cumulative effect of change in accounting principle and discontinued operations. The impact of realized gains and losses on investments includes adjustments for income taxes and that portion of amortization of deferred policy acquisition costs, unearned revenue reserve and value of insurance in force acquired attributable to such gains. While operating income is commonly used in the insurance industry as a measure of on-going earnings performance, it is not a substitute for net income determined in accordance with accounting principles generally accepted in the United States (GAAP). SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES In accordance with GAAP, premiums and considerations received for interest sensitive products such as universal life insurance and ordinary annuities are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for interest sensitive products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses. The Life Companies receive investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited. Amounts for interest credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the consolidated financial statements. Premium revenues reported for traditional life insurance products are recognized as revenues when due. Future policy benefits are recognized as expenses over the life of the policy by means of the provision for future policy benefits. For variable universal life and variable annuities, premiums received are not reported as revenues. Similar to universal life and traditional annuities, revenues reported consist of fee income and product charges collected from the policyholders. Expenses related to these products include benefit claims incurred in excess of policyholder account balances. The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized and amortized into expense. For nonparticipating traditional life and accident and health insurance products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy 16 benefits and are generally "locked in" at the date the policies are issued. For participating traditional life insurance and interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted when the Life Companies revise their estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity. Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to year based on the level of claims incurred under insurance retention limits. The profitability of the Life Companies is primarily affected by fluctuations in mortality, other policyholder benefits, expense levels, interest spreads (i.e., the difference between interest earned on investments and interest credited to policyholders) and persistency. We have the ability to mitigate adverse experience through adjustments to credited interest rates, policyholder dividends or cost of insurance charges. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. For example, significant estimates and assumptions are utilized in the following areas: o valuation of investments; o amortization of deferred policy acquisition costs; o valuation of allowances for deferred tax assets; o calculation of policyholder liabilities and accruals; and o determination of pension expense. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the consolidated financial statements. The following is a discussion of these significant areas of judgement. VALUATION OF INVESTMENTS Our fixed maturity securities classified as available for sale and our equity securities are reported at market value. Approximately 77% of our fixed maturity securities, and 76% of our equity securities, are actively traded. For actively traded securities market values are determined using quoted market prices obtained from various pricing sources. For fixed maturity securities that are not actively traded, fair values are principally estimated using a matrix calculation assuming a spread over U. S. Treasury bonds. The spread used in the matrix calculation is based on current interest rates, risk assessment of the bonds and the current market environment. For equity securities that are not actively traded, estimated fair values are principally based on values of comparable issues. Our internal investment professionals perform or review the valuation of securities that are not actively traded. This review and valuation process requires significant judgement in the determination of the inputs into the matrix calculations and in the identification of comparable issues. Our estimates of fair value for not actively traded securities have proven to be reliable based on the prices obtained when these types of securities are sold. However, although we believe our estimates reasonably reflect the fair value of the securities, our key assumptions used in the valuation process may not reflect those of an active market. When the value of a security declines and the decline is determined to be other than temporary, the carrying value of the investment is reduced to its fair value and a realized loss is recorded to the extent of the decline. In determining if and when a decline in market value below amortized cost is other-than-temporary for our investments in fixed maturity and equity securities, our investment professionals evaluate the operating results of the underlying issuer, general market conditions, causes for the decline in value, the length of time there has been a decline in value and other key economic measures. Considerable judgement is used in this evaluation process. While we believe we record other than temporary impairments on a timely basis, our key assumptions used in not writing down a particular security may prove to be wrong with the passage of time. The evaluation of securities that have a decline in fair value below amortized cost is an ongoing process and we continue to challenge the assumptions and inputs used in the evaluation process. 17 AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS Deferred policy acquisition costs totaled $360.2 million at December 31, 2001. Of this total, approximately 89.2%, or $321.3 million, relates to participating traditional life or interest sensitive products and 10.8%, or $38.9 million, relates to nonparticipating traditional life insurance products. Calculation of the amortization of deferred policy acquisition costs for participating life insurance and interest sensitive products involves significant judgement. As described above, amortization of these costs is dependent upon estimates of current and future gross profits or margins on this business. For nonparticipating traditional life insurance products, amortization is more straightforward as these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Key assumptions used in the calculation of the amortization of deferred policy acquisition costs for participating life insurance and interest sensitive products include the following: o yield on investments supporting the liabilities, o amount of interest or dividends credited to the policies, o amount of policy fees and charges, o amount of expenses necessary to maintain the policies, o amount of death and surrender benefits and o the length of time the policies will stay in force. Our estimate of how long the policies will remain in force varies by the type of product with life insurance products at 30 years and annuity products ranging from 15 to 30 years. The expected yield on investments supporting the liabilities ranges from 7.30% to 7.78% for traditional products and is 10.0% for variable products. The amount of expected interest or dividends to be credited to policies and policy fees and charges assessed are generally set at amounts equal to current levels. Future maintenance expense assumptions are based on current expense levels adjusted for inflation. These estimates, which are revised annually, are based on historical results and our best estimate of future experience. Amortization of deferred policy acquisition costs may increase or decrease if actual results vary from that currently anticipated or if a key assumption is revised. VALUATION OF ALLOWANCES FOR DEFERRED TAX ASSETS As of December 31, 2001, we have approximately $97.1 million of deferred tax assets for which no valuation allowance has been recorded. The deferred tax assets relate principally to book-to-tax differences in the recording of reserves for future policy benefits. The realization of these assets is based upon estimates of future taxable income and the timing of the reversal of offsetting deferred tax liabilities. We have historically generated sufficient taxable income to realize the deferred tax assets recorded as of December 31, 2001 and, based upon future projections of taxable income, do not believe a valuation allowance is necessary. CALCULATION OF POLICY LIABILITIES AND ACCRUALS The development of reserves for future policy benefits for non-interest sensitive insurance products requires the use of many assumptions, all of which require a certain level of judgement. Once established for a particular series of products, these assumptions are generally held constant. The underlying assumptions include the lives of the policies, mortality experience, lapse rates, surrender rates, and dividend crediting rates. These assumptions are made based upon our historical experience, industry standards and our best estimate of future results. The development of reserves for future policy benefits for equity-indexed products requires the valuation of the embedded derivatives relating to the contract holder's right to participate in one or more market indices. This valuation requires assumptions as to future volatility of the market indices, risk free interest rates, market returns and the lives of the contracts. These assumptions are revised at each balance sheet date and changes in the reserve pertaining to changes in assumptions are recorded as a component of net income in the period of the change. 18 DETERMINATION OF PENSION EXPENSE We participate with other Farm Bureau companies in a multiemployer defined benefit pension plan and record as expense our proportionate share of net periodic pension cost of the plan as determined in accordance with Statement of Financial Accounting Standard (Statement) No. 87, "Employers' Accounting for Pensions". Statement No. 87 generally reduces the volatility of pension expense from changes in pension liability discount rates and the performance of the pension plan's assets. The most significant element in determining our pension expense in accordance with Statement No. 87 is the expected return on plan assets. We have assumed that the expected long-term rate of return on plan assets will be 7.0%, which is approximately equal to the rate earned historically. We believe a long-term rate of 7.0% is reasonable. The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which produces the expected return on plan assets that is included in pension expense. The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future pension expense. If plan assets have a rate of return substantially less than 7.0%, future pension expense will be greater than that if rate of return was equal to or greater than 7.0%. At the end of each year, we determine the discount rate to be used to discount plan liabilities. The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, we look to rates of return on high quality, fixed-income investments. At December 31, 2001, we determined this rate to be 7.25%. Changes in discount rates over the past three years have not materially affected pension expense, and the net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, have been deferred as allowed by Statement No. 87. We recognized consolidated pretax pension expense of $5.3 million in 2001, $5.2 million in 2000 and $4.5 million in 1999. We do not expect that changes to pension plan assumptions will have a significant impact on pension expense for 2002. SIGNIFICANT TRANSACTIONS IMPACTING THE COMPARABILITY OF RESULTS During 2001, we entered into a coinsurance agreement with American Equity whereby we assumed 70% of certain fixed and equity-indexed annuity business written by American Equity from August 1, 2001 to December 31, 2001. The agreement also provides for reinsuring 40% of certain new business written by American Equity during 2002 and 2003. This agreement was accounted for as the reinsurance of an in force block of business as of October 1, 2001, and the regular coinsurance of the business written during the fourth quarter of 2001. Accordingly, our consolidated statement of income for 2001 includes revenues and expenses pertaining to this business for only the fourth quarter of 2001. Collected premiums assumed during the fourth quarter of 2001 totaled $280.0 million. Reserves transferred to us in connection with the assumption of the in force block of business totaled $138.7 million. Effective May 1, 2001, we entered into a coinsurance agreement with NTL whereby we assumed 90% of NTL's traditional life, universal life and annuity business in force. In addition, we agreed to assume 50% of NTL's traditional life, universal life and annuity business issued subsequent to May 1, 2001. Assets acquired on May 1, 2001 in connection with this transaction totaled $337.2 million. Collected premiums assumed during 2001 as a result of the NTL agreement totaled $13.3 million. Effective January 1, 2001, we acquired the assets and liabilities of Kansas Farm Bureau Life Insurance Company (Kansas Farm Bureau Life), a single-state life insurance company selling traditional life and annuity products in Kansas. In connection with this acquisition, we assumed all of Kansas Farm Bureau Life's insurance business through an assumption reinsurance agreement. As a result of the acquisition, our geographic market territory expanded into the state of Kansas for our traditional products and our exclusive agency force increased by 336 agents. Assets acquired with this transaction totaled $695.4 million. Premiums collected on business issued as a result of this acquisition during 2001 totaled $77.3 million. Revenues and expenses for 2001 increased compared to 2000 and 1999 as a result of the American Equity, NTL and Kansas Farm Bureau Life transactions. Operating income increased approximately $3.9 million, or $0.14 per common share, during the year ended December 31, 2001 as a result of this new business. See Notes 2 and 5 of the notes to consolidated financial statements for additional information regarding these transactions. 19 Consistent with our objective to exit the disability income line of business, effective September 1, 2001, we entered into a 100% coinsurance agreement to reinsure the individual disability income business acquired through the Kansas Farm Bureau Life transaction. As a result, the consolidated statements of income include the operating results from this accident and health business only through August 31, 2001. Effective September 1, 2000, we entered into a 100% coinsurance agreement to reinsure the individual disability income business on our books at that time. As a result, the consolidated statements of income include the operating results from this business only through August 31, 2000. A loss totaling $1.5 million on these coinsurance transactions has been deferred and is being recognized over the term of the underlying policies. RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2001 Net income applicable to common stock decreased 6.8% in 2001 to $36.5 million and 29.5% in 2000 to $39.2 million. Operating income applicable to common stock decreased 16.8% in 2001 to $45.2 million and 1.6% in 2000 to $54.3 million. The decrease in net income in 2001 is due primarily to a decrease in equity income and a reduction of net investment income resulting from stock repurchase activity during 2000. The impact of these items were partially offset by net income generated from the Kansas Farm Bureau Life, NTL and American Equity transactions, an increase in fee income from mortgage loan prepayments and bond calls and a reduction in realized losses on investments. See discussion following for details on the positive impact the stock repurchase activity had on a per share basis. The decrease in net income in 2000 is generally attributable to an increase in realized losses on investments, due principally to writedowns for other-than-temporary impairments in value. In addition, net investment income decreased due primarily to a decrease in fee income from mortgage loan prepayments and bond calls. These items are partially offset by an increase in equity income. The primary drivers of the differences in operating income are the contributions made by our 2001 acquisition and reinsurance transactions and the differences noted above in investment and equity income. The following is a reconciliation of net income to operating income.
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income applicable to common stock ........................... $ 36,543 $ 39,197 $ 55,560 Adjustments: Net realized losses on investments ........................... 9,019 15,735 1,026 Cumulative effect of change in accounting for derivative instruments ................................................ (344) -- -- Gain on disposal of property-casualty operations ............. -- (600) (1,385) ------------ ------------ ------------ Operating income applicable to common stock ..................... $ 45,218 $ 54,332 $ 55,201 ============ ============ ============ Earnings per common share - assuming dilution ................... $ 1.31 $ 1.27 $ 1.69 ============ ============ ============ Operating earnings per common share - assuming dilution ......... $ 1.62 $ 1.76 $ 1.68 ============ ============ ============
The change in earnings per common share from year to year is positively impacted by a decrease in the weighted average common shares outstanding during the three-year period ended December 31, 2001. Weighted average common shares outstanding, assuming dilution, decreased 9.5% in 2001 to 27,867,140 and 6.2% in 2000 to 30,799,891. These decreases are the result of acquisitions of common stock by the Company, primarily in 2000 and 1999. 20 A summary of our premiums and product charges is as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Premiums and product charges: Interest sensitive product charges .......................... $ 70,492 $ 59,780 $ 55,363 Traditional life insurance premiums ......................... 114,998 83,830 82,569 Accident and health premiums ................................ 3,044 9,654 13,361 ------------ ------------ ------------ Total .................................................... $ 188,534 $ 153,264 $ 151,293 ============ ============ ============
PREMIUMS AND PRODUCT CHARGES increased 23.0% in 2001 to $188.5 million and 1.3% in 2000 to $153.3 million. The increase in 2001 is due primarily to the addition of the Kansas Farm Bureau Life, NTL and American Equity business. Revenues from this business in 2001 included interest sensitive product charges of $8.3 million, traditional life insurance premiums of $28.8 million and accident and health premiums of $2.7 million. In addition, cost of insurance charges, which are included in interest sensitive product charges, increased as a result of an increase in the volume and age of business in force. Accident and health premiums decreased as a result of 100% coinsurance agreements to reinsure our individual long-term disability income business effective September 1, 2001 and 2000. NET INVESTMENT INCOME, which excludes investment income on separate account assets relating to variable products, increased 28.8% in 2001 to $285.1 million and decreased 2.0% in 2000 to $221.4 million. The increase in 2001 is due to an increase in average invested assets and an increase in fee income from mortgage loan prepayments and bond calls. Average invested assets (based on securities at amortized cost) totaled $3,850.2 million in 2001, $2,991.3 million in 2000 and $2,982.1 million in 1999. Average invested assets increased in 2001 due primarily to the acquisition of approximately $620.9 million in investments in connection with the Kansas Farm Bureau Life transaction, $299.3 million in investments in connection with the NTL transaction and $347.7 million in cash from the American Equity transaction. The annualized yield earned on average invested assets was 7.40% in 2001 and 2000 and 7.57% in 1999. Changing market conditions in 2001 and 2000 decreased our investment portfolio yield as investment rates were, in general, lower than our portfolio yield or yield on investments maturing or being paid down. However, in 2001 an increase in prepayment fees and bond call income offset the impact of these market conditions. Fee income from mortgage loan prepayments and bond calls totaled $4.8 million in 2001, $0.4 million in 2000 and $5.2 million in 1999. In addition, we recorded $1.7 million in interest income during 1999 relating to the settlement of a fixed maturity security that had been in default. We had discontinued the accrual of interest on this security during 1996. DERIVATIVE INCOME totaled $0.1 million in 2001. Derivative income is a new line in the consolidated statement of income for 2001 that is the result of the adoption of a new accounting standard. Under the new standard, derivatives are recorded at market value and changes in market value are reported as a component of net income. Our derivative income consists of unrealized gains and losses on the value of the conversion feature embedded in convertible fixed maturity securities and on the value of call options used to fund returns on our equity-indexed annuity contracts assumed from American Equity. Also included in derivative income is amortization of the underlying call options. Derivative income will fluctuate based on market conditions and may be negative. REALIZED LOSSES ON INVESTMENTS decreased to $15.9 million in 2001 and increased to $26.0 million in 2000. Realized losses include writedowns of investments that became other-than-temporarily impaired totaling $16.8 million in 2001, $24.5 million in 2000 and $7.2 million in 1999. These writedowns are the result of deteriorating operating trends, lowered debt ratings, defaults on loan payments, unsuccessful efforts to raise capital and various other operational or economic factors that became evident in the respective years. Approximately $8.4 million of the realized losses in 2001 were from four securities issued by or affiliated with Enron Corporation. Approximately $14.4 million of the realized losses in 2000 were from eight securities that were of investment grade when acquired. The level of realized gains (losses) is subject to fluctuation from year to year depending on the prevailing interest rate and economic environment and the timing of the sale of investments. OTHER INCOME and OTHER EXPENSES include revenues and expenses, respectively, relating primarily to our non-insurance operations. These operations include management, advisory, marketing and distribution services and leasing activities. Fluctuations in these financial statement line items are generally attributable to fluctuations in the level of these services provided during the periods. 21 A summary of our policy benefits is as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Policy benefits: Interest sensitive products benefits ................................ $ 169,272 $ 127,605 $ 123,231 Traditional life insurance and accident and health benefits ......... 80,492 60,229 57,941 Increase in traditional life and accident and health future policy benefits ........................................................ 23,680 19,066 19,556 Distributions to participating policyholders ........................ 29,564 25,043 25,360 ------------ ------------ ------------ Total ........................................................... $ 303,008 $ 231,943 $ 226,088 ============ ============ ============
POLICY BENEFITS increased 30.6% in 2001 to $303.0 million and 2.6% in 2000 to $231.9 million. The increase in 2001 is due primarily to the addition of the Kansas Farm Bureau Life, NTL and American Equity business. Benefits incurred from this business in 2001 included interest sensitive product benefits of $41.0 million, traditional life insurance and accident and health benefits, including change in reserves, of $29.9 million and distributions to participating policyholders of $4.2 million. The increase in traditional life benefits is also due to increased death benefits on our direct business and our participation in a reinsurance pool for catastrophic events. We accrued $1.6 million of death benefits in 2001 for anticipated losses from this pool resulting from the terrorist attacks on September 11, 2001. Partially offsetting these increases was a decrease in accident and health benefits as a result of the 100% coinsurance of our long-term disability income business during 2001 and 2000. Policy benefits can tend to fluctuate from period to period as a result of changes in mortality and morbidity experience. A summary of our underwriting, acquisition and insurance expenses is as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Underwriting, acquisition and insurance expenses: Commission expense, net of deferrals ............................... $ 11,434 $ 9,951 $ 9,740 Amortization of deferred policy acquisition costs .................. 15,444 10,821 12,434 Amortization of value of insurance in force acquired ............... 3,632 861 985 Other underwriting, acquisition and insurance expenses, net of deferrals ....................................................... 61,965 51,297 47,017 ------------ ------------ ------------ Total ........................................................... $ 92,475 $ 72,930 $ 70,176 ============ ============ ============
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 26.8% in 2001 to $92.5 million and 3.9% in 2000 to $72.9 million. The increase in 2001 is due primarily to the addition of the Kansas Farm Bureau Life and NTL business. Underwriting, acquisition and insurance expenses relating to this business totaled $15.8 million in 2001. The impact of the new business was partially offset by a $1.0 million recovery of excess royalty fees paid in prior years for our agreement with the Iowa Farm Bureau Federation to use the "Farm Bureau" and "FB" designations in the State of Iowa. The increase in amortization of deferred policy acquisition costs in 2001 is due partly to a shift in product profitability to blocks of business that have a larger acquisition cost remaining to be amortized or that have higher amortization factors. In addition, amortization increased due to an increase in the unamortized acquisition cost asset caused by the growth in the volume of business in force. The increase in other underwriting, acquisition and insurance expenses is also partially attributable to an increase in salaries, information system expenses and other operating expenses due to general growth in areas that support our growing insurance operations and amortization of capitalized software costs associated with system enhancements. Another item impacting the comparison of expenses are restructuring charges of $1.2 million in 1999 and related cost savings in 2000 relating to the closing of an administrative service center. Other underwriting, acquisition and insurance expenses includes goodwill amortization totaling $0.9 million in 2001 and $0.7 million in 2000 and 1999. INTEREST EXPENSE decreased 51.4% in 2001 to $1.8 million and increased 43.2% in 2000 to $3.7 million. The decrease in 2001 is due to a decrease in average debt outstanding and a decrease in the interest rate on our $40.0 million of variable-rate debt. The increase in 2000 was due to an increase in the average debt outstanding during the year. 22 INCOME TAXES increased 36.6% in 2001 to $18.6 million and decreased 47.5% in 2000 to $13.6 million. The effective tax rate was 29.2% for 2001, 30.3% for 2000 and 31.9% for 1999. The effective tax rates were lower than the federal statutory rate of 35% due primarily to the tax benefit associated with the payment of dividends on mandatorily redeemable preferred stock of subsidiary trust, tax-exempt interest and tax-exempt dividend income in 2001, 2000 and 1999. The impact of these permanent differences, which are relatively consistent from year to year, on the effective tax rate is more significant in 2000 compared to 1999 due to the decrease in pre-tax income. The decrease in the effective tax rate in 2001 compared to 2000 is due primarily to a change in the estimate of certain deferred tax liabilities. EQUITY INCOME, NET OF RELATED INCOME TAXES, decreased 97.9% in 2001 to $0.3 million and increased 207.0% in 2000 to $12.2 million. Equity income includes our proportionate share of gains and losses attributable to our ownership interest in partnerships, joint ventures and certain companies where we exhibit some control but have a minority ownership interest. Given the timing of availability of financial information from these entities, we will consistently use information that is as much as three months in arrears for certain of these entities. Several of these entities are venture capital investment companies, whose operating results are derived primarily from unrealized and realized gains and losses generated by their investment portfolios. The income in 2000 is primarily driven by unrealized appreciation on two internet-related equity securities owned by two of these venture capital investment companies. A substantial portion of the positions held by the equity investees in these two entities was distributed to us and subsequently sold during 2000. As is normal with these types of entities, the level of these gains and losses is subject to fluctuation from period to period depending on the prevailing economic environment, changes in prices of equity securities held by the investment partnerships, timing and success of initial public offerings and other exit strategies, and the timing of the sale of investments held by the partnerships and joint ventures. As a result of our common stock investment in American Equity Investment Life Holding Company, equity income includes $1.4 million in 2001, $0.4 million in 2000 and $0.6 million in 1999, representing our share of its net income. In addition, equity income includes goodwill amortization totaling $0.4 million in 2001, 2000 and 1999. RESTRUCTURING We closed an administrative service center during 1999, after the merger of two of our life insurance subsidiaries. As a result of the closing of the service center, a leased property was vacated, 22 job positions were eliminated and moving costs were incurred. During 1999, we charged to expense costs totaling $1.2 million for related severance benefits, lease costs and other costs primarily associated with closing the service center. The restructuring expenses are recorded in the underwriting, acquistion and insurance expenses line of the 1999 consolidated statement of income. DISCONTINUED OPERATIONS We recorded a gain of $0.6 million in 2000 and $1.4 million in 1999, net of related income taxes, on the sale of Utah Farm Bureau Insurance Company (Utah Insurance), a former wholly-owned property-casualty insurance company, to Farm Bureau Mutual Insurance Company (Farm Bureau Mutual), an affiliate. We did not record any gain during 2001 as the loss ratio of Utah Insurance was higher than the threshold loss ratio in the earn-out calculation included in the sales agreement. The gain on the sale may be increased in 2002 in accordance with an earn-out provision. See "Liquidity - FBL Financial Group, Inc." SEGMENT INFORMATION Prior to January 1, 2001, our life insurance segment was our only reportable operating segment. The life insurance segment included activities related to the sale of life insurance, annuities and accident and health insurance products. Operations were aggregated into the same segment due to the similarity of the products, including the underlying economic characteristics, the method of distribution and the regulatory environment. During the first quarter of 2001, a financial reporting project to refine our line of business detail was completed. With the availability of more detailed line of business information, management now utilizes financial information regarding products that are aggregated into three product segments. These product segments are (1) traditional annuity, (2) traditional and universal life insurance and (3) variable. We also have various support operations and corporate capital that is aggregated into a corporate and other segment. See Note 15 of the notes to consolidated financial statements for additional information regarding segment information. 23 A discussion of our operating results, by segment, follows. TRADITIONAL ANNUITY SEGMENT
YEAR ENDED DECEMBER 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) PRE-TAX OPERATING INCOME Operating revenues: Interest sensitive product charges ........................ $ 1,001 $ 1,171 $ 900 Net investment income ..................................... 126,784 90,490 95,869 Derivative income ......................................... 953 -- -- ------------ ------------ ------------ 128,738 91,661 96,769 Benefits and expenses ........................................ 108,265 75,911 77,994 ------------ ------------ ------------ Pre-tax operating income ............................... $ 20,473 $ 15,750 $ 18,775 ============ ============ ============ OTHER DATA Annuity premiums collected, net of reinsurance ............... $ 388,787 $ 45,091 $ 52,328 Policy liabilities and accruals, end of year ................. 2,078,186 1,132,970 1,169,890
Pre-tax operating income for the traditional annuity segment increased 30.0% in 2001 to $20.5 million and decreased 16.1% in 2000 to $15.8 million. Pre-tax operating income and the volume of business in force increased in 2001 primarily due to the addition of the Kansas Farm Bureau Life, NTL and American Equity business. Annuity premiums collected from this new business in 2001 totaled $330.4 million. The decrease in pre-tax operating income in 2000 compared to 1999 is due to a decrease in the spread between net investment income and interest credited. This decrease is a result of a decrease in the yield on investments and a 0.25% increase, due to competitive factors, in the crediting rate on our flexible premium deferred annuity in September 2000. The crediting rate on our flexible premium deferred annuity was reduced 0.25% in April 2001 and 0.15% in December 2001 as a result of the general decline in market interest rates during 2001. TRADITIONAL AND UNIVERSAL LIFE INSURANCE SEGMENT
YEAR ENDED DECEMBER 31, --------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) PRE-TAX OPERATING INCOME Operating revenues: Interest sensitive product charges ........................ $ 39,327 $ 31,651 $ 31,855 Traditional life insurance premiums and other income ...... 114,998 83,940 82,895 Net investment income ..................................... 141,611 106,867 109,158 Derivative income (loss) .................................. (891) -- -- ------------ ------------ ------------ 295,045 222,458 223,908 Benefits and expenses ........................................ 244,624 178,206 175,143 ------------ ------------ ------------ Pre-tax operating income ............................... $ 50,421 $ 44,252 $ 48,765 ============ ============ ============ OTHER DATA Life premiums collected, net of reinsurance .................. $ 163,684 $ 125,860 $ 126,829 Policy liabilities and accruals, end of year ................. 1,892,070 1,372,946 1,355,791
Pre-tax operating income for the traditional and universal life insurance segment increased 13.9% in 2001 to $50.4 million and decreased 9.3% in 2000 to $44.3 million. Pre-tax operating income and the volume of business in force increased in 2001 primarily due to the addition of the Kansas Farm Bureau Life and NTL business. Life insurance premiums collected from this new business in 2001 totaled $37.4 million. The positive impact of the Kansas Farm Bureau Life and NTL business on pre-tax operating income was partially offset by an increase in death benefits, including $1.6 million in anticipated losses resulting from the terrorist attacks on September 11, 2001. Excluding the impact of the Kansas and NTL business, traditional benefits and the related change in reserves increased to $73.0 million in 2001 compared to $69.6 million in 2000. During 2001, amortization of deferred policy acquisition costs was increased $1.4 million due to changes in lapse rate, expense and other assumptions used to calculate the deferred policy acquisition cost asset. The decrease in pre-tax operating income in 2000 compared to 1999 is due principally to a decrease in investment income and increase in death benefits on interest sensitive products. 24 VARIABLE SEGMENT
YEAR ENDED DECEMBER 31, --------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) PRE-TAX OPERATING INCOME Operating revenues: Interest sensitive product charges ........................ $ 30,382 $ 27,096 $ 22,645 Net investment income ..................................... 10,198 9,007 7,417 Other income .............................................. 829 910 1,104 ------------ ------------ ------------ 41,409 37,013 31,166 Benefits and expenses ........................................ 35,862 35,778 29,549 ------------ ------------ ------------ Pre-tax operating income ............................... $ 5,547 $ 1,235 $ 1,617 ============ ============ ============ OTHER DATA Variable premiums collected, net of reinsurance and internal rollovers ................................................. $ 106,129 $ 107,329 $ 81,652 Policy liabilities and accruals, end of year ................. 149,279 122,081 106,026 Separate account assets, end of year ......................... 356,448 327,407 256,028
Pre-tax operating income for the variable segment increased 349.1% to $5.5 million in 2001 and decreased 23.6% to $1.2 million in 2000. The increase in pre-tax operating income in 2001 is generally attributable to an increase in the volume of business in force, favorable mortality experience and a decrease in expenses. During 2001, amortization of deferred policy acquisition costs was reduced by $1.5 million due to changes in lapse rate, expense and other assumptions used to calculate the deferred policy acquisition cost asset. In addition, expenses were reduced by $1.0 million in 2001 as a result of the recovery of certain royalty fees as discussed above. Operating revenues increased 11.9% in 2001, due to growth in the volume of business in force. Death benefits in excess of related account values on variable universal life policies increased 9.9% to $6.0 million for 2001. Profitability of this line of business is expected to increase as the volume of business grows. CORPORATE AND OTHER SEGMENT
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) PRE-TAX OPERATING INCOME Operating revenues: Accident and health insurance premiums .................... $ 3,044 $ 9,654 $ 13,361 Net investment income ..................................... 6,494 15,005 13,376 Derivative income ......................................... 38 -- -- Other income .............................................. 15,918 17,925 18,785 ------------ ------------ ------------ 25,494 42,584 45,522 Benefits and expenses ........................................ 24,374 34,729 31,358 ------------ ------------ ------------ 1,120 7,855 14,164 Minority interest ............................................ (4,963) (4,730) (4,885) Equity income, before tax .................................... 391 18,763 6,110 ------------ ------------ ------------ Pre-tax operating income (loss) ........................ $ (3,452) $ 21,888 $ 15,389 ============ ============ ============
Pre-tax operating income (loss) for the corporate and other segment decreased 115.8% to ($3.5) million in 2001 and increased 42.2% to $21.9 million in 2000. The changes in pre-tax operating income are primarily due to the fluctuations in equity income as described above. The decrease in net investment income in 2001 is due to a decrease in average invested assets resulting from a smaller volume of accident and health business in force and a $75.0 million stock repurchase and tender offer during the fourth quarter of 2000. As noted above, we sold our long-term disability income business through two coinsurance agreements in 2000 and 2001. These agreements decreased the level of operations reflected in the corporate and other segment. FINANCIAL CONDITION INVESTMENTS Our total investment portfolio increased 49.8% to $4,300.9 million at December 31, 2001 compared to $2,870.7 million at December 31, 2000. This increase is primarily the result of the acquisition of approximately $620.9 million in 25 investments in connection with the Kansas Farm Bureau Life transaction, $299.3 million in investments in connection with the NTL transaction and $347.7 million in cash from the American Equity transaction. In addition, we experienced unrealized appreciation on our fixed maturity securities and positive cash flow from operations. Furthermore, the carrying value of our investment portfolio increased as a result of the reclassification of our fixed maturity securities classified as held for investment to the available-for-sale category in connection with an accounting change for derivatives. See Note 1 to the notes to consolidated financial statements for additional information regarding this reclassification. Over the last several years, the mix of our life insurance business has been shifting from traditional and interest sensitive products to variable products. In addition, we have an exchange program for the rollover of universal life policies to variable universal life policies. We expect the shift to variable products to continue due to this program and the continued popularity of variable products. A majority of premiums received on variable products are typically invested in our separate accounts as opposed to the general account investments. This trend is expected to impact the future growth rate of our investment portfolio and separate account assets. Internal investment professionals manage our investment portfolio. The investment strategy is designed to achieve superior risk-adjusted returns consistent with the investment philosophy of maintaining a largely investment grade portfolio and providing adequate liquidity for obligations to policyholders and other requirements. We continually review the returns on invested assets and change the mix of invested assets as deemed prudent under the current market environment to help maximize current income. Our investment portfolio is summarized in the table below:
DECEMBER 31, ---------------------------------------------------------------------------------------- 2001 2000 1999 -------------------------- -------------------------- -------------------------- CARRYING CARRYING CARRYING VALUE PERCENT VALUE PERCENT VALUE PERCENT ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Fixed maturities: Public ........................ $ 2,773,290 64.5% $ 1,727,513 60.2% $ 1,733,678 58.8% 144A private placement ........ 590,867 13.7 402,877 14.0 429,269 14.6 Private placement ............. 271,993 6.3 169,042 5.9 178,445 6.0 ----------- ----------- ----------- ----------- ----------- ----------- Total fixed maturities ........ 3,636,150 84.5 2,299,432 80.1 2,341,392 79.4 Equity securities ................ 39,733 0.9 30,781 1.1 35,345 1.2 Mortgage loans on real estate .... 385,307 9.0 321,862 11.2 314,523 10.7 Investment real estate: Acquired for debt ............. 2,321 0.1 5,285 0.2 783 -- Investment .................... 17,735 0.4 18,535 0.6 19,336 0.6 Policy loans ..................... 181,054 4.2 125,987 4.4 123,717 4.2 Other long-term investments ...... 5,693 0.1 4,118 0.1 8,575 0.3 Short-term investments ........... 32,863 0.8 64,659 2.3 106,529 3.6 ----------- ----------- ----------- ----------- ----------- ----------- Total investments .......... $ 4,300,856 100.0% $ 2,870,659 100.0% $ 2,950,200 100.0% =========== =========== =========== =========== =========== ===========
As of December 31, 2001, 94.6% (based on carrying value) of the fixed maturity securities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of December 31, 2001, the investment in non-investment grade debt was 5.4% of fixed maturity securities. At that time no single non-investment grade holding exceeded 0.3% of total investments. 26 The following table sets forth the credit quality, by NAIC designation and Standard & Poors (S & P) rating equivalents, of fixed maturity securities.
DECEMBER 31, -------------------------------------------------------------------------------- 2001 2000 1999 ------------------------ ------------------------ ------------------------ NAIC CARRYING CARRYING CARRYING DESIGNATION EQUIVALENT S&P RATINGS (1) VALUE PERCENT VALUE PERCENT VALUE PERCENT ------------- -------------------------------- ------------ --------- ------------ --------- ------------ --------- (DOLLARS IN THOUSANDS) 1 (AAA, AA, A).................... $ 2,297,216 63.2% $ 1,386,708 60.3% $ 1,414,868 60.4% 2 (BBB)........................... 1,141,122 31.4 761,932 33.1 781,342 33.4 ------------ --------- ------------ --------- ------------ --------- Total investment grade.......... 3,438,338 94.6 2,148,640 93.4 2,196,210 93.8 3 (BB)............................ 129,748 3.5 120,495 5.2 107,249 4.6 4 (B)............................. 47,777 1.3 21,762 1.0 30,490 1.3 5 (CCC, CC, C).................... 9,582 0.3 6,478 0.3 7,293 0.3 6 In or near default.............. 10,705 0.3 2,057 0.1 150 -- ------------ --------- ------------ --------- ------------ --------- Total below investment grade......................... 197,812 5.4 150,792 6.6 145,182 6.2 ------------ --------- ------------ --------- ------------ --------- Total fixed maturities.......... $ 3,636,150 100.0% $ 2,299,432 100.0% $ 2,341,392 100.0% ============ ========= ============ ========= ============ =========
------------- (1) Private placement securities are generally rated by the Securities Valuation Office of the NAIC. Comparisons between NAIC designations and S & P ratings are published by the NAIC. S & P has not rated some of the fixed maturity securities in our portfolio. Mortgage and other asset-backed securities constitute a significant portion of our portfolio of securities. These securities are purchased from time to time when we believe these types of investments provide superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securities are diversified as to collateral types, cash flow characteristics and maturity. The return of principal on mortgage and other asset-backed securities occurs more frequently and is more variable than that of more traditional fixed maturity securities. The principal prepayment speeds (e.g., the rate of individuals refinancing their home mortgages) can vary based on a number of economic factors that can not be predicted with certainty. These factors include the prevailing interest rate environment and general status of the economy. Deviations in actual prepayment speeds from that originally expected can cause a change in the yield earned on mortgage and asset-backed securities purchased at a premium or discount. Increases in prepayment speeds, which typically occur in a decreasing interest rate environment, generally increase the rate at which discount is accrued and premium is amortized into income. Decreases in prepayment speeds, which typically occur in an increasing interest rate environment, generally slow down the rate these amounts are recorded into income. The mortgage-backed portfolio includes pass-through and collateralized mortgage obligation (CMO) securities. With a pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" which provide sequential retirement of the bonds. We invest in sequential tranches, which provide cash flow stability in that principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. We do not purchase certain types of collateralized mortgage obligations that we believe would subject the investment portfolio to greater than average risk. These include, but are not limited to, interest only, principal only, floater, inverse floater, PAC II, Z and support tranches. However, in connection with the Kansas Farm Bureau Life acquisition, we did acquire Z securities with a carrying value of $32.5 million at December 31, 2001. These securities generally tend to have more duration risk (risk the security's price will change significantly with a given change in market interest rates) than the other types of mortgage-backed securities in our portfolio. 27 The following table sets forth the amortized cost, par value and carrying value of our mortgage and asset-backed securities at December 31, 2001, summarized by type of security.
PERCENT OF AMORTIZED CARRYING FIXED COST PAR VALUE VALUE MATURITIES ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Residential mortgage-backed securities: Sequential ..................................... $ 580,694 $ 592,497 $ 589,837 16.2% Pass through ................................... 103,188 102,764 104,642 2.9 Planned and targeted amortization class ........ 79,183 78,996 81,137 2.2 Other .......................................... 50,126 51,442 52,042 1.4 ------------ ------------ ------------ ------------ Total residential mortgage-backed securities ...... 813,191 825,699 827,658 22.7 Commercial mortgage-backed securities ............. 289,346 287,218 292,276 8.0 Other asset-backed securities ..................... 264,458 265,682 274,466 7.6 ------------ ------------ ------------ ------------ Total mortgage and asset-backed securities ........ $ 1,366,995 $ 1,378,599 $ 1,394,400 38.3% ============ ============ ============ ============
The commercial and other asset-backed securities are primarily sequential securities. Commercial mortgage-backed securities typically have cash flows that are less sensitive to interest rate changes than residential securities of similar types due principally to prepayment restrictions on many of the underlying commercial mortgage loans. Other asset-backed securities are principally mortgage related (manufactured housing and home equity loans) which historically have also demonstrated relatively less cash flow volatility than residential securities of similar types. At December 31, 2001, we held $385.3 million or 9.0% of invested assets in mortgage loans. These mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. At December 31, 2001, mortgages more than 60 days delinquent accounted for less than 0.1% of the carrying value of the mortgage portfolio. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. Regions with the largest concentration of our mortgage loan portfolio at December 31, 2001 include: Pacific (27.2%), which includes California; and West South Central (21.2%), which includes Oklahoma and Texas. Mortgage loans on real estate are also diversified by collateral type with office buildings (38.7%), retail facilities (34.6%) and industrial facilities (21.3%) representing the largest holdings at December 31, 2001. OTHER ASSETS Assets other than investments generally increased due to the addition of the Kansas Farm Bureau Life, NTL and American Equity business. Cash and cash equivalents increased to $271.5 million at December 31, 2001 from $3.1 million at December 31, 2000 due to an increase in short-term investments with a maturity date of three months or less when acquired, resulting principally from cash received from American Equity in December 2001. Reinsurance recoverable increased 97.4% to $101.3 million at December 31, 2001 due to the impact of acquiring new business in 2001 and the coinsurance of our individual disability income business. Property and equipment decreased 31.7% to $40.4 million at December 31, 2001 due principally to the sale of capitalized software during 2001 to Farm Bureau Mutual. Assets held in separate accounts increased 8.9%, to $356.4 million at December 31, 2001 due primarily to net transfers to the separate accounts resulting from sales of our variable products, partially offset by the decline in the market value of the assets. At December 31, 2001, we had total assets of $5,629.2 million, a 52.0% increase from total assets at December 31, 2000. LIABILITIES AND REDEEMABLE PREFERRED STOCK Policy liabilities and accruals increased 56.3% to $4,185.9 million at December 31, 2001 primarily due to the addition of Kansas Farm Bureau Life, NTL and American Equity business. Policy related liabilities recorded at the inception of these transactions totaled $1,078.3 million. As noted under the "Investments" section above, the shift in sales to variable products will have an impact on the future growth rate of our policy liabilities and accruals as well as the separate account liabilities. Deferred income taxes increased 202.0% to $59.6 million at December 31, 2001 due primarily to an increase in deferred taxes on the change in unrealized appreciation/depreciation on fixed maturity securities and deferred taxes recorded in connection with the Kansas Farm Bureau Life acquisition. Other liabilities at December 31, 2001 include payables for security purchases totaling $163.1 million. At December 31, 2001, we had total liabilities of $4,883.6 million, a 56.0% increase from total liabilities at December 31, 2000. 28 We issued Series C redeemable preferred stock with a carrying value of $82.7 million at December 31, 2001 in connection with the Kansas Farm Bureau Life transaction. See Note 2 of the notes to consolidated financial statements for additional details regarding the terms of this preferred stock. STOCKHOLDERS' EQUITY Stockholders' equity increased 18.7%, to $565.8 million at December 31, 2001, compared to $476.8 million at December 31, 2000. This increase is principally attributable to net income for the year, the change in unrealized appreciation/depreciation on fixed maturity and equity securities and the effect of reclassifying our fixed maturity securities from held-for-investment to the available-for-sale category, partially offset by dividends paid. At December 31, 2001, common stockholders' equity was $562.8 million, or $20.53 per share, compared to $473.8 million, or $17.35 per share at December 31, 2000. Included in stockholders' equity per common share is $1.43 at December 31, 2001 and ($0.78) at December 31, 2000 attributable to net unrealized investment gains (losses) resulting from marking our fixed maturity securities classified as available for sale to market value. The change in unrealized appreciation of fixed maturity and equity securities classified as available for sale increased stockholders' equity $59.4 million during 2001, after related adjustments to deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and deferred income taxes. MARKET RISKS OF FINANCIAL INSTRUMENTS Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the profitability of insurance products and market value of investments. The yield realized on new investments generally increases or decreases in direct relationship with interest rate changes. The market value of our fixed maturity and mortgage loan portfolios generally increases when interest rates decrease, and decreases when interest rates increase. A majority of our insurance liabilities are backed by fixed maturity securities and mortgage loans. The fixed maturity securities have laddered maturities and a weighted average life of 8.4 years at December 31, 2001 and 7.9 years at December 31, 2000. Accordingly, the earned rate on the portfolio lags behind changes in market yields. The extent that the portfolio yield lags behind changes in market yields generally depends upon the following factors: o The average life of the portfolio. o The amount and speed at which market interest rates rise or fall. o The amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and asset-backed securities accelerate during periods of declining interest rates. o The amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and asset-backed securities decelerate during periods of increasing interest rates. For a majority of our traditional insurance products, profitability is significantly affected by the spreads between interest yields on investments and rates credited on insurance liabilities. For variable and equity-indexed products, profitability on the portion of the policyholder's account balance invested in the fixed general account option, if any, is also affected by the spreads earned. For the variable products, the policyholder assumes essentially all the investment earnings risk for the portion of the account balance invested in the separate accounts. For the equity-indexed products, we purchase, indirectly through American Equity, call options that are designed to match the return owed to contract holders who elect to participate in one or more market indices. Profitability on the portion of the equity-indexed products tied to market indices is significantly impacted by the spread on interest earned on investments and the sum of (1) cost of underlying call options purchased to match the returns owed to contract holders and (2) minimum interest guarantees owed to the contract holder, if any. The minimum guaranteed contract values are equal to 80% to 100% of the premium collected plus interest credited at an annual rate of 3%. Profitability on the equity-indexed annuities in any given year is also impacted by changes in the fair value of the embedded option which provides the contract holder the right to participate in market index returns after the next anniversary date of the contract. This impacts profitability because we only purchase one-year call options, through American Equity, to fund the returns owed to the contract holders at the inception of each contract year. This practice matches well with the contract holders' rights to switch to different indices on each anniversary date. The value of the forward starting options embedded in the equity-indexed annuities can fluctuate with changes in assumptions as to future volatility of the market indices, risk free interest rates, market returns and the lives of the contracts. 29 For a substantial portion of our direct business in force, we have the ability to adjust interest or dividend crediting rates in reaction to changes in portfolio yield. We had the ability to adjust rates on 92% of our liabilities at December 31, 2001 and 2000. However, the ability to adjust these rates is limited by competitive factors. Surrender rates could increase and new sales could be negatively impacted if the crediting rates are not competitive with the rates on similar products offered by other insurance companies and financial services institutions. In addition, if market rates were to decrease substantially and stay at a low level for an extended period of time, our spread could be lowered due to interest rate guarantees on many of our interest sensitive products. At December 31, 2001 and 2000, interest rate guarantees on our direct interest sensitive products ranged from 3.0% to 5.5%. The weighted average guarantee was 3.5% at December 31, 2001 and 3.7% at December 31, 2000. For a substantial portion of business assumed from NTL and American Equity, NTL and American Equity, respectively, have the ability to adjust interest and dividend crediting rates in reaction to portfolio yield. While we are precluded from directly controlling these rates, we do manage certain aspects of NTL through a management agreement and have a representative on American Equity's Board of Directors. We design our products and manage our investment portfolio in a manner to encourage persistency and to help ensure targeted spreads are earned. In addition to the ability to change interest crediting rates on our direct products, certain interest sensitive contracts have surrender and withdrawal penalty provisions. The following is a summary of the surrender and discretionary withdrawal characteristics of our interest sensitive products and supplementary contracts without life contingencies:
RESERVE BALANCE AT DECEMBER 31, ---------------------------- 2001 2000 ------------ ------------ (DOLLARS IN THOUSANDS) DIRECT BUSINESS: Surrender charge rate: Greater than or equal to 5% .................................... $ 388,835 $ 281,420 Less than 5%, but still subject to surrender charge ............ 359,339 235,494 Not subject to surrender charge ................................ 1,319,069 1,111,233 Not subject to surrender or discretionary withdrawal .............. 165,350 141,215 BUSINESS ASSUMED FROM NTL AND AMERICAN EQUITY: Surrender charge rate: Greater than or equal to 5% .................................... 478,556 -- Less than 5%, but still subject to surrender charge ............ 163,054 -- Not subject to surrender charge ................................ 58,517 -- Not subject to surrender or discretionary withdrawal .............. 7,922 -- ------------ ------------ Total .................................................... $ 2,940,642 $ 1,769,362 ============ ============
A major component of our asset-liability management program is structuring the investment portfolio with cash flow characteristics consistent with the cash flow characteristics of our insurance liabilities. We use computer models to perform simulations of the cash flows generated from existing insurance policies under various interest rate scenarios. Information from these models is used in the determination of interest crediting rates and investment strategies. Effective duration is a common measure for price sensitivity to changes in interest rates. It measures the approximate percentage change in the market value of a portfolio when interest rates change by 100 basis points. This measure includes the impact of estimated changes in portfolio cash flows from features such as bond calls and prepayments. When the estimated durations of assets and liabilities are similar, exposure to interest rate risk is reduced because a change in the value of assets should be largely offset by a change in the value of liabilities. The effective duration of our fixed maturity portfolio was approximately 5.1 at December 31, 2001 and 4.3 at December 31, 2000. The effective duration of the interest sensitive products was approximately 4.1 at December 31, 2001 and 4.7 at December 31, 2000. If interest rates were to increase 10% from levels at December 31, 2001 and 2000, our fixed maturity securities and short-term investments would decrease approximately $94.3 million at December 31, 2001 and $54.1 million at December 31, 2000. This hypothetical change in value does not take into account any offsetting change in the value of insurance liabilities for investment contracts since we estimate such value to be the cash surrender value of the underlying contracts. If interest rates were to decrease 10% from levels at December 31, 2001 and 2000, the fair value of our debt and mandatorily redeemable preferred stock of subsidiary trust would increase $2.8 million at December 31, 2001 and 2000. 30 The computer models used to estimate the impact of a 10% change in market interest rates use many assumptions and estimates that materially impact the fair value calculations. Key assumptions used by the models include an immediate and parallel shift in the yield curve and an acceleration of bond calls and principal prepayments on mortgage and other asset-backed securities. The above estimates do not attempt to measure the financial statement impact on the resulting change in deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserves and income taxes. Due to the subjectivity of these assumptions, the actual impact of a 10% change in rates on the fair market values would likely be different from that estimated. Equity price risk is not material to us due to the relatively small equity portfolio held at December 31, 2001. However, we do earn investment management fees (on those investments managed by us) and mortality and expense fee income based on the value of our separate accounts. On an annualized basis, the investment management fee rates range from 0.20% to 0.45% for 2001 and 2000. The mortality and expense fee rates range from 0.90% to 1.40% for 2001 and 2000. As a result, revenues from these sources do fluctuate with changes in the market value of the equity, fixed maturity and other securities held by the separate accounts. LIQUIDITY FBL FINANCIAL GROUP, INC. Parent company cash inflows from operations consists primarily of (i) dividends from subsidiaries, if declared and paid, (ii) fees which it charges the various subsidiaries and affiliates for management of their operations, (iii) expense reimbursements from subsidiaries and affiliates and (iv) tax settlements between the parent company and its subsidiaries. Cash outflows are principally for salaries and other expenses related to providing these management services, dividends on outstanding stock and interest on our holding company debt issued to a subsidiary. In addition, our parent company will on occasion enter into capital transactions such as the acquisition of our common stock. We may receive consideration during the period ending December 31, 2003 in accordance with an earn-out provision related to our sale in 1998 of Utah Insurance to Farm Bureau Mutual. Under the earn-out arrangement, we and Farm Bureau Mutual share equally in the dollar amount by which the incurred losses on direct business written in the state of Utah, net of reinsurance ceded, is less than the incurred losses assumed in the valuation model used to derive the initial acquisition price. The earn-out calculation is performed and any settlement (subject to a maximum of $2.0 million per year) is made on a calendar year basis. Earn-out settlements received, on a pre-tax basis, totaled $2.0 million in 2000 and $1.2 million in 1999. We did not record any gain during 2001 as the loss ratio of Utah Insurance was higher than the threshold loss ratio in the earn-out calculation. We acquired Class A common shares totaling 5,900 in 2001, 4,358,397 in 2000 and 1,322,920 in 1999 as a result of stock repurchases. These transactions reduced stockholders' equity by $0.1 million in 2001, $85.8 million in 2000 and $25.7 million in 1999. We paid common and preferred stock dividends totaling $12.5 million in 2001, $11.0 million in 2000 and $10.8 million in 1999. Interest payments on the parent company's 5% Subordinated Deferrable Interest Notes (the Notes), relating to the company-obligated mandatorily redeemable preferred stock of subsidiary trust, totaled $5.0 million in 2001, 2000 and 1999. It is anticipated that cash dividend requirements for 2002 will be $0.10 per quarter per common and Series C preferred share and $0.0075 per quarter per Series B preferred share, or approximately $12.5 million. In addition, interest payments on the Notes are estimated to be $5.0 million for 2002. We have agreed that we will not declare or pay dividends on any class or series of stock except for regular cash dividends (defined as regular, fixed, quarterly or other periodic cash dividends as declared by our Board of Directors as part of the stated cash dividend policy and do not include any other dividends or distributions, such as extraordinary, special or otherwise non-recurring dividends) as long as any Series C redeemable preferred stock is outstanding. FBL Financial Group, Inc. expects to rely on available cash resources and on dividends from Farm Bureau Life to make any dividend payments to its stockholders and interest payments on its Notes. In addition, it is anticipated that dividends from Farm Bureau Life will be used to fund the scheduled redemption of the Series C preferred stock in 2004 ($45.3 million) and 2006 ($46.3 million). 31 The ability of Farm Bureau Life to pay dividends to FBL Financial Group, Inc. is limited by law to earned profits (statutory unassigned surplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the State of Iowa. In addition, under the Iowa Insurance Holding Company Act, Farm Bureau Life may not pay an "extraordinary" dividend without prior notice to and approval by the Iowa insurance commissioner. An "extraordinary" dividend is defined under the Iowa Insurance Holding Company Act as any dividend or distribution of cash or other property whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceeds the greater of (i) 10% of policyholders' surplus (total statutory capital stock and statutory surplus) as of December 31 of the preceding year, or (ii) the statutory net gain from operations of the insurer for the 12-month period ending December 31 of the preceding year. During 2002, the maximum amount legally available for distribution to FBL Financial Group, Inc. without further regulatory approval is $37.8 million. We may from time to time review potential acquisition opportunities. It is anticipated that funding for any such acquisition would be provided from available cash resources, debt or equity financing. As of December 31, 2001, we had no material commitments for capital expenditures. The parent company had available cash and investments totaling $16.3 million at December 31, 2001. INSURANCE OPERATIONS The Life Companies' cash inflows consist primarily of premium income, deposits to policyholder account balances, product charges on variable products, income from investments, sales, maturities and calls of investments and repayments of investment principal. The Life Companies' cash outflows are primarily related to withdrawals of policyholder account balances, investment purchases, payment of policy acquisition costs, policyholder benefits, income taxes, dividends and current operating expenses. Life insurance companies generally produce a positive cash flow which may be measured by the degree to which cash inflows are adequate to meet benefit obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. The Life Companies' liquidity positions continued to be favorable in 2001, with cash inflows at levels sufficient to provide the funds necessary to meet their obligations. For the life insurance operations, cash outflow requirements for operations are typically met from normal premium and deposit cash inflows. Net cash inflows (outflows) for the Life Companies' continuing operations and financing activities relating to interest sensitive products provided funds totaling $536.0 million in 2001, ($36.5) million in 2000 and $104.1 million in 1999. The significant increase in net cash flows in 2001 is due principally to the impact of the Kansas, NTL and American Equity transactions. Net cash inflows are primarily used to increase the insurance companies' fixed maturity and short-term investment portfolios. The net cash outflow for 2000 is primarily the result of a $32.8 million net payment for reserves pursuant to the individual disability income coinsurance arrangement and increased surrender benefits on interest sensitive products and rollovers from traditional products to variable products. This cash outflow was funded with available cash and cash provided from investing activities. In developing their investment strategy, the Life Companies establish a level of cash and securities which, combined with expected net cash inflows from operations, maturities of fixed maturity investments and principal payments on mortgage and asset-backed securities and mortgage loans, are believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations. Through its membership in the Federal Home Loan Bank of Des Moines (FHLB), Farm Bureau Life is eligible to establish and borrow on a line of credit to provide it additional liquidity. The line of credit available is based on the amount of capital stock of the FHLB owned by Farm Bureau Life, which supported a borrowing capacity of $78.9 million as of December 31, 2001. At December 31, 2001, Farm Bureau Life had outstanding borrowings of $40.0 million under this arrangement, leaving a borrowing capacity of $38.9 million. Additional collateral would need to be deposited with the FHLB in order to access this additional borrowing capacity. The outstanding debt is due September 17, 2003, and interest on the debt is charged at a variable rate equal to the London Interbank Offered Rate less 0.0475% (1.85% at December 31, 2001). Fixed maturity securities with a carrying value of $44.4 million are on deposit with the FHLB as collateral for the note. 32 In the normal course of business, we enter into financing transactions, lease agreements, or other commitments which are necessary or beneficial to our operations. These commitments may obligate us to certain cash flows during future periods. The following table summarizes such obligations.
PAYMENTS DUE BY PERIOD ------------------------------------------------------------------ LESS THAN 1 - 3 4 - 5 AFTER 5 TOTAL 1 YEAR YEARS YEARS YEARS ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) CONTRACTUAL OBLIGATIONS: Maturity of long-term debt ...... $ 40,000 $ -- $ 40,000 $ -- $ -- Redemption of Series C redeemable preferred stock .... 91,553 -- 45,280 -- 46,273 Home office operating lease ..... 28,057 2,139 7,149 4,811 13,958 Mortgage loan funding ........... 30,800 30,800 -- -- -- ---------- ---------- ---------- ---------- ---------- Total ...................... $ 190,410 $ 32,939 $ 92,429 $ 4,811 $ 60,231 ========== ========== ========== ========== ==========
We are also a party to other operating leases with total payments of approximately $1.0 million per year. Generally, these leases are renewable annually with similar terms. Although our current intention is to renew these leases, we are not obligated to do so. We anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally generated funds. We believe that the current level of cash and available-for-sale and short-term securities, combined with expected net cash inflows from operations, maturities of fixed maturity investments, principal payments on mortgage and asset-backed securities, mortgage loans and our insurance products, are adequate to meet our anticipated cash obligations for the foreseeable future. Our investment portfolio at December 31, 2001, included $32.9 million of short-term investments and $522.7 million in carrying value of U.S. Government and U.S. Government agency backed securities that could be readily converted to cash at or near carrying value. In addition, our cash balance at December 31, 2001 totaled $271.5 million. ACCOUNTING CHANGES Effective January 1, 2001, we adopted the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (Statement) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." Statement No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Accounting for gains or losses resulting from changes in the values of those derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. Without hedge accounting, these gains or losses are recorded as a component of net income. Statement No. 133 also allows companies to transfer securities classified as held for investment to either available-for-sale or trading categories in connection with the adoption of the new standard. Statement No. 138 amends Statement No. 133 to clarify the appropriate accounting for certain hedging transactions. We have the following three different forms of derivatives on our balance sheet which are subject to Statement No. 133: o the feature of a convertible fixed maturity security that allows the conversion of a fixed maturity security into an equity security is considered an embedded derivative, o the rights of an equity-indexed annuity contract holder to participate in the index returns available under the contract are considered embedded derivatives and o our reinsurance recoverable as it relates to call options purchased to fund returns to equity-indexed annuity contract holders is considered a derivative. These derivatives are described more fully in Note 1 of the notes to consolidated financial statements under the captions "Investments - Fixed Maturities and Equity Securities", "Reinsurance Recoverable" and "Future Policy Benefits". 33 The cumulative effect of adopting these Statements on net income was $0.3 million. This amount represents the difference in accumulated net unrealized capital gains (losses) on the date of adoption, net of tax, resulting from the change in accounting for the conversion features embedded in our convertible fixed maturity securities. Income before cumulative effect of change in accounting for derivative instruments for 2001 was approximately $0.6 million less than what would have been recorded without the accounting change due to a decrease in the fair value of these conversion features during the period. The impact of the accounting change on 2001 income relating to the equity-indexed annuity derivatives has not been quantified, but is not believed to be material to our financial position or results of operations. Upon the adoption of Statement No. 133, we transferred our fixed maturity securities classified as held for investment to the available-for-sale category. In connection with this transfer, the securities were marked to market and the corresponding increase in carrying value totaling $2.8 million, net of offsetting adjustments to deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and income taxes, was credited to stockholders' equity. Prior year financial statements were not restated. In December 2001, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 01-6, "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others." The SOP requires loans and trade receivables that management has the intent and ability to hold for the forseeable future or until maturity or payoff to be reported in the balance sheet at outstanding principal adjusted for any chargeoffs, the allowance for loan losses, any deferred fees or costs on originated loans and any unamortized premiums or discounts on purchased loans. We currently report our mortgage loans in accordance with this SOP and we do not believe it will have a material effect on our financial statements. In October 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Statement No. 144 provides a single accounting model for long lived assets to be disposed of and changes the criteria that must be met to classify an asset as held-for-sale. Statement No. 144 also requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which losses are incurred rather than as of the measurement date as presently required. The Statement is effective for the year beginning January 1, 2002, with earlier adoption encouraged. While we have not quantified the impact of adopting this Statement, we believe the Statement will not have a material effect on our financial position or results of operations. In June 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Under the new Statements, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. In addition, Statement No. 142 requires the identification and amortization of certain intangible assets that had previously been included as a component of goodwill. We will apply the new Statements in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $1.2 million per year, or $0.04 per share. During 2002, we will perform the first of the required impairment tests of goodwill as of January 1, 2002. While we have not completed this testing we do not expect this testing to require the impairment of any goodwill. EFFECTS OF INFLATION We do not believe that inflation has had a material effect on our consolidated results of operations. 34 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION From time to time, we may publish statements relating to anticipated financial performance, business prospects, new products, and similar matters. These statements and others that include words such as "expect", "anticipate", "believe", "intend", and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for these types of statements. In order to comply with the terms of the safe harbor, please note that 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: o Changes to interest rate levels and stock market performance may impact our lapse rates, market value of our investment portfolio and our ability to sell life insurance products, notwithstanding product features to mitigate the financial impact of such changes. o The degree to which our products are accepted by customers and agents (including the agents of our alliance partners) will impact our future growth rate. o Extraordinary acts of nature or man may result in higher than expected claim activity. o Changes in federal and state income tax laws and regulations may affect the relative tax advantage of our products. ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risks of Financial Instruments", for our qualitative and quantitative disclosures about market risk. 35 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FBL FINANCIAL GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Report of Management........................................................ 37 Report of Independent Auditors.............................................. 38 Audited Consolidated Financial Statements Consolidated Balance Sheets................................................. 39 Consolidated Statements of Income........................................... 41 Consolidated Statements of Changes in Stockholders' Equity.................. 42 Consolidated Statements of Cash Flows....................................... 43 Notes to Consolidated Financial Statements.................................. 45 36 REPORT OF MANAGEMENT To Our Stockholders The management of FBL Financial Group, Inc. is responsible for the integrity of the financial information contained in this annual report. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Certain financial information presented depends on management's estimates and judgments regarding the ultimate outcome of transactions that are not yet complete. Management believes these estimates and judgements are fair and reasonable based upon available information. Management maintains a system of internal controls designed to meet its responsibilities for preparing reliable financial statements. The system is designed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized and reported. Reasonable assurance is based upon the premise that the cost of controls should not exceed the benefits derived from them. An internal audit department is maintained to continually monitor and challenge the adequacy of internal control. It is management's opinion that its system of internal control during the periods covered by this annual report was effective in providing reasonable assurance that the financial statements are fairly stated in all material respects. We engage Ernst & Young LLP as independent auditors to audit our financial statements and express their opinion thereon. Their audits include reviews and tests of our internal controls to the extent they believe necessary to determine and conduct the audit procedures that support their opinion. A copy of Ernst & Young LLP's audit opinion follows this letter. The Audit Committee of the Board of Directors, composed solely of nonmanagement directors, meets periodically with management, internal auditors and Ernst & Young LLP to review internal accounting controls, audit activities, auditor independence and financial reporting matters. The internal auditors and Ernst & Young LLP have free access to the Audit Committee, with and without the presence of management, to discuss the adequacy of internal controls and to review the quality of financial reporting. The Audit Committee is also responsible for making recommendations to the Board of Directors concerning the selection of independent auditors. /s/ William J. Oddy ------------------- CHIEF EXECUTIVE OFFICER AND DIRECTOR /s/ James W. Noyce ------------------- CHIEF FINANCIAL OFFICER 37 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders FBL Financial Group, Inc. We have audited the accompanying consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FBL Financial Group, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, in 2001 the Company changed its method of accounting for derivative instruments. /s/ Ernst & Young LLP Des Moines, Iowa February 5, 2002 38 FBL FINANCIAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ---------------------------- 2001 2000 ------------ ------------ ASSETS Investments: Fixed maturities: Held for investment, at amortized cost (market: 2000 - $288,661) .......... $ -- $ 284,253 Available for sale, at market (amortized cost: 2001 - $3,560,988; 2000 - $2,038,161) ............................................................ 3,636,150 2,015,179 Equity securities, at market (cost: 2001 - $39,019; 2000 - $32,629) ......... 39,733 30,781 Mortgage loans on real estate ............................................... 385,307 321,862 Investment real estate, less allowances for depreciation of $3,862 in 2001 and $3,061 in 2000 ........................................................ 20,056 23,820 Policy loans ................................................................ 181,054 125,987 Other long-term investments ................................................. 5,693 4,118 Short-term investments ...................................................... 32,863 64,659 ------------ ------------ Total investments .............................................................. 4,300,856 2,870,659 Cash and cash equivalents ...................................................... 271,459 3,099 Securities and indebtedness of related parties ................................. 57,781 52,458 Accrued investment income ...................................................... 51,207 34,656 Accounts and notes receivable .................................................. 235 107 Amounts receivable from affiliates ............................................. 3,504 6,522 Reinsurance recoverable ........................................................ 101,287 51,312 Deferred policy acquisition costs .............................................. 360,156 250,971 Value of insurance in force acquired ........................................... 50,129 14,264 Property and equipment, less allowances for depreciation of $48,413 in 2001 and $44,742 in 2000 ......................................................... 40,385 59,152 Current income taxes recoverable ............................................... -- 8,496 Goodwill, less accumulated amortization of $5,301 in 2001 and $4,878 in 2000 ........................................................................ 11,170 8,554 Other assets ................................................................... 24,572 16,389 Assets held in separate accounts ............................................... 356,448 327,407 ------------ ------------ Total assets............................................................ $ 5,629,189 $ 3,704,046 ============ ============
39 FBL FINANCIAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ---------------------------- 2001 2000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Policy liabilities and accruals: Future policy benefits: Interest sensitive and equity-indexed products ......................... $ 2,679,088 $ 1,598,958 Traditional life insurance and accident and health products ............ 1,063,930 773,372 Unearned revenue reserve ............................................... 30,870 29,382 Other policy claims and benefits .......................................... 22,009 10,378 ------------ ------------ 3,795,897 2,412,090 Other policyholders' funds: Supplementary contracts without life contingencies ........................ 261,554 170,404 Advance premiums and other deposits ....................................... 112,518 81,739 Accrued dividends ......................................................... 15,965 13,385 ------------ ------------ 390,037 265,528 Short-term debt payable to affiliate ........................................ -- 9,943 Amounts payable to affiliates ............................................... 886 136 Long-term debt .............................................................. 40,000 40,000 Current income taxes ........................................................ 444 -- Deferred income taxes ....................................................... 59,634 19,749 Other liabilities ........................................................... 240,228 55,248 Liabilities related to separate accounts .................................... 356,448 327,407 ------------ ------------ Total liabilities ...................................................... 4,883,574 3,130,101 Commitments and contingencies Minority interest in subsidiaries: Company-obligated mandatorily redeemable preferred stock of subsidiary trust ....................................................... 97,000 97,000 Other ....................................................................... 131 142 Series C redeemable preferred stock, $26.8404 par and redemption value per share - authorized 3,752,100 shares, issued and outstanding 3,411,000 shares ...................................................................... 82,691 -- Stockholders' equity: Preferred stock, without par value, at liquidation value - authorized 10,000,000 shares, issued and outstanding 5,000,000 Series B shares ....... 3,000 3,000 Class A common stock, without par value - authorized 88,500,000 shares, issued and outstanding 26,215,685 shares in 2001 and 26,115,120 shares in 2000 ................................................................... 39,446 37,769 Class B common stock, without par value - authorized 1,500,000 shares, issued and outstanding 1,192,990 shares ................................... 7,563 7,563 Accumulated other comprehensive income (loss) ............................... 39,364 (22,445) Retained earnings ........................................................... 476,420 450,916 ------------ ------------ Total stockholders' equity ................................................ 565,793 476,803 ------------ ------------ Total liabilities and stockholders' equity ............................. $ 5,629,189 $ 3,704,046 ============ ============
See accompanying notes. 40 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Revenues: Interest sensitive product charges ............................. $ 70,492 $ 59,780 $ 55,363 Traditional life insurance premiums ............................ 114,998 83,830 82,569 Accident and health premiums ................................... 3,044 9,654 13,361 Net investment income .......................................... 285,087 221,369 225,820 Derivative income .............................................. 100 -- -- Realized losses on investments ................................. (15,878) (25,960) (2,342) Other income ................................................... 16,747 18,945 20,215 ------------ ------------ ------------ Total revenues ............................................... 474,590 367,618 394,986 Benefits and expenses: Interest sensitive product benefits ............................ 169,272 127,605 123,231 Traditional life insurance and accident and health benefits .... 80,492 60,229 57,941 Increase in traditional life and accident and health future policy benefits .............................................. 23,680 19,066 19,556 Distributions to participating policyholders ................... 29,564 25,043 25,360 Underwriting, acquisition and insurance expenses ............... 92,475 72,930 70,176 Interest expense ............................................... 1,778 3,655 2,553 Other expenses ................................................. 13,643 14,206 15,020 ------------ ------------ ------------ Total benefits and expenses .................................. 410,904 322,734 313,837 ------------ ------------ ------------ 63,686 44,884 81,149 Income taxes ...................................................... (18,576) (13,602) (25,911) Minority interest in earnings of subsidiaries: Dividends on company-obligated mandatorily redeemable preferred stock of subsidiary trust .......................... (4,850) (4,850) (4,850) Other .......................................................... (113) 120 (35) Equity income, net of related income taxes ........................ 254 12,195 3,972 ------------ ------------ ------------ Income before cumulative effect of change in accounting ........ 40,401 38,747 54,325 principle and discontinued operations Cumulative effect of change in accounting for derivative instruments .................................................... 344 -- -- Gain on disposal of property-casualty operations, net of related income taxes ................................................... -- 600 1,385 ------------ ------------ ------------ Net income ........................................................ 40,745 39,347 55,710 Dividends on Series B and C preferred stock ....................... (4,202) (150) (150) ------------ ------------ ------------ Net income applicable to common stock ............................. $ 36,543 $ 39,197 $ 55,560 ============ ============ ============ Earnings per common share: Income before accounting change and discontinued operations ................................................... $ 1.32 $ 1.27 $ 1.68 Cumulative effect of change in accounting for derivative instruments .................................................. 0.01 -- -- Income from discontinued operations ............................ -- 0.02 0.04 ------------ ------------ ------------ Earnings per common share ...................................... $ 1.33 $ 1.29 $ 1.72 ============ ============ ============ Earnings per common share - assuming dilution: Income before accounting change and discontinued operations ................................................... $ 1.30 $ 1.25 $ 1.65 Cumulative effect of change in accounting for derivative instruments .................................................. 0.01 -- -- Income from discontinued operations ............................ -- 0.02 0.04 ------------ ------------ ------------ Earnings per common share - assuming dilution .................. $ 1.31 $ 1.27 $ 1.69 ============ ============ ============ Cash dividends per common share ................................... $ 0.40 $ 0.36 $ 0.33 ============ ============ ============
See accompanying notes. 41 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
ACCUMULATED SERIES B CLASS A CLASS B OTHER TOTAL PREFERRED COMMON COMMON COMPREHENSIVE RETAINED STOCKHOLDERS' STOCK STOCK STOCK INCOME (LOSS) EARNINGS EQUITY ------------ ------------ ------------ ------------ ------------ ------------ Balance at January 1, 1999 ............. $ 3,000 $ 42,034 $ 7,558 $ 50,050 $ 480,946 $ 583,588 Comprehensive income (loss): Net income for 1999 .................. -- -- -- -- 55,710 55,710 Change in net unrealized investment gains/losses ........................ -- -- -- (99,967) -- (99,967) ------------ Total comprehensive loss .............. (44,257) Purchase of 1,322,920 shares of common stock ......................... -- (1,813) -- -- (23,839) (25,652) Issuance of 118,039 shares of common stock under employee benefit and stock option plans, including related income tax benefit . -- 2,087 -- -- -- 2,087 Dividends on preferred stock .......... -- -- -- -- (150) (150) Dividends on common stock ............. -- -- -- -- (10,608) (10,608) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1999 ........... 3,000 42,308 7,558 (49,917) 502,059 505,008 Comprehensive income: Net income for 2000 .................. -- -- -- -- 39,347 39,347 Change in net unrealized investment gains/losses ........................ -- -- -- 27,472 -- 27,472 ------------ Total comprehensive income ............ 66,819 Purchase of 4,358,397 shares of common stock ......................... -- (6,277) -- -- (79,505) (85,782) Issuance of 166,285 shares of common stock under stock option plan, including related income tax benefit .............................. -- 1,709 -- -- -- 1,709 Adjustment resulting from capital transactions of equity investee ...... -- 29 5 -- -- 34 Dividends on preferred stock .......... -- -- -- -- (150) (150) Dividends on common stock ............. -- -- -- -- (10,835) (10,835) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2000 ........... 3,000 37,769 7,563 (22,445) 450,916 476,803 Comprehensive income: Net income for 2001 .................. -- -- -- -- 40,745 40,745 Cumulative effect of change in accounting for derivative instruments ......................... -- -- -- 2,406 -- 2,406 Change in net unrealized investment gains/losses ........................ -- -- -- 59,403 -- 59,403 ------------ Total comprehensive income ............ 102,554 Purchase of 5,900 shares of common stock ................................ -- (9) -- -- (85) (94) Issuance of 106,465 shares of common stock under compensation and stock option plans, including related income tax benefit ........... -- 1,686 -- -- -- 1,686 Dividends on preferred stock .......... -- -- -- -- (4,202) (4,202) Dividends on common stock ............. -- -- -- -- (10,954) (10,954) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2001 ........... $ 3,000 $ 39,446 $ 7,563 $ 39,364 $ 476,420 $ 565,793 ============ ============ ============ ============ ============ ============
See accompanying notes. 42 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ OPERATING ACTIVITIES Continuing operations: Net income ................................................... $ 40,745 $ 38,747 $ 54,325 Adjustments to reconcile net income to net cash provided by continuing operations: Adjustments related to interest sensitive products: Interest credited to account balances ................. 141,801 104,896 105,121 Charges for mortality and administration .............. (68,884) (58,987) (54,229) Deferral of unearned revenues ......................... 2,485 2,851 2,456 Amortization of unearned revenue reserve .............. (1,465) (745) (1,318) Provision for depreciation and amortization ............... 18,483 16,530 16,202 Equity income ............................................. (254) (12,195) (3,972) Realized losses on investments ............................ 15,878 25,960 2,342 Increase (decrease) in traditional life and accident and health benefit accruals, net of reinsurance ........... 8,923 (23,910) 20,552 Policy acquisition costs deferred ......................... (76,299) (39,954) (34,275) Amortization of deferred policy acquisition costs ......... 15,444 10,821 12,434 Provision for deferred income taxes ....................... 491 8,378 2,435 Other ..................................................... 12,733 (15,444) 8,385 ------------ ------------ ------------ Net cash provided by continuing operations ....................... 110,081 56,948 130,458 Discontinued operations: Net income ................................................... -- 600 1,385 Adjustments to reconcile net income to net cash provided by discontinued operations ................................... -- (600) (1,385) ------------ ------------ ------------ Net cash provided by discontinued operations ..................... -- -- -- ------------ ------------ ------------ Net cash provided by operating activities ........................ 110,081 56,948 130,458 INVESTING ACTIVITIES Sale, maturity or repayment of investments: Fixed maturities - held for investment ....................... -- 55,846 154,700 Fixed maturities - available for sale ........................ 548,174 221,730 208,154 Equity securities ............................................ 7,832 20,346 10,391 Mortgage loans on real estate ................................ 27,847 41,850 53,922 Investment real estate ....................................... 2,296 644 20,080 Policy loans ................................................. 41,585 29,168 28,401 Other long-term investments .................................. 390 1,104 1,169 Short-term investments - net ................................. 66,374 41,870 -- ------------ ------------ ------------ 694,498 412,558 476,817 Acquisition of investments: Fixed maturities - available for sale ........................ (853,651) (222,251) (428,718) Equity securities ............................................ (2,144) (2,491) (6,663) Mortgage loans on real estate ................................ (60,599) (49,306) (69,606) Investment real estate ....................................... -- -- (726) Policy loans ................................................. (42,155) (31,438) (28,790) Other long-term investments .................................. (1,792) -- (1,014) Short-term investments - net ................................. -- -- (26,301) ------------ ------------ ------------ (960,341) (305,486) (561,818)
43 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ INVESTING ACTIVITIES (CONTINUED) Proceeds from disposal, repayments of advances and other distributions from equity investees ......................... $ 5,715 $ 8,747 $ 11,395 Investments in and advances to equity investees ................. (1,151) (1,505) (6,654) Net proceeds from sale of discontinued operations ............... 2,000 2,000 1,229 Net cash received in acquisition and coinsurance transaction .... 3,202 -- -- Net purchases of property and equipment and other ............... (5,148) (11,526) (16,172) ------------ ------------ ------------ Net cash provided by (used in) investing activities ............. (261,225) 104,788 (95,203) FINANCING ACTIVITIES Receipts from interest sensitive, equity-indexed and variable products credited to policyholder account balances .......... 700,217 217,657 216,598 Return of policyholder account balances on interest sensitive, equity-indexed and variable products ........................ (264,702) (281,094) (224,826) Proceeds from short-term debt with affiliate .................... -- -- 3,068 Repayments of short-term debt ................................... -- (1,751) (24,500) Proceeds from long-term debt .................................... -- -- 40,000 Repayments of long-term debt .................................... -- -- (71) Distributions on company-obligated mandatorily redeemable preferred stock of subsidiary trust ......................... (4,850) (4,850) (4,850) Other contributions (distributions) related to minority interests - net ............................................. (124) 117 (4,588) Purchase of common stock ........................................ (94) (85,782) (25,309) Issuance of common stock ........................................ 1,527 1,569 1,947 Dividends paid .................................................. (12,470) (10,985) (10,758) ------------ ------------ ------------ Net cash provided by (used in) financing activities ............. 419,504 (165,119) (33,289) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents ................ 268,360 (3,383) 1,966 Cash and cash equivalents at beginning of year .................. 3,099 6,482 4,516 ------------ ------------ ------------ Cash and cash equivalents at end of year ........................ $ 271,459 $ 3,099 $ 6,482 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest .................................................... $ 1,730 $ 3,658 $ 2,414 Income taxes ................................................ 8,126 21,374 11,781
See accompanying notes. 44 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS FBL Financial Group, Inc. (we or the Company) operates predominantly in the life insurance industry through its principal subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and EquiTrust Life Insurance Company (EquiTrust) (collectively, the Life Companies). We currently market 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. Variable universal life insurance and variable annuity contracts are also marketed in these and other states through alliances with other insurance companies and a regional broker/dealer. In addition to writing direct insurance business, we assume through coinsurance agreements a percentage of certain business written by National Travelers Life Company (NTL) and American Equity Investment Life Insurance Company (American Equity). These coinsurance agreements utilize excess capital and increase our volume of business in force. Several subsidiaries support various functional areas of the Life Companies and other affiliates, by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage NTL and two Farm Bureau affiliated property-casualty companies. CONSOLIDATION Our consolidated financial statements include the financial statements of FBL Financial Group, Inc. and its direct and indirect subsidiaries. All significant intercompany transactions have been eliminated. ACCOUNTING CHANGES Effective January 1, 2001, we adopted the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (Statement) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." Statement No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Accounting for gains or losses resulting from changes in the values of those derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. Without hedge accounting, these gains or losses are recorded as a component of net income. Statement No. 133 also allows companies to transfer securities classified as held for investment to either available-for-sale or trading categories in connection with the adoption of the new standard. Statement No. 138 amends Statement No. 133 to clarify the appropriate accounting for certain hedging transactions. We have the following three different forms of derivatives on our balance sheet which are subject to Statement No. 133: o the feature of a convertible fixed maturity security that allows the conversion of a fixed maturity security into an equity security is considered an embedded derivative, o the rights of an equity-indexed annuity contract holder to participate in the index returns available under the contract are considered embedded derivatives, and o our reinsurance recoverable as it relates to call options purchased to fund returns to equity-indexed annuity contract holders is considered a derivative. These derivatives are described more fully in this note under the captions "Investments - Fixed Maturities and Equity Securities," "Reinsurance Recoverable" and "Future Policy Benefits." The cumulative effect of adopting these Statements on net income was $0.3 million. This amount represents the difference in accumulated net unrealized capital gains (losses) on the date of adoption, net of tax, resulting from the change in accounting for the conversion features embedded in our convertible fixed maturity securities. Income before cumulative effect of change in accounting for derivative instruments for 2001 was approximately $0.6 million less than what would have been recorded without the accounting change due to a decrease in the fair value of these conversion features during the period. The impact of the accounting change on 2001 income relating to the equity-indexed annuity derivatives has not been quantified, but is not believed to be material to our financial position or results of operations. Upon the adoption of Statement No. 133, we transferred our fixed maturity securities classified as held for investment to the available-for-sale category. In connection with this transfer, the securities were marked to market 45 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and the corresponding increase in carrying value totaling $2.8 million, net of offsetting adjustments to deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and income taxes, was credited to stockholders' equity. Prior year financial statements were not restated. In December 2001, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 01-6, "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others." The SOP requires loans and trade receivables that management has the intent and ability to hold for the forseeable future or until maturity or payoff to be reported in the balance sheet at outstanding principal adjusted for any chargeoffs, the allowance for loan losses, any deferred fees or costs on originated loans and any unamortized premiums or discounts on purchased loans. We currently report our mortgage loans in accordance with this SOP and we do not believe it will have a material effect on our financial statements. In October 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Statement No. 144 provides a single accounting model for long lived assets to be disposed of and changes the criteria that must be met to classify an asset as held-for-sale. Statement No. 144 also requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which losses are incurred rather than as of the measurement date as presently required. The Statement is effective for the year beginning January 1, 2002, with earlier adoption encouraged. While we have not quantified the impact of adopting this Statement, we believe the Statement will not have a material effect on our financial position or results of operations. In June 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Under the new Statements, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. In addition, Statement No. 142 requires the identification and amortization of certain intangible assets that had previously been included as a component of goodwill. We will apply the new Statements in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $1.2 million per year, or $0.04 per share. During 2002, we will perform the first of the required impairment tests of goodwill as of January 1, 2002. While we have not completed this testing we do not expect this testing to require the impairment of any goodwill. INVESTMENTS FIXED MATURITIES AND EQUITY SECURITIES All of our fixed maturity securities, comprised of bonds and redeemable preferred stocks, are designated as "available for sale" and are reported at market value. Unrealized gains and losses on these securities, with the exception of unrealized gains and losses relating to the conversion feature embedded in convertible fixed maturity securities, are included directly in stockholders' equity as a component of accumulated other comprehensive income or loss. Unrealized gains and losses relating to the conversion feature embedded in convertible fixed maturity securities are recorded as a component of net investment income in the consolidated statements of income. The unrealized gains and losses are reduced by a provision for deferred income taxes and adjustments to deferred policy acquisition costs, value of insurance in force acquired and unearned revenue reserve that would have been required as a charge or credit to income had such amounts been realized. Prior to the adoption of Statement No. 133, we had certain securities classified as "held for investment." Held for investment securities were reported at cost adjusted for amortization of premiums and discounts. Changes in the market value of these securities, except for declines that are other than temporary, are not reflected in our financial statements. Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities' expected lives. Amortization/accrual of premiums and discounts on mortgage and asset-backed securities incorporates prepayment assumptions to estimate the securities' expected lives. Equity securities, comprised of common and non-redeemable preferred stocks, are reported at market value. The change in unrealized appreciation and depreciation of equity securities is included directly in stockholders' equity, net of any related deferred income taxes, as a component of accumulated other comprehensive income or loss. 46 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MORTGAGE LOANS ON REAL ESTATE Mortgage loans on real estate are reported at cost adjusted for amortization of premiums and accrual of discounts. If we determine that the value of any mortgage loan is impaired (i.e., when it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to its fair value, which may be based upon the present value of expected future cash flows from the loan (discounted at the loan's effective interest rate), or the fair value of the underlying collateral. The carrying value of impaired loans is reduced by the establishment of a valuation allowance, changes to which are recognized as realized gains or losses on investments. Interest income on impaired loans is recorded on a cash basis. INVESTMENT REAL ESTATE Investment real estate is reported at cost less allowances for depreciation. Real estate acquired through foreclosure, which is included with investment real estate in our consolidated balance sheets, is recorded at the lower of cost (which includes the balance of the mortgage loan, any accrued interest and any costs incurred to obtain title to the property) or estimated fair value on the foreclosure date. The carrying value of these assets is subject to regular review. If the fair value, less estimated sales costs, of real estate owned decreases to an amount lower than its carrying value, the carrying value of the real estate is reduced by the establishment of a valuation allowance, changes to which are recognized as realized gains or losses on investments. OTHER INVESTMENTS Policy loans are reported at unpaid principal balance. Short-term investments are reported at cost adjusted for amortization of premiums and accrual of discounts. Other long-term investments include investment deposits which are reported at cost and securities held by subsidiaries engaged in the broker-dealer industry. In accordance with accounting practices for the broker-dealer industry, marketable securities held by subsidiaries in this industry are valued at market value. The resulting difference between cost and market is included in the consolidated statements of income as net investment income. Realized gains and losses are also reported as a component of net investment income. Securities and indebtedness of related parties include investments in partnerships and corporations over which we may exercise significant influence. These partnerships and corporations operate predominately in the insurance, broker-dealer, investment company and real estate industries. Such investments are accounted for using the equity method. In applying the equity method, we record our share of income or loss reported by the equity investees. For partnerships operating in the investment company industry, this income or loss includes changes in unrealized gains and losses in the partnerships' investment portfolios. Changes in the value of our investment in equity investees attributable to capital transactions of the investee, such as an additional offering of stock, are recorded directly to stockholders' equity. Securities and indebtedness of related parties also includes advances and loans to the partnerships and corporations which are principally reported at cost. REALIZED GAINS AND LOSSES ON INVESTMENTS The carrying values of all our investments are reviewed on an ongoing basis for credit deterioration. If this review indicates a decline in market value that is other than temporary, the carrying value of the investment is reduced to its estimated realizable value, or fair value, and a specific writedown is taken. Such reductions in carrying value are recognized as realized losses on investments. Realized gains and losses on sales are determined on the basis of specific identification of investments. If we expect that an issuer of a security will modify its payment pattern from contractual terms but no writedown is required, future investment income is recognized at the rate implicit in the calculation of net realizable value under the expected payment pattern. MARKET VALUES Market values of fixed maturity securities are reported based on quoted market prices, where available. Market values of fixed maturity securities not actively traded in a liquid market are estimated using a matrix calculation assuming a spread (based on interest rates and a risk assessment of the bonds) over U. S. Treasury bonds. Market values of the conversion features embedded in convertible fixed maturity securities is estimated using an option-pricing model. Market values of redeemable preferred stocks and equity securities are based on the latest quoted market prices, or for those not readily marketable, generally at values which are representative of the market values of comparable issues. 47 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CASH AND CASH EQUIVALENTS For purposes of our consolidated statements of cash flows, we consider all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. REINSURANCE RECOVERABLE We use reinsurance to manage certain risks associated with our insurance operations. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential risks arising from large claims and provide additional capacity for growth. For business ceded to other companies, reinsurance recoverable generally consists of the reinsurers share of policyholder liabilities, claims and expenses, net of amounts due the reinsurers for premiums. For business assumed from other companies, reinsurance recoverable generally consists of premium receivable, net of our share of benefits and expenses we owe to the ceding company. During 2001, we assumed under a coinsurance agreement, 70% of certain equity-indexed annuity contracts issued by American Equity. The call options used to fund the index credits on the equity-indexed annuities are purchased by and maintained on the books of American Equity. We record our proportionate share of the option value supporting the business we reinsure as a reinsurance recoverable. This component of the reinsurance contract is an embedded derivative and we record our share of the returns on the underlying options, net of the amortization of the option costs, in derivative income. See Note 5, "Reinsurance and Policy Provisions," for additional information regarding this reinsurance agreement. DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE ACQUIRED To the extent recoverable from future policy revenues and gross profits, certain costs of acquiring new insurance business, principally commissions and other expenses related to the production of new business, have been deferred. The value of insurance in force acquired represents the cost assigned to insurance contracts when an insurance company is acquired. The initial value is determined by an actuarial study using expected future gross profits as a measurement of the net present value of the insurance acquired. Interest accrues on the unamortized balance at a weighted average rate of 6.04%. For participating traditional life insurance and interest sensitive products (principally universal life insurance policies and annuity contracts), these costs are being amortized generally in proportion to expected gross profits (after dividends to policyholders, if applicable) from surrender charges and investment, mortality, and expense margins. That amortization is adjusted retrospectively when estimates of current or future gross profits/margins (including the impact of investment gains and losses) to be realized from a group of products are revised. For nonparticipating traditional life and accident and health insurance products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits. PROPERTY AND EQUIPMENT Property and equipment, comprised primarily of furniture, equipment and capitalized software costs, are reported at cost less allowances for depreciation and amortization. Depreciation and amortization expense is computed primarily using the straight-line method over the estimated useful lives of the assets. Furniture and equipment had a carrying value of $33.4 million at December 31, 2001 and $38.8 million at December 31, 2000, and estimated useful lives that range from three to ten years. Capitalized software costs had a carrying value of $7.0 million at December 31, 2001 and $20.4 million at December 31, 2000, and estimated useful lives that range from two to five years. Depreciation expense was $7.4 million in 2001, $8.1 million in 2000 and $8.6 million in 1999. Amortization expense was $6.0 million in 2001, $4.8 million in 2000 and $2.6 million in 1999. 48 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GOODWILL Goodwill represents the excess of the fair value of assets exchanged over the net assets acquired. Through December 31, 2001, goodwill was being amortized on a straight-line basis generally over a period of 20 years. The carrying value of goodwill was regularly reviewed for indicators of impairment in value, which in the view of management were other than temporary. If facts and circumstances suggested that goodwill was impaired, we assessed the fair value of the underlying business and would have reduced goodwill to an amount that resulted in the book value of the underlying business approximating fair value. We did not record any impairments in 2001, 2000 or 1999. See the "Accounting Changes" section in this note for a discussion of the accounting of goodwill subsequent to December 31, 2001. FUTURE POLICY BENEFITS Future policy benefit reserves for interest sensitive products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Future policy benefit reserves for equity-indexed products are equal to the sum of the fair value of the embedded index options, accumulated index credits and the host contract reserve computed using a method similar to that used for interest sensitive product benefits. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest sensitive products ranged from 3.35% to 6.90% in 2001, from 4.00% to 6.50% in 2000 and from 4.00% to 6.25% in 1999. The liability for future policy benefits for participating traditional life insurance is based on net level premium reserves, including assumptions as to interest, mortality and other factors underlying the guaranteed policy cash values. Reserve interest assumptions are level and range from 2.25% to 6.0%. The average rate of assumed investment yields used in estimating gross margins was 7.69% in 2001, 7.74% in 2000 and 7.83% in 1999. Accrued dividends for participating business are established for anticipated amounts earned to date that have not been paid. The declaration of future dividends for participating business is at the discretion of the Board of Directors. Participating business accounted for 40% of receipts from policyholders during 2001 and represented 16% of life insurance in force at December 31, 2001. Participating business accounted for 38% of receipts from policyholders during 2000 (1999 - 40%) and represented 16% of life insurance in force at December 31, 2000. The liabilities for future policy benefits for accident and health insurance are computed using a net level (or an equivalent) method, including assumptions as to morbidity, mortality and interest and to include provisions for possible unfavorable deviations. Policy benefit claims are charged to expense in the period that the claims are incurred. The unearned revenue reserve reflects the unamortized balance of the excess of first year administration charges over renewal period administration charges (policy initiation fees) on interest sensitive products. These excess charges have been deferred and are being recognized in income over the period benefited using the same assumptions and factors used to amortize deferred policy acquisition costs. GUARANTY FUND ASSESSMENTS From time to time, assessments are levied on our insurance subsidiaries by guaranty associations in most states in which the subsidiaries are licensed. These assessments, which are accrued for, are to cover losses of policyholders of insolvent or rehabilitated companies. In some states, these assessments can be partially recovered through a reduction in future premium taxes. We had undiscounted reserves of $0.2 million at December 31, 2001 and $0.1 million at December 31, 2000 to cover estimated future assessments on known insolvencies. We had assets totaling $1.0 million at December 31, 2001 and December 31, 2000 representing estimated premium tax offsets on paid and future assessments. Expenses (credits) incurred for guaranty fund assessments, net of related premium tax offsets, totaled $0.2 million in 2001 and ($0.1) million in 2000 and 1999. It is anticipated that estimated future guaranty fund assessments on known insolvencies will be paid during 2002 and substantially all the related future premium tax offsets will be realized during the six year period ending December 31, 2007. We believe the reserve for guaranty fund assessments is sufficient to provide for future assessments based upon known insolvencies and projected premium levels. 49 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DEFERRED INCOME TAXES Deferred income tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. SEPARATE ACCOUNTS The separate account assets and liabilities reported in our accompanying consolidated balance sheets represent funds that are separately administered for the benefit of certain policyholders that bear the underlying investment risk. The separate account assets and liabilities are carried at fair value. Revenues and expenses related to the separate account assets and liabilities, to the extent of benefits paid or provided to the separate account policyholders, are excluded from the amounts reported in the accompanying consolidated statements of income. RECOGNITION OF PREMIUM REVENUES AND COSTS Revenues for interest sensitive, equity-indexed and variable products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Expenses related to these products include interest or index amounts credited to policyholder account balances, benefit claims incurred in excess of policyholder account balances and amortization of deferred policy acquisition costs. Traditional life insurance premiums are recognized as revenues over the premium-paying period. Future policy benefits and policy acquisition costs are recognized as expenses over the life of the policy by means of the provision for future policy benefits and amortization of deferred policy acquisition costs. All insurance-related revenues, benefits and expenses are reported net of reinsurance ceded. The cost of reinsurance ceded is generally amortized over the contract periods of the reinsurance agreements. Policies and contracts assumed are accounted for in a manner similar to that followed for direct business. OTHER INCOME AND OTHER EXPENSES Other income and other expenses consist primarily of revenue and expenses generated by our various non-insurance subsidiaries for investment advisory, marketing and distribution, and leasing services. They also include revenues and expenses generated by our parent company for management services. Certain of these activities are performed on behalf of affiliates of the Company. In addition, certain revenues generated by our insurance subsidiaries are classified as other income. Revenues of the insurance subsidiaries included as other income aggregated $0.8 million in 2001, $1.2 million in 2000 and $0.6 million in 1999. Lease income from leases with affiliates totaled $5.2 million in 2001, $9.2 million in 2000 and $7.9 million in 1999. Investment advisory fee income from affiliates totaled $1.4 million in 2001, $1.2 million in 2000 and $1.5 million in 1999. DIVIDEND RESTRICTION We have agreed that we will not declare or pay dividends on any class or series of stock except for regular cash dividends (defined as regular, fixed, quarterly or other periodic cash dividends as declared by our Board of Directors as part of the stated cash dividend policy and do not include any other dividends or distributions, such as extraordinary, special or otherwise non-recurring dividends) as long as any Series C redeemable preferred stock is outstanding. COMPREHENSIVE INCOME (LOSS) Unrealized gains and losses on our available-for-sale securities are included in accumulated other comprehensive income (loss) in stockholders' equity. Also included in comprehensive income for 2001 is $2.4 million relating to the transfer of our fixed maturity securities classified as held for investment to the available-for-sale category. Other comprehensive income (loss) excludes net investment losses included in net income which represent transfers from unrealized to realized gains and losses. These amounts totaled $10.0 million in 2001, $14.4 million in 2000 and $0.1 million in 1999. These amounts, which have been measured through the date of sale, are net of income taxes and adjustments to deferred policy acquisition costs, value of insurance in force acquired and unearned revenue reserve totaling $7.4 million in 2001, $9.5 million in 2000 and $0.2 million in 1999. 50 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. For example, significant estimates and assumptions are utilized in the valuation of investments, amortization of deferred policy acquisition costs, valuation of allowances for deferred tax assets, calculation of policyholder liabilities and accruals and determination of pension expense. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the consolidated financial statements. 2. ACQUISITION AND SERIES C PREFERRED STOCK On January 1, 2001, we acquired the assets and liabilities of Kansas Farm Bureau Life Insurance Company, Inc. (Kansas Farm Bureau Life) for $80.7 million. The acquisition was accounted for using purchase accounting. A condensed statement of the assets and liabilities acquired as of January 1, 2001, is as follows (dollars in thousands):
ASSETS LIABILITIES AND PURCHASE PRICE Investments.......................... $ 620,856 Policy liabilities and accruals...... $ 526,391 Cash................................. 2,863 Other policyholder funds............. 76,738 Value of insurance in force acquired. 51,865 Other liabilities.................... 11,621 Goodwill............................. 3,539 ----------- Other assets......................... 16,315 Total liabilities................. 614,750 ----------- Purchase price....................... 80,688 Total........................... $ 695,438 ----------- =========== Total........................... $ 695,438 ===========
Acquisition costs totaling $0.7 million have been deferred and included as a component of goodwill. Goodwill was being amortized during 2001 using the straight-line method and a 20-year amortization schedule. As discussed in Note 1 under "Accounting Changes," goodwill will not be amortized beginning in 2002. As consideration for the purchase, we issued 3,411,000 shares of Series C cumulative voting mandatorily redeemable preferred stock with an estimated fair value of $80.0 million. Each share of Series C preferred stock has a par value of $26.8404 and voting rights identical to that of Class A common stock. Dividends on the Series C preferred stock are payable quarterly at a rate equal to the regular cash dividends per share of common stock, as defined, then payable. The mandatory redemption is structured so that 49.5% of the Series C preferred stock will be redeemed at par value, or $45.3 million, on January 2, 2004 with the remaining 50.5% redeemed at par value, or $46.3 million, on January 3, 2006. In the event of a change in the control of the Company, at the option of the holder, each share of Series C preferred stock is convertible into one share of Class A common stock or redeemable for cash at par. The Series C preferred stock was issued at an $11.6 million discount to par. This discount accretes to preferred stock dividends during the life of the securities using the effective interest method. 51 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENT OPERATIONS FIXED MATURITIES AND EQUITY SECURITIES The following tables contain amortized cost and estimated market value information on fixed maturities and equity securities:
AVAILABLE FOR SALE --------------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED AMORTIZED COST GAINS LOSSES MARKET VALUE -------------- -------------- -------------- -------------- DECEMBER 31, 2001 (DOLLARS IN THOUSANDS) Bonds: United States Government and agencies ..... $ 147,869 $ 2,871 $ (159) $ 150,581 State, municipal and other governments .... 96,057 3,158 (554) 98,661 Public utilities .......................... 146,048 4,932 (2,442) 148,538 Corporate securities ...................... 1,745,672 68,238 (27,796) 1,786,114 Mortgage and asset-backed securities ...... 1,366,995 32,314 (4,909) 1,394,400 Redeemable preferred stocks ................... 58,347 1,276 (1,767) 57,856 -------------- -------------- -------------- -------------- Total fixed maturities ........................ $ 3,560,988 $ 112,789 $ (37,627) $ 3,636,150 ============== ============== ============== ============== Equity securities ............................. $ 39,019 $ 1,468 $ (754) $ 39,733 ============== ============== ============== ============== HELD FOR INVESTMENT --------------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED AMORTIZED COST GAINS LOSSES MARKET VALUE -------------- -------------- -------------- -------------- DECEMBER 31, 2000 (DOLLARS IN THOUSANDS) Fixed maturities - mortgage-backed securities ................................ $ 284,253 $ 5,299 $ (891) $ 288,661 ============== ============== ============== ============== AVAILABLE FOR SALE --------------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED AMORTIZED COST GAINS LOSSES MARKET VALUE -------------- -------------- -------------- -------------- DECEMBER 31, 2000 (DOLLARS IN THOUSANDS) Bonds: United States Government and agencies ..... $ 51,285 $ 2,013 $ (61) $ 53,237 State, municipal and other governments .... 60,456 1,530 (443) 61,543 Public utilities .......................... 124,819 4,252 (1,880) 127,191 Corporate securities ...................... 1,008,387 22,554 (50,448) 980,493 Mortgage and asset-backed securities ...... 749,805 11,227 (8,920) 752,112 Redeemable preferred stocks ................... 43,409 527 (3,333) 40,603 -------------- -------------- -------------- -------------- Total fixed maturities ........................ $ 2,038,161 $ 42,103 $ (65,085) $ 2,015,179 ============== ============== ============== ============== Equity securities ............................. $ 32,629 $ 349 $ (2,197) $ 30,781 ============== ============== ============== ==============
Short-term investments have been excluded from the above schedules as amortized cost approximates market value for these securities. 52 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The carrying value and estimated market value of our portfolio of fixed maturity securities at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
ESTIMATED AMORTIZED COST MARKET VALUE -------------- ------------ (DOLLARS IN THOUSANDS) Due in one year or less .................................................... $ 56,475 $ 57,182 Due after one year through five years ...................................... 406,360 417,386 Due after five years through ten years ..................................... 628,087 645,317 Due after ten years ........................................................ 1,044,724 1,064,009 ------------ ------------ 2,135,646 2,183,894 Mortgage and asset-backed securities ....................................... 1,366,995 1,394,400 Redeemable preferred stocks ................................................ 58,347 57,856 ------------ ------------ $ 3,560,988 $ 3,636,150 ============ ============
Net unrealized investment gains (losses) on equity securities and fixed maturity securities classified as available for sale and recorded directly to stockholders' equity were comprised of the following:
DECEMBER 31, ----------------------------- 2001 2000 ------------ ------------ (DOLLARS IN THOUSANDS) Unrealized appreciation (depreciation) on fixed maturity and equity securities available for sale .......................................... $ 75,876 $ (24,830) Adjustments for assumed changes in amortization pattern of: Deferred policy acquisition costs ...................................... (5,561) 2,202 Value of insurance in force acquired ................................... (8,954) 271 Unearned revenue reserve ............................................... 257 (180) Provision for deferred income taxes ........................................ (21,566) 7,888 ------------ ------------ 40,052 (14,649) Proportionate share of net unrealized investment losses of equity investees (688) (7,796) ------------ ------------ Net unrealized investment gains (losses) ................................... $ 39,364 $ (22,445) ============ ============
The changes in net unrealized investment gains/losses are recorded net of deferred income taxes and other adjustments for assumed changes in the amortization pattern of deferred policy acquisition costs, value of insurance in force acquired and unearned revenue reserve totaling $49.8 million in 2001, $18.6 million in 2000 and ($64.2) million in 1999. MORTGAGE LOANS ON REAL ESTATE Our mortgage loan portfolio consists principally of commercial mortgage loans. Our lending policies require that the loans be collateralized by the value of the related property, establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. We have provided an allowance for possible losses against our mortgage loan portfolio. An analysis of this allowance, which consist of specific and general reserves, is as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Balance at beginning of year ............................... $ 806 $ 806 $ 871 Realized gains ......................................... (751) -- -- Uncollectible amounts written off, net of recoveries ... -- -- (65) ------------ ------------ ------------ Balance at end of year ..................................... $ 55 $ 806 $ 806 ============ ============ ============
53 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The carrying value of impaired loans (those loans in which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements) was under $0.1 million at December 31, 2001 and 2000. During 2001, we also recorded an allowance for possible losses against our real estate portfolio totaling $0.8 million. We did not record any real estate allowance during 2000. NET INVESTMENT INCOME Components of net investment income are as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Fixed maturities: Held for investment ...................................... $ -- $ 24,858 $ 32,431 Available for sale ....................................... 238,666 161,184 154,057 Equity securities ........................................... 1,811 2,181 2,145 Mortgage loans on real estate ............................... 27,932 24,784 23,989 Investment real estate ...................................... 2,614 2,459 5,098 Policy loans ................................................ 11,160 7,942 7,644 Other long-term investments ................................. 260 308 35 Short-term investments, cash and cash equivalents ........... 5,216 5,079 3,897 Other ....................................................... 6,542 1,700 6,700 ------------ ------------ ------------ 294,201 230,495 235,996 Less investment expenses .................................... (9,114) (9,126) (10,176) ------------ ------------ ------------ Net investment income ....................................... $ 285,087 $ 221,369 $ 225,820 ============ ============ ============
Other investment income in 2001 includes $2.5 million earned in connection with the American Equity coinsurance agreement on investment income due but not yet received under the terms of the reinsurance agreement. REALIZED AND UNREALIZED GAINS AND LOSSES Realized gains (losses) and the change in unrealized appreciation/depreciation on investments, excluding amounts attributed to investments held by subsidiaries engaged in the broker-dealer industry, are summarized below:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) REALIZED Fixed maturities - available for sale ....................... $ (16,766) $ (21,795) $ (2,529) Equity securities ........................................... (690) (2,161) 2,307 Mortgage loans on real estate ............................... 751 -- -- Investment real estate ...................................... (668) 186 (221) Other long-term investments ................................. -- (3,500) (1,345) Short-term investments ...................................... 130 -- -- Securities and indebtedness of related parties .............. 1,375 1,310 (582) Notes receivable and other .................................. (10) -- 28 ------------ ------------ ------------ Realized losses on investments .............................. $ (15,878) $ (25,960) $ (2,342) ============ ============ ============ UNREALIZED Fixed maturities: Held for investment ...................................... $ -- $ 5,976 $ (26,009) Available for sale ....................................... 93,736 52,329 (162,494) Equity securities ........................................... 2,562 954 1,500 ------------ ------------ ------------ Change in unrealized appreciation/depreciation of investments .............................................. $ 96,298 $ 59,259 $ (187,003) ============ ============ ============
54 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) An analysis of sales, maturities and principal repayments of our fixed maturities portfolio is as follows:
GROSS REALIZED GROSS REALIZED AMORTIZED COST GAINS LOSSES PROCEEDS -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, 2001 Scheduled principal repayments and calls - available for sale ............. $ 406,443 $ -- $ -- $ 406,443 Sales - available for sale ................ 143,954 3,957 (6,180) 141,731 -------------- -------------- -------------- -------------- Total .................................. $ 550,397 $ 3,957 $ (6,180) $ 548,174 ============== ============== ============== ============== YEAR ENDED DECEMBER 31, 2000 Scheduled principal repayments and calls: Available for sale ..................... $ 114,825 $ -- $ -- $ 114,825 Held for investment .................... 55,846 -- -- 55,846 Sales - available for sale ................ 110,230 3,624 (6,949) 106,905 -------------- -------------- -------------- -------------- Total .................................. $ 280,901 $ 3,624 $ (6,949) $ 277,576 ============== ============== ============== ============== YEAR ENDED DECEMBER 31, 1999 Scheduled principal repayments and calls: Available for sale ..................... $ 133,087 $ -- $ -- $ 133,087 Held for investment .................... 154,700 -- -- 154,700 Sales - available for sale ................ 72,389 3,485 (807) 75,067 -------------- -------------- -------------- -------------- Total .................................. $ 360,176 $ 3,485 $ (807) $ 362,854 ============== ============== ============== ==============
Realized losses on fixed maturities totaling $14.5 million in 2001, $18.5 million in 2000 and $5.2 million in 1999 were incurred as a result of writedowns for other than temporary impairment of fixed maturity securities. During the fourth quarter of 2001, realized losses include $8.4 million related to sales and impairments from our ownership in Enron-related securities. Income taxes include a credit of $5.6 million in 2001, $9.1 million in 2000 and $0.8 million in 1999 for the tax effect of realized losses. OTHER We have a common stock investment in American Equity's parent, American Equity Investment Life Holding Company, valued at $26.7 million at December 31, 2001 and $13.9 million at December 31, 2000. American Equity underwrites and markets life insurance and annuity products throughout the United States. The investment is accounted for using the equity method and is included in the securities and indebtedness of related parties line on the consolidated balance sheets. Due to the timing of the availability of financial information, during 2000 we switched from recording our share of American Equity's results from a current basis to one quarter in arrears. The financial information presented is as of or for the twelve months ended September 30, 2001, the nine months ended September 30, 2000 and the twelve months ended December 31, 1999. The impact of this change on our financial statements was not material. The carrying value of our common stock investment in American Equity Investment Life Holding Company includes goodwill totaling $4.7 million in 2001 and $5.0 million in 2000. In addition to the common stock, during 1999 we acquired $2.3 million in preferred stock issued by American Equity. 55 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Summarized financial information for American Equity Investment Life Holding Company and our common stock ownership percentage is as follows:
AS OF OR FOR THE PERIOD ENDED -------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 2001 2000 1999 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) Total investments ................................. $ 3,652,481 $ 1,922,419 $ 1,453,423 Total assets ...................................... 4,194,531 2,327,891 1,717,619 Long-term debt .................................... 112,535 105,963 82,719 Total liabilities ................................. 4,016,561 2,128,436 1,584,313 Minority interest ................................. 99,894 99,373 98,982 Total revenues .................................... 145,897 83,256 79,811 Income from continuing operations ................. 7,653 2,729 2,443 Net income ........................................ 6,854 2,729 2,443 Percentage ownership of common stock .............. 32.3% 32.3% 33.2%
We reported equity income (loss), net of tax, from APEX Investment Fund III, an equity investee that operates in the investment company industry, totaling ($1.2) million in 2001, $7.7 million in 2000 and $1.5 million in 1999. Summarized financial information for APEX Investment Fund III is as follows:
AS OF OR FOR THE TWELVE-MONTH PERIOD ENDED SEPTEMBER 30, -------------------------------------------------------- 2001 2000 1999 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) Total investments ................................. $ 41,392 $ 99,747 $ 70,343 Total net assets .................................. 44,674 101,286 72,601 Total revenues .................................... 309 291,707 69,868 Income (loss) from continuing operations .......... (45,882) 290,436 68,446 Net income (loss) ................................. (45,882) 290,436 68,446 Percentage ownership of partners' capital ......... 4.0% 4.1% 4.0%
Equity investees distributed to us equity securities with a fair value totaling $2.8 million in 2001 and $14.5 million in 2000. Also during 2000, we received an interest in ten real estate properties with a fair value of $5.0 million in satisfaction of a fixed maturity security that had been in default. These transactions were treated as noncash items for purposes of the statements of cash flow. At December 31, 2001, affidavits of deposits covering investments with a carrying value totaling $4,030.0 million were on deposit with state agencies to meet regulatory requirements. At December 31, 2001, we had committed to provide additional funding for mortgage loans on real estate aggregating $30.8 million. These commitments arose in the normal course of business at terms that are comparable to similar investments. The carrying value of investments which have been non-income producing for the twelve months preceding December 31, 2001 include real estate, fixed maturities, mortgage loans and other long-term investments totaling $6.7 million. No investment in any person or its affiliates (other than bonds issued by agencies of the United States Government) exceeded ten percent of stockholders' equity at December 31, 2001. 4. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized 56 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) in immediate settlement of the instrument. Statement No. 107 also excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements and allows companies to forego the disclosures when those estimates can only be made at excessive cost. Accordingly, the aggregate fair value amounts presented herein are limited by each of these factors and do not purport to represent our underlying value. We used the following methods and assumptions in estimating the fair value of our financial instruments. FIXED MATURITY SECURITIES: Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using a matrix calculation assuming a spread (based on interest rates and a risk assessment of the bonds) over U. S. Treasury bonds. EQUITY SECURITIES: The fair values for equity securities are based on quoted market prices, where available. For equity securities that are not actively traded, estimated fair values are based on values of comparable issues. MORTGAGE LOANS ON REAL ESTATE AND POLICY LOANS: Fair values are estimated by discounting expected cash flows using interest rates currently being offered for similar loans. OTHER LONG-TERM INVESTMENTS: The fair values for investment deposits are estimated by discounting expected cash flows using interest rates currently being offered for similar investments. The fair values for investments held by broker-dealer subsidiaries are based on quoted market prices. CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair values. SECURITIES AND INDEBTEDNESS OF RELATED PARTIES: Fair values for loans and advances are estimated by discounting expected cash flows using interest rates currently being offered for similar investments. As allowed by Statement No. 107, fair values are not assigned to investments accounted for using the equity method. REINSURANCE RECOVERABLE: Reinsurance recoverable relating to our portion of the call options used to fund index credits on the equity-indexed annuities assumed from American Equity is reported at fair value. Fair value is determined using quoted market prices. We are not required to estimate fair value for the remainder of the reinsurance recoverable balance. ASSETS HELD IN SEPARATE ACCOUNTS: Separate account assets are reported at estimated fair value in our consolidated balance sheets. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' FUNDS: Fair values of our liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities, deposit administration funds and supplementary contracts) are estimated at cash surrender value, the cost we would incur to extinguish the liability. We are not required to estimate the fair value of our liabilities under other insurance contracts. SHORT-TERM AND LONG-TERM DEBT: The fair values for long-term debt are estimated using discounted cash flow analysis based on our current incremental borrowing rate for similar types of borrowing arrangements. For short-term debt, the carrying value approximates fair value. LIABILITIES RELATED TO SEPARATE ACCOUNTS: Separate account liabilities are estimated at cash surrender value, the cost we would incur to extinguish the liability. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED STOCK OF SUBSIDIARY TRUST AND SERIES C REDEEMABLE PREFERRED STOCK: Fair values are estimated by discounting expected cash flows using interest rates currently being offered for similar securities. 57 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following sets forth a comparison of the fair values and carrying values of our financial instruments subject to the provisions of Statement No. 107:
DECEMBER 31, --------------------------------------------------------------------- 2001 2000 --------------------------------- --------------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE --------------- --------------- --------------- --------------- (DOLLARS IN THOUSANDS) ASSETS Fixed maturities: Held for investment ...................... $ -- $ -- $ 284,253 $ 288,661 Available for sale ....................... 3,636,150 3,636,150 2,015,179 2,015,179 Equity securities ........................... 39,733 39,733 30,781 30,781 Mortgage loans on real estate ............... 385,307 389,199 321,862 311,175 Policy loans ................................ 181,054 205,114 125,987 143,469 Other long-term investments ................. 5,693 5,693 4,118 4,118 Cash and short-term investments ............. 304,322 304,322 67,758 67,758 Securities and indebtedness of related parties .................................. 887 967 1,067 1,088 Reinsurance recoverable ..................... 9,007 9,007 -- -- Assets held in separate accounts ............ 356,448 356,448 327,407 327,407 LIABILITIES Future policy benefits ...................... $ 1,853,934 $ 1,768,792 $ 984,441 $ 969,323 Other policyholders' funds .................. 373,022 373,022 251,172 251,172 Short-term debt payable to affiliate ........ -- -- 9,943 9,943 Long-term debt .............................. 40,000 40,000 40,000 40,000 Liabilities related to separate accounts .... 356,448 345,371 327,407 317,838 MINORITY INTEREST IN SUBSIDIARIES AND REDEEMABLE PREFERRED STOCK Company-obligated mandatorily redeemable preferred stock of subsidiary trust ......................... $ 97,000 $ 41,894 $ 97,000 $ 37,461 Series C redeemable preferred stock ......... 82,691 79,971 -- --
5. REINSURANCE AND POLICY PROVISIONS REINSURANCE In the normal course of business, we seek to limit our exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers. Our reinsurance coverage for life insurance varies according to the age and risk classification of the insured with retention limits ranging up to $1.1 million of coverage per individual life. We do not use financial or surplus relief reinsurance. Life insurance in force ceded on a consolidated basis totaled $4,772.5 million (16.8% of direct life insurance in force) at December 31, 2001 and $2,059.0 million (9.1% of direct life insurance in force) at December 31, 2000. Reinsurance contracts do not relieve us of our obligations to policyholders. To the extent that reinsuring companies are later unable to meet obligations under reinsurance agreements, our insurance subsidiaries would be liable for these obligations, 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. No allowance for uncollectible amounts has been established against our asset for reinsurance recoverable since none of our receivables are deemed to be uncollectible. In addition to the cession of risks in excess of specific retention limits, we also have reinsurance agreements with variable alliance partners to cede a specified percentage of risks associated with variable universal life and variable annuity contracts. Under these agreements, we pay the alliance partners their reinsurance percentage of charges and deductions collected on the reinsured polices. The alliance partners in return pay us their reinsurance percentage of benefits in excess of related account balances. In addition, the alliance partners pay us an expense allowance for certain new business, development and maintenance costs on the reinsured contracts. 58 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Furthermore, we participate with various unaffiliated life insurance companies in a reinsurance pool to mitigate the impact of a catastrophic event on our financial position and results of operations. Members of the pool share in the eligible catastrophic losses based on their size and contribution to the pool. Under the pool arrangement, we are able to cede catastrophic losses after other reinsurance and a deductible of $0.4 million, subject to a pool cap of $125.0 million per event. We accrued $1.6 million for anticipated losses from this pool resulting from the terrorist acts on September 11, 2001. Effective September 1, 2001, we entered into a 100% coinsurance agreement to reinsure our individual disability income business acquired in the Kansas Farm Bureau Life acquisition with an unaffiliated insurer. Effective September 1, 2000, we entered into a similar arrangement with the same insurer to reinsure our individual disability income business in force at that time. At September 1, 2001, the related accident and health reserves totaled $14.4 million, deferred policy acquisition costs totaled $0.7 million and value of insurance in force acquired totaled $3.1 million. At September 1, 2000, the related accident and health reserves totaled $43.6 million and deferred acquisition costs totaled $11.8 million. We settled these transactions by transferring cash and investments equal to the reserves on the business. In addition, we received cash totaling $3.0 million in 2001 and $11.1 million in 2000 as consideration for the transactions. A loss of $0.8 million in 2001 and $0.7 million in 2000 on the transactions has been deferred and is being recognized over the term of the underlying policies. In total, insurance premiums and product charges have been reduced by $22.1 million in 2001, $9.5 million in 2000 and $5.3 million in 1999 and insurance benefits have been reduced by $13.7 million in 2001, $6.2 million in 2000 and $2.4 million in 1999 as a result of cession agreements. During 2001 we entered into a coinsurance agreement with American Equity whereby we assumed 70% of certain fixed and equity-indexed annuity business written by American Equity from August 1, 2001 to December 31, 2001. The agreement also provides for reinsuring 40% of certain new annuity business written by American Equity during 2002 and 2003. The reinsurance of the business written prior to October 1, 2001 is accounted for as the acquisition of an in force block of business on October 1, 2001. With the reinsurance of the in force block, we recorded cash and reinsurance recoverable totaling $120.4 million, deferred acquisition costs of $18.3 million and policy liabilities of $138.7 million. Effective May 1, 2001, we entered into a coinsurance agreement with NTL whereby we assumed 90% of NTL's traditional life, universal life and annuity business in force. In addition, we agreed to assume 50% of NTL's traditional life, universal life and annuity business issued after May 1, 2001. We received investments and other assets in consideration for the policy liabilities assumed. Assets and liabilities recorded in connection with this agreement as of May 1, 2001 were as follows (dollars in thousands):
ASSETS LIABILITIES Investments............................ $ 299,252 Policy liabilities and accruals...... $ 324,592 Cash................................... 340 Other policyholder funds............. 11,872 Deferred policy acquisition costs...... 32,539 Other liabilities.................... 715 Other assets........................... 5,048 ----------- ----------- Total.................................. $ 337,179 Total........................... $ 337,179 =========== ===========
In addition to these reinsurance assumption agreements, we also assume variable annuity business from American Equity and another alliance partner through modified coinsurance arrangements. Life insurance in force assumed on a consolidated basis totaled $3,784.2 million (13.8% of total life insurance in force) at December 31, 2001 and $2.4 million (less than 0.1% of total life insurance in force) at December 31, 2000. In total, premiums and product charges assumed totaled $11.3 million in 2001, $0.1 million in 2000 and less than $0.1 million in 1999. Insurance benefits assumed totaled $9.0 million in 2001. POLICY PROVISIONS Unpaid claims on accident and health policies (principally disability income products) include amounts for losses and related adjustment expense and are estimates of the ultimate net costs of all losses, reported and unreported. 59 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) These estimates are subject to the impact of future changes in claim severity, frequency and other factors. The activity in the liability for unpaid claims and related adjustment expense, net of reinsurance, is summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Unpaid claims liability, net of related reinsurance, at beginning of year ....................................... $ 1,302 $ 20,433 $ 20,706 Claim reserves resulting from acquisition .................. 1,494 -- -- Add: Provision for claims occurring in the current year ...... 378 6,087 6,630 Change in estimated expense for claims occurring in the prior years .......................................... 719 (1,756) (1,417) ------------ ------------ ------------ Incurred claim expense during the current year ............. 1,097 4,331 5,213 Deduct expense payments for claims occurring during: Current year ............................................ 563 1,711 2,274 Prior years ............................................. 1,312 2,680 3,212 Deduct claim reserves transferred under 100% coinsurance arrangement ............................................. 1,252 19,071 -- ------------ ------------ ------------ 3,127 23,462 5,486 ------------ ------------ ------------ Unpaid claims liability, net of related reinsurance, at end of year ................................................. 766 1,302 20,433 Active life reserve ........................................ 130 176 19,705 ------------ ------------ ------------ Net accident and health reserves ........................... 896 1,478 40,138 Reinsurance ceded .......................................... 63,836 46,456 853 ------------ ------------ ------------ Gross accident and health reserves ......................... $ 64,732 $ 47,934 $ 40,991 ============ ============ ============
We develop reserves for unpaid claims by using industry mortality and morbidity data. One year development on prior year reserves represents our experience being more or less favorable than that of the industry. Over time, we expect our experience with respect to disability income business to be comparable to that of the industry. A certain level of volatility in development is inherent in these reserves since the underlying block of business is relatively small. An analysis of the value of insurance in force acquired is as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Excluding impact of net unrealized investment gains and losses: Balance at beginning of year ............................ $ 13,993 $ 14,854 $ 15,839 Addition resulting from acquisition ..................... 51,865 -- -- Accretion of interest during the year ................... 3,886 823 877 Reduction resulting from coinsurance agreement .......... (3,143) -- -- Amortization of asset ................................... (7,518) (1,684) (1,862) ------------ ------------ ------------ Balance prior to impact of net unrealized investment gains and losses .............................................. 59,083 13,993 14,854 Impact of net unrealized investment gains and losses ....... (8,954) 271 1,040 ------------ ------------ ------------ Balance at end of year ..................................... $ 50,129 $ 14,264 $ 15,894 ============ ============ ============
Net amortization of the value of insurance in force acquired, based on expected future gross profits/margins, for the next five years and thereafter is expected to be as follows: 2002 - $3.0 million; 2003 - $3.0 million; 2004 - $2.9 million; 2005 - $2.9 million; 2006 - $2.7 million; and thereafter, through 2023 - $44.6 million. 60 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES We file a consolidated federal income tax return with Farm Bureau Life and FBL Financial Services, Inc. and certain of their subsidiaries. The companies included in the consolidated federal income tax return each report current income tax expense as allocated under a consolidated tax allocation agreement. Generally, this allocation results in profitable companies recognizing a tax provision as if the individual company filed a separate return and loss companies recognizing a benefit to the extent their losses contribute to reduce consolidated taxes. Deferred income taxes have been established based upon the temporary differences between the financial statement and income tax bases of assets and liabilities. The reversal of the temporary differences will result in taxable or deductible amounts in future years when the related asset or liability is recovered or settled. Income tax expenses (credits) are included in the consolidated financial statements as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Taxes provided in consolidated statements of income on: Income from continuing operations before minority interest in earnings of subsidiaries, equity income and cumulative effect of change in accounting principle: Current ................................................ $ 18,085 $ 5,224 $ 23,604 Deferred ............................................... 491 8,378 2,307 ------------ ------------ ------------ 18,576 13,602 25,911 Equity income: Current ................................................ 137 6,476 2,010 Deferred ............................................... -- 92 128 ------------ ------------ ------------ 137 6,568 2,138 Cumulative effect of change in accounting for derivative instruments - deferred ................................. 185 -- -- Taxes provided in consolidated statements of changes in stockholders' equity: Cumulative effect of change in accounting for derivative instruments - deferred ................................. 1,480 -- -- Change in net unrealized investment gains/losses - deferred ............................................... 31,739 14,792 (53,750) Adjustment resulting from capital transaction of equity investee - deferred .................................... -- 19 -- Adjustment resulting from the issuance of shares under stock option plan - current ............................ (159) (140) (140) ------------ ------------ ------------ 33,060 14,671 (53,890) ------------ ------------ ------------ $ 51,958 $ 34,841 $ (25,841) ============ ============ ============
61 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The effective tax rate on income from continuing operations before income taxes, minority interest in earnings of subsidiaries, equity income and cumulative effect of change in accounting principle is different from the prevailing federal income tax rate as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Income from continuing operations before income taxes, minority interest in earnings of subsidiaries, equity income and cumulative effect of change in accounting principle .................................................. $ 63,686 $ 44,884 $ 81,149 ============ ============ ============ Income tax at federal statutory rate (35%) .................... $ 22,290 $ 15,709 $ 28,402 Tax effect (decrease) of: Dividends on company-obligated mandatorily redeemable preferred stock of subsidiary trust ........... (1,698) (1,698) (1,698) Tax-exempt dividend and interest income .................... (1,068) (1,131) (824) State income taxes ......................................... 67 276 (193) Other items ................................................ (1,015) 446 224 ------------ ------------ ------------ Income tax expense ............................................ $ 18,576 $ 13,602 $ 25,911 ============ ============ ============
The tax effect of temporary differences giving rise to our deferred income tax assets and liabilities is as follows:
DECEMBER 31, ----------------------------- 2001 2000 ------------ ------------ (DOLLARS IN THOUSANDS) Deferred income tax liabilities: Fixed maturity and equity securities ...................................... $ 22,213 $ -- Deferred policy acquisition costs ......................................... 99,265 71,451 Value of insurance in force acquired ...................................... 17,428 4,992 Other ..................................................................... 17,849 17,017 ------------ ------------ 156,755 93,460 Deferred income tax assets: Fixed maturity and equity securities ...................................... -- (6,271) Future policy benefits .................................................... (69,424) (42,378) Accrued dividends ......................................................... (2,160) (2,854) Accrued pension costs ..................................................... (11,867) (8,217) Other ..................................................................... (13,670) (13,991) ------------ ------------ (97,121) (73,711) ------------ ------------ Deferred income tax liability ................................................. $ 59,634 $ 19,749 ============ ============
Prior to 1984, a portion of Farm Bureau Life's current income was not subject to current income taxation, but was accumulated, for tax purposes, in a memorandum account designated as "policyholders' surplus account." The aggregate accumulation in this account at December 31, 2001 was $11.9 million. Should the policyholders' surplus account exceed the limitation prescribed by federal income tax law, or should distributions be made to the parent company in excess of $523.0 million, such excess would be subject to federal income taxes at rates then effective. Deferred income taxes of $4.2 million have not been provided on amounts included in this memorandum account. 7. CREDIT ARRANGEMENTS We have a note payable to the Federal Home Loan Bank (FHLB) totaling $40.0 million at December 31, 2001 and 2000. The note is due September 17, 2003, and interest on the note is charged at a variable rate equal to the London Interbank Offered Rate less 0.0475% (1.85% at December 31, 2001 and 6.50% at December 31, 2000). At December 31, 2001, fixed maturity securities with a carrying value of $44.4 million are on deposit with the FHLB as collateral for the note. As an investor in the FHLB, we have the ability to borrow an additional $38.9 million from the FHLB at December 31, 2001 with appropriate increased collateral deposits. 62 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2000, we had a $9.9 million note payable to Farm Bureau Mutual Insurance Company (Farm Bureau Mutual), an affiliate. The note had been used to acquire certain assets that were leased to Farm Bureau Mutual and other affiliates. During 2001, this note was paid off, principally by transferring the underlying assets to Farm Bureau Mutual. No gain or loss was recorded on this transaction, as fair value of the assets was equal to book value on the transfer date. 8. MINORITY INTEREST AND STOCKHOLDERS' EQUITY Minority interest in the consolidated balance sheets includes $97.0 million of 5% Preferred Securities issued by FBL Financial Group Capital Trust (the Trust), one of our wholly-owned subsidiaries. FBL Financial Group, Inc. (parent company) issued 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the Notes) with a principal amount of $100.0 million to support the 5% Preferred Securities. The sole assets of the Trust are and will be the Notes and any interest accrued thereon. The interest payment dates on the Notes correspond to the distribution dates on the 5% Preferred Securities. The 5% Preferred Securities, which have a liquidation value of $1,000.00 per share plus accrued and unpaid distributions, mature simultaneously with the Notes. As of December 31, 2001 and 2000, 97,000 shares of 5% Preferred Securities were outstanding, all of which we unconditionally guarantee. The 5% Preferred Securities were originally issued to the Iowa Farm Bureau Federation, our majority stockholder. On October 31, 1999, the Iowa Farm Bureau Federation exchanged the 5% Preferred Securities for $97.0 million face amount of 5% trust preferred securities issued by American Equity Investment Life Holding Company. In preparing our consolidated financial statements, we do not eliminate our portion of the 5% Preferred Securities owned by the equity investee since the terms of the preferred securities issued by the equity investee are substantially similar to the terms of the 5% Preferred Securities. During 1999, Western Farm Bureau Life Insurance Company (Western Life), a former wholly-owned subsidiary, merged into Farm Bureau Life. Concurrent with the merger, Western Life redeemed 22,517 shares of its redeemable preferred stock for $4.5 million. The redeemable preferred stock and related dividends were reported as minority interest in subsidiaries in the consolidated financial statements. The Iowa Farm Bureau Federation owns our Series B preferred stock. Each share of Series B preferred stock has a liquidation preference of $0.60 and voting rights identical to that of Class A common stock with the exception that each Series B share is entitled to two votes while each Class A share is entitled to one vote. The Series B preferred stock pays cumulative annual cash dividends of $0.03 per share, payable quarterly, and is redeemable by us, at our option, at $0.60 per share plus unpaid dividends if the stock ceases to be beneficially owned by a Farm Bureau organization. We repurchased 5,900 shares in 2001, 4,358,397 shares in 2000 and 1,322,920 shares in 1999 of Class A common stock in accordance with repurchase plans and a tender offer approved by our Board of Directors. The cost of the repurchases totaled $0.1 million in 2001, $85.8 million in 2000 and $25.7 million in 1999. Of the shares repurchased in 2000, 2,974,735 were unregistered shares owned by various Farm Bureau entities. The purchase amounts were allocated partly to Class A common stock based on the average common stock balance per share on the acquisition dates with the remainder allocated to retained earnings. Holders of the Class A common stock, Series B preferred stock and Series C preferred stock, vote together as a group. The Class B common stock votes as a separate class on all issues. The holders of the Class A common stock, Series B preferred stock and Series C preferred stock vote for the election of Class A Directors (three to five) and only holders of the Class B common stock vote for the election of Class B Directors (ten to twenty). Voting for the Directors is noncumulative. In addition, various ownership aspects of our Class B common stock are governed by a Class B Shareholder Agreement which results in the Iowa Farm Bureau Federation, which owns 63.0% of our voting stock as of December 31, 2001, maintaining control of the Company. Holders of Class A common stock and Class B common stock are entitled to share ratably on a share-for-share basis with respect to common stock dividends. 63 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. RETIREMENT AND COMPENSATION PLANS We participate with several affiliates in various defined benefit plans covering substantially all of our employees. The benefits of these plans are based primarily on years of service and employees' compensation. Net periodic pension cost of the plans is allocated between participants generally on a basis of time incurred by the respective employees for each employer. Such allocations are reviewed annually. Pension expense aggregated $5.3 million in 2001, $5.2 million in 2000 and $4.5 million in 1999. We participate with several affiliates in a 401(k) defined contribution plan which covers substantially all employees. We contribute FBL Financial Group, Inc. stock in the amount equal to 50% of an employee's contributions up to 4% of the annual salary contributed by the employees. Beginning in 2002, we will contribute FBL Financial Group, Inc. stock in an amount equal to 100% of an employee's contributions up to 2% of the annual salary contributed by the employee and an amount equal to 50% of an employee's contributions between 2% and 4% of the annual salary contributed by the employee. Costs are allocated among the affiliates on a basis of time incurred by the respective employees for each company. Related expense totaled $0.5 million in 2001, $0.4 million in 2000 and $0.3 million in 1999. We have established deferred compensation plans for certain key current and former employees and have certain other benefit plans which provide for retirement and other benefits. Liabilities for these plans are accrued as the related benefits are earned. Certain of the assets related to these plans are on deposit with us and amounts relating to these plans are included in our financial statements. In addition, certain amounts included in the policy liabilities for interest sensitive products relate to deposit administration funds maintained by us on behalf of affiliates. In addition to benefits offered under the aforementioned benefit plans, we and several other affiliates sponsor a plan that provides group term life insurance benefits to retired full-time employees who have worked ten years and attained age 55 while in service. Furthermore, during a portion of 2001 we offered certain retiree health benefits to employees and retirees formerly employed by Kansas Farm Bureau Life. During 2001, we discontinued offering this benefit to active employees and wrote off the related liability. Postretirement benefit expense is allocated in a manner consistent with pension expense discussed above. Postretirement benefit expense (benefit) aggregated ($0.5) million in 2001, $0.1 million in 2000 and $0.2 million in 1999. We have a Class A Common Stock Compensation Plan (the Plan) under which incentive stock options, nonqualified stock options, bonus stock, restricted stock and stock appreciation rights may be granted to directors, officers and employees. Option shares granted to directors are fully vested upon grant and have a contractual term that varies with the length of time the director remains on the Board, up to ten years. Option shares granted to officers and employees have a contractual term of 10 years and generally vest over a period up to five years, contingent upon continued employment with us. During 2001, we extended the exercise period for options granted to our former Chairman of the Board and recorded $0.5 million, representing the intrinsic value of the options at the date of modification, in compensation expense. 64 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Information relating to stock options is as follows:
WEIGHTED-AVERAGE NUMBER OF EXERCISE PRICE TOTAL SHARES PER SHARE EXERCISE PRICE -------------- ---------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Shares under option at January 1, 1999...................... 1,427,852 $ 10.01 $ 14,298 Granted................................................. 24,433 22.06 539 Exercised............................................... 35,437 8.77 311 -------------- -------------- Shares under option at December 31, 1999.................... 1,416,848 10.25 14,526 Granted................................................. 454,334 15.79 7,174 Exercised............................................... 166,285 9.44 1,570 Forfeited............................................... 40,054 12.36 495 -------------- -------------- Shares under option at December 31, 2000.................... 1,664,843 11.79 19,635 Granted................................................. 447,218 15.54 6,950 Exercised............................................... 106,348 9.38 998 Forfeited............................................... 35,075 16.35 573 -------------- -------------- Shares under option at December 31, 2001.................... 1,970,638 12.69 $ 25,014 ============== ============== Exercisable options: December 31, 1999....................................... 840,163 $ 9.92 $ 8,334 December 31, 2000....................................... 1,059,168 10.56 11,185 December 31, 2001....................................... 1,272,391 11.04 14,047 Information regarding stock options outstanding at December 31, 2001 is as follows: CURRENTLY OUTSTANDING CURRENTLY EXERCISABLE ------------------------------------------- -------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE LIFE (IN PRICE PER PRICE PER NUMBER YEARS) SHARE NUMBER SHARE ----------- ------------- ----------- ----------- ----------- Range of exercise prices: At $8.75......................... 876,316 4.55 $ 8.75 876,316 $ 8.75 $8.76 - $14.00................... 110,424 5.29 12.22 93,075 12.21 $14.01 - $19.25.................. 923,091 8.35 15.87 253,248 16.33 $19.26 - $24.25.................. 60,807 6.65 22.14 49,752 22.12 ------------ ------------ $8.75 - $24.25................... 1,970,638 6.43 12.69 1,272,391 11.04 ============ ============
At December 31, 2001, shares of Class A common stock available for grant as additional awards under the Plan totaled 807,907. We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related Interpretations in accounting for our stock options. No compensation expense is recognized under APB 25 for stock options granted because the exercise price of our stock options equals the market price of the underlying stock on the date of grant. Under the alternative accounting method provided by Statement No. 123, compensation expense is recognized in an amount equal to the estimated fair value of stock options on the date of grant. We have not adopted the accounting provisions of Statement No. 123 because the valuation of non-traded stock options is highly subjective and, in management's opinion, the existing pricing models do not necessarily provide a reliable single measure of the fair value of our options. Pro forma information regarding net income and earnings per common share is required by Statement No. 123, and has been determined as if we had accounted for the stock options under the fair value method of that Statement. 65 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Risk-free interest rate ....................................... 5.14% 6.70% 4.73% Dividend yield ................................................ 2.20% 2.20% 2.10% Volatility factor of the expected market price ................ 0.25 0.15 0.13 Weighted-average expected life ................................ 5.0 years 5.1 years 5.0 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Our employee stock options have characteristics significantly different from those of traded options and the subjective input assumptions can materially affect the fair value estimate produced by the Black-Scholes option valuation model. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma net earnings and earnings per common share are as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income - as reported ...................................... $ 40,745 $ 39,347 $ 55,710 Net income - pro forma ........................................ 39,763 38,385 55,028 Earnings per common share - as reported ....................... 1.33 1.29 1.72 Earnings per common share - pro forma ......................... 1.30 1.26 1.70 Earnings per common share - assuming dilution, as reported .... 1.31 1.27 1.69 Earnings per common share - assuming dilution, pro forma ...... 1.28 1.25 1.68 Weighted-average fair value of options granted during the year (per common share) .................................... 3.43 3.14 3.31
The pro forma impact is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. 10. MANAGEMENT AND OTHER AGREEMENTS We share certain office facilities and services with the Iowa Farm Bureau Federation and its affiliated companies. These expenses are allocated on the basis of cost and time studies that are updated annually and consist primarily of salaries and related expenses, travel and other operating costs. We have management agreements with NTL, Farm Bureau Mutual and other affiliates under which we provide general business, administrative and management services. Fee income for these services totaled $2.0 million in 2001, $1.1 million in 2000 and $0.8 million in 1999. In addition, Farm Bureau Management Corporation, a wholly-owned subsidiary of the Iowa Farm Bureau Federation, provides certain management services to us under a separate arrangement. We incurred related expenses totaling $0.7 million in 2001, $0.9 million in 2000 and $0.5 million in 1999. We have marketing agreements with the Farm Bureau property-casualty companies operating within our marketing territory, including Farm Bureau Mutual and other affiliates. Under the marketing agreements, the property-casualty companies are responsible for development and management of our agency force for a fee equal to a percentage of commissions on first year life insurance premiums and annuity deposits. We paid $6.2 million in 2001, $6.0 million in 2000 and $5.0 million in 1999 to the property-casualty companies under these arrangements. We are licensed by the Iowa Farm Bureau Federation to use the "Farm Bureau" and "FB" designations in Iowa. In connection with this license, we incurred royalty expense totaling $0.5 million in 2001, $0.7 million in 2000 and $0.9 million in 1999. The expense set forth above in 2001 is before the recovery of $1.0 million in overpayment of royalties in prior years under the terms of the royalty contract. We have similar arrangements with Farm Bureau organizations in other 66 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) states in our market territory. Total royalty expense to Farm Bureau organizations other than the Iowa Farm Bureau Federation totaled $1.0 million in 2001, $1.2 million in 2000 and $1.0 million in 1999. We have administrative services agreements with American Equity under which we provide underwriting, claims processing, accounting, compliance and other administrative services primarily relating to certain variable insurance products underwritten by them. Fee income from performing these services totaled $0.3 million in 2001, 2000 and 1999. 11. COMMITMENTS AND CONTINGENCIES In the normal course of business, we may be involved in litigation where amounts are alleged that are substantially in excess of contractual policy benefits or certain other agreements. At December 31, 2001, management is not aware of any claims for which a material loss is reasonably possible. Effective January 1, 2001, we switched our insurance coverage for employee health and welfare claims from indemnity insurance primarily to self-insurance. However, claims in excess of self-insurance levels are fully insured. We fund insurance claims through a self-insurance trust. Deposits to the trust are made at an amount equal to our best estimate of claims incurred during the period. Accordingly, no accruals are recorded on our financial statements for unpaid claims and claims incurred but not reported. Adjustments, if any, resulting in changes in the estimate of claims incurred will be reflected in operations in the periods in which such adjustments are known. On March 31, 1998, we sold our wholly-owned subsidiary, Utah Farm Bureau Insurance Company, to Farm Bureau Mutual. We may earn additional consideration in the period ended December 31, 2002 in accordance with an earn-out provision included in the related sales agreement. Under the earn-out arrangement, the Company and Farm Bureau Mutual share equally in the dollar amount by which the incurred losses on direct business written in the state of Utah, net of reinsurance ceded, is less than the incurred losses assumed in the valuation model used to derive the initial acquisition price. The earn-out calculation is performed and any settlement (subject to a maximum of $2.0 million per year) is made on a calendar year basis. We have not accrued any contingent consideration for 2002 as such amounts, if any, cannot be reasonably estimated as of December 31, 2001. Receipts as a result of the earn-out provision, if any, are recorded as an adjustment to the gain on the disposal of the discontinued segment. We lease our home office properties under a 15-year operating lease from a wholly-owned subsidiary of the Iowa Farm Bureau Federation. Future remaining minimum lease payments under this lease as of December 31, 2001 are as follows: 2002 - $2.1 million; 2003 - $2.3 million; 2004 - $2.4 million; 2005 - $2.4 million; 2006 - $2.4 million and thereafter, through 2013 - $16.4 million. Rent expense for the lease totaled $3.0 million in 2001, $3.1 million in 2000 and $2.3 million in 1999. These amounts are net of $1.4 million in 2001, 2000 and 1999 in amortization of a deferred gain on the exchange of our home office properties for common stock in 1998. The deferred gain totaled $15.7 million at December 31, 2001 and $17.1 million at December 31, 2000. 12. RESTRUCTURING We closed an administrative processing center during 1999, subsequent to the merger of Western Farm Bureau Life Insurance Company, a former wholly-owned subsidiary, into Farm Bureau Life. As a result of the closing of the service center, a leased property was vacated, 22 positions were eliminated and moving costs were incurred. During 1999, we charged to expense costs totaling $1.2 million for related severance benefits, lease costs and other costs primarily associated with the closing of the service center. The restructuring expenses are recorded in the underwriting, acquisition and insurance expense line of the 1999 consolidated statement of income. 67 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. EARNINGS PER SHARE The following table sets forth the computation of earnings per common share and earnings per common share - assuming dilution:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Income before accounting change and discontinued operations ................................................ $ 40,401 $ 38,747 $ 54,325 Cumulative effect of change in accounting for derivative instruments ............................................... 344 -- -- Income from discontinued operations ......................... -- 600 1,385 ------------ ------------ ------------ Net income .................................................. 40,745 39,347 55,710 Dividends on Series B and C preferred stock ................. (4,202) (150) (150) ------------ ------------ ------------ Numerator for earnings per common share - income available to common stockholders ...................... $ 36,543 $ 39,197 $ 55,560 ============ ============ ============ Denominator: Weighted average shares ..................................... 27,364,771 30,389,665 32,207,149 Deferred common stock units related to directors compensation plan ......................................... 13,471 9,736 6,005 ------------ ------------ ------------ Denominator for earnings per common share - weighted-average shares ........................... 27,378,242 30,399,401 32,213,154 Effect of dilutive securities - employee stock options ...... 488,898 400,490 616,818 ------------ ------------ ------------ Denominator for diluted earnings per common share - adjusted weighted-average shares .......... 27,867,140 30,799,891 32,829,972 ============ ============ ============ Earnings per common share: Income before accounting change and discontinued operations ................................................ $ 1.32 $ 1.27 $ 1.68 Cumulative effect of change in accounting for derivative instruments ............................................... 0.01 -- -- Income from discontinued operations ......................... -- 0.02 0.04 ------------ ------------ ------------ Earnings per common share ................................... $ 1.33 $ 1.29 $ 1.72 ============ ============ ============ Earnings per common share - assuming dilution: Income before accounting change and discontinued operations ................................................ $ 1.30 $ 1.25 $ 1.65 Cumulative effect of change in accounting for derivative instruments ............................................... 0.01 -- -- Income from discontinued operations ......................... -- 0.02 0.04 ------------ ------------ ------------ Earnings per common share ................................... $ 1.31 $ 1.27 $ 1.69 ============ ============ ============
Based upon the provisions of the underlying agreement and the application of the "two class" method to our capital structure, we have not allocated any undistributed net income to the Class C preferred stock since their participation in dividends with the common stockholders is limited to the amount of the annual regular dividend. Options to purchase 133,475 shares of common stock in 2001 at $17.13 to $24.25 per share were granted during 1997, 1998, 1999, 2000 and 2001 but were not included in the computation of 2001 diluted earnings per share because the options' exercise price was greater than the average market price of common shares during 2001. The options, which expire in 2007 through 2011, were still outstanding at December 31, 2001. Options to purchase 564,419 shares of common stock in 2000 at $15.00 to $24.25 per share were granted during 1997, 1998, 1999 and 2000 but were not included in the computation of 2000 diluted earnings per share because the options' exercise price was greater than the average market price of common shares during 2000. The options, which expire in 2007 through 2010, were still outstanding at December 31, 2000. 68 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Options to purchase 56,534 shares of common stock in 1999 at $19.81 to $24.25 per share were granted during 1997, 1998 and 1999 but were not included in the computation of 1999 diluted earnings per share because the options' exercise price was greater than the average market price of common shares during 1999. The options, which expire in 2007 through 2009, were still outstanding at December 31, 1999. 14. STATUTORY INFORMATION The financial statements of the Life Companies included herein differ from related statutory-basis financial statements principally as follows: (a) the bond portfolio is segregated into held-for-investment (carried at amortized cost) and available-for-sale (carried at fair value) classifications rather than generally being carried at amortized cost; (b) acquisition costs of acquiring new business are deferred and amortized over the life of the policies rather than charged to operations as incurred; (c) future policy benefit reserves for participating traditional life insurance products are based on net level premium methods and guaranteed cash value assumptions which may differ from statutory reserves; (d) future policy benefit reserves on certain interest sensitive products are based on full account values, rather than discounting methodologies utilizing statutory interest rates; (e) net realized gains or losses attributed to changes in the level of market interest rates are recognized as gains or losses in the statements of income when the sale is completed rather than deferred and amortized over the remaining life of the fixed maturity security or mortgage loan; (f) the established formula-determined statutory investment reserve, changes in which are charged directly to surplus, is not recorded as a liability; (g) certain deferred income tax assets, agents' balances and certain other assets designated as "non-admitted assets" for statutory purposes are reported as assets rather than being charged to surplus; (h) revenues for interest sensitive and variable products consist of policy charges for the cost of insurance, policy administration charges, amortization of policy initiation fees and surrender charges assessed rather than premiums received; (i) pension income or expense is recognized for all employees in accordance with Statement No. 87, "Employers' Accounting for Pensions" rather than for vested employees only; (j) the financial statements of subsidiaries are consolidated with those of the insurance subsidiary; and (k) assets and liabilities are restated to fair values when a change in ownership occurs that is accounted for as a purchase, with provisions for goodwill and other intangible assets, rather than continuing to be presented at historical cost. Net income (loss) of the Life Companies, as determined in accordance with statutory accounting practices, was ($8.8) million in 2001, $28.9 million in 2000 and $40.4 million in 1999. The net loss for 2001 is primarily attributable to the payment of ceding commissions on the NTL and American Equity coinsurance transactions. Statutory net gain from operations for the life insurance subsidiaries, which excludes realized gains and losses, totaled $5.7 million in 2001, $49.8 million in 2000 and $41.2 million in 1999. Statutory capital and surplus, after appropriate elimination of intercompany accounts, totaled $378.2 million at December 31, 2001 and $311.9 million at December 31, 2000. Statutory capital and surplus decreased $1.3 million during 2001 due to the adoption of accounting changes resulting from the codification of statutory accounting principles. The ability of Farm Bureau Life to pay dividends to the parent company is restricted because prior approval of the Iowa insurance commissioner is required for payment of dividends to the stockholder which exceed an annual limitation. During 2002, Farm Bureau Life could pay dividends to the parent company of approximately $37.8 million without prior approval of insurance regulatory authorities. 15. SEGMENT INFORMATION Prior to January 1, 2001, our life insurance segment was our only reportable operating segment. The life insurance segment included activities related to the sale of life insurance, annuities and accident and health insurance products. Operations were aggregated into the same segment due to the similarity of the products, including the underlying economic characteristics, the method of distribution and the regulatory environment. During the first quarter of 2001, a financial reporting project to refine our line of business detail was completed. With the availability of more detailed line of business information, management now utilizes financial information regarding products that are aggregated into three product segments. The product segments are: (1) traditional annuity, (2) traditional and universal life insurance and (3) variable. We also have various support operations and corporate capital that are aggregated into a corporate and other segment. 69 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The traditional annuity segment consists of traditional annuities, equity-indexed annuities and supplementary contracts (some of which involve life contingencies). Traditional and equity-indexed annuities provide for tax-deferred savings and supplementary contracts provide for the systematic repayment of funds that accumulate interest. Traditional annuities consist primarily of flexible premium deferred annuities, but also include single premium deferred and immediate contracts. With traditional annuities, we bear the underlying investment risk and credit interest to the contracts at rates we determine, subject to interest rate guarantees. With equity-indexed annuity products, we bear the underlying investment risk and credit interest in an amount equal to the greater of a guaranteed interest rate or a percentage of the gain in a specified market index. The traditional and universal 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. The variable segment consists of variable universal life insurance and variable annuity contracts. These products are similar to universal life insurance and traditional annuity contracts, except the contract holder has the option to direct the cash value of the contract to a wide range of investment sub-accounts, thereby passing the investment risk to the contract holder. The corporate and other segment consists of the following corporate items and products/services that do not meet the quantitative threshold for separate segment reporting: o Investments and related investment income not specifically allocated to our product segments; o Interest expense and minority interest pertaining to distributions on trust preferred securities; o Accident and health insurance products, primarily long-term disability income insurance; o Advisory services for the management of investments and other companies; o Marketing and distribution services for the sale of mutual funds and insurance products not issued by us; and o Leasing services, primarily with affiliates. 70 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Financial information concerning our operating segments is as follows. Information for the years 2000 and 1999 has been restated to conform to the new segment presentation.
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Operating revenues: Traditional annuity ........................................ $ 128,738 $ 91,661 $ 96,769 Traditional and universal life ............................. 295,045 222,458 223,908 Variable ................................................... 41,409 37,013 31,166 Corporate and other ........................................ 25,494 42,584 45,522 ------------ ------------ ------------ 490,686 393,716 397,365 Realized losses on investments (A) ............................ (16,096) (26,098) (2,379) ------------ ------------ ------------ Consolidated revenues ...................................... $ 474,590 $ 367,618 $ 394,986 ============ ============ ============ Net investment income: Traditional annuity ........................................ $ 126,784 $ 90,490 $ 95,869 Traditional and universal life ............................. 141,611 106,867 109,158 Variable ................................................... 10,198 9,007 7,417 Corporate and other ........................................ 6,494 15,005 13,376 ------------ ------------ ------------ Consolidated ............................................ $ 285,087 $ 221,369 $ 225,820 ============ ============ ============ Depreciation and amortization: Traditional annuity ........................................ $ 1,804 $ 1,370 $ 1,532 Traditional and universal life ............................. 4,675 3,896 3,158 Variable ................................................... 973 1,125 552 Corporate and other ........................................ 11,031 10,139 10,960 ------------ ------------ ------------ Consolidated ............................................ $ 18,483 $ 16,530 $ 16,202 ============ ============ ============ Pre-tax operating income (loss) from continuing operations: Traditional annuity ........................................ $ 20,473 $ 15,750 $ 18,775 Traditional and universal life ............................. 50,421 44,252 48,765 Variable ................................................... 5,547 1,235 1,617 Corporate and other ........................................ (3,453) 21,888 15,389 ------------ ------------ ------------ 72,988 83,125 84,546 Income taxes on operating income .............................. (23,568) (28,643) (29,195) Realized losses on investments, net (A) ....................... (9,019) (15,735) (1,026) ------------ ------------ ------------ Consolidated income from continuing operations ............. $ 40,401 $ 38,747 $ 54,325 ============ ============ ============ Assets: Traditional annuity ........................................ $ 2,374,426 $ 1,243,475 $ 1,286,237 Traditional and universal life ............................. 2,227,505 1,606,420 1,581,037 Variable ................................................... 633,417 564,051 460,890 Corporate and other ........................................ 342,764 334,417 418,187 ------------ ------------ ------------ 5,578,112 3,748,363 3,746,351 Unrealized gains (losses) on investments, net (A) ............. 60,303 (29,364) (73,439) Other classification adjustments .............................. (9,226) (14,953) (10,581) ------------ ------------ ------------ Consolidated assets ........................................ $ 5,629,189 $ 3,704,046 $ 3,662,331 ============ ============ ============
(A) Amounts are net of adjustments, as applicable, to amortization of unearned reserves, deferred policy acquisition costs, value of insurance in-force acquired and income taxes attributable to gains and losses on investments. We analyze our segment results based on pre-tax operating income. Accordingly, income taxes are not allocated to the segments. In addition, operating results are analyzed net of any transactions between the segments. Depreciation and amortization are allocated to the product segments while the related property, equipment and capitalized software are generally allocated to the corporate and other segment. Depreciation and amortization for the corporate and other segment include charges relating to leases with affiliates totaling $4.6 million for 2001 and 2000 and $3.1 million for 1999. In the consolidated statements of income, we record these depreciation amounts net of related lease income from affiliates. 71 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Our investment in equity method investees and the related equity income are attributable to the corporate and other segment. Interest expense and expenditures for long-lived assets were not significant during the periods presented above. Net statutory premiums collected, which include premiums collected from annuities and universal life-type products that are not included in revenues for GAAP reporting, totaled $672.1 million in 2001. Total premiums collected include $280.0 million assumed from American Equity, $13.3 million assumed from NTL and $378.7 million written in our core Farm Bureau marketing territory or through a variable alliance partner. Excluding reinsurance assumed, our total life and annuity collected premiums for 2001 are concentrated in the following core Farm Bureau distribution states - Iowa (29%), Kansas (22%) and Oklahoma (9%). 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Unaudited quarterly results of operations are as follows:
2001 --------------------------------------------------------------- QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Premiums and product charges ............... $ 44,955 $ 49,646 $ 46,951 $ 46,982 Net investment income ...................... 66,700 71,118 71,260 76,009 Derivative income (loss) ................... (808) (60) (661) 1,629 Realized gains (losses) on investments ..... (1,522) 253 (221) (14,388) Total revenues ............................. 113,585 125,072 121,687 114,246 Income before cumulative effect of change in accounting principle .................. 9,554 12,264 11,216 7,367 Cumulative effect of change in accounting for derivative instruments ............... 344 -- -- -- Net income ................................. 9,898 12,264 11,216 7,367 Net income applicable to common stock ...... 8,859 11,218 10,162 6,304 Earnings per common share: Income before accounting change ............ $ 0.31 $ 0.41 $ 0.37 $ 0.23 Cumulative effect of change in accounting for derivative instruments ............... 0.01 -- -- -- ------------ ------------ ------------ ------------ Earnings per common share ................ $ 0.32 $ 0.41 $ 0.37 $ 0.23 ============ ============ ============ ============ Earnings per common share - assuming dilution: Income before accounting change ............ $ 0.31 $ 0.40 $ 0.36 $ 0.23 Cumulative effect of change in accounting for derivative instruments ............... 0.01 -- -- -- ------------ ------------ ------------ ------------ Earnings per common share - assuming dilution ............................... $ 0.32 $ 0.40 $ 0.36 $ 0.23 ============ ============ ============ ============
72 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2000 --------------------------------------------------------------- QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Premiums and product charges ............... $ 38,725 $ 42,626 $ 36,988 $ 34,925 Net investment income ...................... 54,683 55,373 55,579 55,734 Realized losses on investments ............. (61) (4,148) (15,353) (6,398) Total revenues ............................. 97,845 98,810 82,090 88,873 Income from continuing operations .......... 18,134 9,665 1,881 9,067 Discontinued operations .................... -- -- -- 600 Net income ................................. 18,134 9,665 1,881 9,667 Net income applicable to common stock ...... 18,097 9,627 1,843 9,630 Earnings per common share: Income from continuing operations ........ $ 0.58 $ 0.31 $ 0.06 $ 0.32 Income from discontinued operations ...... -- -- -- 0.02 ------------ ------------ ------------ ------------ Earnings per common share ................ $ 0.58 $ 0.31 $ 0.06 $ 0.34 ============ ============ ============ ============ Earnings per common share - assuming dilution: Income from continuing operations ........ $ 0.57 $ 0.31 $ 0.06 $ 0.31 Income from discontinued operations ...... -- -- -- 0.02 ------------ ------------ ------------ ------------ Earnings per common share - assuming dilution ............................... $ 0.57 $ 0.31 $ 0.06 $ 0.33 ============ ============ ============ ============
Earnings per common share for each quarter is computed independently of earnings per common share for the year. As a result, the sum of the quarterly earnings per common share amounts may not equal the earnings per common share for the year due primarily to transactions affecting the number of weighted average common shares outstanding in each quarter. Derivative income (loss) was classified with net investment income in the Form 10-Q filings for the first three quarters of 2001. 73 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III The information required by Part III is hereby incorporated by reference from the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2001. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. See index to Financial Statements on page 36 for a list of financial statements included in this Report. 2. Financial Statement Schedules. The following financial statement schedules are included as part of this Report immediately following the signature page: Schedule I -- Summary of Investments Schedule II -- Condensed Financial Information of Registrant (Parent Company) Schedule III -- Supplementary Insurance Information Schedule IV -- Reinsurance All other schedules are omitted, either because they are not applicable, not required, or because the information they contain is included elsewhere in the consolidated financial statements or notes. 3. Exhibits. 21 Subsidiaries of FBL Financial Group, Inc. 23 Consent of Independent Auditors (b) Reports on Form 8-K. None. 74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 12th day of March, 2002. FBL Financial Group, Inc. By: /s/ CRAIG A. LANG ------------------ Craig A. Lang CHAIRMAN OF THE BOARD Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated;
Signature Title Date ------------------------- ---------------------------------------------- ---------------- /s/ WILLIAM J. ODDY Chief Executive Officer (Principal Executive March 12, 2002 ------------------- Officer) and Director William J. Oddy /s/ JAMES W. NOYCE Chief Financial Officer (Principal Financial March 12, 2002 ------------------ and Accounting Officer) James W. Noyce /s/ CRAIG A. LANG Chairman of the Board and Director March 12, 2002 ----------------- Craig A. Lang /s/ HOWARD D. POULSON First Vice Chair and Director March 12, 2002 --------------------- Howard D. Poulson /s/ KAREN J. HENRY Second Vice Chair and Director March 12, 2002 ------------------ Karen J. Henry /s/ ERIC K. AASMUNDSTAD Director March 12, 2002 ----------------------- Eric K. Aasmundstad /s/ STANLEY R. AHLERICH Director March 12, 2002 ----------------------- Stanley R. Ahlerich /s/ JERRY L. CHICOINE Director March 12, 2002 --------------------- Jerry L. Chicoine /s/ O. AL CHRISTOPHERSON Director March 12, 2002 ------------------------ O. Al Christopherson /s/ JOHN W. CREER Director March 12, 2002 ----------------- John W. Creer /s/ KENNY J. EVANS Director March 12, 2002 ------------------ Kenny J. Evans /s/ ALAN L. FOUTZ Director March 12, 2002 ----------------- Alan L. Foutz
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Signature Title Date ------------------------- ---------------------------------------------- ---------------- Director March 12, 2002 ----------------- Craig D. Hill /s/ LELAND J. HOGAN Director March 12, 2002 ------------------- Leland J. Hogan /s/ RICHARD G. KJERSTAD Director March 12, 2002 ----------------------- Richard G. Kjerstad Director March 12, 2002 --------------------- G. Steven Kouplen /s/ DAVID L. MCCLURE Director March 12, 2002 -------------------- David L. McClure /s/ BRYCE P. NEIDIG Director March 12, 2002 ------------------- Bryce P. Neidig /s/ FRANK S. PRIESTLEY Director March 12, 2002 ---------------------- Frank S. Priestley /s/ JOHN J. VAN SWEDEN Director March 12, 2002 ---------------------- John J. Van Sweden /s/ JOHN E. WALKER Director March 12, 2002 ------------------ John E. Walker /s/ JERRY C. DOWNIN Senior Vice President, Secretary, Treasurer March 12, 2002 ------------------- and Director Jerry C. Downin
76 REPORT OF INDEPENDENT AUDITORS ON SCHEDULES The Board of Directors and Stockholders FBL Financial Group, Inc. We have audited the consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001, and have issued our report thereon dated February 5, 2002 (included elsewhere in this Form 10-K). Our audits also included the financial statement schedules listed in Item 14(a) of this Form 10-K. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, in 2001, the Company changed its method of accounting for derivative instruments. /s/ Ernst & Young LLP Des Moines, Iowa February 5, 2002 77 SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES FBL FINANCIAL GROUP, INC. DECEMBER 31, 2001
COLUMN A COLUMN B COLUMN C COLUMN D ------------------------------------------------ ----------------- ----------------- ----------------- AMOUNT AT WHICH SHOWN IN THE TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET ------------------------------------------------ ----------------- ----------------- ----------------- (DOLLARS IN THOUSANDS) Fixed maturity securities, available for sale: Bonds: United States Government and agencies........ $ 147,869 $ 150,581 $ 150,581 State, municipal and other governments....... 96,057 98,661 98,661 Public utilities............................. 146,048 148,538 148,538 Corporate securities......................... 1,699,711 1,739,265 1,739,265 Mortgage and asset-backed securities......... 1,366,995 1,394,400 1,394,400 Convertible bonds............................ 45,961 46,849 46,849 Redeemable preferred stocks.................... 58,347 57,856 57,856 ----------------- ----------------- ----------------- Total..................................... 3,560,988 $ 3,636,150 3,636,150 ================= Equity securities, available for sale: Common stocks: Banks, trusts, and insurance companies....... 11,963 12,001 12,001 Industrial, miscellaneous, and all other..... 19,615 19,925 19,925 Nonredeemable preferred stocks................. 7,441 7,807 7,807 ----------------- ----------------- ----------------- Total..................................... 39,019 $ 39,733 39,733 ================= Mortgage loans on real estate................... 385,362 385,307 (2) Investment real estate: Acquired for debt............................ 3,138 2,321 (2) Investment................................... 17,735 17,735 Policy loans.................................... 181,054 181,054 Other long-term investments..................... 6,118 5,693 (3) Short-term investments.......................... 32,863 32,863 ----------------- ----------------- $ 4,226,277 $ 4,300,856 ================= =================
(1) On the basis of cost adjusted for repayments and amortization of premiums and accrual of discounts for fixed maturities, other long-term investments and short-term investments; original cost for equity securities; unpaid principal balance for mortgage loans on real estate and policy loans, and original cost less accumulated depreciation for investment real estate. (2) Amount not equal to cost (Column B) because of allowance for possible losses deducted from cost to determine reported amount. (3) Amount not equal to cost (Column B) because other long-term investments include securities held by broker-dealer subsidiaries that carry securities at market value. Also, an allowance for possible losses is deducted from cost to determine reported amount. 78 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT FBL FINANCIAL GROUP, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ---------------------------- 2001 2000 ------------ ------------ ASSETS Cash and cash equivalents .................................................. $ 9,597 $ 253 Amounts receivable from affiliates ......................................... 1,722 5,479 Amounts receivable from subsidiaries (eliminated in consolidation) ......... 931 1,184 Accrued investment income .................................................. -- 317 Current income taxes recoverable ........................................... 1,690 229 Deferred income taxes ...................................................... 504 281 Other assets ............................................................... 3,701 4,207 Short-term investments ..................................................... 6,736 9,688 Fixed maturities - available for sale, at market (amortized cost in 2000 - $12,236) ......................................................... -- 12,224 Investments in subsidiaries (eliminated in consolidation) .................. 731,153 561,811 ------------ ------------ Total assets ......................................................... $ 756,034 $ 595,673 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accrued expenses and other liabilities .................................. $ 5,089 $ 6,679 Amounts payable to affiliates ........................................... 880 102 Amounts payable to subsidiaries (eliminated in consolidation) ........... 1,581 12,089 Long-term debt (eliminated in consolidation) ............................ 100,000 100,000 ------------ ------------ Total liabilities .................................................... 107,550 118,870 Series C redeemable preferred stock ........................................ 82,691 -- Stockholders' equity: Preferred stock ......................................................... 3,000 3,000 Class A common stock .................................................... 39,446 37,769 Class B common stock .................................................... 7,563 7,563 Accumulated other comprehensive income (loss) ........................... 39,364 (22,445) Retained earnings ....................................................... 476,420 450,916 ------------ ------------ Total stockholders' equity ........................................... 565,793 476,803 ------------ ------------ Total liabilities and stockholders' equity ..................... $ 756,034 $ 595,673 ============ ============
See accompanying notes to condensed financial statements. 79 SCHEDULE II -CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) FBL FINANCIAL GROUP, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Revenues: Net investment income ........................................ $ 589 $ 3,738 $ 1,810 Realized gains on investments ................................ -- 245 -- Dividends from subsidiaries (eliminated in consolidation) .... 15,150 32,150 104,945 Management fee income from non-affiliates .................... 159 -- -- Management fee income from affiliates ........................ 1,866 1,134 780 Management fee income from subsidiaries (eliminated in consolidation) ............................................ 1,985 834 619 ------------ ------------ ------------ Total revenues ............................................ 19,749 38,101 108,154 Expenses: Interest expense (eliminated in consolidation) ............... 5,000 5,000 5,000 General and administrative expenses .......................... 2,949 2,018 1,404 ------------ ------------ ------------ Total expenses ............................................ 7,949 7,018 6,404 ------------ ------------ ------------ 11,800 31,083 101,750 Income tax credits ............................................... (1,600) (651) (1,117) ------------ ------------ ------------ Income before equity in undistributed income (dividends in excess of equity income) of subsidiaries and discontinued operations ................................................... 13,400 31,734 102,867 Equity in undistributed income (dividends in excess of equity income) of subsidiaries (eliminated in consolidation) ........ 27,345 7,013 (48,542) ------------ ------------ ------------ Income from continuing operations ................................ 40,745 38,747 54,325 Discontinued operations: Gain on disposal of property-casualty subsidiary, net of related income taxes ...................................... -- 600 1,385 ------------ ------------ ------------ Net income ....................................................... $ 40,745 $ 39,347 $ 55,710 ============ ============ ============
See accompanying notes to condensed financial statements. 80 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) FBL FINANCIAL GROUP, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ........... $ (11,745) $ 10,357 $ 1,036 INVESTING ACTIVITIES Sale, maturity or repayment of investments: Short-term investments - net .............................. 2,952 36,900 997 Fixed maturities - availiable for sale - net .............. 12,214 13,797 -- Investment in subsidiaries (eliminated in consolidation) ...... (2,370) -- (583) Net proceeds from sale of subsidiary - discontinued operations ................................................ 2,000 2,000 1,229 Dividends from subsidiaries (eliminated in consolidation) ..... 15,150 32,150 29,945 Net cash received in acquisition .............................. 2,863 -- -- Other ......................................................... (683) -- -- ------------ ------------ ------------ Net cash provided by investing activities ..................... 32,126 84,847 31,588 FINANCING ACTIVITIES Purchase of common stock ...................................... (94) (85,782) (25,309) Issuance of common stock ...................................... 1,527 1,569 1,947 Dividends paid ................................................ (12,470) (10,985) (10,758) ------------ ------------ ------------ Net cash used in financing activities ......................... (11,037) (95,198) (34,120) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents .............. 9,344 6 (1,496) Cash and cash equivalents at beginning of year ................ 253 247 1,743 ------------ ------------ ------------ Cash and cash equivalents at end of year ...................... $ 9,597 $ 253 $ 247 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for income taxes .................... $ (71) $ (2,553) $ (786)
See accompanying notes to condensed financial statements. 81 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) FBL FINANCIAL GROUP, INC. (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 2001 1. BASIS OF PRESENTATION The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of FBL Financial Group, Inc. In the parent company only financial statements, our investments in subsidiaries are stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition and net unrealized gains/losses on the subsidiaries' investments classified as "available-for-sale" in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 2. DIVIDENDS FROM SUBSIDIARY The parent company received cash dividends totaling $15.2 million in 2001, $32.2 million in 2000 and $29.9 million in 1999. During 1999, the parent company received noncash dividends totaling $75.0 million from Farm Bureau Life Insurance Company. 3. ACQUISITION On January 1, 2001, we acquired the assets and liabilities of Kansas Farm Bureau Life Insurance Company. All the assets and liabilities acquired, with the exception of $0.5 million in cash, was immediately contributed to Farm Bureau Life Insurance Company. This transaction was financed with the issuance of Series C preferred stock. A condensed statement of the assets and liabilities acquired as of January 1, 2001, is as follows (dollars in thousands):
ASSETS LIABILITIES AND PURCHASE PRICE Investments........................... $ 620,856 Policy liabilities and accruals...... $ 526,391 Cash.................................. 2,863 Other policyholder funds............. 76,738 Value of insurance in force acquired.. 51,865 Other liabilities.................... 11,621 Goodwill.............................. 3,539 ----------- Other assets.......................... 16,315 Total liabilities................. 614,750 ----------- Purchase price....................... 80,688 Total............................ $ 695,438 ----------- =========== Total........................... $ 695,438 ===========
The acquisition and subsequent capital contribution of the noncash assets and liabilities noted above have been excluded from the 2001 condensed statement of cash flows. 82 SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION FBL FINANCIAL GROUP, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ---------------- ---------------- ---------------- ---------------- FUTURE POLICY DEFERRED POLICY BENEFITS, LOSSES, OTHER ACQUISITION CLAIMS AND LOSS UNEARNED POLICYHOLDER COSTS EXPENSES REVENUES FUNDS ---------------- ---------------- ---------------- ---------------- (DOLLARS IN THOUSANDS) December 31, 2001: Traditional annuity ............... $ 92,912 $ 1,816,632 $ -- $ 261,554 Traditional and universal life insurance ...................... 159,726 1,750,424 13,163 128,483 Variable .......................... 113,079 131,315 17,964 -- Corporate and other ............... -- 66,656 -- -- Impact of unrealized gains/ losses ......................... (5,561) -- (257) -- ---------------- ---------------- ---------------- ---------------- Total.............................. $ 360,156 $ 3,765,027 $ 30,870 $ 390,037 ================ ================ ================ ================ December 31, 2000: Traditional annuity ............... $ 24,745 $ 962,566 $ -- $ 170,404 Traditional and universal life insurance ...................... 125,822 1,264,907 12,919 95,124 Variable .......................... 98,201 105,795 16,291 -- Corporate and other ............... -- 49,440 -- -- Impact of unrealized gains/ losses ......................... 2,203 -- 172 -- ---------------- ---------------- ---------------- ---------------- Total.............................. $ 250,971 $ 2,382,708 $ 29,382 $ 265,528 ================ ================ ================ ================ December 31, 1999: Traditional annuity ............... $ 21,751 $ 1,194,943 $ -- $ 160,848 Traditional and universal life insurance ...................... 119,984 1,059,992 13,179 96,723 Variable .......................... 78,862 92,105 13,925 -- Corporate and other ............... 10,089 41,754 -- 89 Impact of unrealized gains/ losses ......................... 5,577 -- 546 -- ---------------- ---------------- ---------------- ---------------- Total.............................. $ 236,263 $ 2,388,794 $ 27,650 $ 257,660 ================ ================ ================ ================
83 SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED) FBL FINANCIAL GROUP, INC.
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J -------- -------------- -------------- -------------- -------------- -------------- AMORTIZATION BENEFITS, OF DEFERRED CLAIMS, LOSSES POLICY OTHER PREMIUM NET INVESTMENT AND SETTLEMENT ACQUISITION OPERATING REVENUE INCOME (1) EXPENSES COSTS EXPENSES (2) -------------- -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS) December 31, 2001: Traditional annuity ............... $ 1,001 $ 126,784 $ 94,756 $ 2,456 $ 11,053 Traditional and universal life insurance ...................... 154,325 141,611 164,011 12,109 39,044 Variable .......................... 30,382 10,198 12,630 3,103 19,130 Corporate and other ............... 3,044 6,494 2,047 73 7,728 Impact of realized gains/losses ... (218) -- -- (2,297) 76 -------------- -------------- -------------- -------------- -------------- Total ............................. $ 188,534 $ 285,087 $ 273,444 $ 15,444 $ 77,031 ============== ============== ============== ============== ============== December 31, 2000: Traditional annuity ............... $ 1,171 $ 90,490 $ 65,754 $ 2,696 $ 7,461 Traditional and universal life insurance ...................... 115,481 106,867 120,343 6,140 26,784 Variable .......................... 27,096 9,007 11,137 2,936 20,755 Corporate and other ............... 9,654 15,005 9,666 684 7,364 Impact of realized gains/losses ... (138) -- -- (1,635) (255) -------------- -------------- -------------- -------------- -------------- Total ............................. $ 153,264 $ 221,369 $ 206,900 $ 10,821 $ 62,109 ============== ============== ============== ============== ============== December 31, 1999: Traditional annuity ............... $ 900 $ 95,869 $ 67,786 $ 2,188 $ 8,020 Traditional and universal life insurance ...................... 114,424 109,158 117,816 6,811 25,282 Variable .......................... 22,645 7,417 9,297 2,655 16,701 Corporate and other ............... 13,361 13,376 5,829 972 7,754 Impact of realized gains/losses ... (37) -- -- (192) (15) -------------- -------------- -------------- -------------- -------------- Total ............................. $ 151,293 $ 225,820 $ 200,728 $ 12,434 $ 57,742 ============== ============== ============== ============== ==============
(1) Net investment income is allocated to the segments based upon the investments held by the respective segment. (2) Expenses have been allocated using one of two methodologies, depending on the nature of the expense. Direct expenses, such as those incurred by our underwriting and policy administration departments, and other expenses for which there is a reliable basis for allocation are allocated based upon time studies and cost analysis performed by the respective departments. The remaining indirect expenses are allocated in proportion to the equity of each segment. 84 SCHEDULE IV - REINSURANCE FBL FINANCIAL GROUP, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F -------- ------------ -------------- ------------ ------------ -------------- ASSUMED FROM PERCENT OF CEDED TO OTHER OTHER AMOUNT GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT ASSUMED TO NET ------------ -------------- ------------ ------------ -------------- (DOLLARS IN THOUSANDS) Year ended December 31, 2001: Life insurance in force, at end of year .................................. $ 28,444,285 $ 4,772,504 $ 3,784,244 $ 27,456,025 13.8% ============ ============ ============ ============ ============ Insurance premiums and other considerations: Interest sensitive product charges ................................ $ 65,221 $ 1,911 $ 7,182 $ 70,492 10.2% Traditional life insurance premiums ............................... 118,089 7,202 4,111 114,998 3.6 Accident and health premiums ............. 16,034 12,990 -- 3,044 -- ------------ ------------ ------------ ------------ ------------ $ 199,344 $ 22,103 $ 11,293 $ 188,534 6.0% ============ ============ ============ ============ ============ Year ended December 31, 2000: Life insurance in force, at end of year .................................. $ 22,601,417 $ 2,058,979 $ 2,432 $ 20,544,870 --% ============ ============ ============ ============ ============ Insurance premiums and other considerations: Interest sensitive product charges ................................ $ 61,727 $ 2,049 $ 102 $ 59,780 0.2% Traditional life insurance premiums ............................... 86,684 2,854 -- 83,830 -- Accident and health premiums ............. 14,220 4,566 -- 9,654 -- ------------ ------------ ------------ ------------ ------------ $ 162,631 $ 9,469 $ 102 $ 153,264 0.1% ============ ============ ============ ============ ============ Year ended December 31, 1999: Life insurance in force, at end of year .................................. $ 21,024,991 $ 1,826,299 $ 56 $ 19,198,748 --% ============ ============ ============ ============ ============ Insurance premiums and other considerations: Interest sensitive product charges ................................ $ 57,206 $ 1,846 $ 3 $ 55,363 --% Traditional life insurance premiums ............................... 85,689 3,120 -- 82,569 -- Accident and health premiums ............. 13,731 370 -- 13,361 -- ------------ ------------ ------------ ------------ ------------ $ 156,626 $ 5,336 $ 3 $ 151,293 --% ============ ============ ============ ============ ============
85