-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PVXfLQTqdNOQX4ZOB/5bVSfotziS1GD9lf9ApNbUyJxJrxzaA/H7KfsnuAtk/fND QPjNO5hz/iDJSl4hW+u4xw== 0000897101-99-000240.txt : 19990322 0000897101-99-000240.hdr.sgml : 19990322 ACCESSION NUMBER: 0000897101-99-000240 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FBL FINANCIAL GROUP INC CENTRAL INDEX KEY: 0001012771 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 421411715 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11917 FILM NUMBER: 99569235 BUSINESS ADDRESS: STREET 1: 5400 UNIVERSITY AVE CITY: WEST DES MOINES STATE: IA ZIP: 50266 BUSINESS PHONE: 5152255400 10-K405 1 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, 1998 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] Yes [ ] No Aggregate market value of Class A Common Stock held by non-affiliates of the registrant (computed as of March 4, 1999): $294,669,003 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 31,523,668 shares of Class A Common Stock and 1,192,990 shares of Class B Common Stock as of March 4, 1999. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive proxy statement for the annual meeting of shareholders to be held May 18, 1999 are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS GENERAL FBL Financial Group, Inc. (the Company or FBL) sells universal life, variable universal life, traditional life and disability income insurance and traditional and variable annuity products. These products are principally marketed through a core distribution force consisting of approximately 1,600 exclusive Farm Bureau agents in 14 midwestern and western states. FBL Financial Group was incorporated in Iowa in October 1993 and its principal insurance subsidiaries include Farm Bureau Life Insurance Company (Farm Bureau Life), Western Farm Bureau Life Insurance Company (Western Life) and EquiTrust Life Insurance Company (EquiTrust). Variable universal life and variable annuity products are also marketed in other states through alliances with other Farm Bureau insurance companies, which are not affiliated with the Company. In addition, beginning in 1998, the Company started marketing variable products to non-Farm Bureau members through its strategic alliances with a life insurance company and a regional broker-dealer. With respect to the insurance company alliances, FBL shares in the risks, costs and operating results of these variable product alliances through reinsurance arrangements. Production from these alliances was minimal in 1998, as these operations were in the start-up phase throughout most of the year. BUSINESS STRATEGY FBL Financial Group has a three-pronged growth strategy which consists of (1) internal growth within its traditional Farm Bureau distribution network in 14 midwestern and western states, (2) alliances and consolidations with other Farm Bureau companies and (3) alternative distribution - opportunities beyond the boundaries of the Farm Bureau network. The Company's growth strategies are detailed below: GROWTH STRATEGY #1 - INTERNAL GROWTH WITHIN THE TRADITIONAL FARM BUREAU DISTRIBUTION NETWORK. The Company's main focus is to grow its core business, which comes through its Farm Bureau distribution network in 14 states, through cross-selling opportunities, new products and competitive product features. FBL has significant opportunity to increase its sales through cross selling life insurance products to Farm Bureau members who already own a property-casualty policy offered by the property-casualty companies managed by the Company or another Farm Bureau affiliated property-casualty company. For example, in the four-state region consisting of Iowa, Minnesota, South Dakota and Utah, approximately 27% of Farm Bureau members own at least one of the Company's life products, 63% own at least one Farm Bureau property-casualty product and approximately 20% own both, providing significant opportunity for cross selling. Cross selling and other opportunities have been enhanced through the introduction of new products including a new preferred term product and structured settlement annuities during 1998 and a single premium deferred annuity, single premium immediate annuity and last survivor whole life policy during 1997. Also, in the spring of 1999, FBL will introduce several new variable product features, including new outside investment options from Fidelity(R)* and T. Rowe Price, dollar cost averaging, systematic withdrawals, automatic re-balancing and several other items for the benefit of the policyholder. GROWTH STRATEGY #2 - ALLIANCES AND CONSOLIDATIONS WITH OTHERS IN THE FARM BUREAU ORGANIZATION. As the only Farm Bureau organization with variable product expertise, variable product alliances within the Farm Bureau network give FBL additional growth and economies of scale while sharing its expertise and expanding relationships within the Farm Bureau network. In 1998, FBL announced variable product alliances with Country Life Insurance Company of Illinois and United Farm Family Life Insurance Company of Indiana. In February of 1999, FBL signed a letter of intent for a variable annuity alliance with Southern Farm Bureau Life Insurance Company of Mississippi. These organizations join Kansas Farm Bureau Life as alliance partners within the Farm Bureau network. FBL's variable products are now available through five of the nine Farm Bureau affiliated life insurance groups. Management believes that additional opportunities exist in the cultivation of new business alliances within the national Farm Bureau organization. These alliances can range from marketing agreements to sell the Company's variable products to the consolidation of resources through acquisition. Management believes the Company's position as a publicly traded Farm Bureau affiliated insurance company increases its attractiveness as a merger partner. * Fidelity(R) is a registered trademark of FMR Corp. 1 GROWTH STRATEGY #3 - ALTERNATIVE DISTRIBUTION - OPPORTUNITIES BEYOND THE BOUNDARIES OF THE FARM BUREAU NETWORK. FBL is also focusing on creating alliances with entities outside the Farm Bureau organization to complement its solid foundation of serving Farm Bureau members. FBL is looking to leverage its expertise in designing, registering and marketing variable products through unaffiliated companies that do not have the expertise or systems to underwrite variable products. Management believes alliances with these types of entities is an efficient means to leverage the Company's insurance product expertise and expand its distribution channels. In September of 1998, FBL announced a variable product strategic alliance with National Travelers Life Company. National Travelers Life joins American Equity Investment Life Holding Company and Berthel Fisher & Company as alternative distribution alliance partners. Alliances of this nature will continue to be sought to broaden the Company's distribution system and target the needs of new market segments. During 1997, FBL acquired EquiTrust, a life insurance company currently licensed in 39 states, to underwrite life insurance and annuity products outside the Farm Bureau network. Variable product sales generated by the alliance partners are underwritten by either EquiTrust or the alliance partner. With respect to the insurance company alliances, the risks, costs and profits of the business are shared, generally on an equal basis, through reinsurance arrangements. For all the alliance partners, EquiTrust performs various administrative processing and other services with respect to the variable business written. SEGMENT INFORMATION In general, the Company is organized by the types of products and services it offers for sale. The Company's principal and only reportable operating segment is its life insurance segment. Life operations have been aggregated into the same segment due to the similarity of the products, including the underlying economic characteristics, the method of distribution and the regulatory environment. The Company also has several other operating segments that do not meet the quantitative threshold for separate segment reporting. A summary of these segments, along with the related source of revenues, is as follows: SEGMENT SOURCE OF REVENUES Investment advisory........... Fee income from the management of investments Marketing and distribution.... Commissions and distribution fee income from the sale of mutual funds and insurance products not issued by the Company Leasing....................... Income from operating leases Corporate..................... Fees from management and administrative services See Note 15 of Notes to Consolidated Financial Statements for additional information regarding the financial results of the Company by operating segment. On March 31, 1998, the Company sold its wholly-owned subsidiary, Utah Farm Bureau Insurance Company (Utah Insurance), to Farm Bureau Mutual Insurance Company (Farm Bureau Mutual), an affiliate. As a result of the sale, the Company no longer has property-casualty operations. See Note 14 of Notes to Consolidated Financial Statements for additional information regarding this segment. MARKETING MARKET AREA The Company's sales are principally conducted in the following 14 state core marketing region: multi-line (FBL owns the life company and manages the property-casualty company) states - Arizona, Iowa, Minnesota, New Mexico, South Dakota and Utah; and life only (FBL owns the life company only) states - Colorado, Idaho, Montana, Nebraska, North Dakota, Oklahoma, Wisconsin and Wyoming. Additionally, FBL's Farm Bureau variable alliance partners market to Farm Bureau members in an additional 18 states and FBL's alternative distribution alliance partners market to non-Farm Bureau members throughout the United States. The Company's core target market consists primarily of farmers, ranchers, rural and suburban residents and related individuals and businesses. Management believes 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 2 Bureau membership. Many of the Company's 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 the Company's 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 4.9 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. Historically, these marketing rights have only been granted to companies owned by or closely affiliated with Farm Bureau Federations. For each of the 14 states in the Company's core market territory, the Company has the exclusive right to use the "Farm Bureau" name and "FB" logo for marketing the products it sells in that state. The American Farm Bureau Federation has the right to terminate the Company's right to use the "Farm Bureau" and "FB" designations as to all states (i) in the event of a material breach of the trademark license not cured by the Company 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 the Company to adhere to the American Farm Bureau Federation's policies. Each state Farm Bureau federation in the Company's trade territory could terminate the right of the Company to use the Farm Bureau designations in that particular state without cause on 60 days' notice. Management believes that the occurrence of any such termination is highly unlikely. Management believes its relationship with Farm Bureau provides a number of advantages. Farm Bureau organizations in the Company's current territory tend to be well known and long established, have active memberships and provide a number of benefits other than financial services. Management believes the strength of these organizations provides enhanced prestige and brand awareness for the Company's 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 the Company's products that exceeds industry averages. The Company's 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 generally cost $24 to $130 and are available to individuals and families who are farmers and ranchers, and to the general public as well. To facilitate the Company's working relationship with state Farm Bureau organizations, the Presidents of the 14 state Farm Bureau federations in the Company's core market territory serve on the Company's Board of Directors. Pursuant to a royalty agreement with the Company, each state Farm Bureau federation or its assignee benefits from its relationship with the Company through receipt of royalties on the sale of the Company's products in the state. For 1998, total royalties paid to Farm Bureau organizations were approximately $1.7 million. The President of the Kansas Farm Bureau federation also serves on the Company's Board of Directors. The Company has marketing agreements with all of the Farm Bureau property-casualty companies in its core marketing area, both affiliated and non-affiliated, pursuant to which the property-casualty companies develop and manage their common agency force for a fee 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 by the Company. Overwrite commissions paid by the Company for 1998 totaled $4.5 million. The Company is assisted in its relationships with the property-casualty organizations by an Advisory Committee, consisting of certain executives of Farm Bureau property-casualty insurance companies in the Company's market territory. The Advisory Committee meets on a regular basis to coordinate efforts and issues relating to the agency force and other related matters. Management views the Advisory Committee as an important contributor to the Company's success in marketing its products through the Farm Bureau system. 3 All of the state Farm Bureau federations in the Company's current marketing area are associated with the American Farm Bureau Federation. The primary goal of the American Farm Bureau Federation is to improve net farm income and the 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 state by state but generally include newspapers and magazines, theft and arson rewards, eye care programs, vehicle purchase and leasing 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 MARKET TERRITORY The Company's life insurance, annuities, disability income insurance and mutual funds are currently marketed throughout its core market territory by an exclusive Farm Bureau force of approximately 1,600 agents and agency managers. The Company has a written contract with each member of the agency force. The contracts specify and limit the authority of the agents to solicit insurance applications on behalf of the Company; describe the nature of the independent contractor relationship between the Company and the agent; define the agent as an exclusive agent limited to selling insurance of the types sold on behalf of the Company, only for the Company and Farm Bureau affiliated insurance companies; allow either party to immediately terminate the contract; specify the compensation payable to the agents; reserve ownership of customer lists to the Company; and set forth all other terms and conditions of the relationship. Sales activities of the Company's agents focus on personal contact and on cross selling the multiple lines of products available through Farm Bureau affiliated companies. Agents' offices are generally located in or serve as the Farm Bureau office for their community. Management believes that Farm Bureau name recognition and access to Farm Bureau membership leads to additional customers and cross selling of additional insurance products. The Company's agents are independent contractors and exclusive agents of the Company. In the states where FBL manages the Farm Bureau affiliated property-casualty company, FBL's agents are supervised by agency managers and assistant managers employed by the property-casualty companies which are under the direction of the Company. There are approximately 750 agents and managers in FBL's multi-line states, all of whom market a full range of FBL's life insurance and most of whom market the Company sponsored mutual funds. These agents and agency managers also market property-casualty products for the property-casualty companies managed by FBL. In the life only states, the Company's life insurance products and its sponsored mutual funds are marketed through agents of the property-casualty company affiliated with the Farm Bureau Federation in each state. These agents market the Company's life and mutual fund products on an exclusive basis and market the property-casualty products of such affiliated property-casualty companies. The agents are under the management of such Farm Bureau affiliated property-casualty companies. Agents as well as agency managers in the life only states are independent contractors of the Company. Average life production per agent in the life only states has historically been less than average life production per agent in the multi-line states. Management believes that average life production in these states will increase, over time, as the agents continue to benefit from the Company's ongoing training programs and marketing support. Approximately 97% of the agents in the multi-line states are licensed with the National Association of Securities Dealers (NASD) to sell the Company's variable life and annuity products and sponsored mutual funds. FBL continues to emphasize the training of agents for NASD licensing in its life only territories, where approximately 70% of the agents are NASD licensed. The Company is responsible for product and sales training for all lines of business in the multi-line states, and for training the agency force in life insurance products and sales methods in the life only states. The Company structures its 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 4 months and on premium payments in the first three years subsequent to when 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 the Company is willing to pay added incentives for higher volumes of business only as long as the business is profitable. In 1998, approximately 44% of agent compensation in the 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 the Company, the agent's manager receives additional overwrite commissions to encourage early agent development. Farm Bureau Life and Western Life 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. Management believes that these programs provide significant incentives for the most productive agents. Approximately 10% of the agents qualify for the Company's annual incentive trip. Agents recruiting, training and financing programs are designed to develop a productive agent for the long term. The one-year agency force retention rate for 1998 in the multi-line states was approximately 84%. Management believes retention of agents is enhanced because of their ability to sell both life and property-casualty insurance products, as well as mutual funds. AGENCY FORCE - ALLIANCE PARTNERS The Company's Farm Bureau alliance partners have approximately 5,900 exclusive agents that are dedicated to selling Farm Bureau products. The Company's other alliance partners have over 14,000 independent agents and registered representatives that have access to outside variable products and are not limited solely to the variable products jointly developed with FBL. While many of the 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. FBL's variable product alliance partners are responsible for managing and training their own agency force. FBL provides each partner with assistance on how to train their agents in the sale of variable products. PRODUCTS CURRENTLY UNDERWRITTEN The Company is currently engaged in selling a varied portfolio of insurance products including variable, interest sensitive and traditional permanent life insurance, term life, variable and traditional annuities and disability income insurance primarily to individuals in the rural and suburban areas of its market territory. VARIABLE UNIVERSAL LIFE INSURANCE. Variable universal life insurance is the Company's lead life insurance product. The variable universal life policy provides 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. The policyholder has the ability to direct 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 by the Company. For 1998, variable universal life represented 22% of first year direct life insurance premiums collected in the life-only states, 76% of the Company's first year direct life premiums collected in the multi-line states and 60% of the Company's total first year direct life insurance premiums collected. A majority of the variable sub-accounts are managed by the Company for an additional fee. Variable products sold through the alliance partners have sub-accounts that are managed by outside investment advisors in addition to sub-accounts managed by the Company. In May 1999, the investment options for new and existing variable products in the core 14 state market territory will be expanded to include sub-accounts managed by outside investment advisors. See "Variable Sub-Accounts and Mutual Funds." 5 UNIVERSAL LIFE INSURANCE. The Company offers a universal life policy which is similar in design to the variable universal life policy, but without the additional investment options for the cash value. Interest is credited to the cash value at rates periodically set by the Company. Agents need not be registered with the NASD to offer this product. The Company markets a last survivor universal life policy designed especially for the estate planning market. TRADITIONAL LIFE INSURANCE. The Company offers 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 the surplus of the Company to the extent determined by the Board of Directors, generally through annual participating policy dividends. For 1998, participating life policies represented 13% of first year life insurance collected premiums. The Company has a substantial book of in-force participating policies with persistency which has historically exceeded industry averages. The Company currently markets 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. The Company may change the premium scales at any time but may not increase rates above guaranteed levels. In the past, the Company sold participating term insurance, but has discontinued such sales. ANNUITIES. The Company offers annuities which are generally marketed to individuals in anticipation of retirement. The Company offers variable and traditional annuities principally in the form of flexible premium deferred annuities which allow policyholders to make contributions over a number of periods. For traditional annuity products, policyholder account balances are credited interest at rates determined by the Company. 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. Approximately 60% of the Company's existing individual annuity business based on account balances is held in qualified retirement plans. To further encourage persistency, a surrender charge against the policyholders' account balance is imposed for early termination of the annuity contract within a specified period after its effective date. The sub-account options for variable annuity contracts are the same as those available for variable universal life policies. The sub-account options for variable annuities are also expanding in May 1999. See "Variable Sub-Accounts and Mutual Funds." In addition to flexible premium deferred annuities, the Company markets 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 the Company's other traditional annuity products. DISABILITY INCOME INSURANCE. The Company writes a number of individual disability policies. This type of policy provides for payment of benefits in the event of a disabling accident or illness. Disability benefits reimburse the policyholder for a specified dollar amount payable over a specific time period or for the duration of the disability. Disability is defined as the inability to pursue the policyholder's own occupation for the first two years after disability, and the inability to pursue any occupation thereafter. The risks insured are similar to those insured in a medical expense policy but the claim costs are much more predictable. Since the policies are guaranteed renewable rather than noncancellable, the Company may change the premium scale at any time based on claim costs incurred, subject to regulatory approval. Some disability income products offer flexibility in coverage amounts as financial needs change. 6 The following table sets forth the first year and renewal premiums collected for the Company's life, annuity and accident and health products for the periods indicated: COLLECTED PREMIUMS BY PRODUCT TYPE
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Direct life premiums collected: Universal life First year ........................ $ 2,857 $ 3,522 $ 4,398 $ 2,452 $ 2,321 Renewal ........................... 42,263 44,969 46,493 47,901 49,171 ----------- ----------- ----------- ----------- ----------- Total ........................... 45,120 48,491 50,891 50,353 51,492 Variable universal life First year - core distribution .... 15,272 12,427 9,244 7,689 11,603 First year - alliance partners .... 98 -- -- -- -- Renewal ........................... 22,423 19,156 16,715 13,625 10,054 Internal rollover ................. 18,032 7,824 2,726 1,328 2,392 ----------- ----------- ----------- ----------- ----------- Total ........................... 55,825 39,407 28,685 22,642 24,049 Participating whole life First year ........................ 3,226 3,646 6,105 7,390 9,245 Renewal ........................... 61,867 61,660 58,818 54,743 51,058 ----------- ----------- ----------- ----------- ----------- Total ........................... 65,093 65,306 64,923 62,133 60,303 Other First year ........................ 4,151 3,802 3,409 3,242 3,137 Renewal ........................... 16,676 15,513 14,646 13,891 13,622 ----------- ----------- ----------- ----------- ----------- Total ........................... 20,827 19,315 18,055 17,133 16,759 ----------- ----------- ----------- ----------- ----------- Total direct life ........... 186,865 172,519 162,554 152,261 152,603 Reinsurance ceded ....................... (4,632) (4,681) (4,521) (4,190) (3,891) ----------- ----------- ----------- ----------- ----------- Total life, net of reinsurance .......... 182,233 167,838 158,033 148,071 148,712 Direct annuity premiums collected: Traditional annuities: Individual ........................ 51,775 54,002 59,111 64,557 69,652 Group ............................. 1,022 7,241 16,502 6,253 5,502 Reinsurance assumed ............... 22,034 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total traditional annuities . 74,831 61,243 75,613 70,810 75,154 Variable annuities: First year - core distribution .... 24,891 23,773 14,638 5,426 12,852 First year - alliance partners .... 490 -- -- -- -- Renewal ........................... 4,616 3,641 1,424 393 -- Internal rollover ................. 11,469 6,240 855 143 540 ----------- ----------- ----------- ----------- ----------- Total variable annuities .... 41,466 33,654 16,917 5,962 13,392 ----------- ----------- ----------- ----------- ----------- Total annuities ......................... 116,297 94,897 92,530 76,772 88,546 Accident and health premiums collected, net of reinsurance ................... 11,717 11,370 10,558 10,023 (4,530) ----------- ----------- ----------- ----------- ----------- Total collected premiums, net of reinsurance .......................... $ 310,247 $ 274,105 $ 261,121 $ 234,866 $ 232,728 =========== =========== =========== =========== ===========
During the five years in the period ended December 31, 1998, the Company has emphasized the marketing of its variable products. This marketing emphasis, coupled with the popularity of variable products and a program to encourage the rollover of universal life policies to variable universal life policies, has resulted in a shift in premiums during the period from traditional and interest sensitive products to variable products. During 1998, the Company assumed a block of individual deferred annuity policies through a 100% coinsurance agreement. Premiums related to this block of business totaled $22.0 million. 7 The negative accident and health premiums collected during 1994 is due to the Company's exit from the medical insurance business in that year. Accident and health premiums collected since 1994 represent collections on the Company's disability income block of business. LIFE INSURANCE AND ANNUITIES IN FORCE The following table sets forth information regarding life insurance and annuities in force at the end of each period presented:
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FACE AMOUNTS IN MILLIONS) Life insurance Universal Number of direct policies ............ 114,317 109,558 107,817 105,256 103,623 Policyholder account balances ........ $ 576,392 $ 565,291 $ 540,116 $ 503,877 $ 467,773 Direct face amounts .................. 9,549 8,830 8,476 8,096 7,841 Traditional Number of direct policies ............ 265,407 267,476 266,599 267,452 267,590 Future policy benefits ............... $ 691,047 $ 672,885 $ 645,684 $ 617,376 $ 597,961 Direct face amounts .................. 10,117 9,551 8,719 8,113 7,380 Total life Number of direct policies ............ 379,724 377,034 374,416 372,708 371,213 Direct face amounts .................. $ 19,666 $ 18,381 $ 17,195 $ 16,209 $ 15,221 Deposit administration funds - Policyholder account balances ........... $ 127,128 $ 77,254 $ 54,028 $ 48,109 $ 37,565 Annuities Number of direct policies ............... 48,785 49,912 50,255 49,575 48,409 Policyholder account balances ........... $ 770,081 $ 808,740 $ 808,221 $ 779,827 $ 731,254 Future policy benefits .................. 122,870 127,509 123,646 110,412 108,115 Liabilities related to separate accounts .. 190,111 138,409 79,043 44,789 28,043
Substantially all of the deposit funds relate to the funding of the Iowa Farm Bureau and Affiliated Companies' retirement plans. In 1998, the funding vehicle for a portion ($48.0 million) of the Iowa Farm Bureau and Affiliated Companies' retirement plans was changed from group annuities to deposit administration funds. The Company has experienced low lapse rates compared to the life insurance industry, as indicated in the following table:
LAPSE RATES FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Company life insurance lapse rates......... 7.2 % 7.0 % 7.5 % 7.9 % 7.2 % Industry life insurance lapse rates........ (A) 8.5 8.5 8.8 8.9
- -------------- (A) The industry lapse rate for 1998 is not available as of the filing date of this Form 10-K. 8 UNDERWRITING The Company has adopted and follows detailed, uniform underwriting standards and procedures designed to properly assess and quantify life insurance risks before issuing policies to individuals. To implement these procedures, the Company employs a professional underwriting staff of twelve underwriters who have an average of 22 years of experience in the insurance industry. The Company's underwriters review each applicant's written application, which is prepared under the supervision of the Company's agents, and any required medical records. The Company employs blood and urine testing (including HIV antibody testing) to provide additional information on applications of over $100,000 face amount. Based on the results of these tests, the Company 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 by the Company of the policy upon the return of any premiums paid. REINSURANCE The Company reinsures portions of its 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, the Company has the right to terminate and can generally discontinue the reinsurance on a block of business. This is normally done to increase the Company's retention on older business to the same level as current cessions. Generally, the Company enters into indemnity reinsurance arrangements to assist in diversifying its risks and to limit its maximum loss on risks that exceed the Company's policy retention limits. The retention limits are $500,000 for Farm Bureau Life, $250,000 for Western Life and $100,000 for EquiTrust. Farm Bureau Life assumes EquiTrust exposures in excess of $100,000, up to a Company total of $600,000. Indemnity reinsurance does not fully discharge the Company's obligation to pay claims on the reinsured business. The Company, as the ceding insurer, remains responsible for policy claims to the extent the reinsurer fails to pay such claims. No reinsurer of business ceded by the Company has failed to pay any material policy claims (either individually or in the aggregate) with respect to such ceded business. The Company continually monitors the financial strength of its reinsurers. If for any reason such reinsurance coverages would need to be replaced, the Company believes that replacement coverages from financially responsible reinsurers would be available. A summary of the Company's primary reinsurers as of December 31, 1998 is as follows: AMOUNT OF IN REINSURER A.M. BEST RATING FORCE CEDED ---------------- --------------- (DOLLARS IN MILLIONS) Lincoln National Life Insurance Company...... A $ 492.6 Business Men's Assurance Company............. A 304.4 The Cologne Life Reinsurance Company......... A+ 219.4 All other.................................... 282.3 --------------- Total.................................... $ 1,298.7 =============== POLICY RESERVES The policy liabilities reflected in the consolidated financial statements are calculated in accordance with generally accepted accounting principles (GAAP). Liabilities for universal life and annuity policies consist of the premiums and considerations received plus accumulated credited interest, less accumulated policyholder assessments and benefits. For traditional policies, liabilities for future policy benefits have been provided based on the net level premium method, including assumptions as to interest, mortality and other assumptions underlying the guaranteed policy cash values. See Note 1 of Notes to Consolidated Financial Statements for additional information regarding policy liability assumptions under GAAP. 9 INTEREST CREDITING AND PARTICIPATING DIVIDEND POLICY The Company has 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 universal life insurance and annuity products after any initial guaranteed period. Earnings on assets are examined by portfolio. Interest rates are then established based on each product's required interest spread and competitive market conditions at the time. The Company pays dividends, credits interest and determines other nonguaranteed elements on their 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. Policyholder dividends are currently being paid and will continue to be paid as declared on traditional participating whole life business, some term business, and the participating annuity 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. Average credited rates on the Company's universal life contracts were 5.94%, 6.18% and 6.39% and average credited rates on annuity contracts were 5.83%, 6.18% and 6.35% for 1998, 1997 and 1996, respectively. RATINGS 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(Very Vulnerable)." Farm Bureau Life has maintained its existing "A+(Superior)" rating since A.M. Best first began using this rating methodology. Western Life is rated "A (Excellent)" and EquiTrust is rated "A- (Excellent)" by A.M. Best. A.M. Best ratings consider the claims paying ability of the rated Company and are not a rating of the investment worthiness of the rated Company. VARIABLE SUB-ACCOUNTS AND MUTUAL FUNDS The Company sponsors the EquiTrust Series Fund, Inc. (the Series Fund), formerly known as FBL Series Fund, Inc., and EquiTrust Variable Insurance Series Fund (the Insurance Series Fund), formerly known as FBL Variable 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 Variable Insurance Series Fund offers its shares, without a sales charge, only to the separate accounts of participating insurance companies as the investment medium for variable annuity contracts or variable life insurance policies issued by the participating insurance companies. The Company currently uses only the Variable Insurance Series Fund to provide variable annuity and variable universal life insurance sub-accounts to its customers. These Funds each currently issue shares in six investment series (a Portfolio or collectively the Portfolios) with distinct investment objectives: (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 market place; (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 equity, managed and money market portfolios at December 31, 1998 aggregated $349.2 million and the net assets of the bond portfolios on that date were $53.1 million. Variable products sold through the alliance partners have sub-accounts that are managed by outside investment advisors in addition to sub-accounts managed by the Company. In addition, in May 1999, the investment options for new and existing variable products in the core 14 state market territory will be expanded to include sub-accounts managed by outside investment advisors. The Company will receive an administrative service fee from the outside 10 investment advisors ranging from 4 basis points to 25 basis points (annualized) of the sub-account values, generally once the sub-accounts meet a predetermined asset threshold. EquiTrust Investment Management Services, Inc. (the Advisor), a subsidiary of the Company formerly known as FBL Investment Advisory Services, Inc., 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 of the Company formerly known as FBL Marketing Services, Inc., serves as the principal dealer for the Series Fund and receives commissions and service fees. The Company also sponsors a money market fund, EquiTrust Money Market Fund, Inc. (Money Market Fund), formerly known as FBL Money Market Fund, Inc., 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, on a graduated basis commencing at 0.25%, and certain other fees. The net assets of the Money Market Fund were $29.0 million at December 31, 1998. 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. COMPETITION The Company operates 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 its insurance ratings from rating agencies such as A.M. Best and other factors. Management believes the Company's ability to compete with other insurance companies is dependent upon, among other things, its ability to attract and retain agents to market its insurance products, its ability to develop competitive and profitable products and its maintenance of high ratings from A.M. Best. In connection with the development and sale of its products, the Company encounters significant competition from other insurance companies, and other financial institutions, such as banks, many of whom have financial resources substantially greater than those of the Company. REGULATION The Company's insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such 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. The Company's 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 recent legislative developments, the National Association of Insurance Commissioners (NAIC) and state insurance regulators continue to reexamine existing laws and regulations, 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. Management does not believe the adoption in any of its operating states of any of the current NAIC initiatives will have a material adverse impact on the Company; however, the Company cannot predict the form of any future proposals or regulation. 11 IMPACT OF YEAR 2000 See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" (page 20), for disclosures regarding the impact of the Year 2000 on the Company's operations. EMPLOYEES At March 1, 1999, the Company had approximately 1,200 employees. Many employees and the executive officers of the Company also provide services to Farm Bureau Mutual and other affiliates of the Company pursuant to management agreements. None of the employees are members of a collective bargaining unit. Management believes that relations with its employees are good. ITEM 2. PROPERTIES The principal operations of the Company and its subsidiaries are conducted from property leased from the Iowa Farm Bureau Federation under a 15 year operating lease which expires in 2013. The property leased currently consists of approximately 140,000 square feet of a 400,000 square foot office building located at 5400 University Avenue, West Des Moines, Iowa 50266. Effective in the fourth quarter of 1999, it is expected that the Company's lease will be extended to include up to 60,000 additional square feet of this building. The Company also leases office space totaling approximately 16,000 square feet for a service center in Denver, Colorado. This space is in facilities owned by Colorado Farm Bureau Mutual Insurance Company, a related party. Management considers the current facilities to be adequate for the foreseeable needs of the Company. ITEM 3. LEGAL PROCEEDINGS The Company is a party to lawsuits arising in the normal course of business. The Company believes the resolution of these lawsuits will not have a material adverse effect on its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 12 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 1998 and 1997. All per share amounts reflect the two-for-one common stock split which occurred on April 17, 1998.
COMMON STOCK DATA (PER SHARE) 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. ------------ ------------- ------------- ------------- 1998 High............................................... $ 26 5/16 $ 30 11/16 $ 28 5/8 $ 26 3/8 Low................................................ 17 5/8 24 3/4 19 11/16 18 1/16 Dividends declared and paid........................ $ 0.075 $ 0.075 $ 0.075 $ 0.075 1997 High............................................... $ 13 3/16 $ 19 $ 19 1/2 $ 20 3/4 Low................................................ 11 1/2 12 1/8 15 7/16 17 15/16 Dividends declared and paid........................ $ 0.050 $ 0.050 $ 0.050 $ 0.050
There is no established public trading market for the Company's Class B common stock. As of March 1, 1999, there were approximately 3,300 holders of Class A common stock, including participants holding securities under the name of a broker (i.e., in "street name"), and 27 holders of Class B common stock. The Company intends 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 1999 will be $0.0825 per common share. For restrictions on dividends, see Management's Discussion and Analysis of Financial Condition (page 26) and Note 10 to the consolidated financial statements (page 58). 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
AS OF OR FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA: Interest sensitive product charges .......... $ 52,157 $ 47,979 $ 43,654 $ 43,722 $ 42,734 Traditional life insurance and accident and health premiums ........................... 93,473 92,528 92,780 85,611 70,266 Net investment income ....................... 228,067 220,366 208,265 221,525 177,310 Realized gains (losses) on investments ...... (4,878) 40,953 52,760 5,860 9,429 Total revenues .............................. 389,621 421,351 413,373 377,719 323,062 Income from continuing operations .......... 52,675 75,128 84,049 58,189 34,732 Income (loss) from discontinued operations . 287 699 (1,165) 1,439 855 Gain on sale of discontinued operations .... 978 -- -- -- 6,479 Net income ................................. 53,940 75,827 82,844 59,628 42,066 Net income applicable to common stock ...... 53,790 73,656 80,634 59,628 42,066 Per common share: Income from continuing operations ........ 1.56 2.01 1.90 1.23 0.74 Income from continuing operations - assuming dilution ...................... 1.52 1.97 1.89 1.23 0.74 Earnings ................................. 1.60 2.03 1.87 1.26 0.90 Earnings - assuming dilution ............. 1.56 1.99 1.86 1.26 0.90 Cash dividends ........................... 0.30 0.20 0.04 -- -- Weighted average commons shares outstanding - assuming dilution .......... 34,400,513 36,971,236 43,270,392 47,182,200 46,788,520 CONSOLIDATED BALANCE SHEET DATA: Total investments .......................... $ 3,031,436 $ 2,940,911 $ 2,829,517 $ 2,620,132 $ 2,314,428 Assets held in separate accounts ........... 190,111 138,409 79,043 44,789 28,043 Total assets ............................... 3,650,960 3,601,526 3,368,192 3,093,582 2,795,266 Long-term debt ............................. 71 24,577 24,581 12,604 18,519 Company-obligated mandatorily redeemable preferred stock of subsidiary trust ...... 97,000 97,000 -- -- -- Total liabilities .......................... 2,965,869 2,894,708 2,724,867 2,524,781 2,359,945 Total stockholders' equity ................. 583,588 605,315 638,522 564,298 430,743 Book value per common share ................ 17.75 16.77 14.28 11.83 9.18 Book value per common share excluding unrealized appreciation (depreciation) (1) ...................................... 16.14 15.36 13.75 11.12 9.82 OTHER DATA (UNAUDITED): Adjusted operating income applicable to common stock (2) ......................... $ 55,998 $ 46,977 $ 42,495 $ 41,648 $ 29,780 Adjusted operating income per common share - assuming dilution (2) ............ 1.63 1.27 0.98 0.88 0.64 Statutory capital and surplus (3) .......... 376,929 360,782 344,965 288,302 250,709 Net statutory premiums collected (4) ....... 310,247 274,105 261,121 234,866 232,728 Life insurance in force .................... 18,367,078 17,132,235 16,113,121 15,254,669 14,296,709
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (1) Excludes the effect of reporting certain fixed maturity securities at fair value. (2) Adjusted operating income equals net income adjusted to eliminate certain items which management believes are not indicative of operating trends because they are unusual and/or nonrecurring in nature, including the impact of realized gains (losses) on investments, gain on sale of discontinued operations and net income (loss) from a venture capital investment company subsidiary. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Statutory data has been derived from the annual statements of the Company's insurance subsidiaries, as filed with insurance regulatory authorities and prepared in accordance with statutory accounting practices. (4) Net statutory premiums include premiums collected from annuities and universal life-type products. For GAAP reporting, such premiums received are not reported as revenues. Amounts include internal rollover premiums to variable universal life or variable annuity contracts totaling $29.5 million in 1998, $14.1 million in 1997, $3.6 million in 1996, $1.5 million in 1995 and $2.9 million in 1994. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING ANALYSIS OF THE CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE WITHIN THIS DOCUMENT. UNLESS NOTED OTHERWISE, ALL REFERENCES TO THE COMPANY INCLUDE ALL OF ITS DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE SUBSIDIARIES, FARM BUREAU LIFE INSURANCE COMPANY (FARM BUREAU LIFE), WESTERN FARM BUREAU LIFE INSURANCE COMPANY (WESTERN LIFE) AND EQUITRUST LIFE INSURANCE COMPANY (EQUITRUST) (COLLECTIVELY, THE LIFE COMPANIES). OVERVIEW The Company sells universal life, variable universal life, traditional life and disability income insurance and traditional and variable annuity products. These products are principally marketed through a core distribution force consisting of approximately 1,600 exclusive Farm Bureau agents in 14 midwestern and western states. Variable universal life and variable annuity products are also marketed in other states through alliances with unaffiliated Farm Bureau companies. In addition, beginning in 1998, the Company started marketing variable products through alliances with a life insurance company and a regional broker-dealer not affiliated with Farm Bureau. Production from these alliances was minimal in 1998, as these operations were in the start-up phase throughout most of the year. Several subsidiaries support various functional areas of the Life Companies and other affiliates, by providing investment advisory, marketing and distribution, and leasing services. In accordance with generally accepted accounting principles, premiums and considerations received for interest sensitive products such as universal life insurance and ordinary annuities are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for interest sensitive products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses. The Life Companies receive investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited. Amounts for interest credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the consolidated financial statements. Premium revenues reported for traditional life and disability income 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 ordinary 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 certain other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized and amortized into expense. For nonparticipating traditional life and accident and health insurance products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits. For participating traditional life insurance and interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality, and expense margins. This amortization is adjusted when the Life Companies revise their estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity. Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to year based on the level of claims incurred under insurance retention limits. The profitability of the Life Companies is primarily affected by expense levels, interest spreads (i.e., the difference between interest earned on investments and interest credited to policyholders), persistency and fluctuations in mortality and other policyholder benefits. The Company has the ability to mitigate adverse experience through adjustments to credited interest rates, policyholder dividends or cost of insurance charges. 15 On March 17, 1998, the Company's Board of Directors approved a two-for-one common stock split payable in the form of a 100% stock dividend to stockholders of record as of April 6, 1998. The additional shares were distributed April 17, 1998. All references to the number of common shares and per share amounts in this report have been restated to reflect the effect of the stock dividend. On March 31, 1998, the Company sold its wholly-owned subsidiary, Utah Farm Bureau Insurance Company (Utah Insurance), to Farm Bureau Mutual Insurance Company (Farm Bureau Mutual), an affiliate. As a result of the sale, which was approved by the Company's Board of Directors on March 17, 1998, the Company no longer has property-casualty operations. Results of the property-casualty operations have been reported separately as "discontinued" and applicable amounts for 1997 and 1996 have been restated. The Company's revenues and income from continuing operations are primarily derived from its life insurance segment. Revenues and expenses of the Company's other segments, which consist of investment advisory, marketing and distribution, leasing and management operations, are principally recorded in the other income and other expense line items on the Consolidated Statements of Income. See Note 15 of the Notes to Consolidated Financial Statements (page 61) for additional information regarding segment information. RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1998 Net income applicable to common stock totaled $53.8 million in 1998, $73.7 million in 1997 and $80.6 million in 1996. The decreases in net income are attributable primarily to the impact of realized gains and losses on investments. Adjusted operating income applicable to common stock, which does not include the impact of realized gains and losses on investments and other items that management believes are not indicative of operating trends, totaled $56.0 million in 1998, $47.0 million in 1997 and $42.5 million in 1996. The following is a reconciliation of net income to adjusted operating income.
YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income applicable to common stock........................ $ 53,790 $ 73,656 $ 80,634 Adjustments: Net realized losses (gains) on investments................ 3,186 (25,956) (34,992) Gain on disposal of property-casualty operations.......... (978) -- -- Net income from FBL Ventures.............................. -- (723) (3,147) ------------ ------------ ------------ Adjusted operating income applicable to common stock......... $ 55,998 $ 46,977 $ 42,495 ============ ============ ============ Earnings per common share - assuming dilution................ $ 1.56 $ 1.99 $ 1.86 ============ ============ ============ Adjusted operating earnings per common share - assuming dilution......................................... $ 1.63 $ 1.27 $ 0.98 ============ ============ ============
The adjustment for realized gains and losses on investments noted in the table above is net of adjustments for that portion of amortization of deferred policy acquisition costs, unearned revenue reserve, value of insurance in force acquired and income taxes attributable to such gains and losses. FBL Ventures was a wholly owned investment company subsidiary which invested in start-up and mezzanine level venture capital investments in various sectors. FBL Ventures was dissolved on June 30, 1997. The change in earnings per common share from year to year is positively impacted by a decrease in the weighted average common shares outstanding during the three year period ended December 31, 1998. Weighted average common shares outstanding totaled 34.4 million in 1998, 37.0 million in 1997 and 43.3 million in 1996. These decreases are the result of acquisitions of common stock by the Company during 1998 and 1997, and the exchange of common stock for preferred stock in 1996. 16 A summary of the Company's premiums and product charges is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ------------ ------------- ------------- (DOLLARS IN THOUSANDS) Premiums and product charges: Interest sensitive product charges................................ $ 52,157 $ 47,979 $ 43,654 Traditional life insurance and accident and health premiums....... 93,473 92,528 92,780 ------------ ------------- ------------- Total.......................................................... $ 145,630 $ 140,507 $ 136,434 ============ ============= =============
INTEREST SENSITIVE PRODUCT CHARGES increased 8.7% in 1998, to $52.2 million, and 9.9% in 1997, to $48.0 million. These increases are due primarily to increased cost of insurance charges resulting from an increase in the volume and age of business in force. In addition, mortality and expense charges have increased as a result of growth in variable product account balances. TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH PREMIUMS increased 1.0% in 1998, to $93.5 million, and decreased 0.3% in 1997, to $92.5 million. Management believes the relatively flat sales of traditional life insurance products is the result of a marketing emphasis placed on the sale of variable universal life insurance contracts. Premiums collected on variable universal life insurance products increased 19.7% to $37.8 million in 1998 and increased 21.7% to $31.6 million in 1997. NET INVESTMENT INCOME increased 3.5% in 1998, to $228.1 million, and 5.8% in 1997, to $220.4 million. These increases are attributable to increases in invested assets and the yield earned on those investments. Average invested assets totaled $2,895.5 million in 1998, $2,855.7 million in 1997 and $2,701.6 million in 1996. The annualized yield earned on average invested assets was 7.88% in 1998 compared to 7.72% in 1997 and 7.71% in 1996. Despite a general decline in market interest rates during 1998 and 1997, yield on invested assets increased due principally to an increase in fee income and discount accretion associated with bond calls and prepayments on mortgage loans and mortgage-backed securities. Fee income from mortgage loan prepayments and bond calls totaled $9.8 million in 1998, $3.1 million in 1997 and $1.3 million in 1996. This revenue is not expected to be a consistently recurring source of income for the Company. In addition, investment income increased because of the sale in 1997 and 1996 of equity securities which generate little current income and the reinvestment of the proceeds in fixed maturity securities. Partially offsetting the increase in net investment income was a $1.1 million decrease in 1998 and $1.8 million decrease in 1997 in investment income from FBL Ventures. REALIZED GAINS (LOSSES) ON INVESTMENTS decreased 111.9% in 1998, to a loss of $4.9 million, and 22.4% in 1997, to a gain of $41.0 million. Net realized gains in 1997 and 1996 resulted primarily from the sale of equity securities. Realized gains (losses) include writedowns of investments that became other-than-temporarily impaired totaling $9.4 million in 1998, $23.8 million in 1997 and $1.4 million in 1996. These writedowns are the result of sustained operating losses, unsuccessful efforts to raise capital and various other operational or economic factors that became evident in the respective years. The level of realized gains (losses) is subject to fluctuation from year to year depending on the prevailing interest rate and economic environment and the timing of the sale of investments. OTHER INCOME increased 6.5% in 1998, to $20.8 million, and 22.7% in 1997, to $19.5 million. These increases are attributable to an increase in the level of leasing, investment advisory and other financial services provided to affiliates and third parties. In addition, during 1997 the Company increased the investment advisory rate charged for certain types of investments. The increases for 1998 are partially offset by a $2.4 million decrease in rental income due to the exchange of home office properties on March 30, 1998. See "Exchange of Home Office Properties." 17 A summary of the Company's policy benefits is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ------------ ------------- ------------- (DOLLARS IN THOUSANDS) Policy benefits: Interest sensitive products benefits............................. $ 122,527 $ 122,729 $ 119,186 Traditional life insurance and accident and health benefits...... 55,880 56,369 53,864 Increase in traditional life and accident and health future policy benefits..................................................... 21,264 27,173 25,875 Distributions to participating policyholders..................... 25,818 25,852 26,152 ------------ ------------- ------------- Total........................................................ $ 225,489 $ 232,123 $ 225,077 ============ ============= =============
INTEREST SENSITIVE PRODUCT BENEFITS decreased 0.2% in 1998, to $122.5 million, and increased 3.0% in 1997, to $122.7 million. The components of interest sensitive product benefits, along with selected average interest crediting rates, are as follows:
YEAR ENDED DECEMBER 31, ----------------------------- -------------- 1998 1997 1996 ------------- --------------- -------------- (DOLLARS IN THOUSANDS) Interest credited to account balances.................. $ 105,604 $ 107,239 $ 105,176 Death benefits in excess of related account balances... 16,923 15,490 14,010 Average crediting rate for universal life liabilities.. 5.94% 6.18% 6.39% Average crediting rate for annuity liabilities......... 5.83 6.18 6.35
The Company decreased interest crediting rates on many of its products during 1998 and 1997 in response to the general decline in market interest rates during the same periods. During 1997, the impact of the decreases in interest crediting rates was more than offset by an increase in the volume of business in force. TRADITIONAL LIFE INSURANCE AND ACCIDENT AND HEALTH BENEFITS, INCLUDING THE RELATED CHANGES IN RESERVES, decreased 7.7% in 1998, to $77.1 million, and increased 4.8% in 1997, to $83.5 million. Death and surrender benefits on traditional products increased 3.6% in 1998, to $48.2 million, and 4.7% in 1997, to $46.5 million. Accident and health benefits decreased $2.1 million in 1998 and increased $0.9 million in 1997. A $5.9 million decrease in the change in reserves in 1998 compared to 1997 is attributable primarily to a $4.0 million decrease in the change in accident and health reserves resulting from fewer disability income claims. Traditional life insurance and accident and health benefits can tend to fluctuate from year to year as a result of changes in mortality and morbidity experience. DISTRIBUTIONS TO PARTICIPATING POLICYHOLDERS decreased 0.1% in 1998, to $25.8 million, and 1.1% in 1997, to $25.9 million. These decreases are primarily attributable to decreases in the average interest rate used in the dividend formula for these policies to 5.84% at December 31, 1998, from 5.89% at December 31, 1997 and 6.12% at December 31, 1996. A summary of the Company's underwriting, acquisition and insurance expenses is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ------------ ------------- ------------- (DOLLARS IN THOUSANDS) Underwriting, acquisition and insurance expenses: Commission expense, net of deferrals.............................. $ 9,125 $ 9,037 $ 9,191 Amortization of deferred policy acquisition costs................. 10,171 8,474 8,667 Other underwriting, acquisition and insurance expenses, net of deferrals...................................................... 44,687 44,072 39,403 ------------ ------------- ------------- Total.......................................................... $ 63,983 $ 61,583 $ 57,261 ============ ============= =============
COMMISSION EXPENSE increased 1.0% in 1998, to $9.1 million, and decreased 1.7% in 1997, to $9.0 million. Changes in the level of commission expense have been small due primarily to relative consistency in the amount of direct life and accident and health insurance premiums earned. 18 AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS increased 20.0% in 1998, to $10.2 million, and decreased 2.2% in 1997, to $8.5 million. The increase in 1998 is primarily attributable to an increase in the profitability of the underlying business. The decrease in 1997 is the result of the impact of realized gains and losses on investments backing the related policyholder liabilities. OTHER UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased 1.4% in 1998, to $44.7 million, and 11.8% in 1997, to $44.1 million. During 1998 and 1997, expenses totaling $2.2 million and $0.7 million, respectively, were incurred relating to modifying the Company's computer systems to prepare for the Year 2000 date conversion. See "Impact of Year 2000". Expenses also increased during 1998 as a result of start-up activities relating to the sale of variable products through alternative distribution channels. The increases in 1998 were partially offset by a $2.6 million decrease in home office real estate expense due to the exchange of home office properties on March 30, 1998. See "Exchange of Home Office Properties". Changes in the amounts and timing of estimated guaranty fund assessments resulted in a related credit of $1.2 million in 1998, while the adoption of a new accounting pronouncement in 1997 resulted in an increase in guaranty fund expense of $1.6 million in 1997. Also effecting expenses in 1997 was a $1.6 million increase in the amortization of value of insurance in force due to the impact of realized gains and losses on investments. INTEREST EXPENSE increased 13.2% in 1998, to $1.7 million, and 63.7% in 1997, to $1.5 million due to an increase in the average debt outstanding. OTHER EXPENSES increased 33.6% in 1998, to $15.5 million, and 3.0% in 1997, to $11.6 million. These increases are due principally to an increase in the level of leasing, management and financial services provided to affiliates and third parties. INCOME TAXES decreased 31.2% in 1998, to $26.4 million, and 0.8% in 1997, to $38.4 million. The effective tax rate was 31.8% for 1998, 33.5% for 1997 and 32.5% for 1996. The effective tax rates were lower than the federal statutory rate of 35% due primarily to (i) a tax benefit in 1998 and 1997 associated with the payment of dividends on mandatorily redeemable preferred stock of subsidiary trust, (ii) tax-exempt interest and (iii) tax-exempt dividend income. In addition, in 1996, other permanent differences between book and taxable income primarily relating to investment transactions reduced the effective tax rate. DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED STOCK OF SUBSIDIARY TRUST increased to $4.9 million in 1998 from $2.8 million in 1997. The underlying securities were issued on May 30, 1997. The increase in 1998 is offset by a corresponding decrease in dividends on series preferred stock. EQUITY INCOME, NET OF RELATED INCOME TAXES, decreased 39.8% in 1998, to $1.3 million, and 52.0% in 1997, to $2.1 million. Equity income includes the Company's proportionate share of gains and losses on investments owned by the underlying partnerships and joint ventures. The level of these gains and losses is subject to fluctuation from year to year depending on the prevailing economic environment and the timing of the sale of investments held by the partnerships and joint ventures. DISCONTINUED OPERATIONS The Company recorded a gain of $1.0 million, net of related income taxes, on the sale of Utah Insurance. In addition, the increase in net unrealized appreciation on securities classified as available for sale was reduced $1.4 million, net of related income taxes, as a result of the sale. The gain on the sale may be increased in future years in accordance with an earn-out provision included in the related sales agreement. See "Liquidity and Capital Resources - FBL Financial Group, Inc." Income (loss) from discontinued operations totaled $0.3 million for 1998, $0.7 million for 1997 and ($1.2) million for 1996. Revenues from discontinued operations totaled $12.9 million through the date of sale in 1998, $53.2 million in 1997 and $35.7 million in 1996. 19 EXCHANGE OF HOME OFFICE PROPERTIES On March 30, 1998, the Company exchanged a subsidiary owning its home office properties for 2,536,112 unregistered shares of Class A common stock owned by the Iowa Farm Bureau Federation. The Company is leasing a portion of the properties back from a wholly-owned subsidiary of the Iowa Farm Bureau Federation under a 15-year operating lease. The value of the transaction, which was structured as a tax-free exchange of a real estate subsidiary, was $45.7 million, or $18.00 per common share. The book value of the properties was $24.7 million on the date of the exchange. A gain on the transaction of approximately $21.0 million was deferred and is being amortized over the term of the operating lease. The exchange did not have a significant impact on income from continuing operations for 1998, nor is it expected to have a significant impact in the future, as the increase in net expense associated with leasing the properties versus owning them directly is substantially offset by the amortization of the deferred gain on the transaction. IMPACT OF YEAR 2000 Many of the Company's computer programs were originally written using two digits rather than four to define a particular year. As a result, these computer programs have time-sensitive software that may recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions to operations, including, but not limited to, a temporary inability to process transactions, send premium notices and calculate policy reserves and accruals. To a lesser extent, the Company is dependent on various non-information technology systems, such as telephone switches. The Year 2000 could also cause these systems to fail or malfunction. During 1997, the Company completed a comprehensive assessment of the Year 2000 issue and developed a plan to address the issue in a timely manner. The plan consists of the following four phases: (1) identification of all information technology and non-information technology systems that have time-sensitive software, (2) modification or replacement of the software/systems, (3) testing the modified or new software/systems and (4) development of a contingency plan to address any critical system that may malfunction. In addition, the Company has ongoing formal communications with all of its significant vendors to keep abreast of the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company has and will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. With only a few exceptions, the Year 2000 modifications and testing have been completed. The exceptions are limited to a few third-party software packages for which the Year 2000 compliant version will become available in the first quarter of 1999. It is anticipated that the Company will complete its system modifications and testing prior to any material impact on its operating systems. Non-information technology systems that are not Year 2000 compliant have been replaced or have been identified and will be replaced by December 31, 1999. The total incremental cost of the Year 2000 project (those costs which would not have been incurred had the Year 2000 issue not existed) is estimated to be $4.1 million and is being funded through operating cash flows. Year 2000 modification costs incurred and charged to expense totaled $2.4 million (including $0.2 million attributable to discontinued operations) for 1998 and $1.0 million (including $0.3 million attributable to discontinued operations) for 1997. It is anticipated the project costs to be charged to expense during 1999 will total approximately $0.7 million. The Company has also incurred internal costs associated with the Year 2000 project. These costs, which are principally payroll related expenses for information systems personnel, have not been separately accounted for and, therefore, are not available. Despite the Company's extensive efforts to modify or replace computer programs and information systems that are time-sensitive, the Company could experience a disruption to its operations as a result of the Year 2000. The Company has a detailed contingency plan to address any critical system that may malfunction despite the testing being performed. The contingency plan provides for the availability of staff, defines and prioritizes tasks and outlines procedures to fix any systems that are malfunctioning. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantees that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the 20 availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. FINANCIAL CONDITION INVESTMENTS The Company's total investment portfolio increased 3.1% to $3,031.4 million at December 31, 1998 compared to $2,940.9 million at December 31, 1997. This increase is primarily the result of positive cash flows from operations, partially offset by net withdrawals of policyholder account balances on interest sensitive products. Over the last several years, the mix of the Company's life insurance business has been shifting from traditional and interest sensitive products to variable products. In addition, in an attempt to enhance the Company's persistency rate, the Company has promoted an exchange program for the rollover of universal life policies to variable universal life policies. The Company expects the shift to variable products to continue due to this program and the continued popularity of the variable products. A majority of premiums received on variable products are typically invested in the Company's separate accounts as opposed to the general account investments. This trend is expected to impact the future growth rate of the Company's investment portfolio and separate account assets. The Company's investment portfolio is managed by its internal investment professionals. The investment strategy is designed to achieve superior risk-adjusted returns consistent with the investment philosophy of maintaining a largely investment grade portfolio and providing adequate liquidity for obligations to policyholders and other requirements. Management continually reviews the returns on invested assets and changes the mix of invested assets as deemed prudent under the current market environment to help maximize current income. The Company's investment portfolio is summarized in the table below:
DECEMBER 31, ---------------------------------------------------------------------------------- 1998 1997 1996 --------------------------- -------------------------- ------------------------- CARRYING CARRYING CARRYING VALUE PERCENT VALUE PERCENT VALUE PERCENT ------------ ---------- ----------- ---------- ------------ --------- (DOLLARS IN THOUSANDS) Fixed maturities: Public.................... $ 1,852,291 61.1 % $ 1,807,240 61.4 % $ 1,676,307 59.3 % 144A private placement.... 347,499 11.5 276,578 9.4 230,296 8.1 Private placement......... 242,542 8.0 267,358 9.1 302,136 10.7 ------------ ---------- ----------- ---------- ------------ --------- Total fixed maturities.... 2,442,332 80.6 2,351,176 79.9 2,208,739 78.1 Equity securities............ 35,287 1.2 57,736 2.0 86,977 3.1 Mortgage loans on real estate 299,372 9.9 323,605 11.0 293,777 10.3 Investment real estate: Acquired for debt......... 867 -- 1,168 -- 2,007 -- Investment................ 39,812 1.3 38,774 1.3 26,384 1.0 Policy loans................. 123,328 4.1 121,941 4.2 118,996 4.2 Other long-term investments.. 10,210 0.3 14,438 0.5 24,287 0.9 Short-term investments....... 80,228 2.6 32,073 1.1 68,350 2.4 ------------ ---------- ----------- ---------- ------------ --------- Total investments...... $ 3,031,436 100.0 % $ 2,940,911 100.0 % $ 2,829,517 100.0 % ============ ========== =========== ========== ============ =========
As of December 31, 1998, 94.5% (based on carrying value) of the fixed maturity securities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. The Company regularly reviews the percentage of its portfolio which is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of December 31, 1998, the investment in non-investment grade debt was 5.5% of fixed maturity securities. At that time no single non-investment grade holding exceeded 0.3% of total investments. 21 The following table sets forth the credit quality, by NAIC designation and Standard & Poors (S & P) rating equivalents, of fixed maturity securities.
DECEMBER 31, ---------------------------------------------------------------------------- 1998 1997 1996 ----------------------- ----------------------- ------------------------ NAIC EQUIVALENT S&P RATINGS CARRYING CARRYING CARRYING DESIGNATION (1) VALUE PERCENT VALUE PERCENT VALUE PERCENT - ------------- ------------------------ ----------- --------- ----------- --------- ------------ --------- (DOLLARS IN THOUSANDS) 1 (AAA, AA, A)............ $ 1,570,264 64.3 % $ 1,548,628 65.9 % $ 1,430,604 64.8 % 2 (BBB)................... 738,468 30.2 689,414 29.3 622,597 28.2 ----------- --------- ----------- --------- ------------ --------- Total investment grade.. 2,308,732 94.5 2,238,042 95.2 2,053,201 93.0 3 (BB).................... 105,138 4.3 62,214 2.7 103,292 4.7 4 (B)..................... 18,005 0.7 47,225 2.0 48,932 2.2 5 (CCC, CC, C)............ 7,060 0.3 525 - 275 - 6 In or near default...... 3,397 0.2 3,170 0.1 3,039 0.1 ----------- --------- ----------- --------- ------------ --------- Total below investment grade..... 133,600 5.5 113,134 4.8 155,538 7.0 ----------- --------- ----------- --------- ------------ --------- Total fixed maturities.. $ 2,442,332 100.0 % $ 2,351,176 100.0 % $ 2,208,739 100.0 % =========== ========= =========== ========= ============ =========
- --------------- (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 the Company's portfolio. Mortgage and other asset-backed securities constitute a significant portion of the Company's portfolio of securities. These securities were purchased at a time when, management believed, these types of investments provided superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securities are diversified as to collateral types, cash flow characteristics and maturity. The 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 increases 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 slows 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, the Company receives a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" which provide sequential retirement of the bonds. The Company invests in sequential tranches, which provide cash flow stability in that principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, the Company invests in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. The Company does not purchase certain types of collateralized mortgage obligations which it believes would subject the investment portfolio to greater than average risk. These include, but are not limited to, interest only, principal only, floater, inverse floater, PAC II, Z and support tranches. 22 The following table sets forth the par value, amortized cost and carrying value of the Company's mortgage and asset-backed securities at December 31, 1998, summarized by type of security.
PERCENT AMORTIZED CARRYING OF FIXED COST PAR VALUE VALUE MATURITIES ----------- ----------- ----------- ---------- (DOLLARS IN THOUSANDS) Residential mortgage-backed securities: Sequential........................................ $ 437,003 $ 441,264 $ 442,087 18.1 % Pass through...................................... 85,664 84,997 86,662 3.5 Planned and targeted amortization class........... 52,803 52,922 52,753 2.2 Other............................................. 13,637 13,872 13,625 0.6 ----------- ----------- ----------- ---------- Total residential mortgage-backed securities......... 589,107 593,055 595,127 24.4 Commercial mortgage-backed securities................ 231,004 231,186 235,444 9.6 Other asset-backed securities........................ 259,284 259,076 272,221 11.2 ----------- ----------- ----------- ---------- Total mortgage and asset-backed securities........... $ 1,079,395 $ 1,083,317 $ 1,102,792 45.2 % =========== =========== =========== ==========
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, 1998, the Company held $299.4 million or 9.9% of invested assets in mortgage loans. These mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. At December 31, 1998, mortgages more than 60 days delinquent accounted for 0.4% of the carrying value of the mortgage portfolio. The Company's mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. Regions with the largest concentration of the Company's mortgage loan portfolio at December 31, 1998 include: Pacific (26.9%), which includes California, Oregon and Washington; and West South Central (25.2%), which includes Oklahoma and Texas. Mortgage loans on real estate are also diversified by collateral types with office buildings (37.4%) and retail facilities (37.2%) representing the largest holdings at December 31, 1998. OTHER ASSETS Deferred policy acquisition costs increased 11.9% to $203.6 million at December 31, 1998 due principally to the capitalization of costs incurred with new sales. Property and equipment decreased $8.2 million, or 13.0%, due principally to the exchange of home office properties for Class A common stock, partially offset by increases in leased assets and capitalized software costs. Assets of discontinued operations decreased $106.7 million as a result of the sale of Utah Insurance. Assets held in separate accounts increased $51.7 million, or 37.4%, to $190.1 million at December 31, 1998 due primarily to increased sales of variable products, partially offset by depreciation in the value of separate account investments. At December 31, 1998, the Company had total assets of $3,651.0 million, a 1.4% increase from total assets at December 31, 1997. LIABILITIES Policy liabilities and accruals increased 1.6% to $2,364.3 million at December 31, 1998. The relatively modest increase in policy liabilities is partially attributable to the Company's marketing emphasis on the sale of variable products. As noted under the "Investments" section above, the shift in sales to variable products will have an impact on the future growth rate of the Company's policy liabilities and accruals as well as the separate account liabilities. Other liabilities increased 90.2% to $85.5 million at December 31, 1998 due primarily to an increase in payables for securities purchased and the deferral of the gain on the exchange of home office properties for Class A common stock. Liabilities of discontinued operations decreased $79.1 million as a result of the sale of Utah Insurance. At December 31, 1998, the Company had total liabilities of $2,965.9 million, a 2.5% increase from total liabilities at December 31, 1997. 23 STOCKHOLDERS' EQUITY Stockholders' equity decreased 3.6%, to $583.6 million at December 31, 1998 compared to $605.3 million at December 31, 1997. This decrease is principally attributable to the exchange of home office properties for Class A common stock and stock repurchases which, collectively, resulted in a $70.7 million decrease in equity. These decreases were partially offset by net income during 1998 and net unrealized appreciation of securities classified as available for sale. At December 31, 1998, common stockholders' equity was $580.6 million, or $17.75 per share, compared to $602.3 million, or $16.77 per share at December 31, 1997. Included in stockholders' equity per common share is $1.61 at December 31, 1998 and $1.41 at December 31, 1997 attributable to unrealized investment gains resulting from marking the Company's fixed maturity securities classified as available for sale to market value. The change in unrealized appreciation of fixed maturity and equity securities classified as available for sale increased stockholders' equity $1.5 million during 1998, after related adjustments to deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and deferred income taxes. MARKET RISKS OF FINANCIAL INSTRUMENTS Interest rate risk is the Company's 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 the Company's fixed maturity and mortgage loan portfolios generally increases when interest rates decrease, and decreases when interest rates increase. A majority of the Company's insurance liabilities are backed by fixed maturity securities and mortgage loans. The fixed maturity securities have laddered maturities and a weighted average life of 7.0 years. Accordingly, the earned rate on the portfolio lags behind changes in market yields. The extent that the portfolio yield lags behind changes in market yields generally depends upon (i) the average life of the portfolio, (ii) the amount and speed at which market interest rates rise or fall, (iii) the amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and asset-backed securities accelerate during periods of declining interest rates and (iv) the amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and asset-backed securities decelerate during periods of increasing interest rates. For a majority of the Company's traditional insurance products, profitability is significantly affected by the spreads between interest yields on investments and rates credited on insurance liabilities. For variable products, profitability on the portion, if any, of the policyholder's account balance invested in the Company's general account is also affected by the spreads earned. The variable policyholder assumes essentially all the investment earnings risk for the portion of the account balance invested in the separate accounts. For approximately 93% of the policy liabilities, the Company has the ability to adjust interest or dividend crediting rates in reaction to changes in portfolio yield. However, the ability to adjust these rates is limited by competitive factors. Surrender rates could increase and new sales could be negatively impacted if the crediting rates are not competitive with the rates on similar products offered by other insurance companies and financial service institutions. In addition, if market rates were to decrease substantially and stay at a low level for an extended period of time, the Company's spread could be lowered due to interest rate guarantees on many of its interest sensitive products. At December 31, 1998, interest rate guarantees on interest sensitive products ranged from 3.0% to 5.5%, with a weighted average guarantee of 3.7%. 24 The Company designs its products and manages its investment portfolio in a manner to encourage persistency and to help ensure targeted spreads are earned. In addition to the ability to change interest crediting rates on its products, certain interest sensitive contracts have surrender and withdrawal penalty provisions. The following is a summary of the surrender and discretionary withdrawal characteristics of the Company's interest sensitive products and supplementary contracts without life contingencies as of December 31, 1998:
RESERVE BALANCE --------------- (DOLLARS IN THOUSANDS) Surrender charge rate: Greater than or equal to 5%............................. $ 359,319 Less than 5%, but still subject to surrender charge..... 240,345 Not subject to surrender charge......................... 1,019,908 Not subject to surrender or discretionary withdrawal......... 124,654 -------------- Total........................................................ $ 1,744,226 ==============
A major component of the Company's asset-liability management program is structuring the investment portfolio with cash flow characteristics consistent with the cash flow characteristics of the Company's insurance liabilities. The Company uses computer models to perform simulations of the cash flows generated from existing insurance policies under various interest rate scenarios. Information from these models is used in the determination of interest crediting rates and investment strategies. Effective duration is a common measure for the price sensitivity to changes in interest rates. It measures the approximate percentage change in the market value of a portfolio when interest rates change by 100 basis points. This measure includes the impact of estimated changes in portfolio cash flows from features such as bond calls and prepayments. When the estimated durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in the value of assets should be largely offset by a change in the value of liabilities. At December 31, 1998, the effective duration of the Company's fixed maturity portfolio was approximately 4.4 and the effective duration of the interest sensitive products was approximately 3.5. If interest rates were to increase 10% from levels at December 31, 1998, the Company's fixed maturity securities and short-term investments, net of corresponding changes in the values of deferred policy acquisition costs, value of insurance in force acquired and unearned revenue reserves, would decrease approximately $49.3 million. This hypothetical change in value does not take into account any offsetting change in the value of insurance liabilities for investment contracts since the Company estimates such value to be the cash surrender value of the underlying contracts. If interest rates were to decrease 10% from levels at December 31, 1998, the fair value of the Company's debt, mandatorily redeemable preferred stock of subsidiary trust and preferred stock issued by Western Life would increase $3.1 million. The computer models used to estimate the impact of a 10% change in market interest rates use many assumptions and estimates which materially impact the fair value calculations. Key assumptions used by the models include an immediate and parallel shift in the yield curve and an acceleration of bond calls and principal prepayments on mortgage and other asset-backed securities. Due to the subjectivity of these assumptions, the actual impact of a 10% change in rates on the fair market values would likely be different from that estimated. Equity price risk is not material to the Company due to the relatively small equity portfolio held at December 31, 1998. However, the Company does earn investment management fees (on those investments managed by the Company) and mortality and expense fee income based on the value of the Company's separate accounts. On an annualized basis, the investment management fee rates range from 0.20% to 0.45% and the mortality and expense fee rates range from 0.90% to 1.40%. As a result, revenues from these sources do fluctuate with changes in the market value of the equity, fixed maturity and other securities held by the separate accounts. LIQUIDITY FBL FINANCIAL GROUP, INC. Parent company cash inflows from operations consists primarily of dividends from subsidiaries, if declared and paid, fees which it charges the various subsidiaries and affiliates for management of their operations and tax settlements between the parent company and its subsidiaries. Cash outflows are principally for salaries and other expenses related to providing these management services, dividends on outstanding stock and interest on holding company 25 debt issued to a subsidiary. In addition, the parent company will on occasion enter into capital transactions such as the acquisition of its common stock. The Company received $25.0 million in cash on March 31, 1998 in connection with the sale of Utah Insurance. The Company will receive an additional $1.2 million (before applicable taxes) in the first quarter of 1999 and may receive additional consideration during each of the four years in the period ending December 31, 2003, in accordance with an earn-out provision included in the underlying sales agreement. Under the earn-out arrangement, the Company and Farm Bureau Mutual will share equally in the dollar amount by which the incurred losses on Utah Insurance's direct business, net of reinsurance ceded, is less than the incurred losses assumed in the valuation model used to derive the initial $25.0 million acquisition price. The earn-out calculation will be performed and any settlement (subject to a maximum of $2.0 million per year) will be made on a calendar year basis. On May 30, 1997, FBL Financial Group Capital Trust (the Trust), a consolidated wholly-owned subsidiary of the Company, issued $97.0 million of 5% Preferred Securities to the Iowa Farm Bureau Federation. In connection with the Trust's issuance of the 5% Preferred Securities and the related purchase of all of the Trust's common securities, the parent company issued to the Trust $100.0 million principal amount of its 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the Notes). Concurrent with the issuance of the Notes, the Company purchased from the Iowa Farm Bureau Federation 5,000,000 shares of the parent company's Series A preferred stock at its liquidation value of $100.0 million. In addition, the parent company issued 5,000,000 shares of Series B preferred stock to the Iowa Farm Bureau Federation for $3.0 million. The purchase of Series A preferred stock and simultaneous issuance of Series B preferred stock and 5% Preferred Securities were noncash transactions. Except for the maturity of the Notes on June 1, 2047, the parent company's future cash flow requirements were not changed significantly by the aforementioned transactions. The Company acquired Class A common shares totaling 3,497,648 in 1998 and 1,930,740 in 1997 as a result of the exchange of a subsidiary owning its home office properties and two stock repurchase programs. These transactions reduced stockholders' equity $70.7 million in 1998 and $24.8 million in 1997. FBL Financial Group, Inc. paid common and preferred stock dividends totaling $10.2 million in 1998, $9.4 million in 1997 and $3.6 million in 1996. It is anticipated that dividend requirements for 1999 will be $0.0825 per quarter per common share and $0.0075 per quarter per preferred share, or approximately $11.0 million. In addition, interest payments on the Notes are estimated to be $5.0 million for 1999. FBL Financial Group, Inc. relies primarily on dividends from Farm Bureau Life and Western Life to make any dividend payments to its stockholders and interest payments on its Notes. The ability of these companies to pay dividends to FBL Financial Group, Inc. is limited by law to earned profits (statutory unassigned surplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the State of Iowa for Farm Bureau Life and the State of Colorado for Western Life. In addition, under the Iowa and Colorado Insurance Holding Company Acts, the Life Companies may not pay an "extraordinary" dividend without prior notice to and approval by the respective insurance commissioner. An "extraordinary" dividend is defined under the Iowa and Colorado Insurance Holding Company Acts as any dividend or distribution of cash or other property whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceeds the greater of (i) 10% of policyholders' surplus (total statutory capital stock and statutory surplus) as of December 31 of the preceding year, or (ii) the statutory net gain from operations of the insurer for the 12-month period ending December 31 of the preceding year. During 1999, the maximum amount legally available for distribution to FBL Financial Group, Inc. without further regulatory approval is approximately $41.0 million from Farm Bureau Life and $14.6 million from Western Life. In November 1998, the Company's Board of Directors approved a $25.0 million Class A common stock repurchase plan. In connection with the plan, the Company entered into a $25.0 million short-term line of credit with a bank to fund any repurchases. The line of credit, which expires on June 30, 1999, requires the Company to maintain minimum tangible net worth and risk-based capital ratios and limits the Company's ability to incur additional indebtedness. As of December 31, 1998, no repurchases had been made under the plan and no related draws were made on the line of credit. It is anticipated that any draws on the line of credit will be repaid during 1999 with dividends from subsidiaries. 26 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 1998, 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 the year's normal premium and deposit cash inflows. This has been the case for all reported years as the Life Companies' continuing operations and financing activities relating to interest sensitive products provided funds amounting to $121.5 million in 1998, $99.3 million in 1997 and $156.6 million in 1996. These funds were primarily used to increase the insurance companies' short-term and fixed maturity investment portfolios. In developing their investment strategy, the Life Companies establish a level of cash and securities which, combined with expected net cash inflows from operations, maturities of fixed maturity investments and principal payments on mortgage and asset-backed securities and mortgage loans, are believed adequate to meet anticipated short-term and long-term benefit and expense payment obligations. Through its membership in the Federal Home Loan Bank of Des Moines, 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 Federal Home Loan Bank of Des Moines owned by Farm Bureau Life, which supported a borrowing capacity of $54.0 million as of December 31, 1998. Interest is payable at the current market rate on the date of issuance. As of December 31, 1998, the line of credit was not established and no borrowings were outstanding. The Company has a $12.0 million line of credit with Farm Bureau Mutual in the form of a revolving demand note. Borrowings on the note, which totaled $8.6 million at December 31, 1998, are being used to acquire assets that will be leased to certain affiliates, including Farm Bureau Mutual. Interest is payable at a rate equal to the prime rate of a national bank (7.75% at December 31, 1998). Management anticipates that funds to meet its short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally generated funds. Management believes that the current level of cash and available-for-sale and short-term securities, combined with expected net cash inflows from operations, maturities of fixed maturity investments, principal payments on mortgage and asset-backed securities, mortgage loans and its insurance products, are adequate to meet the Company's anticipated cash obligations for the foreseeable future. The Company's investment portfolio at December 31, 1998, included $80.2 million of short-term investments and $311.4 million in carrying value of U.S. Government and U.S. Government agency backed securities that could be readily converted to cash at or near carrying value. Notwithstanding the above, management currently anticipates refinancing the $24.5 million lease-backed note payable that is due August, 1999. The Company may from time to time review potential acquisition opportunities. The Company anticipates that funding for any such acquisition may be provided from available cash resources, debt or equity financing. As of December 31, 1998, the Company had no material commitments for capital expenditures. PENDING ACCOUNTING CHANGES In March 1998, Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", was issued. The Company plans to adopt the SOP effective on January 1, 1999. The SOP requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company currently capitalizes external software development costs and charges internal costs, primarily payroll and related items, to expense as they are incurred. Under the SOP, these internal costs will be capitalized. The Company has not yet determined the impact of adopting this SOP. 27 In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Accounting for gains or losses resulting from changes in the values of those derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. Statement No. 133 also allows companies to transfer securities classified as held to maturity to either the available-for-sale or trading categories in connection with the adoption of the new standard. The Statement is effective for the Company in the year 2000, with earlier adoption encouraged. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. EFFECTS OF INFLATION The Company does not believe that inflation has had a material effect on its consolidated results of operations. CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION From time to time, the Company may publish statements relating to anticipated financial performance, business prospects, new products, and similar matters. These statements and others which include words such as "expect", "anticipate", "believe", "intend", and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for these types of statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experiences to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business, in addition to those identified under "Impact of Year 2000", include but are not limited to the following: * Changes to interest rate levels and stock market performance may impact the Company's lapse rates, market value of investment portfolio and the Company's ability to sell its life insurance products, notwithstanding product features to mitigate the financial impact of such changes. * The degree to which the Company's products are accepted by customers and agents (including the agents of the Company's alliance partners) will impact the Company's future growth rate. * Extraordinary acts of nature or man may result in higher than expected claim activity. * Changes in federal and state income tax laws and regulations may affect the relative tax advantage of the Company's products. ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" (page 24), for the Company's qualitative and quantitative disclosures about market risk. 28 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FBL FINANCIAL GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 Report of Management........................................................ 30 Report of Independent Auditors.............................................. 31 Audited Consolidated Financial Statements Consolidated Balance Sheets................................................. 32 Consolidated Statements of Income........................................... 34 Consolidated Statements of Changes in Stockholders' Equity.................. 35 Consolidated Statements of Cash Flows....................................... 36 Notes to Consolidated Financial Statements.................................. 38 29 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 generally accepted accounting principles appropriate in the circumstances. Certain financial information presented depends on management's estimates and judgments regarding the ultimate outcome of transactions which are not yet complete. Management believes these estimates and judgements are fair and reasonable based upon available information. Management maintains a system of internal control 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 its financial statements are fairly stated in all material respects. The Company engages Ernst & Young LLP as independent auditors to audit its financial statements and express their opinion thereon. Their audits include reviews and tests of the Company's internal controls to the extent they believe necessary to determine and conduct the audit procedures that support their opinion. A copy of Ernst & Young LLP's audit opinion follows this letter. The Audit Committee of the Board of Directors, composed solely of nonmanagement directors, meets periodically with management, internal auditors and Ernst & Young LLP to review internal accounting control, audit activities, auditor independence and financial reporting matters. The internal auditors and Ernst & Young LLP have free access to the Audit Committee, with and without the presence of management, to discuss the adequacy of internal control and to review the quality of financial reporting. The Audit Committee is also responsible for making recommendations to the Board of Directors concerning the selection of independent auditors. Thomas R. Gibson CHIEF EXECUTIVE OFFICER AND DIRECTOR James W. Noyce CHIEF FINANCIAL OFFICER 30 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, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Des Moines, Iowa February 15, 1999 31 FBL FINANCIAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, -------------------------------- 1998 1997 -------------- -------------- ASSETS Investments: Fixed maturities: Held for investment, at amortized cost (market: 1998 - $516,729; 1997 - $663,315)............................................................ $ 492,288 $ 639,598 Available for sale, at market (amortized cost: 1998 - $1,862,861; 1997 - $1,629,950).......................................................... 1,950,044 1,711,578 Equity securities, at market (cost: 1998 - $39,589; 1997 - $60,500)....... 35,287 57,736 Mortgage loans on real estate............................................. 299,372 323,605 Investment real estate, less allowances for depreciation of $4,223 in 1998 and $2,682 in 1997...................................................... 40,679 39,942 Policy loans.............................................................. 123,328 121,941 Other long-term investments............................................... 10,210 14,438 Short-term investments.................................................... 80,228 32,073 -------------- -------------- Total investments............................................................ 3,031,436 2,940,911 Cash and cash equivalents.................................................... 4,516 2,397 Securities and indebtedness of related parties............................... 65,291 64,442 Accrued investment income.................................................... 34,318 33,894 Accounts and notes receivable................................................ 833 1,401 Amounts receivable from affiliates........................................... 4,020 3,656 Reinsurance recoverable...................................................... 4,711 9,789 Deferred policy acquisition costs............................................ 203,581 181,916 Value of insurance in force acquired......................................... 14,533 16,044 Property and equipment, less allowances for depreciation of $37,100 in 1998 and $48,847 in 1997....................................................... 55,250 63,481 Current income taxes recoverable............................................. 13,185 11,925 Goodwill, less accumulated amortization of $3,484 in 1998 and $2,792 in 1997...................................................................... 9,948 10,640 Other assets................................................................. 19,227 15,949 Assets of discontinued operations............................................ -- 106,672 Assets held in separate accounts............................................. 190,111 138,409 -------------- -------------- Total assets......................................................... $ 3,650,960 $ 3,601,526 ============== ==============
32 FBL FINANCIAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS)
DECEMBER 31, -------------------------------- 1998 1997 -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Policy liabilities and accruals: Future policy benefits: Interest sensitive products.......................................... $ 1,596,471 $ 1,578,794 Traditional life insurance and accident and health products.......... 731,873 711,722 Unearned revenue reserve............................................. 25,373 23,530 Other policy claims and benefits........................................ 10,625 13,488 -------------- -------------- 2,364,342 2,327,534 Other policyholders' funds: Supplementary contracts without life contingencies...................... 147,755 137,398 Advance premiums and other deposits..................................... 84,206 85,280 Accrued dividends....................................................... 13,797 13,801 -------------- -------------- 245,758 236,479 Short-term debt........................................................... 24,500 -- Short-term debt payable to affiliate...................................... 8,626 -- Amounts payable to affiliates............................................. 511 60 Long-term debt............................................................ 71 24,577 Deferred income taxes..................................................... 46,497 43,592 Other liabilities......................................................... 85,453 44,939 Liabilities of discontinued operations.................................... -- 79,118 Liabilities related to separate accounts.................................. 190,111 138,409 -------------- -------------- Total liabilities.................................................... 2,965,869 2,894,708 Commitments and contingencies Minority interest in subsidiaries: Company-obligated mandatorily redeemable preferred stock of subsidiary trust..................................................... 97,000 97,000 Other..................................................................... 4,503 4,503 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 31,512,113 shares in 1998 and 34,732,448 shares in 1997................................................................. 42,034 42,907 Class B common stock, without par value - authorized 1,500,000 shares, issued and outstanding 1,192,990 shares................................. 7,558 7,567 Accumulated other comprehensive income.................................... 50,050 48,559 Retained earnings......................................................... 480,946 503,282 -------------- -------------- Total stockholders' equity.............................................. 583,588 605,315 -------------- -------------- Total liabilities and stockholders' equity........................... $ 3,650,960 $ 3,601,526 ============== ==============
See accompanying notes. 33 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenues: Interest sensitive product charges ......................... $ 52,157 $ 47,979 $ 43,654 Traditional life insurance and accident and health premiums 93,473 92,528 92,780 Net investment income ...................................... 228,067 220,366 208,265 Realized gains (losses) on investments ..................... (4,878) 40,953 52,760 Other income ............................................... 20,802 19,525 15,914 ----------- ----------- ----------- Total revenues ........................................... 389,621 421,351 413,373 Benefits and expenses: Interest sensitive product benefits ........................ 122,527 122,729 119,186 Traditional life insurance and accident and health benefits 55,880 56,369 53,864 Increase in traditional life and accident and health future policy benefits .......................................... 21,264 27,173 25,875 Distributions to participating policyholders ............... 25,818 25,852 26,152 Underwriting, acquisition and insurance expenses ........... 63,983 61,583 57,261 Interest expense ........................................... 1,690 1,493 912 Other expenses ............................................. 15,453 11,565 11,223 ----------- ----------- ----------- Total benefits and expenses .............................. 306,615 306,764 294,473 ----------- ----------- ----------- 83,006 114,587 118,900 Income taxes .................................................. (26,404) (38,367) (38,660) Minority interest in earnings of subsidiaries: Dividends on company-obligated mandatorily redeemable preferred stock of subsidiary trust ...................... (4,850) (2,829) -- Other ...................................................... (335) (351) (542) Equity income, net of related income taxes .................... 1,258 2,088 4,351 ----------- ----------- ----------- Income from continuing operations ............................. 52,675 75,128 84,049 Discontinued operations: Income (loss) from property-casualty operations, net of related income taxes ..................................... 287 699 (1,165) Gain on disposal of property-casualty operations, net of related income taxes ..................................... 978 -- -- ----------- ----------- ----------- Net income .................................................... 53,940 75,827 82,884 Dividends on Series A and B preferred stock ................... (150) (2,171) (2,250) ----------- ----------- ----------- Net income applicable to common stock ......................... $ 53,790 $ 73,656 $ 80,634 =========== =========== =========== Earnings per common share: Income from continuing operations .......................... $ 1.56 $ 2.01 $ 1.90 Income (loss) from discontinued operations ................. 0.04 0.02 (0.03) ----------- ----------- ----------- Earnings per common share .................................. $ 1.60 $ 2.03 $ 1.87 =========== =========== =========== Earnings per common share - assuming dilution: Income from continuing operations .......................... $ 1.52 $ 1.97 $ 1.89 Income (loss) from discontinued operations ................. 0.04 0.02 (0.03) ----------- ----------- ----------- Earnings per common share - assuming dilution .............. $ 1.56 $ 1.99 $ 1.86 =========== =========== ===========
See accompanying notes. 34 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
COMMON STOCK AND ACCUMULATED CLASS A CLASS B ADDITIONAL OTHER TOTAL PREFERRED COMMON COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' STOCK STOCK STOCK CAPITAL INCOME EARNINGS EQUITY ---------- ---------- ---------- ---------- ------------- --------- ------------ Balance at January 1, 1996 .. $ -- $ -- $ -- $ 146,481 $ 37,807 $ 380,010 $ 564,298 Comprehensive income: Net income for 1996 ....... -- -- -- -- -- 82,884 82,884 Change in net unrealized investment gains/losses . -- -- -- -- (9,949) -- (9,949) ---------- Total comprehensive income . 72,935 Recapitalization and conversion of common stock -- 139,157 7,324 (146,481) -- -- -- Exchange of common stock for preferred stock ....... 100,000 (100,000) -- -- -- -- -- Adjustment resulting from capital transaction of equity investee ........... -- 4,616 243 -- -- -- 4,859 Dividends on preferred stock .................. -- -- -- -- -- (2,250) (2,250) Dividends on common stock .. -- -- -- -- -- (1,320) (1,320) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1996 100,000 43,773 7,567 -- 27,858 459,324 638,522 Comprehensive income: Net income for 1997 ....... -- -- -- -- -- 75,827 75,827 Change in net unrealized investment gains/losses . -- -- -- -- 20,701 -- 20,701 ---------- Total comprehensive income . 96,528 Purchase of Series A preferred stock ........... (100,000) -- -- -- -- -- (100,000) Issuance of Series B preferred stock ........... 3,000 -- -- -- -- -- 3,000 Purchase of 1,930,740 shares of common stock .... -- (2,402) -- -- -- (22,432) (24,834) Issuance of 136,578 shares of common stock under stock option plan, including related income tax benefit ............... -- 1,536 -- -- -- -- 1,536 Dividends on preferred stock .................... -- -- -- -- -- (2,171) (2,171) Dividends on common stock .. -- -- -- -- -- (7,266) (7,266) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1997 3,000 42,907 7,567 -- 48,559 503,282 605,315 Comprehensive income: Net income for 1998 ....... -- -- -- -- -- 53,940 53,940 Change in net unrealized investment gains/losses . -- -- -- -- 1,491 -- 1,491 ---------- Total comprehensive income . 55,431 Acquisition of 2,536,112 shares of common stock in exchange for properties ... -- (3,340) -- -- -- (42,310) (45,650) Purchase of 961,536 shares of common stock ........... -- (1,224) -- -- -- (23,784) (25,008) Issuance of 277,313 shares of common stock under stock option plan, including related income tax benefit ............... -- 3,742 -- -- -- -- 3,742 Adjustment resulting from capital transactions of equity investee ........... -- (51) (9) -- -- -- (60) Dividends on preferred stock .................... -- -- -- -- -- (150) (150) Dividends on common stock .. -- -- -- -- -- (10,032) (10,032) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1998 $ 3,000 $ 42,034 $ 7,558 $ -- $ 50,050 $ 480,946 $ 583,588 ========== ========== ========== ========== ========== ========== ==========
See accompanying notes. 35 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- OPERATING ACTIVITIES Continuing operations: Net income .................................................. $ 52,675 $ 75,128 $ 84,049 Adjustments to reconcile net income to net cash provided by continuing operations: Adjustments related to interest sensitive products: Interest credited to account balances ................ 105,604 107,238 105,176 Charges for mortality and administration ............. (52,050) (48,468) (44,981) Deferral of unearned revenues ........................ 2,607 2,417 1,858 Amortization of unearned revenue reserve ............. (888) (775) (531) Provision for depreciation and amortization .............. 10,629 17,276 15,435 Net losses (gains) related to investments held by broker-dealer and investment company subsidiaries .... 326 (1,130) (3,272) Realized losses (gains) on investments ................... 4,878 (40,953) (52,760) Increase in traditional life and accident and health benefit accruals ..................................... 22,305 26,921 25,842 Policy acquisition costs deferred ........................ (31,081) (30,111) (25,493) Amortization of deferred policy acquisition costs ........ 10,171 8,474 8,667 Provision for deferred income taxes ...................... 3,051 (8,552) 3,601 Other .................................................... 19,830 (9,240) 8,088 ----------- ----------- ----------- Net cash provided by continuing operations ...................... 148,057 98,225 125,679 Discontinued operations: Net income (loss) ........................................... 1,265 699 (1,165) Adjustments to reconcile net income (loss) to net cash provided by discontinued operations ...................... 1,207 7,144 18,962 ----------- ----------- ----------- Net cash provided by discontinued operations .................... 2,472 7,843 17,797 ----------- ----------- ----------- Net cash provided by operating activities ....................... 150,529 106,068 143,476 INVESTING ACTIVITIES Sale, maturity or repayment of investments: Fixed maturities - held for investment ...................... 151,298 49,961 42,855 Fixed maturities - available for sale ....................... 280,324 288,893 253,801 Equity securities ........................................... 24,843 115,742 102,237 Mortgage loans on real estate ............................... 75,887 48,059 29,086 Investment real estate ...................................... 1,349 1,191 5,075 Policy loans ................................................ 28,423 27,513 25,754 Other long-term investments ................................. 2,152 660 10,951 Short-term investments - net ................................ -- 38,870 -- ----------- ----------- ----------- 564,276 570,889 469,759
36 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- INVESTING ACTIVITIES (CONTINUED) Acquisition of investments: Fixed maturities - held for investment ....................... $ -- $ -- $ (52,614) Fixed maturities - available for sale ........................ (513,992) (422,178) (440,156) Equity securities ............................................ (5,644) (50,368) (29,631) Mortgage loans on real estate ................................ (51,883) (78,703) (56,295) Investment real estate ....................................... (3,096) (10,208) (5,001) Policy loans ................................................. (29,810) (30,458) (28,643) Other long-term investments .................................. (1,726) (4,960) (946) Short-term investments - net ................................. (48,155) -- (21,529) ----------- ----------- ----------- (654,306) (596,875) (634,815) Proceeds from disposal, repayments of advances and other distributions from equity investees .......................... 6,254 16,519 37,058 Investments in and advances to equity investees .................. (5,505) (41,018) (10,396) Net cash paid for acquisitions ................................... -- (9,694) -- Net proceeds from sale of discontinued operations ................ 24,844 -- -- Net purchases of property and equipment and other ................ (26,680) (13,249) (10,867) Investing activities of discontinued operations .................. (2,474) (8,356) (33,374) ----------- ----------- ----------- Net cash used in investing activities ............................ (93,591) (81,784) (182,635) FINANCING ACTIVITIES Receipts from interest sensitive and variable products credited to policyholder account balances ............................. 260,949 258,919 220,328 Return of policyholder account balances on interest sensitive and variable products ........................................ (286,469) (247,823) (185,627) Proceeds from short-term debt with affiliate ..................... 8,626 -- -- Proceeds from long-term debt ..................................... -- -- 24,500 Repayments of long-term debt ..................................... (6) (4) (12,523) Distributions on company-obligated mandatorily redeemable preferred stock of subsidiary trust .......................... (4,850) (2,829) -- Other distributions to minority interests ........................ (335) (663) (366) Purchase of common stock ......................................... (25,008) (24,834) -- Issuance of common stock ......................................... 2,456 1,201 -- Dividends paid ................................................... (10,182) (9,437) (3,570) ----------- ----------- ----------- Net cash provided by (used in) financing activities .............. (54,819) (25,470) 42,742 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents ................. 2,119 (1,186) 3,583 Cash and cash equivalents at beginning of year ................... 2,397 3,583 -- ----------- ----------- ----------- Cash and cash equivalents at end of year ......................... $ 4,516 $ 2,397 $ 3,583 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest ..................................................... $ 1,676 $ 1,486 $ 836 Income taxes ................................................. 23,683 56,592 25,415
See accompanying notes. 37 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS FBL Financial Group, Inc. (the Company) operates predominantly in the life insurance industry through its principal subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life), Western Farm Bureau Life Insurance Company (Western Life) and EquiTrust Life Insurance Company (EquiTrust) (collectively, the Life Companies). The Company currently markets individual life insurance policies and annuity contracts to Farm Bureau members and other individuals and businesses in 14 midwestern and western states. Variable insurance and annuity contracts are also marketed in other states through alliances with other insurance companies and a regional broker/dealer. Several subsidiaries support various functional areas of the Life Companies and other affiliates, by providing investment advisory, marketing and distribution, and leasing services. On March 31, 1998, the Company sold its wholly-owned subsidiary, Utah Farm Bureau Insurance Company (Utah Insurance), to Farm Bureau Mutual Insurance Company (Farm Bureau Mutual), an affiliate. As a result of the sale, the Company no longer has property-casualty operations. Financial information herein has been restated to reflect the operations of Utah Insurance as discontinued. See Note 14, "Discontinued Operations." CONSOLIDATION The consolidated financial statements include the financial statements of the Company and its direct and indirect subsidiaries. All significant intercompany transactions have been eliminated. INVESTMENTS FIXED MATURITIES AND EQUITY SECURITIES Fixed maturity securities, comprised of bonds and redeemable preferred stocks, that the Company has the positive intent and ability to hold to maturity are designated as "held for investment." Held for investment securities are reported at cost adjusted for amortization of premiums and discounts. Changes in the market value of these securities, except for declines that are other than temporary, are not reflected in the Company's financial statements. Fixed maturity securities which may be sold are designated as "available for sale." Available for sale securities are reported at market value and unrealized gains and losses on these securities are included directly in stockholders' equity as a component of accumulated other comprehensive income. The unrealized gains and losses included in accumulated other comprehensive income are reduced by a provision for deferred income taxes and adjustments to deferred policy acquisition costs, value of insurance in force acquired and unearned revenue reserve that would have been required as a charge or credit to income had such amounts been realized. Premiums and discounts are amortized/accrued using methods which result in a constant yield over the securities' expected lives. Amortization/accrual of premiums and discounts on mortgage and asset-backed securities incorporates prepayment assumptions to estimate the securities' expected lives. Equity securities, comprised of common and non-redeemable preferred stocks, are reported at market value. The change in unrealized appreciation and depreciation of equity securities is included directly in stockholders' equity, net of any related deferred income taxes, as a component of accumulated other comprehensive income. 38 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 the value of any mortgage loan is determined to be impaired (i.e., when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to its fair value, which may be based upon the present value of expected future cash flows from the loan (discounted at the loan's effective interest rate), or the fair value of the underlying collateral. The carrying value of impaired loans is reduced by the establishment of a valuation allowance, changes to which are recognized as realized gains or losses on investments. Interest income on impaired loans is recorded on a cash basis. 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 the consolidated balance sheets, is recorded at the lower of cost (which includes the balance of the mortgage loan, any accrued interest and any costs incurred to obtain title to the property) or fair value as determined at or before the foreclosure date. The carrying value of these assets is subject to regular review. If the fair value, less estimated sales costs, of real estate owned decreases to an amount lower than its carrying value, a valuation allowance is established for the difference. This valuation allowance can be reduced or eliminated should the fair value of the property increase. Changes in this valuation allowance are recognized as realized gains or losses on investments. The Company had a valuation allowance on its investment real estate totaling $0.1 million at December 31, 1997. No allowance was recorded at December 31, 1998. OTHER 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 certain nontraditional investments and securities held by subsidiaries engaged in the broker-dealer or venture capital investment company industries. Nontraditional investments include a debt-related instrument and investment deposits which are reported at cost. In accordance with accounting practices for the broker-dealer and investment company industries, marketable securities held by subsidiaries in these industries are valued at market value if readily marketable or at fair value, as determined by the Board of Directors of the subsidiary holding the security, if not readily marketable. The resulting difference between cost and market is included in the statements of income as net investment income. Realized gains and losses are also reported as a component of net investment income. The Company recorded transfers from its venture capital subsidiary, which was dissolved during 1997, at fair value on the date of transfer, re-establishing a new cost basis for the security. Securities and indebtedness of related parties include investments in partnerships and corporations over which the Company may exercise significant influence. Such investments are accounted for using the equity method. Changes in the value of the Company's investment in equity investees attributable to capital transactions of the investee, such as an additional offering of stock, are recorded directly to stockholders' equity. Securities and indebtedness of related parties also includes advances and loans to the partnerships and corporations which are principally reported at cost. REALIZED GAINS AND LOSSES ON INVESTMENTS The carrying values of all the Company's investments are reviewed on an ongoing basis for credit deterioration, and if this review indicates a decline in market value that is other than temporary, the Company's carrying value in the investment is reduced to its estimated realizable value (the sum of the estimated nondiscounted cash flows for securities or fair value for mortgage loans on real estate) 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 the Company expects 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. 39 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 redeemable preferred stock and equity securities are based on the latest quoted market prices, or for those not readily marketable, generally at values which are representative of the market values of comparable issues. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. 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 rates that range from 5.91% to 6.79%. 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 home office properties (prior to March 30, 1998, see Note 2), furniture, equipment and capitalized software costs, are reported at cost less allowances for depreciation and amortization. Depreciation and amortization expense are computed primarily using the straight-line method over the estimated useful lives of the assets. Depreciation and amortization expense for 1998, 1997 and 1996 was $11.4 million, $11.0 million and $10.0 million, respectively. GOODWILL Goodwill represents the excess of the fair value of assets exchanged over the net assets acquired. Goodwill is generally being amortized on a straight-line basis over a period of 20 years. The carrying value of goodwill is regularly reviewed for indicators of impairment in value, which in the view of management are other than temporary. If facts and circumstances suggest that goodwill is impaired, the Company assesses the fair value of the underlying business and reduces goodwill to an amount that results in the book value of the underlying business approximating fair value. The Company has not recorded any such writedowns during 1998, 1997 or 1996. FUTURE POLICY BENEFITS The liability for future policy benefits for participating traditional life insurance is based on net level premium reserves, including assumptions as to interest, mortality, and other assumptions underlying the guaranteed policy cash values. Reserve interest assumptions are level and range from 2.5% to 6.0%. The average rate of assumed investment yields used in estimating gross margins was 8.03% in 1998, 8.15% in 1997 and 8.34% in 1996. Accrued dividends for participating business are established for anticipated amounts earned to date for the period through the policy's next anniversary and are provided for as a separate liability. The declaration of future dividends for participating business is at the discretion of the Board of Directors. Participating business accounted for 41% of 40 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) receipts from policyholders during the year ended December 31, 1998 and represented 18% of life insurance inforce at December 31, 1998. Participating business accounted for 42% of receipts from policyholders during the year ended December 31, 1997 and represented 19% of life insurance inforce at December 31, 1997. 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. Future policy benefit reserves for interest sensitive products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. 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 4.00% to 6.50% in 1998, from 4.00% to 7.00% in 1997 and from 4.00% to 7.50% in 1996. 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 the Company's insurance subsidiaries by guaranty associations in most states in which the subsidiaries are licensed. These assessments are to cover losses of policyholders of insolvent or rehabilitated companies. In some states, these assessments can be partially recovered through a reduction in future premium taxes. During 1997, the Company adopted Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments", which requires the accrual of such assessments. Prior to 1997, the Company recognized its obligation for guaranty fund assessments when such assessments were received and an asset was recorded for future premium tax offsets on assessments paid. The impact of adopting SOP 97-3 was not separately reported as a change in accounting principles because the impact of adoption was not material to the Company. At December 31, 1998 and 1997, the Company had undiscounted reserves of $1.3 million and $2.8 million, respectively, to cover estimated future assessments on known insolvencies. The Company had assets totaling $3.1 million and $3.9 million at December 31, 1998 and 1997, respectively, representing estimated premium tax offsets on paid and future assessments. Expenses (credits) incurred for guaranty fund assessments, net of related premium tax offsets, totaled ($1.2) million, $1.9 million (including $1.6 million related to the adoption of SOP 97-3) and $0.1 million during 1998, 1997 and 1996, respectively. It is estimated future guaranty fund assessments on known insolvencies will be paid during the three year period ended December 31, 2001 and substantially all the related future premium tax offsets will be realized during the six year period ended December 31, 2004. The Company believes the reserve for guaranty fund assessments is sufficient to provide for future assessments based upon known insolvencies and projected premium levels. DEFERRED INCOME TAXES Deferred 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 the accompanying consolidated balance sheets represent funds that are separately administered, principally for the benefit of certain policyholders who 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. 41 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) RECOGNITION OF PREMIUM REVENUES AND COSTS Revenues for interest sensitive and variable products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Expenses related to these products include interest credited to policyholder account balances and benefit claims incurred in excess of policyholder account balances. 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. REINSURANCE The Company uses reinsurance to manage certain risks associated with its insurance operations. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential risks arising from large losses and provide additional capacity for growth. The Company's life insurance operations cede reinsurance to various reinsurers. The cost of reinsurance is generally amortized over the contract periods of the reinsurance agreements. OTHER INCOME AND OTHER EXPENSES Other income and other expenses include revenue and expenses generated by the Company's various non-insurance subsidiaries for investment advisory, marketing and distribution, and leasing services. A portion of these activities are performed on behalf of affiliates of the Company. In addition, certain revenue generated by the Company's insurance subsidiaries have been classified as other income. During 1998, 1997 and 1996, revenues of the insurance subsidiaries included as other income aggregated $1.4 million, $4.0 million and $2.9 million, respectively. Lease income from leases with affiliates totaled $5.8 million, $3.0 million and $2.4 million for 1998, 1997 and 1996, respectively. Investment advisory fee income from affiliates totaled $1.3 million, $1.2 million and $0.9 million for 1998, 1997 and 1996, respectively. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Statement of Financial Accounting Standard (Statement) No. 130, "Reporting Comprehensive Income." Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income or stockholders' equity. Statement No. 130 requires unrealized gains and losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. Other comprehensive income excludes net investment gains (losses) included in net income which merely represent transfers from unrealized to realized gains and losses. These amounts totaled ($0.9) million in 1998, $26.5 million in 1997 and $38.1 million in 1996. Such amounts, which have been measured through the date of sale, are net of income taxes and adjustments to deferred policy acquisition costs, value of insurance inforce acquired and unearned revenue reserve totaling $0.5 million in 1998, ($15.3) million in 1997 and ($19.5) million in 1996. SEGMENT INFORMATION At December 31, 1998, the Company adopted Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information." Statement No. 131 establishes standards for reporting information about operating segments, products and markets. Generally, Statement No. 131 requires financial information to be reported on the basis on which it is used internally for evaluating segment performance and deciding how to allocate resources to segments. Adoption of Statement No. 131 increased the number of the Company's reportable segments. See Note 15, "Segment Information." 42 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) RECLASSIFICATIONS Certain amounts in the 1997 and 1996 consolidated financial statements have been reclassified to conform to the 1998 financial statement presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, significant estimates and assumptions are utilized in the calculation of deferred policy acquisition costs, policyholder liabilities and accruals and valuation allowances on investments. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the consolidated financial statements. PENDING ACCOUNTING CHANGES In March 1998, SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", was issued. The Company plans to adopt the SOP effective on January 1, 1999. The SOP requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company currently capitalizes external software development costs and charges internal costs, primarily payroll and related items, to expense as they are incurred. Under the SOP, these internal costs will be capitalized. The Company has not yet determined the impact of adopting this SOP. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Accounting for gains or losses resulting from changes in the values of those derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. Statement No. 133 also allows companies to transfer securities classified as held for investment to either the available-for-sale or trading categories in connection with the adoption of the new standard. The Statement is effective for the Company in the year 2000, with earlier adoption encouraged. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. 2. STOCKHOLDERS' EQUITY AND MINORITY INTEREST On March 12, 1996, the Company's stockholders approved a change to the Company's capital structure and a related revision to the Company's Articles of Incorporation (the Recapitalization). The restated Articles of Incorporation authorize the Company to issue 88,500,000 shares of Class A common stock, without par value; 1,500,000 shares of Class B common stock, without par value, and 10,000,000 shares of preferred stock. Pursuant to the Recapitalization, each outstanding share of common stock prior to Recapitalization was converted on a pro rata basis to 1,900 shares of Class A common stock and 100 shares of Class B common stock. On April 29, 1996, the Company designated 5,000,000 shares of its preferred stock as Series A preferred stock and on July 18, 1996, such shares were issued in exchange for 5,000,000 shares of Class A common stock. The Series A preferred stock paid quarterly cash dividends of $0.25 per share and had voting rights identical to that of Class A common stock. As described below, the Series A preferred stock was redeemed during 1997. On May 30, 1997, FBL Financial Group Capital Trust (the Trust), a consolidated wholly-owned subsidiary of the Company, issued $97.0 million of 5% Preferred Securities to the Company's majority stockholder, the Iowa Farm Bureau Federation. In connection with the Trust's issuance of the 5% Preferred Securities and the related purchase by the Company of all of the Trust's common securities, the Company issued to the Trust $100.0 million principal amount of its 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the Notes). The sole assets of the Trust are and will be the Notes and any interest accrued thereon. The interest payment dates on the Notes correspond to the distribution dates on the 5% Preferred Securities. The 5% Preferred Securities, which have a liquidation value of $1,000.00 per share plus accrued and unpaid distributions, mature simultaneously with the Notes. As of December 31, 1998, 97,000 shares of 5% Preferred Securities were outstanding, all of which are unconditionally guaranteed by the Company. 43 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Concurrent with the issuance of the 5% Preferred Securities, the Company purchased from the Iowa Farm Bureau Federation the Company's Series A preferred stock at its liquidation value of $100.0 million. In addition, the Company issued 5,000,000 shares of Series B preferred stock to the Iowa Farm Bureau Federation for $3.0 million. Each share of Series B preferred stock has a liquidation preference of $0.60 and voting rights identical to that of Class A common stock. The Series B preferred stock pays cumulative annual cash dividends of $0.03 per share, payable quarterly, and is redeemable by the Company, at the option of the Company, at $0.60 per share plus unpaid dividends if the stock ceases to be beneficially owned by a Farm Bureau organization. The purchase of Series A preferred stock and simultaneous issuance of Series B preferred stock and 5% Preferred Securities were treated as noncash transactions for purposes of the 1997 statement of cash flows. On March 30, 1998, the Company exchanged a subsidiary owning its home office properties for 2,536,112 unregistered shares of Class A common stock owned by the Iowa Farm Bureau Federation. The value of the transaction, which was structured as a tax-free exchange of a real estate subsidiary, was $45.7 million, or $18.00 per common share. The book value of the properties was $24.7 million on the date of the exchange. The Company is leasing a portion of the properties back from a wholly-owned subsidiary of the Iowa Farm Bureau Federation under a 15-year operating lease. A gain on the transaction of approximately $21.0 million was deferred by the Company and is being amortized over the term of the operating lease. The transaction was accounted for as a noncash financing activity for purposes of the 1998 statement of cash flows. On March 17, 1998, the Company's Board of Directors approved a two-for-one common stock split payable in the form of a 100% stock dividend to stockholders of record as of April 6, 1998. The additional shares were distributed April 17, 1998. As required by the Company's Articles of Incorporation, holders of the Class B common stock received Class A common shares in payment of the stock dividend. In addition, the 5.0 million shares of Series B preferred stock have non-dilutive voting rights. As a result, voting rights on these shares increased proportionately while the number of shares outstanding did not change. All references to the number of common shares and per share amounts in this report have been restated to reflect the effect of the stock dividend. During 1998 and 1997, the Company repurchased 961,536 and 1,930,740 shares, respectively, of Class A common stock in accordance with repurchase plans approved by the Board of Directors. The cost of the repurchases totaled $25.0 million in 1998 and $24.8 million in 1997. Of the shares repurchased, 2,701,476 were unregistered shares owned by various Farm Bureau entities. The purchase amounts were allocated partly to Class A common stock based on the average common stock balance per share on the acquisition dates with the remainder allocated to retained earnings. During 1998, 1997 and 1996, the Company paid cash dividends totaling $0.30, $0.20 and $0.04 per common share, respectively. Holders of the Class A common stock and Series preferred stock, together as a group, and Class B common stock vote as separate classes on all issues. Only holders of the Class A common stock and Series preferred stock vote for the election of Class A Directors (three to five) and only holders of the Class B common stock vote for the election of Class B Directors (ten to twenty). Voting for the Directors is noncumulative. In addition, various ownership aspects of the Company's Class B common stock are governed by a Class B Shareholder Agreement which results in the Iowa Farm Bureau Federation, which owns 65.3% of the Company's voting stock as of December 31, 1998, maintaining control of the Company. Holders of Class A common stock and Class B common stock are entitled to share ratably on a share-for-share basis with respect to common stock dividends. 44 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 market value information on fixed maturities and equity securities at December 31, 1998 and 1997:
HELD FOR INVESTMENT --------------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED AMORTIZED COST GAINS LOSSES MARKET VALUE -------------- -------------- -------------- -------------- DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) Bonds: Corporate securities .................... $ 5,008 $ 542 $ (8) $ 5,542 Mortgage-backed securities .............. 487,280 24,690 (783) 511,187 -------------- -------------- -------------- -------------- Total fixed maturities ...................... $ 492,288 $ 25,232 $ (791) $ 516,729 ============== ============== ============== ============== AVAILABLE FOR SALE --------------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED AMORTIZED COST GAINS LOSSES MARKET VALUE -------------- -------------- -------------- -------------- DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) Bonds: United States Government and agencies ... $ 81,674 $ 5,375 $ (4) $ 87,045 State, municipal and other governments .. 61,194 2,516 (101) 63,609 Public utilities ........................ 137,640 9,626 (536) 146,730 Corporate securities .................... 959,689 64,729 (16,985) 1,007,433 Mortgage and asset-backed securities .... 592,115 24,526 (1,129) 615,512 Redeemable preferred stock .................. 30,549 741 (1,575) 29,715 -------------- -------------- -------------- -------------- Total fixed maturities ...................... $ 1,862,861 $ 107,513 $ (20,330) $ 1,950,044 ============== ============== ============== ============== Equity securities ........................... $ 39,589 $ 748 $ (5,050) $ 35,287 ============== ============== ============== ============== HELD FOR INVESTMENT --------------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED AMORTIZED COST GAINS LOSSES MARKET VALUE -------------- -------------- -------------- -------------- DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) Bonds: Corporate securities .................... $ 5,008 $ 814 $ (8) $ 5,814 Mortgage-backed securities .............. 634,590 24,721 (1,810) 657,501 -------------- -------------- -------------- -------------- Total fixed maturities ...................... $ 639,598 $ 25,535 $ (1,818) $ 663,315 ============== ============== ============== ==============
45 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AVAILABLE FOR SALE --------------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED AMORTIZED COST GAINS LOSSES MARKET VALUE -------------- -------------- -------------- -------------- DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) Bonds: United States Government and agencies ... $ 93,721 $ 2,040 $ (146) $ 95,615 State, municipal and other governments .. 46,767 1,382 (128) 48,021 Public utilities ........................ 138,328 6,682 (495) 144,515 Corporate securities .................... 846,252 62,131 (6,468) 901,915 Mortgage and asset-backed securities .... 477,091 16,491 (1,308) 492,274 Redeemable preferred stock .................. 27,791 1,576 (129) 29,238 -------------- -------------- -------------- -------------- Total fixed maturities ...................... $ 1,629,950 $ 90,302 $ (8,674) $ 1,711,578 -------------- -------------- -------------- -------------- Equity securities ........................... $ 60,500 $ 4,647 $ (7,411) $ 57,736 ============== ============== ============== ==============
Short-term investments have been excluded from the above schedules as amortized cost approximates market value for these securities. The carrying value and estimated market value of the Company's portfolio of fixed maturity securities at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
HELD FOR INVESTMENT AVAILABLE FOR SALE -------------------------------- -------------------------------- ESTIMATED ESTIMATED AMORTIZED COST MARKET VALUE AMORTIZED COST MARKET VALUE -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Due in one year or less ..................... $ -- $ -- $ 15,264 $ 15,342 Due after one year through five years ....... -- -- 201,829 205,364 Due after five years through ten years ...... 5,008 5,542 377,892 396,558 Due after ten years ......................... -- -- 645,212 687,553 -------------- -------------- -------------- -------------- 5,008 5,542 1,240,197 1,304,817 Mortgage and asset-backed securities ........ 487,280 511,187 592,115 615,512 Redeemable preferred stocks ................. -- -- 30,549 29,715 -------------- -------------- -------------- -------------- $ 492,288 $ 516,729 $ 1,862,861 $ 1,950,044 ============== ============== ============== ==============
46 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net unrealized investment gains on equity securities and fixed maturity securities classified as available for sale were comprised of the following:
DECEMBER 31, ------------------------------- 1998 1997 -------------- -------------- (DOLLARS IN THOUSANDS) Unrealized appreciation on fixed maturity and equity securities available for sale.............................................................. $ 82,881 $ 81,076 Adjustments for assumed changes in amortization pattern of: Deferred policy acquisition costs..................................... (5,264) (6,019) Value of insurance in force acquired.................................. (1,306) (1,061) Unearned revenue reserve.............................................. 585 709 Provision for deferred income taxes....................................... (26,914) (26,146) -------------- -------------- 49,982 48,559 Proportionate share of net unrealized investment gains of equity investees 68 -- -------------- -------------- Net unrealized investment gains........................................... $ 50,050 $ 48,559 ============== ==============
The change 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 $1.2 million in 1998, $16.6 million in 1997 and ($20.9) million in 1996. MORTGAGE LOANS ON REAL ESTATE The Company's mortgage loan portfolio consists principally of commercial mortgage loans. The Company's lending policies require that the loans be collateralized by the value of the related property, establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. The Company has provided an allowance for possible losses against its mortgage loan portfolio. An analysis of this allowance, which consist of specific and general reserves, is as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Balance at beginning of year................................ $ 812 $ 1,128 $ 800 Realized losses......................................... 59 -- 2,983 Uncollectible amounts written off, net of recoveries... -- (316) (2,655) -------------- -------------- -------------- Balance at end of year...................................... $ 871 $ 812 $ 1,128 ============== ============== ==============
Impaired loans (those loans in which the Company does not believe it will collect all amounts due according to the contractual terms of the respective loan agreements) totaled $1.0 million at December 31, 1998 and $0.3 million at December 31, 1997. A valuation allowance totaling $0.4 million at December 31, 1998 and $0.3 million at December 31, 1997 was established on the impaired loans. 47 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NET INVESTMENT INCOME Components of net investment income are as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Fixed maturities: Held for investment ..................................... $ 49,176 $ 53,332 $ 55,662 Available for sale ...................................... 136,269 126,089 111,899 Equity securities .......................................... 2,116 1,283 1,367 Mortgage loans on real estate .............................. 25,895 26,160 24,791 Investment real estate ..................................... 5,822 4,902 5,024 Policy loans ............................................... 7,642 7,587 7,314 Other long-term investments ................................ (42) 3,143 3,860 Short-term investments ..................................... 3,670 4,064 3,519 Other ...................................................... 8,200 4,522 3,678 ----------- ----------- ----------- 238,748 231,082 217,114 Less investment expenses ................................... (10,681) (10,716) (8,849) ----------- ----------- ----------- Net investment income ...................................... $ 228,067 $ 220,366 $ 208,265 =========== =========== ===========
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 and investment company industries, are summarized below:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) REALIZED Fixed maturities - available for sale ....................... $ 318 $ 4,300 $ 1,055 Equity securities ........................................... (1,712) 37,468 56,584 Mortgage loans on real estate ............................... (59) -- (2,983) Investment real estate ...................................... 381 (28) 411 Other long-term investments ................................. -- (300) (154) Securities and indebtedness of related parties .............. (331) (487) (1,387) Notes receivable and other .................................. (3,475) -- (766) ----------- ----------- ----------- Realized gains on investments ............................... $ (4,878) $ 40,953 $ 52,760 =========== =========== =========== UNREALIZED Fixed maturities: Held for investment ...................................... $ 724 $ 8,900 $ (14,385) Available for sale ....................................... 5,555 51,465 (36,577) Equity securities ........................................... (1,538) (14,957) 5,521 ----------- ----------- ----------- Change in unrealized appreciation/depreciation of investments $ 4,741 $ 45,408 $ (45,441) =========== =========== ===========
48 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) An analysis of sales, maturities and principal repayments of the Company's fixed maturities portfolio for 1998, 1997, and 1996 is as follows:
GROSS REALIZED GROSS REALIZED AMORTIZED COST GAINS LOSSES PROCEEDS ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31, 1998 Scheduled principal repayments and calls: Available for sale ................... $ 191,636 $ 170 $ (291) $ 191,515 Held for investment .................. 151,298 -- -- 151,298 Sales - available for sale .............. 85,586 5,965 (2,742) 88,809 ------------- ------------- ------------- ------------- Total ................................ $ 428,520 $ 6,135 $ (3,033) $ 431,622 ============= ============= ============= ============= YEAR ENDED DECEMBER 31, 1997 Scheduled principal repayments and calls: Available for sale ................... $ 175,996 $ 42 $ -- $ 176,038 Held for investment .................. 49,961 -- -- 49,961 Sales - available for sale .............. 108,597 6,457 (2,199) 112,855 ------------- ------------- ------------- ------------- Total ................................ $ 334,554 $ 6,499 $ (2,199) $ 338,854 ============= ============= ============= ============= YEAR ENDED DECEMBER 31, 1996 Scheduled principal repayments and calls: Available for sale ................... $ 155,507 $ -- $ -- $ 155,507 Held for investment .................. 42,855 -- -- 42,855 Sales - available for sale .............. 96,739 5,241 (3,686) 98,294 ------------- ------------- ------------- ------------- Total ............................ $ 295,101 $ 5,241 $ (3,686) $ 296,656 ============= ============= ============= =============
Realized losses totaling $2.8 million in 1998 and $0.5 million in 1996 were incurred as a result of writedowns for other than temporary impairment of fixed maturity securities. No such writedowns were recorded during 1997. Income taxes (credits) during 1998, 1997 and 1996 include a provision of ($1.7) million, $14.3 million and $18.5 million, respectively, for the tax effect of realized gains. OTHER In December 1997, the Company acquired a 35% interest in an unaffiliated life insurance company for $25.0 million. The excess (approximately $5.9 million) of the carrying amount of the investment, which is classified as securities and indebtedness of related parties on the consolidated balance sheets, over the amount of underlying equity in net assets on the acquisition date is attributable to goodwill and is being amortized over a 20 year period. The investment is being accounted for using the equity method. The insurance company underwrites and markets life insurance and annuity products throughout the United States. Also in December 1997, the Company acquired all of the common stock of EquiTrust Life Insurance Company for $9.7 million. EquiTrust Life Insurance Company is a life insurance company licensed in 38 states. Goodwill totaling $1.5 million was recorded in connection with the acquisition and is being amortized over 20 years. In February 1996, an equity investee of the Company completed an initial public offering which resulted in an increase of $4.9 million, net of $2.6 million in taxes, in the Company's share of the investee's stockholders' equity. This increase was credited directly to common stock, allocated proportionately among Class A common stock and Class B common stock based on shares outstanding. Subsequent to the public offering, the Company reclassified the investment to equity securities. The Company has sold its holdings in this investment and realized gains of $2.4 million, $24.3 million and $50.4 during 1998, 1997 and 1996, respectively. At December 31, 1998, affidavits of deposits covering investments with a carrying value totaling $2,139.9 million were on deposit with state agencies to meet regulatory requirements. 49 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 1998, the Company had committed to provide additional funding for mortgage loans on real estate aggregating $11.9 million. These commitments arose in the normal course of business at terms which are comparable to similar investments. The carrying value of investments which have been non-income producing for the twelve months preceding December 31, 1998, include: fixed maturities - $3.7 million; mortgage loans on real estate - $1.0 million; and other long-term investments - $1.6 million. No investment in any person or its affiliates (other than bonds issued by agencies of the United States Government) exceeded ten percent of stockholders' equity at December 31, 1998. 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 in immediate settlement of the instrument. Statement No. 107 also excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements and allows companies to forego the disclosures when those estimates can only be made at excessive cost. Accordingly, the aggregate fair value amounts presented herein are limited by each of these factors and do not purport to represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. 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 nontraditional debt instruments and investment deposits are estimated by discounting expected cash flows using interest rates currently being offered for similar investments. The fair values for investments held by broker-dealer subsidiaries are based on quoted market prices, where available. For holdings that are not actively traded, fair values are determined in good faith by the Board of Directors of the subsidiary holding the security. 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. ASSETS AND LIABILITIES OF SEPARATE ACCOUNTS: Separate account assets and liabilities are reported at estimated fair value in the Company's consolidated balance sheets. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' FUNDS: Fair values of the Company's liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities, deposit administration funds and supplementary contracts) are stated at cash surrender value, the cost the Company would incur to extinguish the liability. The Company is not required to estimate the fair value of its liabilities under other contracts. 50 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHORT-TERM AND LONG-TERM DEBT: The fair values for long-term debt are estimated using discounted cash flow analysis based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. For short-term debt, the carrying value approximates fair value. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED STOCK OF SUBSIDIARY TRUST: Fair values are estimated by discounting expected cash flows using interest rates currently being offered for similar securities. OTHER PREFERRED STOCK: The carrying amount reported in the consolidated balance sheets, which equals redemption value, approximates fair value. The following sets forth a comparison of the fair values and carrying values of the Company's financial instruments subject to the provisions of Statement No. 107:
DECEMBER 31, ------------------------------------------------------------------------- 1998 1997 ----------------------------------- ----------------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE ----------------- ---------------- ---------------- ----------------- (DOLLARS IN THOUSANDS) ASSETS Fixed maturities: Held for investment.................. $ 492,288 $ 516,729 $ 639,598 $ 663,315 Available for sale................... 1,950,044 1,950,044 1,711,578 1,711,578 Equity securities....................... 35,287 35,287 57,736 57,736 Mortgage loans on real estate........... 299,372 311,012 323,605 337,868 Policy loans............................ 123,328 144,264 121,941 131,311 Other long-term investments............. 10,210 10,610 14,438 14,036 Cash and short-term investments......... 84,744 84,744 34,470 34,470 Securities and indebtedness of related parties.............................. 4,812 5,288 5,451 5,829 Assets held in separate accounts........ 190,111 190,111 138,409 138,409 LIABILITIES Future policy benefits.................. $ 1,020,080 $ 996,428 $ 1,013,503 $ 988,535 Other policyholders' funds.............. 230,945 230,945 221,675 221,675 Short-term debt......................... 24,500 24,500 -- -- Short-term debt payable to affiliate.... 8,626 8,626 -- -- Long-term debt.......................... 71 75 24,577 24,583 Liabilities related to separate accounts 190,111 190,111 138,409 138,409 MINORITY INTEREST IN SUBSIDIARIES Company-obligated mandatorily redeemable preferred stock of subsidiary trust.. $ 97,000 $ 53,024 $ 97,000 $ 54,921 Other preferred stock................... 4,503 4,503 4,503 4,503
51 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. REINSURANCE AND POLICY PROVISIONS An analysis of the value of insurance in force acquired for 1998, 1997 and 1996 is as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Excluding impact of net unrealized investment gains and losses: Balance at beginning of year............................. $ 17,105 $ 18,824 $ 18,900 Accretion of interest during the year.................... 973 1,062 1,226 Amortization of asset.................................... (2,239) (2,781) (1,302) -------------- -------------- -------------- Balance prior to impact of net unrealized investment gains and losses............................................... 15,839 17,105 18,824 Impact of net unrealized investment gains and losses........ (1,306) (1,061) 1,104 -------------- -------------- -------------- Balance at end of year...................................... $ 14,533 $ 16,044 $ 19,928 ============== ============== ==============
Net amortization of the value of insurance in force acquired, based on expected future gross profits/margins, for the next five years and thereafter is expected to be as follows: 1999 - $1.0 million; 2000 - $1.1 million; 2001 - $1.1 million; 2002 - $1.0 million; 2003 - $1.0 million; and thereafter, through 2023 - $10.6 million. In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers. Reinsurance coverages for life insurance vary according to the age and risk classification of the insured with retention limits ranging up to $0.5 million of coverage per individual life. The Company does not use financial or surplus relief reinsurance. Life insurance in force ceded on a consolidated basis totaled $1,298.7 million (6.6% of total life insurance in force) at December 31, 1998 and $1,248.6 million (6.8% of total life insurance in force) at December 31, 1997. Reinsurance contracts do not relieve the Company of its obligations to its policyholders. To the extent that reinsuring companies are later unable to meet obligations under reinsurance agreements, the Company's life insurance subsidiaries would be liable for these obligations, and payment of these obligations could result in losses to the Company. To limit the possibility of such losses, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. No allowance for uncollectible amounts has been established against the Company's asset for reinsurance recoverable since none of the receivables are deemed to be uncollectible. Insurance premiums and product charges have been reduced by $5.9 million, $6.0 million and $5.7 million and insurance benefits have been reduced by $2.2 million, $6.6 million and $5.1 million during 1998, 1997 and 1996, respectively, as a result of cession agreements. Prior to 1998, the amount of reinsurance assumed was not significant. In December 1998, the Company assumed a block of ordinary annuity policies with reserves totaling $22.0 million. In addition, beginning in 1998, the Company began assuming variable annuity business from an equity investee through a modified coinsurance arrangement. Product charges from this business were not significant during 1998. 52 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unpaid claims on accident and health policies (entirely 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. 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, ---------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Unpaid claims liability, net of related reinsurance, at beginning of year....................................... $ 21,199 $ 14,801 $ 14,964 Add: Provision for claims occurring in the current year...... 5,520 8,289 5,334 Increase (decrease) in estimated expense for claims occurring in the prior years......................... (519) 3,038 (485) -------------- -------------- -------------- Incurred claim expense during the current year............. 5,001 11,327 4,849 Deduct expense payments for claims occurring during: Current year............................................ 2,200 2,010 1,996 Prior years............................................. 3,294 2,919 3,016 -------------- -------------- -------------- 5,494 4,929 5,012 -------------- -------------- -------------- Unpaid claims liability, net of related reinsurance, at end of year................................................. 20,706 21,199 14,801 Active life reserve........................................ 17,632 16,924 16,419 -------------- -------------- -------------- Net accident and health reserves........................... 38,338 38,123 31,220 Reinsurance ceded.......................................... 612 2,940 2,498 -------------- -------------- -------------- Gross accident and health reserves......................... $ 38,950 $ 41,063 $ 33,718 ============== ============== ==============
Reserves for unpaid claims are developed using industry mortality and morbidity data. One year development on prior year reserves represents Company experience being more or less favorable than that of the industry. Over time, the Company expects its experience with respect to disability income business to be comparable to that of the industry. A certain level of volatility in development is inherent in these reserves since the underlying block of business is relatively small. 6. INCOME TAXES The Company files a consolidated federal income tax return with Utah Insurance, Farm Bureau Life and certain of its subsidiaries and FBL Financial Services, Inc. and its subsidiaries. The companies included in the consolidated federal income tax return each report current income tax expense as allocated under a consolidated tax allocation agreement. Generally, this allocation results in profitable companies recognizing a tax provision as if the individual company filed a separate return and loss companies recognizing benefits to the extent their losses contribute to reduce consolidated taxes. Western Life files a separate federal income tax return. 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. 53 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income tax expenses (credits) are included in the consolidated financial statements as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Taxes provided in consolidated statements of income on: Income from continuing operations before minority interest in earnings of subsidiaries and equity income: Current.............................................. $ 23,432 $ 46,996 $ 35,656 Deferred............................................. 2,972 (8,629) 3,004 -------------- -------------- -------------- 26,404 38,367 38,660 Equity income: Current.............................................. 575 1,048 1,746 Deferred............................................. 79 78 597 -------------- -------------- -------------- 654 1,126 2,343 Taxes provided in consolidated statements of changes in stockholders' equity: Change in net unrealized investment gains/losses - deferred............................................. 1,570 10,734 (5,470) Adjustment resulting from capital transaction of equity investee - deferred.................................. (33) -- 2,617 Adjustment resulting from the issuance of shares under stock option plan - current.......................... (1,286) (335) -- -------------- -------------- -------------- 251 10,399 (2,853) -------------- -------------- -------------- $ 27,309 $ 49,892 $ 38,150 ============== ============== ==============
The effective tax rate on income from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income is different from the prevailing federal income tax rate as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Income from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income.................................................. $ 83,006 $ 114,587 $ 118,900 ============== ============== ============== Income tax at federal statutory rate (35%).................. $ 29,052 $ 40,105 $ 41,615 Tax effect (decrease) of: Dividends on company-obligated mandatorily redeemable preferred stock of subsidiary trust................... (1,698) (990) - Tax-exempt interest income.............................. (280) (336) (397) Tax-exempt dividend income.............................. (229) (1,186) (1,253) State income taxes...................................... (207) 240 231 Other items............................................. (234) 534 (1,536) -------------- -------------- -------------- Income tax expense.......................................... $ 26,404 $ 38,367 $ 38,660 ============== ============== ==============
54 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effect of temporary differences giving rise to the Company's deferred income tax assets and liabilities at December 31, 1998 and 1997, is as follows:
DECEMBER 31, ----------------------------- 1998 1997 ------------- ------------- (DOLLARS IN THOUSANDS) Deferred income tax liabilities: Fixed maturity and equity securities.................................. $ 34,214 $ 35,654 Deferred policy acquisition costs..................................... 57,114 51,955 Value of insurance in force acquired.................................. 5,087 5,613 Other................................................................. 16,747 17,631 ------------- ------------- 113,162 110,853 Deferred income tax assets: Future policy benefits................................................ (44,684) (44,071) Accrued dividends..................................................... (4,045) (3,533) Accrued pension costs................................................. (10,729) (11,485) Other................................................................. (7,207) (8,172) ------------- ------------- (66,665) (67,261) ------------- ------------- Deferred income tax liability............................................. $ 46,497 $ 43,592 ============= =============
Prior to 1984, a portion of current income of the Company's life insurance subsidiaries was not subject to current income taxation, but was accumulated, for tax purposes, in a memorandum account designated as "policyholders' surplus account." The aggregate accumulation in this account at December 31, 1998 was $11.1 million and $0.7 million for Farm Bureau Life and Western Life, respectively. Should the policyholders' surplus account of Farm Bureau Life and Western Life exceed the limitation prescribed by federal income tax law, or should distributions be made by Farm Bureau Life and Western Life to the parent company in excess of $479.1 million and $158.3 million, respectively, such excess would be subject to federal income taxes at rates then effective. Deferred income taxes of $4.2 million have not been provided on amounts included in this memorandum account. 7. CREDIT ARRANGEMENTS As an investor in the Federal Home Loan Bank (FHLB), the Company has the right to borrow up to $54.0 million from the FHLB as of December 31, 1998. As of December 31, 1998 and 1997, the Company had no outstanding debt under this credit arrangement. During 1998, the Company entered into a $12.0 million line of credit with Farm Bureau Mutual in the form of a revolving demand note. Borrowings on the note, which totaled $8.6 million at December 31, 1998, are being used to acquire assets that are leased to certain affiliates, including Farm Bureau Mutual. Interest is payable at a rate equal to the prime rate of a national bank (7.75% at December 31, 1998). Rental income from the related leases includes a provision for interest on the carrying value of the assets. Also during 1998, the Company entered into a $25.0 million short-term line of credit. The line of credit expires on June 30, 1999 and requires the Company to maintain minimum tangible net worth and risk-based capital ratios. The agreement also limits the Company's ability to incur additional indebtedness. As of December 31, 1998, the Company had no outstanding debt under this credit arrangement. The Company's short-term debt consists of a lease-backed note payable with an outstanding balance of $24.5 million at December 31, 1998 and 1997. Interest on the note is charged at a variable rate equal to LIBOR plus 0.31% (5.37% at December 31, 1998) with a maximum rate of 14.0% per annum. The note is due August 1999, and is secured by rentals to be received under certain operating leases with members of the consolidated group and other affiliates. 55 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. RETIREMENT AND COMPENSATION PLANS The Company participates with several affiliates in various defined benefit plans covering substantially all employees. The benefits of these plans are based primarily on years of service and employees' compensation. The Company and affiliates have adopted a policy of allocating the net periodic pension cost of the plans between themselves generally on a basis of time incurred by the respective employees for each employer. Such allocations are reviewed annually. Pension expense aggregated $5.7 million, $6.9 million and $8.6 million for 1998, 1997 and 1996, respectively. The Company participates with several affiliates in a 401(k) defined contribution plan which covers substantially all employees. Beginning in 1998, the Company contributes FBL Financial Group, Inc. stock in amounts equal to 50 percent of employee contributions up to four percent of the annual salary contributed by the employees. Costs are allocated among the affiliates on a basis of time incurred by the respective employees for each employer. Related expense totaled $0.3 million for 1998. The Company has established deferred compensation plans for certain key current and former employees and has certain other benefit plans which provide for retirement and other benefits. These plans have been accrued or funded as deemed appropriate by management of the Company. Certain of the assets related to these plans are on deposit with the Company and amounts relating to these plans are included in the financial statements herein. In addition, certain amounts included in the policy liabilities for interest sensitive products relate to deposit administration funds maintained by the Company on behalf of affiliates offering substantially the same benefit programs as the Company. In addition to benefits offered under the aforementioned benefit plans, the Company and several other affiliates sponsor a plan that provides group term life insurance benefits to retired full-time employees who have worked ten years and attained age 55 while in service with the Company. Postretirement benefit expense is allocated in a manner consistent with pension expense discussed above. Postretirement pension expense aggregated $0.1 million, $0.3 million and $0.1 million for 1998, 1997 and 1996, respectively. 9. STOCK COMPENSATION During 1996, the Company adopted the 1996 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. Option shares granted to officers and employees generally vest over a period up to five years contingent upon continued employment with the Company and have a contractual term of 10 years. Information relating to stock options during 1998, 1997 and 1996 is as follows:
WEIGHTED-AVERAGE NUMBER OF EXERCISE PRICE TOTAL SHARES PER SHARE EXERCISE PRICE -------------- ---------------- --------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Shares granted during 1996 and under option at December 31, 1996....................................... 1,642,464 $ 8.83 $ 14,511 Granted................................................. 137,684 13.04 1,795 Exercised............................................... 136,578 8.79 1,201 Forfeited............................................... 39,898 8.80 351 -------------- -------------- Shares under option at December 31, 1997.................... 1,603,672 9.20 $ 14,754 Granted................................................. 105,143 19.56 2,057 Exercised............................................... 276,807 8.84 2,446 Forfeited............................................... 4,156 16.12 67 -------------- -------------- Shares under option at December 31, 1998.................... 1,427,852 10.01 $ 14,298 ============== ============== Exercisable options: December 31, 1997....................................... 514,330 $ 8.99 $ 4,626 December 31, 1998....................................... 610,258 9.87 6,022
56 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Information regarding stock options outstanding at December 31, 1998 is as follows:
CURRENTLY EXERCISABLE ------------------------------ WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE PRICE EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) PER SHARE NUMBER PER SHARE ------------- -------------- -------------- ------------- -------------- Range of exercise prices: At $8.75..................... 1,149,922 7.49 $ 8.75 517,448 $ 8.75 $8.76 - $14.00............... 155,881 8.01 12.06 52,706 12.00 $14.01 - $19.25.............. 86,630 8.99 18.07 11,588 18.39 $19.26 - $23.25.............. 35,419 9.16 22.36 28,516 22.75 ------------- ------------ $8.75 - $23.25............... 1,427,852 7.68 10.01 610,258 9.87 ============= ============
At December 31, 1998 and 1997, shares of Class A common stock available for grant as additional awards under the Plan totaled 1,658,763 and 1,759,750, respectively. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related Interpretations in accounting for its stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Under the alternative accounting method provided by Statement No. 123, compensation expense is recognized in an amount equal to the estimated fair value of stock options on the date of grant. The Company has not adopted the accounting provisions of 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 the Company's options. Pro forma information regarding net income and earnings per common share is required by Statement No. 123, and has been determined as if the Company had accounted for its stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996:
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1998 1997 1996 ---------------- ---------------- ----------------- Risk-free interest rate....................................... 5.40 % 6.34 % 6.50 % Dividend yield................................................ 1.40 % 1.60 % 1.60 % Volatility factor of the expected market price................ 0.12 0.12 0.12 Weighted-average expected life................................ 4.9 years 5.1 years 5.1 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. The Company's 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. 57 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net earnings and earnings per common share were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1998 1997 1996 --------------- --------------- ---------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income - as reported...................................... $ 53,940 $ 75,827 $ 82,884 Net income - pro forma........................................ 53,273 75,240 82,488 Earnings per common share - as reported....................... 1.60 2.03 1.87 Earnings per common share - pro forma......................... 1.58 2.01 1.86 Earnings per common share - assuming dilution, as reported.... 1.56 1.99 1.86 Earnings per common share - assuming dilution, pro forma...... 1.55 1.98 1.85 Weighted-average fair value of options granted during the year 3.27 2.29 1.77
The pro forma impact is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. 10. STOCKHOLDERS' EQUITY OF SUBSIDIARIES REDEEMABLE PREFERRED STOCK OF SUBSIDIARY Western Life is authorized to issue up to 100,000 shares of redeemable preferred stock in series at $200.00 per share. There were 22,517 preferred shares outstanding at December 31, 1998 and 1997, all of which are currently redeemable at the option of Western Life. Dividends accrue at fixed or variable rates depending on the series and can range from 7.5% to 15.0%. Under certain circumstances and with respect to certain matters, the holders of redeemable preferred stock are entitled to vote separately as a class. The redeemable preferred stock and related dividends are reported as minority interest in subsidiaries in the consolidated financial statements. STATUTORY LIMITATIONS ON SUBSIDIARY DIVIDENDS The ability of Farm Bureau Life and Western Life to pay dividends to the parent company is restricted because prior approval of insurance regulatory authorities is required for payment of dividends to the stockholder which exceed an annual limitation. During 1999, Farm Bureau Life and Western Life could pay dividends to the parent company of approximately $41.0 million and $14.6 million, respectively, without prior approval of insurance regulatory authorities. STATUTORY ACCOUNTING POLICIES The financial statements of the Company's insurance subsidiaries included herein differ from related statutory-basis financial statements principally as follows: (a) the bond portfolio is segregated into held-for-investment (carried at amortized cost) and available-for-sale (carried at fair value) classifications rather than generally being carried at amortized cost; (b) acquisition costs of acquiring new business are deferred and amortized over the life of the policies rather than charged to operations as incurred; (c) future policy benefit reserves for participating traditional life insurance products are based on net level premium methods and guaranteed cash value assumptions which may differ from statutory reserves; (d) future policy benefit reserves on certain interest sensitive products are based on full account values, rather than discounting methodologies utilizing statutory interest rates; (e) deferred income taxes are provided for the difference between the financial statement and income tax bases of assets and liabilities; (f) net realized gains or losses attributed to changes in the level of market interest rates are recognized as gains or losses in the statements of income when the sale is completed rather than deferred and amortized over the remaining life of the fixed maturity security or mortgage loan; (g) declines in the estimated realizable value of investments are charged to the statements of income when such declines are judged to be other than temporary rather than through the establishment of a formula-determined statutory investment reserve (carried as a liability), changes in which are charged directly to surplus; (h) agents' balances and certain other assets designated as "non-admitted assets" for statutory purposes are reported as assets rather than being charged to surplus; (i) revenues for interest sensitive and variable products consist of policy charges for the cost of insurance, policy administration charges, amortization of policy initiation fees and surrender charges assessed rather than premiums received; (j) pension income or expense is recognized in accordance with Statement No. 87, "Employers' Accounting for Pensions" rather than in accordance 58 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) with rules and regulations permitted by the Employee Retirement Income Security Act of 1974; (k) the financial statements of subsidiaries are consolidated with those of the insurance subsidiary; and (l) assets and liabilities are restated to fair values when a change in ownership occurs that is accounted for as a purchase, with provisions for goodwill and other intangible assets, rather than continuing to be presented at historical cost. Net income of the life insurance subsidiaries, as determined in accordance with statutory accounting practices, was $52.5 million, $85.3 million and $83.0 million for 1998, 1997 and 1996, respectively. Statutory net gain from operations for the life insurance subsidiaries, which excludes realized gains and losses, totaled $56.0 million, $46.9 and $43.3 million for 1998, 1997 and 1996, respectively. Statutory capital and surplus, after appropriate elimination of intercompany accounts, totaled $376.9 million at December 31, 1998 and $360.8 million at December 31, 1997. 11. MANAGEMENT AND OTHER AGREEMENTS The Company shares certain office facilities and services with the Iowa Farm Bureau Federation and its affiliated companies. These expenses are allocated by the Company on the basis of cost and time studies that are updated annually and consist primarily of salaries and related expenses, travel, and other operating costs. The Company has management agreements with Farm Bureau Mutual and other affiliates under which the Company provides general business, administrative and management services. Fee income for these services totaled $0.5 million, $0.2 million and $0.2 million during 1998, 1997 and 1996, respectively. In addition, Farm Bureau Management Corporation, a wholly-owned subsidiary of the Iowa Farm Bureau Federation, provides certain management services to the Company under a separate arrangement. During 1998, 1997 and 1996, the Company incurred related expenses totaling $0.7 million, $0.8 million and $2.6 million, respectively. The Company has marketing agreements with the property-casualty companies operating within its marketing territory, including Farm Bureau Mutual and other affiliates. Under the marketing agreements, the property-casualty companies are responsible for development and management of the Company's agency force for a fee equal to a percentage of commissions on first year life insurance premiums and annuity deposits. During 1998, 1997 and 1996, the Company paid $4.5 million, $3.9 million and $3.6 million, respectively, to the property-casualty companies under these arrangements. The Company is licensed by the Iowa Farm Bureau Federation to use the "Farm Bureau" and "FB" designations in Iowa. In connection with this license, royalties of $0.7 million, $0.5 million and $0.4 million were paid to the Iowa Farm Bureau Federation for 1998, 1997 and 1996, respectively. The Company has similar arrangements with Farm Bureau organizations in other states in its market territory. Total royalties paid to Farm Bureau organizations other than the Iowa Farm Bureau Federation for 1998, 1997 and 1996 were $1.0 million, $1.1 million and $0.8 million, respectively. Beginning in 1998, the Company has administrative services agreements with an equity investee under which the Company provides underwriting, claims processing, accounting, compliance and other administrative services relating to certain variable insurance products underwritten by the affiliate. Fee income from performing these services totaled $0.2 million during 1998. 12. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company may be involved in litigation where amounts are alleged that are substantially in excess of contractual policy benefits or certain other agreements. At December 31, 1998, management is not aware of any claims for which a material loss is reasonably possible. The Company leases its home office properties under a 15-year operating lease. Future remaining minimum lease payments under this lease as of December 31, 1998 are as follows: 1999 - $1.7 million; 2000 - $2.1 million; 2001 - $2.1 million; 2002 - $2.1 million; 2003 - $2.3 million and thereafter, through 2013 - $23.6 million. Rent expense for the lease during 1998 totaled $1.3 million, net of $1.0 million in amortization of the deferred gain on the exchange of home office properties for common stock (see Note 2). In connection with an investment in a limited real estate partnership, the Company has agreed to pay any cash flow deficiencies of a medium-sized shopping center owned by the partnership through January 1, 2001. At December 59 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 31, 1998, the Company recorded a $0.3 million reserve for expected future cash flow deficiencies. No reserves were recorded at December 31, 1997. At December 31, 1998, the limited partnership had a $5.3 million mortgage loan, secured by the shopping center, with Farm Bureau Mutual Insurance Company. 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, -------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator: Income from continuing operations ...................... $ 52,675 $ 75,128 $ 84,049 Income (loss) from discontinued operations ............. 1,265 699 (1,165) -------------- -------------- -------------- Net income ............................................. 53,940 75,827 82,884 Dividends on Series A and B preferred stock ............ (150) (2,171) (2,250) -------------- -------------- -------------- Numerator for earnings per common share-income available to common stockholders ................ $ 53,790 $ 73,656 $ 80,634 ============== ============== ============== Denominator: Denominator for earnings per common share - weighted-average shares ............................. 33,568,852 36,332,858 43,144,258 Effect of dilutive securities - employee stock options . 831,661 638,378 126,134 -------------- -------------- -------------- Denominator for diluted earnings per common share - adjusted weighted-average shares ................ 34,400,513 36,971,236 43,270,392 ============== ============== ============== Earnings per common share: Income from continuing operations ...................... $ 1.56 $ 2.01 $ 1.90 Income (loss) from discontinued operations ............. 0.04 0.02 (0.03) -------------- -------------- -------------- Earnings per common share .............................. $ 1.60 $ 2.03 $ 1.87 ============== ============== ============== Earnings per common share - assuming dilution: Income from continuing operations ...................... $ 1.52 $ 1.97 $ 1.89 Income (loss) from discontinued operations ............. 0.04 0.02 (0.03) -------------- -------------- -------------- Earnings per common share - assuming dilution .......... $ 1.56 $ 1.99 $ 1.86 ============== ============== ==============
14. DISCONTINUED OPERATIONS On March 31, 1998, the Company sold its wholly-owned subsidiary, Utah Insurance, to Farm Bureau Mutual. The Company recorded a gain on the sale of $1.0 million, consisting of $0.2 million on the transaction date and $0.8 million accrued in connection with an earn-out provision included in the underlying sales agreement. The gain is net of an income tax benefit of $0.5 million resulting from the reversal of cumulative temporary differences between the book and income tax bases of Utah Insurance's assets and liabilities. The Company may earn additional consideration during each of the four years in the period ended December 31, 2002 in accordance with the earn-out provision. Under the earn-out arrangement, the Company and Farm Bureau Mutual share equally in the dollar amount by which the incurred losses on Utah Insurance's direct business, net of reinsurance ceded, is less than the incurred losses assumed in the valuation model used to derive the initial acquisition price. The earn-out calculation is performed and any settlement (subject to a maximum of $2.0 million per year) is made on a calendar year basis. The Company has not accrued any contingent consideration for the four year period ending December 31, 2002 as such amounts, if any, cannot be reasonably estimated as of December 31, 1998. Receipts as a result of the earn-out provision are recorded as an adjustment to the gain on the disposal of the discontinued segment. 60 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income (loss) from discontinued operations was comprised of the following:
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Revenues................................................... $ 12,902 $ 53,199 $ 35,698 Benefits and expenses...................................... 12,579 52,522 37,745 -------------- -------------- -------------- Pre-tax income (loss)................................... 323 677 (2,047) Income tax expense (credit)................................ 36 (22) (882) -------------- -------------- -------------- Income (loss)........................................... $ 287 $ 699 $ (1,165) =============== =============== ==============
15. SEGMENT INFORMATION In general, the Company is organized by the types of products and services it offers for sale. The Company's principal and only reportable operating segment is its life insurance segment. The life insurance segment includes activities related to the sale of life insurance, annuities and accident and health insurance products. Operations have been aggregated into the same segment due to the similarity of the products, including the underlying economic characteristics, the method of distribution and the regulatory environment. The Company also has several other operating segments that do not meet the quantitative threshold for separate segment reporting and, therefore, are aggregated herein. A summary of these segments, along with the related source of revenues, is as follows: SEGMENT SOURCE OF REVENUES Investment advisory........... Fee income from the management of investments Marketing and distribution.... Commissions and distribution fee income from the sale of mutual funds and insurance products not issued by the Company Leasing....................... Income from operating leases Corporate..................... Fees from management and administrative services As noted above, the Company also had a property-casualty insurance segment prior to March 31, 1998. Revenues from this segment were derived from the sale of property and casualty insurance policies. See Note 14, "Discontinued Operations", for additional information regarding this segment. 61 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Financial information concerning the Company's operating segments for 1998, 1997 and 1996 is as follows:
LIFE INSURANCE ALL OTHER SUBTOTAL ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Revenues from external customers: 1998 ............................. $ 371,230 36,939 $ 408,169 $ (18,548) $ 389,621 1997 ............................. 406,712 32,903 439,615 (18,264) 421,351 1996 ............................. 401,978 25,628 427,606 (14,233) 413,373 Intersegment revenues: 1998 ............................. 934 17,614 18,548 (18,548) -- 1997 ............................. 1,162 17,102 18,264 (18,264) -- 1996 ............................. 1,900 12,333 14,233 (14,233) -- Net investment income: 1998 ............................. 228,494 216 228,710 (643) 228,067 1997 ............................. 220,328 326 220,654 (288) 220,366 1996 ............................. 208,250 364 208,614 (349) 208,265 Depreciation and amortization: 1998 ............................. 1,111 9,518 10,629 -- 10,629 1997 ............................. 8,714 8,562 17,276 -- 17,276 1996 ............................. 7,801 7,634 15,435 -- 15,435 Income tax expense (benefit): 1998 ............................. 27,196 (792) 26,404 -- 26,404 1997 ............................. 38,007 360 38,367 -- 38,367 1996 ............................. 37,801 859 38,660 -- 38,660 Income (loss) from continuing operations: 1998 ............................. 53,661 (986) 52,675 -- 52,675 1997 ............................. 74,907 221 75,128 -- 75,128 1996 ............................. 83,028 1,021 84,049 -- 84,049 Assets: December 31, 1998 ................ 3,602,015 175,996 3,778,011 (127,051) 3,650,960 December 31, 1997 ................ 3,466,489 154,308 3,620,797 (125,943) 3,494,854
The Company's investment in equity method investees and the related equity income are attributable to the life insurance segment. The exchange of the Company's home office properties for Class A common stock described in Note 2 is attributable to the life insurance segment. Transactions between segments are recorded at negotiated rates generally intended to be at levels commensurate with charges that would be assessed to unaffiliated parties. Interest expense and expenditures for long-lived assets were not significant during 1998, 1997 and 1996. 62 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Unaudited quarterly results of operations are as follows:
1998 ----------------------------------------------------------- QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Premiums and product charges ............. $ 35,496 $ 39,548 $ 35,119 $ 35,467 Net investment income .................... 56,070 58,603 56,587 56,807 Realized gains (losses) on investments ... 1,312 (4,169) 475 (2,496) Total revenues ........................... 98,162 99,006 97,239 95,214 Income from continuing operations ........ 13,076 12,870 14,198 12,531 Discontinued operations .................. 466 -- -- 799 Net income ............................... 13,542 12,870 14,198 13,330 Net income applicable to common stock .... 13,505 12,832 14,160 13,293 Earnings per common share: Income from continuing operations ..... $ 0.36 $ 0.39 $ 0.43 $ 0.38 Income from discontinued operations ... 0.02 -- -- 0.03 ------------ ------------ ------------ ------------ Earnings per common share ............. $ 0.38 $ 0.39 $ 0.43 $ 0.41 ============ ============ ============ ============ Earnings per common share - assuming dilution: Income from continuing operations ..... $ 0.35 $ 0.38 $ 0.42 $ 0.37 Income from discontinued operations ... 0.02 -- -- 0.03 ------------ ------------ ------------ ------------ Earnings per common share - assuming dilution ............................ $ 0.37 $ 0.38 $ 0.42 $ 0.40 ============ ============ ============ ============ 1997 ----------------------------------------------------------- QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Premiums and product charges ............. $ 33,844 $ 38,763 $ 34,406 $ 33,494 Net investment income .................... 53,882 55,063 55,232 56,189 Realized gains on investments ............ 21,836 2,089 10,533 6,495 Total revenues ........................... 113,843 100,679 104,911 101,918 Income from continuing operations ........ 26,529 12,863 20,285 15,451 Discontinued operations .................. 24 (25) (161) 861 Net income ............................... 26,553 12,838 20,124 16,312 Net income applicable to common stock .... 25,303 11,992 20,087 16,274 Earnings per common share: Income from continuing operations ..... $ 0.67 $ 0.33 $ 0.56 $ 0.43 Income from discontinued operations ... -- -- -- 0.02 ------------ ------------ ------------ ------------ Earnings per common share ............. $ 0.67 $ 0.33 $ 0.56 $ 0.45 ============ ============ ============ ============ Earnings per common share - assuming dilution: Income from continuing operations ..... $ 0.66 $ 0.33 $ 0.55 $ 0.42 Income from discontinued operations ... -- -- -- 0.02 ------------ ------------ ------------ ------------ Earnings per common share - assuming dilution ............................ $ 0.66 $ 0.33 $ 0.55 $ 0.44 ============ ============ ============ ============
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. 63 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, 1998. 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 29 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. 3.4 Restated Bylaws of the Registrant 21 Subsidiaries of FBL Financial Group, Inc. 23 Consent of Independent Auditors 27 Financial Data Schedule (b) Reports on Form 8-K. None 64 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 16th day of March, 1999. FBL Financial Group, Inc. By: /s/ EDWARD M. WIEDERSTEIN -------------------------- Edward M. Wiederstein 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/ THOMAS R. GIBSON Chief Executive Officer and Director (Principal March 16, 1999 - -------------------- Executive Officer) Thomas R. Gibson /s/ JAMES W. NOYCE Chief Financial Officer (Principal Financial and March 16, 1999 - ------------------ Accounting Officer) James W. Noyce /s/ EDWARD M. WIEDERSTEIN Chairman of the Board and Director March 16, 1999 - ------------------------- Edward M. Wiederstein /s/ ROGER BILL MITCHELL First Vice Chair and Director March 16, 1999 - ----------------------- Roger Bill Mitchell /s/ KAREN J. HENRY Second Vice Chair and Director March 16, 1999 - ------------------ Karen J. Henry /s/ KENNETH R. ASHBY Director March 16, 1999 - -------------------- Kenneth R. Ashby /s/ JERRY L. CHICOINE Director March 16, 1999 - --------------------- Jerry L. Chicoine /s/ AL CHRISTOPHERSON Director March 16, 1999 - --------------------- Al Christopherson /s/ JOHN W. CREER Director March 16, 1999 - ----------------- John W. Creer /s/ KENNY J. EVANS Director March 16, 1999 - ------------------ Kenny J. Evans /s/ JACK M. GIVENS Director March 16, 1999 - ------------------ Jack M. Givens /s/ GARY L. HALL Director March 16, 1999 - ---------------- Gary L .Hall
65
Signature Title Date - ------------------------------ ------------------------------------------------ ------------------ /s/ JAMES K. HARMON Director March 16, 1999 - ------------------- James K. Harmon /s/ RICHARD G. KJERSTAD Director March 16, 1999 - ----------------------- Richard G. Kjerstad /s/ DAVID L. MCCLURE Director March 16, 1999 - -------------------- David L. McClure /s/ BRYCE P. NEIDIG Director March 16, 1999 - ------------------- Bryce P. Neidig /s/ HOWARD D. POULSON Director March 16, 1999 - --------------------- Howard D. Poulson /s/ FRANK S. PRIESTLEY Director March 16, 1999 - ---------------------- Frank S. Priestley /s/ JOHN J. VAN SWEDEN Director March 16, 1999 - ---------------------- John J. Van Sweden /s/ JOHN E. WALKER Director March 16, 1999 - ------------------ John E. Walker /s/ RICHARD D. HARRIS Senior Vice President, Secretary, Treasurer and March 16, 1999 - --------------------- Director Richard D. Harris /s/ STEPHEN M. MORAIN Senior Vice President, General Counsel and March 16, 1999 - --------------------- Director Stephen M. Morain
66 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, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 15, 1999 (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. /s/ Ernst & Young LLP Des Moines, Iowa February 15, 1999 67 SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES FBL FINANCIAL GROUP, INC. DECEMBER 31, 1998
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, held for investment: Bonds: Corporate securities......................... $ 5,008 $ 5,542 $ 5,008 Mortgage-backed securities................... 487,280 511,187 487,280 --------------------- --------------------- --------------------- Total .................................... 492,288 $ 516,729 492,288 ===================== Fixed maturity securities, available for sale: Bonds: United States Government and agencies........ 81,674 87,045 87,045 State, municipal and other governments....... 61,194 63,609 63,609 Public utilities............................. 137,640 146,730 146,730 Corporate securities......................... 942,929 991,320 991,320 Mortgage and asset-backed securities......... 592,115 615,512 615,512 Convertible bonds............................ 16,760 16,113 16,113 Redeemable preferred stock..................... 30,549 29,715 29,715 --------------------- --------------------- --------------------- Total..................................... 1,862,861 $ 1,950,044 1,950,044 ===================== Equity securities, available-for-sale: Common stocks: Public utilities............................. 2,950 3,009 3,009 Banks, trusts, and insurance companies....... 8,972 9,036 9,036 Industrial, miscellaneous, and all other..... 19,467 15,558 15,558 Nonredeemable preferred stocks................. 8,200 7,684 7,684 --------------------- --------------------- --------------------- Total..................................... 39,589 $ 35,287 35,287 ===================== Mortgage loans on real estate................... 300,243 299,372 (2) Investment real estate: Acquired for debt............................ 867 867 Investment................................... 39,812 39,812 Policy loans.................................... 123,328 123,328 Other long-term investments..................... 14,197 10,210 (3) Short-term investments.......................... 80,228 80,228 --------------------- --------------------- $ 2,953,413 $ 3,031,436 ===================== =====================
(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 and investment company subsidiaries which carry securities at market value. Also, an allowance for possible losses is deducted from cost to determine reported amount. 68 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT FBL FINANCIAL GROUP, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ---------------------------- 1998 1997 ------------ ------------ ASSETS Cash and cash equivalents ............................................... $ 1,743 $ 409 Amounts receivable from affiliates ...................................... 2,067 2,843 Amounts receivable from subsidiaries (eliminated in consolidation) ...... 3,521 3,463 Current income taxes recoverable ........................................ 2,197 1,356 Deferred income taxes ................................................... 1,668 -- Other assets ............................................................ 3,121 2,644 Investments in subsidiaries (eliminated in consolidation) ............... 675,161 675,747 Investment in subsidiary - discontinued operations (eliminated in consolidation) ....................................... -- 27,711 ------------ ------------ Total assets ..................................................... $ 689,478 $ 714,173 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accrued expenses and other liabilities .............................. $ 1,649 $ 1,783 Amounts payable to affiliates ....................................... 437 202 Amounts payable to subsidiaries (eliminated in consolidation) ....... 3,804 6,844 Deferred income taxes ............................................... -- 29 Long-term debt (eliminated in consolidation) ........................ 100,000 100,000 ------------ ------------ Total liabilities ................................................ 105,890 108,858 Stockholders' equity: Preferred stock ..................................................... 3,000 3,000 Class A common stock ................................................ 42,034 42,907 Class B common stock ................................................ 7,558 7,567 Accumulated other comprehensive income .............................. 50,050 48,559 Retained earnings ................................................... 480,946 503,282 ------------ ------------ Total stockholders' equity ....................................... 583,588 605,315 ------------ ------------ Total liabilities and stockholders' equity ................. $ 689,478 $ 714,173 ============ ============
See accompanying notes to condensed financial statements. 69 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, ---------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Revenues: Net investment income ..................................... $ 242 $ 22 $ 16 Dividends from subsidiaries (eliminated in consolidation) 59,244 37,038 20,096 Management fee income from affiliates ..................... 538 247 182 Management fee income from subsidiaries (eliminated in consolidation) ......................................... 392 290 284 ------------ ------------ ------------ Total revenues ......................................... 60,416 37,597 20,578 Expenses: Interest expense (eliminated in consolidation) ............ 5,000 2,917 -- General and administrative expenses ....................... 1,083 562 278 ------------ ------------ ------------ Total expenses ......................................... 6,083 3,479 278 ------------ ------------ ------------ 54,333 34,118 20,300 Income taxes (credits) ........................................ (1,795) (975) 61 ------------ ------------ ------------ Income before equity in undistributed income (dividends in excess of equity income) of subsidiaries and discontinued operations ................................................ 56,128 35,093 20,239 Equity in undistributed income (dividends in excess of equity income) of subsidiaries (eliminated in consolidation) ..... (3,453) 40,035 63,810 ------------ ------------ ------------ Income from continuing operations ............................. 52,675 75,128 84,049 Discontinued operations: Equity income from property-casualty subsidiary, net of related income taxes ................................... 287 699 (1,165) Gain on disposal of property-casualty subsidiary, net of related income taxes ................................... 978 -- -- ------------ ------------ ------------ Net income .................................................... 53,940 75,827 82,884 Dividends on Series A and B preferred stock ................... (150) (2,171) (2,250) ------------ ------------ ------------ Net income applicable to common stock ......................... $ 53,790 $ 73,656 $ 80,634 ============ ============ ============
See accompanying notes to condensed financial statements. 70 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, ---------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .......... $ (4,526) $ (4,048) $ 1,104 INVESTING ACTIVITIES Investments in subsidiaries (eliminated in consolidation) -- -- (1,500) Investments in subsidiary - discontinued operations (eliminated in consolidation) ......................... -- -- (16,000) Net proceeds from sale of subsidiary - discontinued operations ............................................ 25,000 -- -- Dividends and return of capital from subsidiaries (eliminated in consolidation) ......................... 13,594 37,038 20,000 ------------ ------------ ------------ Net cash provided by (used in) investing activities .......... 38,594 37,038 2,500 FINANCING ACTIVITIES Purchase of common stock ................................. (25,008) (24,834) -- Issuance of common stock ................................. 2,456 1,201 -- Dividends paid ........................................... (10,182) (9,437) (3,570) ------------ ------------ ------------ Net cash used in financing activities ........................ (32,734) (33,070) (3,570) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents ............. 1,334 (80) 34 Cash and cash equivalents at beginning of year ............... 409 489 455 ------------ ------------ ------------ Cash and cash equivalents at end of year ..................... $ 1,743 $ 409 $ 489 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash received (paid) during the year for income taxes ........ $ 1,853 $ (111) $ 73 Noncash investing and financing activities: Dividend from subsidary .................................. 45,650 -- -- Investment in subsidiaries ............................... -- (3,000) -- Issuance of long-term debt ............................... -- 100,000 -- Purchase of Series A preferred stock ..................... -- (100,000) -- Issuance of Series B preferred stock ..................... -- 3,000 -- ------------ ------------ ------------ 45,650 -- --
See accompanying notes to condensed financial statements. 71 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) FBL FINANCIAL GROUP, INC. (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1998 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, the Company's 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. CASH DIVIDENDS FROM SUBSIDIARY During the 1998, 1997 and 1996, the parent company received cash dividends totaling $13.6 million, $37.0 million and $5.0 million, respectively. 72 SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION FBL FINANCIAL GROUP, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F -------- -------------- -------------- --------------- -------------- --------------- FUTURE POLICY DEFERRED BENEFITS, POLICY LOSSES, OTHER ACQUISITION CLAIMS AND UNEARNED POLICYHOLDER COSTS LOSS EXPENSES REVENUES FUNDS PREMIUM REVENUE ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) December 31, 1998: Life insurance................... $ 203,581 $ 2,338,969 $ 25,373 $ 245,758 $ 145,630 =========== ============ =========== =========== =========== December 31, 1997: Life insurance................... $ 181,916 $ 2,304,004 $ 23,530 $ 236,479 $ 140,507 =========== ============ =========== =========== =========== December 31, 1996: Life insurance................... $ 164,277 $ 2,215,422 $ 22,215 $ 226,234 $ 136,434 =========== ============ =========== =========== ===========
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J -------- -------------- -------------- --------------- -------------- BENEFITS, AMORTIZATION CLAIMS, OF DEFERRED NET LOSSES AND POLICY OTHER INVESTMENT SETTLEMENT ACQUISITION OPERATING INCOME EXPENSES COSTS EXPENSES -------------- -------------- --------------- -------------- (DOLLARS IN THOUSANDS) December 31, 1998: Life insurance................... $ 228,494 $ 199,671 $ 10,171 $ 53,812 Other, including eliminations.... (427) -- -- -- ----------- ------------- ------------- ------------ Total............................ $ 228,067 $ 199,671 $ 10,171 $ 53,812 =========== ============= ============= ============ December 31, 1997: Life insurance................... $ 220,328 $ 206,271 $ 8,474 $ 53,109 Other, including eliminations.... 38 -- -- -- ----------- ------------- ------------- ------------ Total............................ $ 220,366 $ 206,271 $ 8,474 $ 53,109 =========== ============= ============= ============ December 31, 1996: Life insurance................... $ 208,250 $ 198,925 $ 8,667 $ 48,594 Other, including eliminations.... 15 -- -- -- ----------- ------------- ------------- ------------ Total............................ $ 208,265 $ 198,925 $ 8,667 $ 48,594 =========== ============= ============= ============
73 SCHEDULE IV - REINSURANCE FBL FINANCIAL GROUP, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F -------- -------------- -------------- -------------- -------------- -------------- PERCENT OF CEDED TO AMOUNT OTHER ASSUMED FROM ASSUMED TO GROSS AMOUNT COMPANIES OTHER COMPANY NET AMOUNT NET -------------- -------------- -------------- -------------- -------------- Year ended December 31, 1998: Life insurance in force, at end of year......................... $ 19,665,773 $ 1,298,695 $ -- $ 18,367,078 -- =========== ============ ============ ============ ============ Insurance premiums and other considerations: Interest sensitive product charges....................... $ 53,976 $ 1,820 $ 1 $ 52,157 -- Traditional life insurance and accident and health premiums.. 97,591 4,118 -- 93,473 -- ----------- ------------ ------------ ------------ ------------ $ 151,567 $ 5,938 $ 1 $ 145,630 -- % =========== ============ ============ ============ ============ Year ended December 31, 1997: Life insurance in force, at end of year......................... $ 18,380,799 $ 1,248,564 $ -- $ 17,132,235 -- =========== ============ ============ ============ ============ Insurance premiums and other considerations: Interest sensitive product charges....................... $ 49,793 $ 1,814 $ -- $ 47,979 -- Traditional life insurance and accident and health premiums.. 96,708 4,180 -- 92,528 -- ----------- ------------ ------------ ------------ ------------ $ 146,501 $ 5,994 $ -- $ 140,507 -- % =========== ============ ============ ============ ============ Year ended December 31, 1996: Life insurance in force, at end of year........................ $ 17,195,432 $ 1,082,311 $ -- $ 16,113,121 -- =========== ============ ============ ============ ============ Insurance premiums and other considerations: Interest sensitive product charges...................... $ 45,549 $ 1,895 $ -- $ 43,654 -- Traditional life insurance and accident and health premiums. 96,567 3,787 -- 92,780 -- ----------- ------------ ------------ ------------ ------------ $ 142,116 $ 5,682 $ -- $ 136,434 -- % =========== ============ ============ ============ ============
74 EX-3.4 2 RESTATED BYLAWS EXHIBIT 3.4 RESTATED BYLAWS OF FBL FINANCIAL GROUP, INC. WITH FIRST AMENDMENT THERETO ARTICLE I. MEETINGS OF SHAREHOLDERS 1.1 PLACE OF MEETINGS. All meetings of the shareholders shall be held at such place, either within or without Iowa, as from time to time may be fixed by the Board of Directors. 1.2 ANNUAL MEETINGS. The annual meeting of the shareholders shall be held on the third Tuesday in the month of May in each year, at the hour of 9:00 a.m., at the principal office of the Corporation, or at such other date, time and place as may be fixed from time to time by resolution of the Board of Directors and set forth in the notice of the meeting, for the purpose of electing directors and transacting such other business as may properly come before the meeting. If the day fixed for the annual meeting is a legal holiday, such meeting shall be held on the next succeeding business day. At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before an annual meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the meeting by a shareholder of the Corporation who was a shareholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation, at the principal executive offices of the Corporation. To be timely, a shareholder's notice shall be delivered not less than 45 days prior to the anniversary of the mailing of the preceding year's proxy statement; provided however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from the prior year's meeting date, notice by the shareholder, to be timely, must be so delivered not later than the 90th day prior to such annual meeting or the 10th day following the day on which public announcement (as defined herein) of the date of such meeting is first made. Such shareholder's notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (ii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (A) the name and address of such shareholder, as they appear on the Corporation's books, and of such beneficial owner and (B) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owners; and (iii) in the event that such business includes a proposal to amend either the Articles of Incorporation or the Bylaws of the Corporation, the language of the proposed amendment. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with this paragraph, and the Chairman of the Board or other person presiding at an annual meeting of shareholders, may refuse to permit any business to be brought before an annual meeting without compliance with the foregoing procedures. For the purposes of this paragraph "public announcement" shall mean disclosure in a press release reported by the Dow Jones New Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition to the provisions of this paragraph, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in these Bylaws shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 1.3 SPECIAL MEETINGS. A special meeting of the shareholders for any purpose or purposes may be called at any time by the Chairman of the Board or by any two members of the Board of Directors. Unless otherwise provided in an agreement to which holders of a voting group are subject, If the holders of at least fifty percent (50%) of all votes entitled to be cast by any voting group on any issue proposed to be considered at a proposed special meeting sign, date, and deliver to the Secretary of the Corporation one or more written demands for the meeting, describing the purpose or purposes for which it is to be held, the Board of Directors shall call the requested special meeting within a reasonable time, at a place and time determined by the Board of Directors. At a special meeting no business shall be conducted other than that stated in the notice of the meeting. At any special meeting of the shareholders whereat the sole purpose of the meeting is to elect or remove only Class A Directors or only Class B Directors, or at any other special meeting of the shareholders at which only shareholders of Class A Common Stock or only shareholders of Class B Common Stock are entitled to vote, only holders of the class of stock entitled to vote are entitled to notice. 1.4 NOTICE OF MEETINGS. Written or printed notice stating the place, day and hour of every meeting of the shareholders and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be mailed not less than ten nor more than sixty days before the date of the meeting to each shareholder of record entitled to vote at such meeting, at the shareholder's address which appears in the share transfer books of the Corporation. Such further notice shall be given as may be required by law, but meetings may be held without notice if all the shareholders entitled to vote at the meeting are present in person or by proxy or if notice is waived in writing by those not present, either before or after the meeting. 1.5 DIRECTOR NOMINATION BYLAW. Nominations of persons for election as Class A Directors may be made by the Board of Directors or by any shareholder entitled to vote for the election of Class A Directors. Any shareholder entitled to vote for the election of Class A Directors may nominate a person or persons for election as director only if written notice of such shareholder's intent is delivered to the Secretary of the Corporation at the principal executive offices of the Corporation (i) with respect to an election to be held at an annual meeting of shareholders, not less than 45 days prior to the anniversary of the mailing of the preceding year's proxy statement, or as set out below, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, not later than 10 days following the date on which public announcement (as hereinafter defined) of the date of such meeting is first made. For the purposes of this Bylaw "public announcement" means disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. In the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from the date of the prior year's annual meeting, notice by the shareholder must be delivered not later than 90 days prior to such annual meeting, or the 10th day following the day on which public announcement of the date of such meeting is first made. Notwithstanding anything in the foregoing sentence to the contrary, in the event that the number of Class A Directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 100 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made. Such shareholder's notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and the name, address, age and principal occupation or employment of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of Class A Common Stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) the number and class of shares of the Corporation which are owned by such shareholder and the beneficial owner, if any, and the number and class of shares, if any, beneficially owned by the nominee; (d) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (e) such other information regarding each nominee that is required to be disclosed in connection with the solicitation of proxies for the election of directors, or as otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including, without limitation, such person's written consent to being named in a proxy statement as a nominee and to serving as a director if nominated). The Chairman of the Board or other person presiding at a meeting of shareholders, may refuse to acknowledge the nomination of any person not made in accordance with the procedures prescribed by these Bylaws, and in that event the defective nomination shall be disregarded. 1.6 VOTING LISTS. After the record date for a meeting has been fixed, the officer or agent having charge of the stock transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged by voting group and within each voting group, in alphabetical order, with the address of and the number and class of shares held by each, which list, for a period beginning two business day after notice of the meeting was first given for which the list was prepared and continuing through the meeting, shall be kept on file at the principal office of the Corporation or at the place identified in the meeting notice in the city where the meeting will be held. The list shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection of any shareholder during the whole time of the meeting. The list furnished to the Corporation by its stock transfer agent shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. 1.7 QUORUM. At any meeting of the shareholders, a majority of the votes entitled to be cast on the matter by a voting group constitutes a quorum of that voting group for action on that matter, unless the representation of a different number is required by law, and in that case, the representation of the number so required shall constitute a quorum. If a quorum shall fail to attend any meeting, the chairman of the meeting or a majority of the votes present may adjourn the meeting to another place, date or time. When a meeting is adjourned to another place, date or time, notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than one hundred twenty (120) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. 1.8 PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by the shareholder's duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. No holder of any share of any class of stock of the Corporation shall sell the vote pertaining to such share or issue a proxy to vote such share in consideration of any sum of money or anything of value. 1.9 VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted, either in person or by proxy, without a transfer of such shares. Shares standing in the name of a trustee may be voted by the trustee, either in person or by proxy, but no trustee shall be entitled to vote shares so held without a transfer of such shares into the name of the trustee. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof if authority so to do be contained in an appropriate order of the court by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares nor, absent special circumstances, shares held by another corporation if a majority of the shares entitled to vote for the election of directors of such other corporation is held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time. 1.10 VOTING. At any meeting of the shareholders, each shareholder of a class entitled to vote on any matter coming before the meeting shall, as to such matter, have one vote, in person or by proxy, for each share of capital stock of such class standing in such shareholder's name on the books of the Corporation on the date, not more than seventy days prior to such meeting, fixed by the Board of Directors as the record date for the purpose of determining shareholders entitled to vote, except that holders of serial preferred shares shall have such number of votes per share as are required by the terms of such series. Every proxy shall be in writing, dated and signed by the shareholder entitled to vote or the shareholder's duly authorized attorney-in-fact. 1.11 VOTING BY BALLOT. Voting by shareholders on any question or in any election may be viva voce unless the presiding officer shall order or any shareholder shall demand that voting be by ballot. 1.12 INSPECTORS. One or more inspectors for any meeting of shareholders may be appointed by the Chairman of such meeting. Inspectors so appointed will open and close the polls, will receive and take charge of proxies and ballots, and will decide all questions as to the qualifications of voters, validity of proxies and ballots, and the number of votes properly cast. ARTICLE II. DIRECTORS 2.1 GENERAL POWERS. The property, affairs and business of the Corporation shall be managed under the direction of the Board of Directors, and, except as otherwise expressly provided by law, the Articles of Incorporation or these Bylaws, all of the powers of the Corporation shall be vested in such Board. 2.2 NUMBER OF DIRECTORS. The number of Class A Directors shall be not less than three (3) nor more than five (5) with the exact number as determined from time to time by resolution of the Board of Directors. The number of Class B Directors shall be not less than ten (10) nor more than twenty (20) with the exact number as determined from time to time by written agreement of the holders of at least a majority of the Class B Common Stock. 2.3 ELECTION AND REMOVAL OF DIRECTORS; QUORUM. (a) At each annual meeting of the shareholders, the Class A shareholders shall elect, by a majority vote of the votes cast by the shares of Class A Common Stock entitled to vote in the election, Class A Directors, and the Class B shareholders shall elect, by a majority vote of the votes cast by the shares of Class B Common Stock entitled to vote in the election, Class B Directors, each to hold office until the next succeeding annual meeting of shareholders and until their successors are elected. (b) Any Class A Director or Class B Director may be removed from office at a meeting called expressly for that purpose by the vote of shareholders holding not less than a majority of the class of shares entitled to vote for directors of that class at an election of Directors of that class. (c) Any vacancy occurring in the Board of Directors may be filled by the vote of a majority of the Directors, including a majority of the Class of Directors with respect to which such vacancy occurred. (d) A majority of the number of Directors prescribed pursuant to Resolution of the Board of Directors in accordance with the Articles of Incorporation shall constitute a quorum for the transaction of business. The act of a majority of Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Less than a quorum may adjourn any meeting. 2.4 MEETINGS OF DIRECTORS. An annual meeting of the Board of Directors shall be held as soon as practicable after the adjournment of the annual meeting of shareholders at such place as the Board may designate. Regular meetings of the Board of Directors shall be held quarterly at such time and place as the Board may fix by resolution. Other meetings of the Board of Directors shall be held at places within or without the State of Iowa and at times fixed by resolution of the Board, or upon call of the Chairman of the Board or any two of the Directors. The Secretary or officer performing the Secretary's duties shall give not less than twenty-four hours' notice by letter, telegraph, telefax, or telephone (or in person) of all meetings of the Board of Directors, provided that notice need not be given of the annual meeting or of regular meetings held at times and places fixed by resolution of the Board. Meetings may be held at any time without notice if all of the Directors are present, or if those not present waive notice in writing either before or after the meeting. The notice of meetings of the Board need not state the purpose of the meeting. 2.5 COMPENSATION. By resolution of the Board, Directors may be allowed annual fees and fees and expenses for attendance at all meetings of the Board of Directors and any committee of the Board of Directors, but nothing herein shall preclude Directors from serving the Corporation in other capacities and receiving compensation for such other services. 2.6 ELIGIBILITY FOR SERVICE AS A DIRECTOR. Qualifications for election as a Director of the Corporation are set forth in, or in the manner prescribed in, the Articles of Incorporation. The directorship of any Director who ceases to remain qualified shall immediately thereupon be vacant, and the vacancy may be filled in the manner specified in these Bylaws. ARTICLE III. COMMITTEES 3.1 EXECUTIVE COMMITTEE. An Executive Committee consisting of two or more members of the Board of Directors may be designated by the Board of Directors at the time of the annual meeting or at such other time as the Board of Directors may determine. The Chairman and the Chief Executive Officer shall, at all times, be designated members of the Executive Committee. The Executive Committee shall, during the intervals between the meetings of the Board of Directors and so far as it lawfully may, possess and exercise all of the authority of the Board of Directors in the management of the business of the Corporation, in all cases in which specific directions shall not have been given by the Board of Directors provided that notwithstanding the foregoing, the Executive Committee shall not have authority: (1) to authorize dividends or other distributions; (2) to approve or propose to shareholders actions or proposals required by the Iowa Business Corporation Act to be approved by shareholders; (3) to fill vacancies on the Board of Directors or any committee thereof; (4) to amend the Articles of Incorporation of the Corporation; (5) to adopt, amend or repeal Bylaws; (6) to approve a plan of merger not requiring shareholder approval; (7) to authorize or approve the reacquisition of shares unless pursuant to a general formula or method specified by the Board of Directors; (8) to authorize or approve the issuance or sale of, or any contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares; except that the Board of Directors may authorize a committee or senior officer to do so within limits specifically prescribed by the Board of Directors; or (9) to remove the Chairman of the board, Chairman of the Executive Committee or the Chief Executive Officer, or to appoint any person to fill a vacancy in any such office. 3.2 AUDIT COMMITTEE. The Board of Directors shall appoint an Audit Committee. The Audit Committee shall consist solely of Class A Directors who are independent of management and free from any relationships that, in the opinion of the Board of Directors, would interfere with the exercise by the Director of independent judgment as a committee member. No Director who is an officer or director of a Class B Common Stockholder or who is an officer or employee of the Corporation shall be qualified for Audit Committee membership. The policy statement on audit committees issued by the New York Stock Exchange shall be applicable in determining which Directors are "independent" for this purpose. The Audit Committee shall assist the Board of Directors in fulfilling its responsibilities for the Corporation's accounting and financial reporting practices and provide a channel of communication between the Board of Directors and the Corporation's independent auditors. To accomplish the above purposes, the Audit Committee shall: (a) Review with the independent auditors the scope of their annual and interim examinations, placing particular attention where either the Committee or the auditors believe such attention should be directed, and to direct the auditors to expand (but not to limit) the scope of their audit whenever such action is, in the opinion of the Committee, necessary or desirable. The independent auditors shall have sole authority to determine the scope of the audit which they deem necessary for the formation of an opinion on financial statements. (b) Consult with the auditors during any annual or interim audit on any situation which the auditors deem advisable for resolution prior to the completion of their examination. (c) Meet with the auditors to appraise the effectiveness of the audit effort. Such appraisal shall include a discussion of the overall approach to and the scope of the examination, with particular attention on those areas on which either the Committee or the auditors believe emphasis is necessary or desirable. (d) Determine through discussions with the auditors and otherwise, that no restrictions were placed by management on the scope of the examination or its implementation. (e) Inquire into the effectiveness of the Corporation's accounting and internal control functions through discussions with the auditors and appropriate officers of the Corporation and exercise supervision of the Corporation's policies which prohibit improper or illegal payments. (f) Review with the auditors and management any registration statement which shall be filed by the Corporation in connection with the public offering of securities and such other public financial reports as the Committee or the Board of Directors shall deem desirable. (g) Report to the Board of Directors on the results of the Committee's activities and recommend to the Board of Directors any changes in the appointment of independent auditors which the Committee may deem to be in the best interests of the Corporation and its shareholders. (h) Review with the auditors and management any transaction or series of similar transactions to which the Corporation or a subsidiary of the Corporation was within the past year or is currently expected to be a party not previously made known to the Board involving more than $60,000, and with respect to which any of the following persons had or is expected to have a direct or indirect material interest: (1) Any director or executive officer of the Corporation; (2) Any nominee for election as a director; (3) Any stockholder who is known to the Corporation to own of record or beneficially more than five percent of any class of the Corporation's Common Stock; and (4) Any member of the immediate family of any of the foregoing persons. (i) Report to the Board of Directors any transaction described in (h) above determined by the Audit Committee to be unfair to the Corporation. (j) Have such other powers and perform such other duties as the Board shall, from time to time, grant and assign to it. 3.3 BUDGET COMMITTEE. The Board of Directors shall appoint a Budget Committee. The Budget Committee shall consist of members of the Board of Directors and shall be nominated by the Chairman of the Board. The Chairman thereof shall be designated by the Chairman of the Board. The Budget Committee shall review at periodic intervals all budgets proposed by management and make recommendations thereon to the Board of Directors, and perform such other duties as may be delegated to it by the Board of Directors. 3.4 COMPENSATION AND STOCK OPTION COMMITTEE. The Board of Directors shall appoint a Compensation and Stock Option Committee, consisting of any number of its members as it may designate, consistent with the Articles of Incorporation, the Bylaws, and the laws of Iowa. The Compensation and Stock Option Committee shall establish a general compensation policy for the Corporation and shall have responsibility for the approval of Directors' fees and salaries. The Chairman of the Board shall be chairman of the Compensation and Stock Option Committee. 3.5 INVESTMENT COMMITTEE. The investment policy of the Corporation shall be determined by the Board of Directors, which shall have the power to determine the classes of investments and the percentage of investment to be made within each of the said classifications. The Board of Directors may appoint an Investment Committee of up to seven members as designated from time to time by the Board. Other members of the Investment Committee need not be Directors. The Investment Committee shall have the duty and the power to authorize and direct the mode, manner and time of making and calling in investments, and the sale or transfer of investments and the reinvestment of the proceeds thereof, and to examine all funds and securities as often as they deem necessary or when required to do so by the Board of Directors. The Investment Committee shall have the duty and authority from time to time and whenever necessary to authorize the execution of all contracts, deeds, conveyances and any other instruments of the Corporation necessary for the assignment, transfer, and sale of investments of the Corporation requiring corporate signature. The Committee shall select from its members a Chairman and Secretary. The Secretary of the Committee shall keep a complete record of the proceedings thereof. The Investment Committee shall make a report to the board of Directors at each meeting of the Board, which report shall show the investments purchased, sold, or retired since the prior report, and in addition, said Committee shall make a full report to the Board of Directors, covering all investment activities with particular reference to purchases and sales each fiscal year. The Board of Directors may call for special reports on investments at any time. 3.6 NOMINATING COMMITTEE. (a) Class A Directors Nominating Committee. The Class A Directors Nominating Committee shall include at least two-thirds of the Class A Directors and consist of up to five members of the Board of Directors who shall be nominated by the Chairman of the Board and appointed by the Board of Directors. Any action of the Class A Directors Nominating Committee requires the concurrence of at least 50% of the Class A Directors who are members of such Committee. The Chairman of the Board shall designate the Chairman and the Secretary of the Class A Director Nominating Committee. A majority of the members of the Committee shall constitute a quorum. The Secretary of the Committee shall keep a complete record of the proceedings thereof. The duty of the Committee shall be to recommend to the Board of Directors the number of Class A Directors, which shall be not less than 3, nor more than 5, to be elected for the next year, and to nominate for election the Class A Directors. The Secretary of the Committee shall submit and file in writing with the Secretary of this Corporation, not less than seventy-five (75) days prior to the date of the meeting of the shareholders of this Corporation at which Directors are to be elected, the names of such nominees. (b) Class B Directors Nominating Committee. The Class B Directors Nominating Committee shall include at least two (2) Class B Directors and consist of up to five members of the Board of Directors who shall be nominated by the Chairman of the Board and appointed by the Board of Directors. The Chairman of the Board shall designate the Chairman and the Secretary of the Class B Director Nominating Committee. A majority of the members of the Committee shall constitute a quorum. The Secretary of the Committee shall keep a complete record of the proceedings thereof. The duty of the Committee shall be to recommend to the Board of Directors the number of Class B Directors, which shall be not less than 10 nor more than 20, to be elected for the next year, consistent with any agreement among the Class B Common Stockholders, and to nominate for election the Class B Directors. The Secretary of the Committee shall submit and file in writing with the Secretary of this Corporation, not less than seventy-five (75) days prior to the date of the meeting of the shareholders of this Corporation at which Directors are to be elected, the names of such nominees. (c) Class A and Preferred Shareholder Bylaw. Section 3.6(a) and this Section 3.6(c) are shareholder bylaws and may only be amended by a vote of a majority of a quorum of the Class A Common Stock and any series of preferred stock having voting rights, voting together as a single voting group. (d) Report of Secretary. The Secretary shall report and submit to the shareholders for election, the names of those so nominated, if eligible; in regard to the nominees as Class B Directors, no other names may be nominated for election and no others may be elected. 3.7 OTHER COMMITTEES. The Board of Directors by resolution may establish such other standing or special committees of the Board as it may deem advisable, consisting of not less than two Directors; and the members, terms, and authority of such committees shall be as set forth in the resolutions establishing the same. 3.8 MEETINGS. Regular and special meetings of any Committee established pursuant to this Article may be called and held subject to the same requirements with respect to time, place, and notice as are specified in these Bylaws for regular and special meetings of the Board of Directors. 3.9 QUORUM AND MANNER OF ACTING. A majority of the members of any Committee serving at the time of any meeting thereof shall constitute a quorum for the transaction of business at such meeting. The action of a majority of those members present at a Committee meeting at which a quorum is present shall constitute the act of the Committee. 3.10 TERM OF OFFICE. Members of any Committee shall be elected as above provided and shall hold office until their successors are elected by the Board of Directors or until such Committee is dissolved by the Board of Directors. 3.11 RESIGNATION AND REMOVAL. Any member of a Committee may resign at any time by giving written notice of his intention to do so to the Chairman of the Board or the Secretary of the Corporation, or may be removed, with or without cause, at any time by vote of the Board of Directors. 3.12 VACANCIES. Any vacancy occurring in a Committee resulting from any cause whatever may be filled by a person elected by majority of the Directors then in office. ARTICLE IV. OFFICERS 4.1 OFFICERS. The Officers of the Corporation shall be a Chairman of the Board; a Chief Executive Officer; a First Vice Chair; a Second Vice Chair; a Secretary; a Treasurer; a Vice President and Chief Financial Officer; and additional Vice Presidents (the number thereof to be determined by the Board of Directors), and such other officers as the Board of Directors may from time to time designate by resolution, each of whom shall be elected by the Board of Directors. Any two or more offices may be held by the same person. In its discretion, the Board of Directors may delegate the powers or duties of any officer to any other officer or agents, notwithstanding any provision of these Bylaws, and the Board of Directors may leave unfilled for any such period as it may fix, any office except those of Chairman of the Board, the Chief Executive Officer, the Vice President, Chief Financial Officer, and the Secretary. 4.2 ELECTION AND TERM OF OFFICE. The officers of the Corporation to be elected by the Board of Directors shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office until such officer's successor shall have been duly elected or until death or until such officer shall resign or shall have been removed in the manner hereinafter provided. 4.3 REMOVAL. Any officers or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer or agent elected by the Board of Directors except the Chairman of the Board, Chairman of the Executive Committee and the Chief Executive Officer, may be removed by the Executive Committee. 4.4 VACANCIES. A vacancy in the office of Chairman of the Board, or Chief Executive Officer because of death, resignation, removal, disqualification or otherwise, may be filled only by the Board of Directors for the unexpired portion of the term. A vacancy in any other office may be filled by the Executive Committee. 4.5 CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside over all meetings of the Board of Directors and meetings of the shareholders; shall be the Chairman of the Executive Committee, and shall be a member or member ex-officio of all other committees of the Board of Directors. 4.6 CHIEF EXECUTIVE OFFICER. Subject to the business and administrative policies adopted by the Board of Directors from time to time and under the supervision and direction of the Board, the Chief Executive Officer shall be responsible for the supervision and direction of the business and affairs of this Corporation and its employees. 4.7 FIRST VICE CHAIR. In the absence or the inability or disability of the Chairman of the Board or his refusal to act, his duties shall devolve upon and be discharged by the First Vice Chair. 4.8 SECOND VICE CHAIR. In the absence or the inability or disability of the Chairman of the Board and First Vice Chair, or their refusal to act, their duties shall devolve upon and be discharged by the Second Vice Chair. 4.9 SECRETARY. The Secretary shall be the custodian of all books, papers, records and documents of the Corporation, except as otherwise authorized by the Board of Directors. He shall conduct, by himself or through such assistant secretaries and other subordinates, such business as shall be authorized by the Board of Directors; he shall serve or cause to be served, printed and published, such notice as shall be required by law, by these Bylaws and by resolutions of the Board of Directors; he shall keep the corporate records, carry on all proper correspondence and shall act as Secretary in the meetings of the shareholders and the Board of Directors, and shall perform such other administrative duties as shall be assigned to him from time to time by the Board of Directors. 4.10 TREASURER. The Treasurer shall have charge of the funds of the Corporation and shall pay them out as ordered by the Board of Directors. He shall keep an accurate account of receipts and disbursements and submit a report thereof to the Board of Directors at their regular meeting and more often as required. 4.11 VICE PRESIDENT AND CHIEF FINANCIAL OFFICER. The Vice President and Chief Financial Officer shall be the principal and chief accounting and principal and chief finance officer of the Corporation. In that capacity, the Vice President and Chief Financial Officer shall keep and maintain, or cause to be kept and maintained accurate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of the assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The Vice President and Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. The Vice President and Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the Chairman of the Board, or to the Chief Executive Officer, Treasurer and/or the Board of Directors, upon their request, an account of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the Treasurer. ARTICLE V. INDEMNIFICATION OF DIRECTORS AND OFFICERS 5.1 GENERAL. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a Director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 5.2 DERIVATIVE ACTIONS. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, provided that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses which the court shall deem proper. 5.3 INDEMNIFICATION IN CERTAIN CASES. To the extent that a Director, officer, employee, or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article V, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 5.4 PROCEDURE. Any indemnification under Sections 1 and 2 of this Article V (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in such Sections 1 and 2. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such action, suit, or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable if a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or (c) by the shareholders. 5.5 ADVANCES FOR EXPENSES. Expenses incurred in defending a civil or criminal action, suit, or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of the Director or officer to repay such amount if it shall be ultimately determined that he is not entitled to be indemnified by the Corporation as authorized in this Article V. 5.6. RIGHTS NOT EXCLUSIVE. The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this Article V shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, bylaw, agreement, vote of shareholders, or disinterested Directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such offices. 5.7 INSURANCE. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article V. 5.8 DEFINITION OF CORPORATION. For the purposes of this Article V, references to "the Corporation" include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director or officer of such a constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise shall stand in the same position under the provisions of this Article V with respect to the resulting or surviving corporation as he would if he had served the resulting or surviving corporation in the same capacity. 5.9 SURVIVAL RIGHTS. The indemnification and advancement of expenses provided by, or granted pursuant to this Article V shall continue as to a person who has ceased to be a Director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VI. CAPITAL STOCK 6.1 CERTIFICATES FOR SHARES. Certificates for shares of capital stock of the Corporation shall be in such form as shall be determined by the Board of Directors. They shall be issued in consecutive order within each class shall indicate the class of stock represented thereby, shall be numbered in the order of their issue within the class, and shall be signed by the Chairman of the Board or the Chief Executive Officer or any other Vice Chair or Vice President and the Secretary or an Assistant Secretary, provided, however, that if any stock certificate is countersigned by a transfer agent, other than the Corporation or its employee, or by a registrar, other than the Corporation or its employee, any other signature, including that of any such officer, on such certificate may be a facsimile, engraved, stamped or printed. In case any officer or agent who has signed or whose facsimile signature shall be used on any stock certificate shall cease to be such officer or agent of the Corporation because of death, resignation or otherwise before such stock certificate shall have been delivered by the Corporation, such stock certificate may nevertheless be issued and delivered as though the person or agent who signed the certificate or whose facsimile signature shall have been used thereon had not ceased to be such officer or agent of the Corporation. 6.2 TRANSFER OF SHARES. Upon surrender to the Corporation or its transfer agent of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction on its books. 6.3 LOST, DESTROYED AND MUTILATED CERTIFICATES. Holders of the shares of the Corporation shall immediately notify the Corporation of any loss, destruction, or mutilation of the certificate therefor, and the Board of Directors may in its discretion cause one or more new certificates for the same number of shares in the aggregate to be issued to such shareholder upon the surrender of the mutilated certificate or upon satisfactory proof of such loss or destruction, and the deposit of a bond in such form and amount and with such surety as the Board of Directors may require. 6.4 FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Corporation may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than seventy days and, in case of a meeting of shareholders, not less than ten days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the day before the first date on which notice of the meeting is mailed or the day before the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. In order to determine the shareholders entitled to demand a special meeting, the record date shall be the sixtieth day preceding the date of receipt by the Corporation of written demands sufficient to require the calling of such meeting, unless otherwise fixed by the Board of Directors. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof, unless the Board of Directors selects a new record date or unless a new record date is required by law. 6.5 TRANSFER OF SHARES. The shares of the Corporation shall be transferable or assignable only on the books of the Corporation by the holder in person or by attorney on surrender of the certificate for such shares duly endorsed and, if sought to be transferred by attorney, accompanied by a written power of attorney to have the same transferred on the books of the Corporation. The Corporation will recognize however, the exclusive right of the person registered on the books as the owner of shares to receive dividends and to vote as such owner. No person, holding shares of Class B Common Stock may transfer, and the Corporation shall not register the transfer of, such shares of Class B Common Stock whether by sale, assignment, gift, bequest, appointment or otherwise, except as permitted by the Class B Common Stockholder Agreement dated May 1, 1996, as amended hereafter (the "Class B Stockholder Agreement"). ARTICLE VII. MISCELLANEOUS PROVISIONS 7.1 SEAL. This Corporation shall not have a corporate seal. 7.2 FISCAL YEAR. The fiscal year of the Corporation shall commence with the first day of January each year and terminate with the 31st day of December each year. 7.3 CHECKS, NOTES AND DRAFTS. Checks, notes, drafts, and other orders for the payment of money shall be signed by such persons as the Board of Directors from time to time may authorize. When the Board of Directors so authorizes, however, the signature of any such person may be a facsimile. 7.4 AMENDMENT OF BYLAWS. Unless proscribed by the Articles of Incorporation, an existing Bylaw, or by law, these Bylaws may be amended or altered at any meeting of the Board of Directors. Only the holders of Class A Common Stock and any series of preferred stock having voting rights, voting together as a single voting group, shall have the power to rescind, amend, alter, or repeal Section 3.6(a) and Section 3.6(c). Any other shareholder amendment or repeal of the Bylaws shall require the approval of a majority of the shares of each voting group. 7.5 VOTING OF SHARES HELD. Unless otherwise provided by resolution of the Board of Directors, the Chairman of the Board may from time to time appoint an attorney or attorneys or agent or agents of the Corporation, in the name and on behalf of the Corporation, to cast the vote which the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation, any of whose securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation, or to consent in writing to any action by any such other corporation; and the Chairman of the Board shall instruct the person or persons to appoint as to the manner of casting such votes or giving such consent and may execute or cause to be executed on behalf of the Corporation such written proxies, consents, waivers, or other instruments as may be necessary or proper in the premises. In lieu of such appointment the Chairman of the Board may himself attend any meetings of the holders of shares or other securities of any such other corporation and there vote or exercise any or all power of the Corporation as the holder of such shares or other securities of such other corporation. 7.6. PRINCIPAL OFFICE. The principal office and principal executive office of the Corporation in the State of Iowa shall be located in the City of West Des Moines, County of Polk, and as otherwise or more particularly identified in the most recently filed (at any time), annual report of the Corporation on file with the Iowa Secretary of State. ARTICLE VIII. EMERGENCY BYLAWS 8.1 The Emergency Bylaws provided in this Article VIII shall be operative during any emergency, notwithstanding any different provision in the preceding Articles of these Bylaws or in the Articles of Incorporation of the Corporation or in the Iowa Business Corporation Act (other than those provisions relating to emergency bylaws). An emergency exists if a quorum of the Corporation's Board of Directors cannot readily be assembled because of some catastrophic event. To the extent not inconsistent with these Emergency Bylaws, the Bylaws provided in the preceding Articles shall remain in effect during such emergency and upon the termination of such emergency the Emergency Bylaws shall cease to be operative unless and until another such emergency shall occur. 8.2 During any such emergency: (a) Any meeting of the Board of Directors may be called by any officer of the Corporation or by any Director. The notice thereof shall specify the time and place of the meeting. To the extent feasible, notice shall be given in accordance with Section 2.4 above, but notice may be given only to such of the Directors as it may be feasible to reach at the time, by such means as may be feasible at the time, including publication or radio, and at a time less than twenty-four hours before the meeting if deemed necessary by the person giving notice. Notice shall be similarly given, to the extent feasible, to the other persons referred to in (b) below. (b) At any meeting of the Board of Directors, a quorum shall consist of a majority of the number of Directors then in office. If the Directors present at any particular meeting shall be fewer than the number required for such quorum, other persons present as referred to below, to the number necessary to make up such quorum, shall be deemed Directors for such particular meeting as determined by the following provisions and in the following order priority: (i) Vice-Presidents not already serving as Directors, in the order of their seniority of first election to such offices, or if two or more shall have been first elected to such offices on the same day, in the order of their seniority in age; (ii) All other officers of the Corporation in the order of their seniority of first election to such offices, or if two or more shall have been first elected to such offices on the same day, in the order of their seniority in age; and (iii) Any other persons that are designated on a list that shall have been approved by the Board of Directors before the emergency, such persons to be taken in such order of priority and subject to such conditions as may be provided in the resolution approving the list. (iv) The Board of Directors, during as well as before any such emergency, may provide, and from to time modify, lines of succession in the event that during such an emergency any or all officers or agents of the Corporation shall for any reason be rendered incapable of discharging their duties. (v) The Board of Directors, during as well as before any such emergency, may, effective in the emergency, change the principal office, or designate several alternative offices, or authorize the officers so to do. 8.3 No officer, Director, or employee shall be liable for action taken in good faith in accordance with these Emergency Bylaws. 8.4 These Emergency Bylaws shall be subject to repeal or change by further action of the Board of Directors or by action of the shareholders, except that no such repeal or change shall modify the provisions of the next preceding paragraph with regard to action or inaction prior to the time of such repeal or change. Any such amendment of these Emergency Bylaws may make any further or different provision that may be practical and necessary for the circumstances of the emergency. These Restated Bylaws were duly adopted by the Board of Directors of the Corporation on the 29th day of April, 1996, and amended by the Board of Directors of the Corporation on the 16th day of November, 1998. /S/ RICHARD D. HARRIS --------------------- Richard D. Harris, Secretary EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 FBL FINANCIAL GROUP, INC. SUBSIDIARIES OF FBL FINANCIAL GROUP, INC. STATE OF INCORPORATION ----------------- Insurance Subsidiaries: EquiTrust Life Insurance Company......................... Iowa Farm Bureau Life Insurance Company....................... Iowa Universal Assurors Life Insurance Company................ Iowa Western Farm Bureau Life Insurance Company............... Colorado Noninsurance Subsidiaries: EquiTrust Assigned Benefit Company....................... Iowa EquiTrust Investment Management Services, Inc. .......... Delaware EquiTrust Marketing Services, LLC ....................... Delaware FBL Financial Group Capital Trust........................ Delaware FBL Financial Services, Inc.............................. Iowa FBL Insurance Brokerage, Inc............................. Iowa FBL Leasing Services, Inc................................ Iowa FBL Real Estate Ventures, Ltd............................ Wisconsin Western Ag Insurance Agency, Inc......................... Arizona EX-23 4 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-17007) pertaining to the Amended and Restated FBL Financial Group, Inc. 1996 Class A Common Stock Compensation Plan, Registration Statement (Form S-8 No. 333-08567) pertaining to the Farm Bureau 401(k) Savings Plan (formerly the Iowa Farm Bureau Federation and Affiliated Companies 401(k) Savings Plan), and Registration Statement (Form S-8 No.333-53739) pertaining to the FBL Financial Group, Inc. Director Compensation Plan of our reports dated February 15, 1999, with respect to the consolidated financial statements and schedules of FBL Financial Group, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1998. Des Moines, Iowa March 15, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
7 1,000 12-MOS DEC-31-1998 DEC-31-1998 1,950,044 492,288 516,729 35,287 299,372 40,679 3,031,436 4,516 4,711 203,581 3,650,960 2,328,344 0 35,998 245,758 33,197 0 3,000 49,592 530,996 3,650,960 145,630 228,067 (4,878) 20,802 199,671 10,171 53,812 83,006 26,404 52,675 1,265 0 0 53,940 1.60 1.56 21,199 5,520 (519) 2,200 3,294 20,706 (519)
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