-----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, TtXGP8RTjzTQu0UtdlV5C75xt4GeBTPNIE9hLGs7Pb97TZPuz1eFHmbxuMO5LAxs 8ZMW12ffh+IdVsQbkSyZxQ== 0000912057-96-014524.txt : 19960715 0000912057-96-014524.hdr.sgml : 19960715 ACCESSION NUMBER: 0000912057-96-014524 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960712 SROS: NYSE 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: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-04332 FILM NUMBER: 96594324 BUSINESS ADDRESS: STREET 1: 5400 UNIVERSITY AVE CITY: WEST DES MOINES STATE: IA ZIP: 50266 BUSINESS PHONE: 5152255400 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1996. REGISTRATION NO. 333-4332 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- FBL FINANCIAL GROUP, INC. (Exact name of registrant as specified in its charter) IOWA 6719 42-1411715 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification incorporation or Classification Code) Number) organization)
5400 UNIVERSITY AVENUE, WEST DES MOINES, IA 50266 515-225-5410; FAX 515-225-4686 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) STEPHEN M. MORAIN SENIOR VICE PRESIDENT AND GENERAL COUNSEL 5400 UNIVERSITY AVENUE WEST DES MOINES, IA 50266 515-225-5410; FAX 515-225-4686 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------- COPIES TO: Donald J. Brown, Esq. Steven Ostner, Esq. Davis, Brown, Koehn, Shors & Debevoise & Plimpton Roberts, P.C. 875 Third Avenue 2500 Financial Center New York, NY 10022 Des Moines, IA 50309 212-909-6619; FAX 212-909-6836 515-288-2500; FAX 515-243-0654
-------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1993, check the following box. / / -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
FORM S-1 ITEM PROSPECTUS HEADING -------------------------------------------------- -------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus................... Registration Statement Cover Page; Outside Front Cover of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Inside Front Cover Page and Outside Back Cover Page of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Outside Front Cover Page of Prospectus; Pro- spectus Summary; The Company; Risk Factors 4. Use of Proceeds................................... Use of Proceeds 5. Determination of Offering Price................... Underwriting 6. Dilution.......................................... * 7. Selling Security Holders.......................... Principal and Selling Stockholders 8. Plan of Distribution.............................. Underwriting 9. Description of Securities to be Registered........ Description of Capital Stock 10. Interests of Named Experts and Counsel............ Validity of Common Stock; Experts 11. Information with Respect to the Registrant........ Available Information; Prospectus Summary; Risk Factors; The Company; Dividend Policy; Capitalization; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Management Compensation; Certain Transactions and Relationships; Principal and Selling Stockholders; Description of Capital Stock; Shares Eligible for Future Sale; Glossary of Selected Insurance Terms; Index to Consoli- dated Financial Statements 12. Disclosure of Commission Position on Indem- nification for Securities Act Liabilities........ Part II--Indemnification of Directors and Of- ficers
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION JULY 12, 1996 4,000,000 SHARES [LOGO] FBL FINANCIAL GROUP, INC. CLASS A COMMON STOCK ----------- All of the 4,000,000 shares of Class A Common Stock of FBL Financial Group, Inc. (the Company) offered hereby (Shares) are being sold by certain stockholders (the Selling Stockholders). The Company will not receive any of the proceeds from the sale of the Shares. Prior to this offering (the Offering), there has been no public market for the Shares. It is currently estimated that the initial public offering price per Share will be between $17.50 and $19.50. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Shares have been authorized for listing on the New York Stock Exchange under the symbol FFG, subject to official notice of issuance. The Company has requested that the Underwriters reserve 200,000 Shares for purchase, on the same terms as all other Purchasers, by certain persons having a relationship with the Company. See "Underwriting." The Company has three classes of stock consisting of Class A Common Stock, which is being offered hereby, Series A Preferred Stock which votes generally with the Class A Common Stock as a single voting group, and Class B Common Stock. The ownership of Class B Common Stock is restricted to organizations associated with the American Farm Bureau Federation. The holders of the Class A Common Stock and Series A Preferred Stock voting together as a single voting group (Class A Voting Rights) elect three Class A directors and the holders of the Class B Common Stock elect 18 Class B Directors, 15 of whom are the Presidents of the 15 state Farm Bureau Federations in the Company's market territory. After the Offering, the Iowa Farm Bureau Federation together with other state Farm Bureau organizations located in the Company's market territory will own 100% of the Class B voting rights, as well as 82.4% of the Class A Voting Rights, and, accordingly, will be able to elect all of the Directors of the Company. -------------- SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR INFORMATION RELEVANT TO AN INVESTMENT IN THE SHARES. ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE UNDERWRITING PROCEEDS TO TO DISCOUNTS AND THE SELLING PUBLIC COMMISSIONS (1) STOCKHOLDERS (2) Per Share................................ $ $ $ Total (3)................................ $ $ $
(1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting expenses payable by the Selling Stockholders estimated at $40,400, and excluding expenses payable by the Company estimated at $709,600. (3) Certain of the Selling Stockholders have granted the Underwriters a 30-day option to purchase up to 600,000 additional Shares solely to cover over-allotments, if any. To the extent the option is exercised, the Underwriters will offer the additional Shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to the Selling Stockholders will be $ , $ and $ , respectively. See "Principal and Selling Stockholders" and "Underwriting." -------------- The Shares are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the Shares will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about , 1996. ALEX. BROWN & SONS INCORPORATED SMITH BARNEY INC. EVEREN SECURITIES, INC. THE DATE OF THIS PROSPECTUS IS , 1996. The Company intends to furnish its stockholders with annual reports for each calendar year containing audited financial statements and an opinion thereon expressed by independent certified public accountants and with quarterly reports for each of the first three quarters of each calendar year containing unaudited summary financial information. -------------- FOR NORTH CAROLINA RESIDENTS: THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. -------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. -------------- The following schematically displays the structure of FBL Financial Group, Inc. and the respective total economic ownership interest in FBL Financial Group, Inc. represented by the Class A and Class B Common Stock after the Offering, and assuming no exercise of the Underwriters' over-allotment option: -------------- [GRAPH] [Graph provides following information:
STOCKHOLDER ECONOMIC OWNERSHIP - ----------------------------------------------------------------------------------------------------- ------------------------- Public Stockholders 21.2% Iowa Farm Bureau Federation 54.3% 25 Other Farm Bureau Organizations 16.4% Farm Bureau Mutual Insurance Company 8.1%
ENTITIES OWNED: FBL Financial Group, Inc. Farm Bureau Life Insurance Company FBL Financial Services, Inc. Western Farm Bureau Life Insurance Company Utah Farm Bureau Insurance Company (1) - ------------------------ (1) participates with Farm Bureau Mutual Insurance Company and South Dakota Farm Bureau Mutual Insurance Company, commonly managed mutual insurance companies, in the Farm Bureau Mutual pool.] 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "GLOSSARY OF SELECTED INSURANCE TERMS" FOR DEFINITIONS OF CERTAIN INSURANCE TERMS USED HEREIN. UNLESS OTHERWISE INDICATED, THE FINANCIAL INFORMATION SET FORTH HEREIN HAS BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP), AND ALL OF THE INFORMATION INCLUDED HEREIN ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND REFLECTS THE 2,000-FOR-1 STOCK SPLIT EFFECTIVE MARCH 19, 1996, EXCEPT WHERE OTHERWISE INDICATED. UNLESS THE CONTEXT REQUIRES OTHERWISE, ALL REFERENCES IN THIS PROSPECTUS TO THE COMPANY INCLUDE ALL OF ITS DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE COMPANY SUBSIDIARIES, FARM BUREAU LIFE INSURANCE COMPANY (FARM BUREAU LIFE) AND WESTERN FARM BUREAU LIFE INSURANCE COMPANY (WESTERN LIFE) (TOGETHER THE LIFE COMPANIES) AND ITS PROPERTY-CASUALTY SUBSIDIARY, UTAH FARM BUREAU INSURANCE COMPANY (UTAH INSURANCE). THE COMPANY The Company through its subsidiaries underwrites, markets and distributes life insurance, annuities, property-casualty insurance and mutual funds to individuals and small businesses in 15 midwestern and western states. The Company has exclusive marketing arrangements with the state Farm Bureau Federations in its territory and targets sales to approximately 700,000 Farm Bureau member families and other rural, small town and suburban residents through an exclusive agency force. Through acquisitions of Rural Security Life Insurance Company (Rural Security Life) in 1993 and Western Life in 1994, the Company expanded its operations to 15 states, including Wisconsin and the eight-state Western Life area (the Western Life states). Prior to 1993 the Company operated only in Iowa, Nebraska, Minnesota, South Dakota and Utah, and in Kansas sold mutual funds only. All of the state Farm Bureau Federations in the Company's marketing area are associated with the American Farm Bureau Federation. With approximately 4.6 million member families in all 50 states, the American Farm Bureau Federation is the largest grass roots farm and ranch organization in the United States. 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. Management believes that the Company's relationship with the state Farm Bureau Federations places it in a unique position to serve the insurance and financial needs of farmers, ranchers, rural and suburban residents, and related individuals and businesses. Farm Bureau organizations in the Company's territories tend to be well known and long established, have active memberships and provide a number of benefits other than financial services. See "The Company - -- Company History and Farm Bureau Affiliation." 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. Many of the Company's customers are self-employed individuals who are responsible for providing for their own insurance and retirement needs. Management believes that Farm Bureau insurance customers tend to be financially conservative and stable, which management believes has led to persistency greater than industry averages. The Company's life insurance products are currently available for sale both to Farm Bureau members and to non-members. Most of the Company's property-casualty insurance products are available for sale only to Farm Bureau members. The Company sells its insurance and mutual fund products through an exclusive Farm Bureau distribution system comprised of approximately 1,795 agents. All of the Company's agents are independent contractors who sell only Farm Bureau sponsored or authorized products. See "Business -- Marketing -- Exclusive Agency Force." Approximately 635 agents located in Iowa, Minnesota, South Dakota and Utah (the multi-line states) sell both life and property-casualty products offered only through the Company. Approximately 1,160 agents located in the eight Western Life states and three other states (collectively, the life-only states) sell only the Company's life insurance, annuity and mutual fund products (in Kansas only the Company's variable products) and offer property-casualty products of Farm Bureau property-casualty insurance companies not managed by the Company. Approximately 76% of all agents are licensed to sell variable life insurance, variable annuities and mutual funds. 3 The Company offers a full range of life insurance products including universal life, variable universal life, whole life, term life and disability income insurance, together with variable and traditional annuity products. The Company is establishing variable universal life as its lead product. In the three month period ended March 31, 1996 and the year ended December 31, 1995, variable universal life accounted for 36.4% and 37.0%, respectively, of first year direct life insurance premiums collected. Since its acquisition of Western Life in 1994, the Company has pursued an aggressive program of training and licensing the agents in the Western Life states to enable them to market the Company's variable universal life insurance, variable annuities and mutual funds. The Company has recently ceased offering medical insurance products but makes those products available to its agents through affiliations with other carriers. The Company also provides a portfolio of mutual funds and asset management services to third parties. The Company's property-casualty insurance products include automobile, homeowners, farm and ranch owners and crop insurance and workers' compensation. Property-casualty business written in Utah through Utah Insurance is pooled with the business written in Iowa, Minnesota and South Dakota through two Farm Bureau related mutual insurance companies, Farm Bureau Mutual Insurance Company (Farm Bureau Mutual) and South Dakota Farm Bureau Mutual Insurance Company (South Dakota Mutual) (the Farm Bureau Mutual pool). All of the companies participating in the Farm Bureau Mutual pool are managed by the Company. The current participation of Utah Insurance in the Farm Bureau Mutual pool, which had net premiums written of $57.2 million in the three month period ended March 31, 1996 and $235.6 million in the year ended December 31, 1995, is 8%. Management anticipates that during the second quarter of 1996 the share of Utah Insurance in the Farm Bureau Mutual pool will be increased to 20% retroactive to January 1, 1996. Effective January 1, 1996, the Farm Bureau Mutual pool participates through a loss pooling agreement in business written in Arizona and New Mexico by Farm Bureau affiliated companies managed by the Company, thereby providing further geographic diversification of risk. During the three month period ended March 31, 1996, the Company had total premiums and product charges of $37.4 million, total revenues of $93.3 million, adjusted operating income of $10.8 million and net income of $10.9 million and, during the year ended December 31, 1995, the Company had total premiums and product charges of $148.0 million, total revenues of $406.0 million, adjusted operating income of $41.6 million and net income of $59.6 million. At March 31, 1996, the investment portfolio of the Company had an aggregate carrying value of $2.7 billion, and the Company's total assets and stockholders' equity were $3.1 billion and $556.0 million, respectively. For information relating to the Company's adjusted operating income, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Adjusted Operating Income." Farm Bureau Life is rated "A+ (Superior)", Western Life is rated "A (Excellent)", and the Farm Bureau Mutual pool is rated "Ap (Excellent)" by A.M. Best Company, Inc. (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. See "Glossary of Selected Insurance Terms -- A.M. Best rating." BUSINESS STRATEGY The Company's current management team which was appointed in 1991 has initiated a strategy focused on enhancing profitability and expanding its market territory. The Company's strategy is designed to capitalize on the Company's exclusive association with state Farm Bureau federations in its operating territory. Key components of the Company's strategy include: ENHANCING PRODUCT PROFITABILITY. The Company is focusing on improving its margins by analyzing its product portfolio for competitiveness and profitability. In 1994, the Company exited the unprofitable medical insurance business. Currently, the Company is reviewing its allocation of capital by product line, policyholder dividend and interest rate crediting policies, modifying its systems to accommodate alternative product designs and considering possible changes in product structure. INCREASING SALES. The Company has significant opportunity to increase its sales through cross selling life insurance products to Farm Bureau members who already own property-casualty policies offered by the Company or other Farm Bureau affiliated property-casualty companies. For example, in Iowa approximately 4 29% of Farm Bureau members own at least one of the Company's life products, 53% own at least one of the Company's property-casualty products, and approximately 20% own both, providing significant opportunity for cross selling. Prior to 1996, agents selling the Company's life insurance products in the Western Life states were not able to sell the Company's variable life insurance and variable annuity products. In March 1996, the Company introduced a uniform portfolio of life insurance and annuity products throughout its market territory. This portfolio improves the products available to many agents and expands the offering of variable products into all states in the Company's territory. Additionally, the Company seeks to enhance agent productivity through a restructured incentive compensation program and more effective and increased training. GROWING THROUGH ACQUISITIONS AND JOINT VENTURES. Since 1993, the Company has consolidated operations with two Farm Bureau affiliated insurance companies, resulting in a significant expansion of marketing area and revenue base. The Company will continue to pursue growth opportunities through acquisitions and mergers with Farm Bureau related and other companies. Management believes the Company's position as a publicly traded Farm Bureau affiliated insurance company will increase its attractiveness as a merger partner. Additionally, the Company seeks to leverage its position as the only Farm Bureau company with variable product expertise by entering into joint ventures and other marketing arrangements with Farm Bureau and other organizations. REDUCING OPERATING EXPENSES. The Company has focused on reducing operating expenses through reengineering projects and consolidation of operations and systems. These efforts have resulted in significant cost savings and a 25% reduction in job positions over the last three years. Management intends to seek further expense improvements from continuing reengineering efforts. THE SERIES A EXCHANGE The Company has offered, subject to completion of the Offering, 5,000,000 shares of Series A Preferred Stock in exchange for 5,000,000 shares of Class A Common Stock (the Series A Exchange). The Series A Exchange was offered on a pro rata basis to its existing shareholders, all of whom are Farm Bureau organizations. The Iowa Farm Bureau Federation has agreed to exchange shares of Class A Common Stock for all of the shares of Series A Preferred Stock, none of which was taken up by other existing shareholders in the Series A Exchange. Each share of Series A Preferred Stock is entitled to one vote, so long as it is held by a Farm Bureau organization, and will vote together with the Class A Common Stock as one voting group. The Series A Preferred Stock is cumulative, will pay an annual dividend of $1.00 per share and has a liquidation preference of $20.00 per share. 5 THE OFFERING Class A Common Stock offered hereby.......... 4,000,000 shares Common Stock to be outstanding after the Offering (1): Class A.................................. 17,666,810 shares Class B.................................. 1,192,990 shares --------- Total.................................. 18,859,800 shares --------- ---------
Relative rights of holders of Class A Common Stock and Class B Common Stock.............. The holders of Class A Common Stock vote as a group with the holders of Series A Preferred Stock to elect three Class A Directors and on all other matters. The holders of Class B Common Stock elect 18 Class B Directors. All of the Class B Common Stock is held by Farm Bureau organizations and automatically converts to Class A Common Stock upon transfer to any person which is not a Farm Bureau organization. Use of proceeds.............................. The Company will not receive any of the proceeds from the sale of Shares in the Offering. Dividend policy.............................. Subject to the Company's financial results and declaration by the Company's Board of Directors, the Company currently intends to pay a quarterly cash dividend on its Common Stock of $0.07 per share commencing the first full fiscal quarter following the Offering. NYSE symbol.................................. FFG
- ------------------------ (1) Based on shares outstanding as of April 30, 1996, assuming consummation of the Series A Exchange, and not including an estimated 1,750,000 shares of Class A Common Stock reserved for issuance under the Company's Stock Option Plan or 1,192,990 shares of Class A Common Stock reserved for issuance upon conversion of Class B Common Stock. See "Management Compensation -- 1996 Class A Common Stock Compensation Plan" and "Description of Capital Stock." RISK FACTORS Potential investors should carefully consider the factors described in "Risk Factors" as well as other information contained in this Prospectus, in making an investment decision regarding the Shares. 6 SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial and statutory data of the Company for the periods indicated. This information should be read in conjunction with the consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The selected data as of December 31, 1995, 1994, 1993 and 1992, and for each of the four years in the period ended December 31, 1995, with the exception of pro forma net income per common share, pro forma book value per common share and the information presented under the caption "Other Data", are derived from the Company's consolidated financial statements which have been audited by Ernst & Young LLP, independent auditors. The selected data as of March 31, 1996 and 1995, and for the three month periods then ended and as of December 31, 1991, and for the year then ended, with the exception of the information presented under the caption "Other Data", are derived from the Company's unaudited consolidated financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the consolidated financial statements as of or for the appropriate periods in conformity with generally accepted accounting principles.
AS OF OR FOR THE THREE MONTH PERIOD ENDED MARCH 31, AS OF OR FOR THE YEAR ENDED DECEMBER 31, ------------------------ ------------------------------------------------ 1996 1995 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA (1): Premiums and product charges: Universal life and annuity product charges..... $ 11,317 $ 10,632 $ 43,722 $ 42,734 $ 26,500 $ 18,967 Traditional life insurance premiums............ 19,131 18,227 75,450 72,222 46,050 44,831 Accident and health premiums (2)............... 2,652 2,383 10,161 (1,956) 46,437 23,138 Property-casualty premiums..................... 4,298 4,323 18,709 17,778 16,937 14,570 ----------- ----------- ----------- ----------- ---------- ---------- Total premiums and product charges............... 37,398 35,565 148,042 130,778 135,924 101,506 Net investment income............................ 52,428 48,037 223,108 178,834 138,320 126,500 Realized gains (losses) on investments........... (2,098) 1,850 5,883 9,448 3,967 12,162 Other income..................................... 5,592 7,138 28,952 30,825 25,251 21,183 ----------- ----------- ----------- ----------- ---------- ---------- Total revenues................................... $ 93,320 $ 92,590 $ 405,985 $ 349,885 $ 303,462 $ 261,351 ----------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- ----------- ---------- ---------- Income from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income.................. $ 15,957 $ 13,934 $ 90,447 $ 59,873 $ 38,931 $ 41,232 Income from continuing operations................ 10,889 9,043 59,628 35,587 22,705 26,367 Income from continuing operations per common share........................................... $ 0.46 $ 0.39 $ 2.53 $ 1.52 $ 1.26 $ 1.56 Net income (3)................................... $ 10,889 $ 9,043 $ 59,628 $ 42,066 $ 19,803 $ 21,435 Net income per common share (3).................. $ 0.46 $ 0.39 $ 2.53 $ 1.80 $ 1.10 $ 1.27 Pro forma net income per common share (4)........ 0.50 2.92 CONSOLIDATED BALANCE SHEET DATA (1): Total investments................................ $ 2,668,001 $ 2,415,565 $ 2,646,123 $ 2,337,154 $1,757,277 $1,385,669 Total assets..................................... 3,120,166 2,869,806 3,090,851 2,792,535 2,142,849 1,728,963 Long-term debt................................... 11,776 17,445 12,604 18,519 30,638 881 Total liabilities................................ 2,559,643 2,406,898 2,522,050 2,357,214 1,814,206 1,452,566 Total stockholders' equity....................... 556,020 458,323 564,298 430,743 312,277 262,582 Book value per common share...................... $ 23.30 $ 19.54 $ 23.65 $ 18.37 $ 17.07 $ 15.51 Pro forma book value per common share (4)........ 24.18 STATEMENT OF INCOME SEGMENT DATA (1): Income (loss) from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income by segment Life insurance................................. $ 15,745 $ 13,261 $ 88,500 $ 58,573 $ 38,898 $ 40,952 Property-casualty insurance.................... 346 676 2,083 1,288 33 280 Corporate...................................... (134) (3) (136) 12 -- -- ----------- ----------- ----------- ----------- ---------- ---------- 15,957 13,934 90,447 59,873 38,931 41,232 1991 ---------- CONSOLIDATED STATEMENT OF INCOME DATA (1): Premiums and product charges: Universal life and annuity product charges..... $ 18,722 Traditional life insurance premiums............ 42,460 Accident and health premiums (2)............... 20,869 Property-casualty premiums..................... 13,593 ---------- Total premiums and product charges............... 95,644 Net investment income............................ 117,339 Realized gains (losses) on investments........... 5,816 Other income..................................... 18,854 ---------- Total revenues................................... $ 237,653 ---------- ---------- Income from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income.................. $ 26,208 Income from continuing operations................ 17,198 Income from continuing operations per common share........................................... $ 1.02 Net income (3)................................... $ 9,254 Net income per common share (3).................. $ 0.55 Pro forma net income per common share (4)........ CONSOLIDATED BALANCE SHEET DATA (1): Total investments................................ $1,291,986 Total assets..................................... 1,592,612 Long-term debt................................... 835 Total liabilities................................ 1,336,967 Total stockholders' equity....................... 243,994 Book value per common share...................... $ 14.41 Pro forma book value per common share (4)........ STATEMENT OF INCOME SEGMENT DATA (1): Income (loss) from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income by segment Life insurance................................. $ 25,709 Property-casualty insurance.................... 499 Corporate...................................... -- ---------- 26,208
7
AS OF OR FOR THE THREE MONTH PERIOD ENDED MARCH 31, AS OF OR FOR THE YEAR ENDED DECEMBER 31, ------------------------ ------------------------------------------------ 1996 1995 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1991 ---------- OTHER DATA (1): Adjusted operating income (5).................... $ 10,804 $ 8,304 $ 41,648 $ 29,780 $ 19,024 $ 17,067 Adjusted operating income per common share (5)... $ 0.45 $ 0.35 $ 1.77 $ 1.27 $ 1.06 $ 1.01 Pro forma adjusted operating income per common share (4)....................................... 0.50 1.96 Life insurance statutory capital and surplus (6)(7).......................................... $ 296,289 $ 253,086 $ 288,302 $ 250,709 $ 177,130 $ 164,600 Net statutory premiums collected by the Life Companies (6)(8)................................ 70,859 59,930 233,538 230,336 218,976 168,064 Life insurance in force.......................... 15,356,041 14,475,141 15,254,669 14,296,709 9,525,136 7,098,231 Statutory property-casualty ratios (6): Loss & loss adjustment expense (9)............. 74.7% 68.8% 72.8% 75.6% 82.4% 86.2% Expense (10)................................... 27.4 25.5 25.1 25.9 26.2 25.4 Combined (11).................................. 102.1 94.3 97.9 101.5 108.6 111.6 OTHER DATA (1): Adjusted operating income (5).................... $ 13,292 Adjusted operating income per common share (5)... $ .79 Pro forma adjusted operating income per common share (4)....................................... Life insurance statutory capital and surplus (6)(7).......................................... $ 154,075 Net statutory premiums collected by the Life Companies (6)(8)................................ 157,487 Life insurance in force.......................... 6,579,420 Statutory property-casualty ratios (6): Loss & loss adjustment expense (9)............. 83.0% Expense (10)................................... 25.7 Combined (11).................................. 108.7
- ------------------------------ (1) As discussed in more detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations," the comparability of selected data from year to year is impacted by the acquisition of Rural Security Life in March 1993 and the acquisition of Western Life and the minority interests in FBL Insurance Company and Rural Security Life in January 1994. (2) During 1994, the Company ceased writing medical insurance business. The Company continues to sell individual disability income insurance. (3) The Company recognized net income (loss) related to its discontinued cable television operations of $6.5 million, or $0.28 per share, $(2.9) million, or $(0.16) per share, $(4.9) million, or $(0.29) per share and $(7.9) million, or $(0.47) per share for the years ended December 31, 1994, 1993, 1992 and 1991, respectively. (4) Pro forma net income per common share and pro forma adjusted operating income per common share are presented as if the increase in Utah Insurance's participation in the Farm Bureau Mutual pool and the Series A Exchange had occurred as of January 1, 1995. Pro forma book value per common share is presented as if the increase in Utah Insurance's participation in the Farm Bureau Mutual pool and the Series A Exchange had occurred as of March 31, 1996. See "Pro Forma Consolidated Financial Statements" and related notes thereto included elsewhere herein. (5) 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 realized gains (losses) on investments (less that portion of amortization of deferred policy acquisition costs and value of insurance in force acquired and income taxes attributable to such gains), discontinued operations and net income or loss from a venture capital investment company subsidiary. Adjusted operating income and adjusted operating income per common share should not be considered as necessarily being better indicators of the Company's overall operating performance than net income or net income per common share, nor are they better indicators of the Company's liquidity than cash flows. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Adjusted Operating Income." (6) 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. (7) Statutory capital and surplus reflects amounts related to Farm Bureau Life and Western Life (after 1993) only and does not include the Asset Valuation Reserve, Interest Maintenance Reserve or Mandatory Securities Valuation Reserve for the appropriate periods. (8) Net statutory premiums as presented for statutory reporting purposes include premiums collected from annuities and universal life-type products. For GAAP reporting, such premiums received are not reported as premium revenues. (9) Loss and loss adjustment expense ratio equals the sum of statutory incurred losses and loss adjustment expenses divided by statutory earned premiums. (10) Expense ratio equals all statutory expenses, including policyholder dividends and excluding loss and loss adjustment expenses, divided by statutory net written premiums. (11) Combined ratio equals the sum of the loss and loss adjustment expense and expense ratios. 8 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES OFFERED BY THIS PROSPECTUS. CERTAIN STATEMENTS IN THIS PROSPECTUS WHICH ARE NOT HISTORICAL FACTS ARE FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT COULD RENDER THEM MATERIALLY DIFFERENT, INCLUDING, BUT NOT LIMITED TO, THE EFFECT OF GLOBAL ECONOMIC CONDITIONS, INTEREST RATE FLUCTUATIONS, THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING, PRODUCT DEVELOPMENT AND COMMERCIALIZATION, THE RATE OF TECHNOLOGY CHANGE, DEMAND FOR INSURANCE PRODUCTS, MARKET ACCEPTANCE RISKS, THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES, THE EFFECT OF REGULATORY AND LEGAL DEVELOPMENTS, AND OTHER RISKS INCLUDING THOSE DETAILED BELOW. RELATIONSHIP WITH FARM BUREAU ORGANIZATIONS; CONTROL BY THE IOWA FARM BUREAU FEDERATION; ANTI-TAKEOVER EFFECTS. The business of the Company is dependent upon the maintenance of its right to use the "Farm Bureau" and "FB" trade names and related trademarks and service marks which are controlled by the American Farm Bureau Federation. The American Farm Bureau Federation has granted to each state Farm Bureau federation the right to use these designations in their respective states and to allow their subsidiaries and affiliates, upon receipt of written permission from the American Farm Bureau Federation, to do so. The American Farm Bureau Federation requires the state Farm Bureau federations to ensure, through stock ownership, positions on the Board or license provisions, that the subsidiary or affiliate permitted to use such designations conducts its operations in a manner consistent with the policies of the American Farm Bureau Federation and the state Farm Bureau federations. Policies of the American and state Farm Bureau federations are responsive to the purposes of the organizations, which include to promote, protect and represent the business, economic, social and educational interests of the farmers of the nation, and to develop agriculture. Under the agreements governing the Company's use of such designations and marks, the American Farm Bureau Federation and each state Farm Bureau federation have the right to terminate the Company's rights. The Company's right to use the designations and marks could be terminated by the American Farm Bureau Federation 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 Federation of the Iowa Farm Bureau Federation's membership in the American Farm Bureau Federation 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 aforementioned policies. In addition, the royalty agreements with the state Farm Bureau Federations can be terminated without cause on 60 days' notice. While management believes any such event is highly unlikely to occur so long as the Company remains subject to the influence of Farm Bureau organizations, the loss of the right to use these designations in a key state or states could have a material adverse effect upon the conduct of its business. Accordingly, the Company has adopted policies concerning ownership of its stock and the composition of its Board of Directors that will ensure that the Company remains within the control of Farm Bureau organizations. In order to preserve control of the Company in the Farm Bureau organizations following this Offering, the Farm Bureau organizations, which prior to this Offering owned all of the stock of the Company, recapitalized the existing common stock of the Company into three separate classes: the Class A Common Stock, including the Shares to be offered hereby, which will vote as a single voting group with the Series A Preferred Stock to elect three Directors; the Series A Preferred Stock which votes as a single voting group with the Class A Common Stock on all matters; and the Class B Common Stock, which may be owned only by Farm Bureau organizations and which will vote as a class to elect 18 Directors. The Farm Bureau organizations then entered into an agreement (Stockholders' Agreement) providing that the Farm Bureau organizations will vote their shares of Class B Common Stock at each stockholders' meeting at which Class B Directors are elected to elect the President of each of the 15 state Farm Bureau federations in the Company's territory, the Chief Executive Officer of the Company and two other officers of the Company nominated by the Chairman of the Board as Class B Directors of the Company. The President of the Iowa Farm Bureau Federation is to serve as Chairman of the Board of the Company. See "Certain Transactions and Relationships -- Stockholders' Agreement Regarding Management and Transfer of Shares of Class B Common Stock" and "Description of Capital Stock." 9 Following the completion of the Offering, the Iowa Farm Bureau Federation will own 53.6% of the Class A Common Stock, 100% of the Series A Preferred Stock and 63.9% of the Class B Common Stock of the Company. Consequently, the Iowa Farm Bureau Federation will have the power to control the election of the Class A Directors and four of the Class B Directors, as well as the Chairman of the Board, the Chief Executive Officer, the Secretary and the Treasurer of the Company. The approval of any action requiring stockholder approval, including adopting amendments to the Company's Articles of Incorporation and approving or disapproving mergers or sales of all or substantially all of the assets of the Company, generally requires approval of a majority of (i) the Class A Common stockholders and the Series A Preferred stockholders voting together as a single voting group and (ii) the Class B Common stockholders, voting as a separate voting group. Under no foreseeable circumstances will third parties be able to obtain control of the Company through purchases of common stock. In the unanticipated event that control of the Company were lost by Farm Bureau organizations, the Company could not retain the use of the trade names "FB" or "Farm Bureau" or the related trademarks and service marks in any state without the consent of the American Farm Bureau Federation, or in any particular state without the consent of its state Farm Bureau Federation. In addition, FBL Financial Group, Inc. is an insurance holding company, and as such is subject to statutes governing insurance holding companies in various jurisdictions. Under the terms of applicable state statutes, any person or entity desiring to acquire more than a specified percentage (commonly 10%) of the Company's outstanding voting securities is first required to obtain approval of applicable state insurance regulators. These and certain other factors, including absence of cumulative voting, may have the effect of preventing or delaying a change of control of the Company and render it unlikely that the purchasers of the Shares could obtain a "control premium" with respect to the sale of the Shares. See "Business -- Regulation" and "Certain Transactions and Relationships." CONFLICTS OF INTEREST; RELATIONSHIPS WITH THE FARM BUREAU. The business and operations of the Company, the Iowa Farm Bureau Federation, affiliates of the Iowa Farm Bureau Federation, and Farm Bureau Mutual, are interrelated. The substantial overlap of the business, executive officers and Directors of the Company, the Iowa Farm Bureau Federation and Farm Bureau Mutual may give rise to conflicts of interest among such companies. Such conflicts could arise, for example, with respect to business dealings among such companies, the use of a common agency force, the sharing of employees, space and other services and facilities under intercompany agreements, and the allocation of business opportunities among the companies. Additional conflicts of interest could arise due to the fact that the Presidents of the state Farm Bureau Federations, who will serve as Directors elected by Class B stockholders pursuant to the Stockholders Agreement, are elected as Presidents by members of Farm Bureau organizations, many of whom are also purchasers of the Company's products. See "Certain Transactions and Relationships -- Services Agreement with Farm Bureau Management Corporation." It is expected that potential conflicts involving the Company and Farm Bureau Mutual will be resolved by a coordinating committee consisting of two Directors of the Company who are not directors of Farm Bureau Mutual and two directors of Farm Bureau Mutual who are not Directors of the Company. The Audit Committee of the Company is required by the Bylaws of the Company to consist solely of Class A Directors who are independent of management and free from any relationships that would interfere with the exercise by such Class A Directors of independent judgment as committee members. The Audit Committee's responsibility includes review with the auditors and management of any material transaction or series of similar transactions to which the Company is a party involving, among others, any five percent stockholder of the Company, and reporting to the Board of Directors any such transaction determined by the Audit Committee to be unfair to the Company. Conflicts of interest could also arise between the Company and the various state Farm Bureau Federations in the life-only states, whose presidents serve as Directors of the Company, and which control their state affiliated property-casualty insurance company, with respect to the use of the common agency force. The Company has adopted a conflict of interest policy which requires a Director to disclose to the Board of Directors and any appropriate committee of the Board, the existence of any transaction or proposed transaction in which the Director has a direct or indirect interest, and the material facts relating thereto. 10 RESTRICTIONS ON ABILITY TO PAY DIVIDENDS. FBL Financial Group, Inc. is a holding company without independent operations other than the provision of the services of its employees to its subsidiaries and to its affiliated companies, Farm Bureau Mutual, Iowa Farm Bureau Federation, Management Corp. and South Dakota Mutual, on a cost basis plus one-half of one percent thereof. See "Certain Transactions and Relationships." The primary source of cash of FBL Financial Group, Inc. is expected to be dividends on the stock of its insurance subsidiaries. The payment of dividends to FBL Financial Group, Inc. by its insurance subsidiaries is subject to limitations imposed by applicable insurance laws. "Extraordinary" dividends may not be paid without permission of the Insurance Commissioner of the state of domicile of the respective insurance subsidiary. An "extraordinary" dividend is defined, in general, 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, with respect to the calculation for the Life Companies, and the lesser of, with respect to the calculation for Utah Insurance, (i) 10% of policyholders' surplus (total statutory capital stock and surplus) as of December 31 of the preceding year or (ii) the statutory net gain from operations (excluding realized gains on investments) of the insurer for the 12-month period ending the December 31 of the preceding year. For 1996, the maximum amount available for payment of dividends by Farm Bureau Life without the approval of the Iowa Insurance Commissioner is $48.6 million, without giving effect to the contemplated dividend of the stock of FBL Financial Services, Inc., with a statutory carrying value of approximately $21.1 million at March 31, 1996. The maximum amount available for payment of dividends by Western Life in 1996 without the approval by the Colorado Insurance Commissioner is $5.7 million. The maximum amount available for payment of dividends by Utah Insurance in 1996 without the approval of the Utah Insurance Commissioner is $924,000. Annual cumulative dividends on the outstanding shares of Series A Preferred Stock are expected to be $5.0 million. The Company has never paid dividends on its common stock. 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 NASD licensed broker-dealers and agents are also subject to regulation by the Securities and Exchange Commission, the NASD, and state agencies. During the past several years, 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 are reexamining 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. The NAIC has approved risk-based capital (RBC) standards and is considering a model investment law. It is anticipated that the NAIC RBC standards will apply to all of the Company's insurance subsidiaries in 1996. Management believes that, based on the Company's financial statements and its interpretation of the RBC formula, the capital levels of its subsidiaries are sufficient to support the level of risk inherent in their operations and such capital levels are in excess of the probable minimums required. Management does not believe the adoption in any of its states of operation of either 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. See "Business -- Regulation." Individual state guaranty associations assess insurance companies to pay benefits to policyholders of insolvent or failed insurance companies. The Company's insurance subsidiaries were assessed $436,000 in the three month period ended March 31, 1996, $1.4 million in 1995, $1.6 million in 1994 and $708,000 in 1993. The impact of such assessments may be partially offset by credits against future state premium taxes. The Company cannot predict the amount of any future assessments, nor has it attempted to estimate the amount of assessments to be made for known insolvencies. 11 POTENTIAL TAX LEGISLATION. Congress has from time to time considered possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. The United States Supreme Court recently held in NATIONSBANK OF NORTH CAROLINA V. VARIABLE ANNUITY LIFE INSURANCE COMPANY that annuities are not insurance for purposes of the National Bank Act. This factor or others may cause Congress to consider legislation that would eliminate such tax deferral, at least for certain annuities. Other possible legislation, including a simplified "flat tax" income tax structure with an exemption from taxation for investment income, could also adversely affect the sale of life insurance compared with other financial products if such legislation were to be enacted. There can be no assurance as to whether such legislation will be enacted or, if enacted, whether such legislation would contain provisions with possible adverse effects on the Company's annuity and life insurance products. 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, particularly to Farm Bureau members, its ability to develop competitive and profitable products and its maintenance of high ratings from 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. See "Glossary of Selected Insurance Terms -- A.M. Best rating." In connection with the development and sale of its products, the Company encounters significant competition from other insurance companies, many of whom have financial resources substantially greater than those of the Company, as well as from other investment alternatives available to its customers. In addition, several proposals to repeal or modify the Glass-Steagall Act of 1933, as amended, and the Bank Holding Company Act of 1956, as amended, have been made by members of Congress and the Clinton administration. Generally, the Bank Holding Company Act restricts banks from being affiliated with insurance companies. Certain of the proposals would repeal or modify these restrictions and permit banks to become affiliated with insurance companies. None of these proposals has yet been enacted, and it is not possible to predict whether any of these proposals will be enacted or, if enacted, their potential effect on the Company. INTEREST RATE FLUCTUATIONS; RISK OF IMPACT OF FORCED LIQUIDATION OF INVESTMENT PORTFOLIO. Interest rate fluctuations could impair the Company's ability to pay policyholder benefits with operating and investment cash flows, cash on hand and other cash sources. In the unanticipated event that such sources would prove inadequate, management believes the Company could meet shortfalls with funds available to Farm Bureau Life as a result of its membership in the Federal Home Loan Bank of Des Moines, as well as other borrowing sources. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Interest rate fluctuations may also have an impact on policyholder behavior. To the extent that interest rates credited by the Company are less than those generally available in the marketplace, increased policyholder lapses may be experienced. This would be mitigated in the current period by income generated by surrender charges from universal life insurance policies and annuity contracts, but would reduce the Company's future income. Surrender charges also serve to discourage early policyholder surrenders. Although historically the Company's actual lapse experience has been better than the industry average, no assurance can be given that this will always be true in the future. The Company's policy is to test the impact of forced liquidations of investments due to interest rate fluctuations. These tests include assumptions for increases in lapses if the Company's credited rate lags those of its competitors. Some of the Company's corporate bonds have call features which could cause the Company to reinvest these proceeds when market conditions are not favorable. As of March 31, 1996, approximately $342.8 million, or 30.4% of the bond portfolio excluding mortgage and other asset-backed securities of $1.1 billion, was subject to call. The Company's collateralized mortgage obligations (CMOs) and other asset-backed securities are purchased based on assumptions regarding rates of prepayments. To the extent that actual prepayments are earlier or later than anticipated at the time of purchase, the Company may 12 not receive cash flows when needed. These prepayment rates are influenced by interest rates available for new mortgages as well as general economic conditions. The Company's policy is not to purchase the more volatile tranches of CMOs including, but not limited to, interest only, principal only, floater, inverse floater, PAC II, Z or support tranches. FUTURE POLICY BENEFITS. The liability established by the Company for future life insurance policy benefits is based upon a number of factors, including certain assumptions. If the Company underestimates future policy benefits, additional expenses would be incurred by the Company at the time the Company becomes aware of the inadequacy. Management believes that liabilities for future policy benefits are adequate based on its analysis of industry studies and the mortality, morbidity, persistency and benefit payment experience of the Life Companies. PRODUCT ASSUMPTIONS. The Company makes certain assumptions as to expected mortality, lapse rates and other factors in developing the pricing and other terms of its life insurance products. These assumptions are based on the Company's experience with its own products as well as on industry experience. The Company reviews and revises its assumptions regularly so as to reflect actual experience on a current basis. Variation of actual experience from that assumed by the Company in developing such terms may affect such product's profitability. CATASTROPHE LOSSES IN THE PROPERTY-CASUALTY INSURANCE INDUSTRY; GEOGRAPHIC CONCENTRATION. Property-casualty insurers are subject to claims arising out of catastrophes, which may have a significant impact on their results of operations and financial condition. The Company, through its participation in the Farm Bureau Mutual pool, may experience catastrophe losses in the future which could have a material adverse effect on the Company. Catastrophes can be caused by various events including hurricanes, earthquakes, tornadoes, wind, hail, fires, severe winter weather, explosions and floods, and the frequency and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of the total amount of insured exposure in the area affected by the event and the severity of the event. The Farm Bureau Mutual pool attempts to mitigate the effects of claims arising out of catastrophes by reinsuring a portion of those claims. Reinsurance does not relieve the Company of any liability under its policies, but permits the Company to obtain reimbursement from its reinsurers to the extent of the claims reinsured, provided its reinsurers remain solvent. The Company believes, based upon its review of the pool's reinsurers' financial statements and reputations in the reinsurance marketplace, that the financial condition of such reinsurers is sound. However, there can be no assurance that reinsurance will be adequate to protect the Company against such losses or that such reinsurance will continue to be available in the future at commercially reasonable rates. See "Business -- Property-Casualty Segment -- Farm Bureau Mutual Pool." The officers and employees of the Company manage the operations of four Farm Bureau related property-casualty insurance companies: Farm Bureau Mutual (which writes business in Iowa and Minnesota); South Dakota Farm Bureau Mutual (which writes business in South Dakota), Western Agricultural Insurance Company (Western Ag) (which writes business in Arizona) and Western Farm Bureau Mutual Insurance Company (Western Farm Bureau Mutual) (which writes business in New Mexico). Although the management of the Company manages the day-to-day operations of such companies, each of such companies is governed by its own independent board of directors. The property-casualty business written by Utah Insurance (which writes business in Utah) is pooled with the property-casualty insurance written by the four companies in Iowa, Minnesota, South Dakota, Arizona and New Mexico in order to diversify the risks of geographic concentration. See "Business -- Property-Casualty Segment -- Farm Bureau Mutual Pool" and "Certain Transactions and Relationships -- Farm Bureau Mutual Pool." For the three month period ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, 61%, 58%, 56% and 59%, respectively, of the statutory direct premiums written net of reinsurance cessions were derived from policies issued in Iowa. The revenues and profitability of the Company's property-casualty business are therefore subject to prevailing economic, regulatory, demographic and other conditions, including adverse weather, in Iowa and the other five states. 13 To diversify geographic exposures and utilize its capital resources the Farm Bureau Mutual pool also assumes risks under property-casualty insurance written on risks throughout the United States, including coastal areas subject to hurricanes and other areas subject to earthquakes. Farm Bureau Mutual assumes exposures from other insurers through various reinsurance contracts. The primary assumed catastrophic exposures are from direct property catastrophe treaties providing coverage to insurance companies for large loss events. The estimated maximum loss to the Company through such contracts would be approximately $4 million per occurrence through Utah Insurance when its share of the Farm Bureau Mutual pool is increased to 20%. CYCLICALITY IN THE PROPERTY-CASUALTY INSURANCE INDUSTRY. Historically, the property-casualty insurance industry has been highly cyclical. The property-casualty industry's profitability can be affected significantly by price competition, volatile and unpredictable developments such as extreme weather conditions and natural disasters, legal developments affecting insurer liability and the size of jury awards, fluctuations in interest rates and other factors that affect investment returns and other general economic conditions and trends that may affect the adequacy of reserves. Competition for premiums in the property-casualty insurance markets may have an adverse impact on the Company's rates and profitability. UNCERTAINTY REGARDING ADEQUACY OF PROPERTY-CASUALTY LOSS RESERVES. Utah Insurance, through the Farm Bureau Mutual pool, maintains reserves to cover its estimated ultimate liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred as of the end of each accounting period. These reserves are estimates, involving actuarial projections at a given time, of what the property-casualty pool expects the ultimate settlement and administration of claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claims severity and judicial theories of liability, legislative activity and other factors. The inherent uncertainties of estimating reserves are greater for certain types of property-casualty insurance lines, particularly workers' compensation, where a longer period of time may elapse before a definitive determination of ultimate liability may be made, and environmental liability, where the technological, judicial and political climate changes over time. See "Business -- Property-Casualty Segment -- Farm Bureau Mutual Pool" and "-- Loss and Loss Adjustment Expense." The Company regularly reviews reserving techniques, reinsurance and overall reserve adequacy. Based upon (i) review of historical data, legislative enactments, judicial decisions, legal developments in imposition of damages, changes in political attitudes and trends in general economic conditions, (ii) review of per claim information, (iii) historical loss experience of the property-casualty operations of the Company and the industry and (iv) the relatively short-term nature of most of its property-casualty insurance policies, management believes that adequate provision has been made for reserves. However, establishment of appropriate reserves is an inherently uncertain process involving estimates of future losses and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience. The Farm Bureau Mutual pool's reserves are annually certified by Company actuaries as required by insurance regulatory authorities. See "Business -- Property - Casualty Segment -- Farm Bureau Mutual Pool" and "-- Loss and Loss Adjustment Expense." ABSENCE OF PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE. Prior to the Offering, there has been no public market for the Shares, and there can be no assurance that an active public market for the Shares will develop or that the Shares can be resold at the initial public offering price. The initial public offering price will be determined by negotiations among the Company, the Selling Stockholders, and the Representatives (as defined below in "Underwriting"). No assurance can be given as to the trading volume of the Shares in the public market or the market price of the Shares after the Offering. The Shares have been authorized for listing on the New York Stock Exchange under the symbol FFG, subject to official notice of issuance. SHARES ELIGIBLE FOR FUTURE SALE. No prediction can be made as to the effect, if any, that future sales of Shares, or the availability of Shares for future sale, will have on the market price of the Shares prevailing from time to time. Sales of substantial numbers of Shares (including shares issued upon the exercise of stock options or upon conversion of Class B Common Stock) or the perception that such sales could occur, might 14 adversely affect prevailing market prices for the Shares. The Iowa Farm Bureau Federation, the Selling Stockholders, all of the other existing stockholders of the Company and purchasers of the Shares reserved by the Underwriters for sale to certain Directors, officers, employees and other persons having a relationship with the Farm Bureau organizations will agree not to offer, sell, contract to sell, or otherwise dispose of any shares of common stock or any securities convertible into or exchangeable or exercisable for common stock for a period of 180 days after the date of this Prospectus without the prior written consent of Alex. Brown & Sons Incorporated. After completion of the Offering and expiration of the 180 day period described above, in addition to the Shares sold in the Offering, substantially all of the 13,666,810 Shares of Class A Common Stock held by the existing stockholders (as well as 760,208 shares of Class A Common Stock issuable upon exercise of outstanding options and 1,192,990 shares of Class A Common Stock subject to issuance upon conversion of the Class B Common Stock) will be eligible for sale on the open market under Rule 144 of the Securities Act, subject to the volume and timing requirements of Rule 144. An increase in the number of shares of Class A Common Stock that becomes available for sale in the public market as a result of sales made pursuant to Rule 144 may adversely affect the trading price of the Shares in the public market and could impair the Company's ability to raise additional capital through the sale of its equity securities. See "Shares Eligible for Future Sale" and "Certain Transactions and Relationships." There is no established market for the Class B Common Stock. 15 THE COMPANY GENERAL The Company through its subsidiaries underwrites, markets and distributes life insurance, annuities, property-casualty insurance and mutual funds to individuals and small businesses in 15 midwestern and western states. The Company has exclusive marketing arrangements with the state Farm Bureau Federations in its territory and targets sales to approximately 700,000 Farm Bureau member families and other rural, small town and suburban residents through an exclusive agency force. Through acquisitions of Rural Security Life in 1993 and Western Life in 1994, the Company expanded its operations to 15 states, including Wisconsin and the eight Western Life states. Prior to 1993 the Company operated only in Iowa, Nebraska, Minnesota, South Dakota and Utah, and in Kansas sold mutual funds only. COMPANY HISTORY AND FARM BUREAU AFFILIATION Throughout the 1920s and 1930s, the Iowa Farm Bureau Federation allied itself with unaffiliated insurance companies to provide members with hail insurance, life insurance, automobile and fire insurance and similar coverages. Because of dissatisfaction with these alliances, in January 1939 the Iowa Farm Bureau Federation organized Farm Bureau Mutual as a property-casualty insurance company. In 1945 the Iowa Farm Bureau Federation organized Farm Bureau Life. At the request of the respective state Farm Bureau Federations, Farm Bureau Life expanded from Iowa into Nebraska in 1951 and to Minnesota in 1954. In 1971 the Company initiated the sale of its mutual funds. Utah Insurance was acquired by Farm Bureau Life in 1984 and Utah Farm Bureau Life Insurance Company's business was managed by Farm Bureau Life until it was merged with Farm Bureau Life in 1988. Utah Insurance operated under a quota share reinsurance agreement from 1984 to 1990 at which time it entered into a pooling arrangement with Farm Bureau Mutual and South Dakota Mutual. In 1987 the Company's life operations were expanded to South Dakota. Variable insurance products were introduced in 1990. In 1993, Farm Bureau Life became the majority owner of Rural Security Life, the life insurance affiliate of the Wisconsin Farm Bureau Federation. Effective January 1, 1994 the Company acquired all of the common stock of Western Life in exchange for stock of the Company. Western Life was organized as a Colorado life insurance company in 1952 by Farm Bureau leaders in six western states. Other state Farm Bureau organizations subsequently became stockholders of Western Life. Western Life currently writes business in Arizona, Colorado, Idaho, Montana, New Mexico, Oklahoma, North Dakota and Wyoming, and Farm Bureau Life has also qualified, or is in the process of qualifying, to write insurance in those states. State Farm Bureau Federations are generally organized as non-profit corporations. Each state Farm Bureau Federation is governed by an independent board of directors elected by voting delegates selected by vote of the individual members of the county Farm Bureau organizations within the state. State Farm Bureau Federations generally sponsor publications and legislation of interest to members and often organize and own other entities, such as insurance companies, for the purpose of providing services to the individual members of the county Farm Bureau organizations in the particular state. EXECUTIVE OFFICES FBL Financial Group, Inc. was incorporated in Iowa in 1993. The Company's principal executive offices are located at 5400 University Avenue, West Des Moines, Iowa 50266, and its telephone number is (515) 225-5400. 16 USE OF PROCEEDS All of the Shares offered hereby are being offered by the Selling Stockholders. The Company will not receive any proceeds from the sale of Shares in the Offering. DIVIDEND POLICY It is anticipated that the Board of Directors will declare a $0.07 quarterly cash dividend on the common stock, payable initially for the first quarter commencing subsequent to the date of this Prospectus. The Company intends to declare regular quarterly cash dividends in the future. However, the payment of dividends in the future will be subject to the discretion of the Board of Directors and will depend upon general business conditions, legal restrictions on the payment of dividends and other factors that the Board of Directors deems relevant. As a holding company, FBL Financial Group, Inc. is largely dependent upon dividends from its life insurance subsidiaries to pay dividends to its stockholders. The Company's insurance subsidiaries are subject to state laws that restrict their ability to distribute dividends. During 1996, the maximum amounts legally available for distribution by Farm Bureau Life (without giving effect to the contemplated dividend of the stock of FBL Financial Services, Inc. with a statutory carrying value of approximately $21.1 million at March 31, 1996) and Western Life are $48.6 million and $5.7 million, respectively, and the maximum amount legally available for distribution by Utah Insurance is $924,000. Annual cumulative dividends payable on the outstanding shares of Series A Preferred Stock are expected to be $5.0 million. See "Risk Factors -- Restrictions on Ability to Pay Dividends," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Business -- Regulation," and Note 10 of Notes to Consolidated Financial Statements. The total amount of dividends to be paid on all classes of stock of the Company for 1996, on an annualized basis, would be approximately $10.3 million. The total amount available for payment of dividends to FBL Financial Group, Inc. by its principal insurance subsidiaries in 1996 without regulatory approval (after giving effect to the dividend of stock of FBL Financial Services, Inc.) is approximately $34.1 million. CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996 and the pro forma capitalization of the Company assuming that the Series A Exchange and the increase in Utah Insurance's participation in the Farm Bureau Mutual pool had been consummated as of that date. This table should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto and "Pro Forma Consolidated Financial Statements" and notes thereto included elsewhere herein.
HISTORICAL PRO FORMA ---------- --------------- (DOLLARS IN THOUSANDS) Long-term debt....................................................................... $ 11,776 $ 26,776 Stockholders' equity (1): Preferred Stock, without par value -- authorized 10,000,000 shares, issued and outstanding 5,000,000 Series A Preferred.......................................... -- 100,000 Class A Common Stock, without par value -- authorized 88,500,000 shares, issued and outstanding 22,666,810 shares historical and 17,666,810 shares pro forma.......... 143,773 43,773 Class B Common Stock, without par value -- authorized 1,500,000 shares, issued and outstanding 1,192,990 shares...................................................... 7,567 7,567 Net unrealized investment gains.................................................... 13,781 13,781 Retained earnings.................................................................. 390,899 390,899 ---------- --------------- Total stockholders' equity....................................................... 556,020 556,020 ---------- --------------- Total capitalization........................................................... $ 567,796 $ 582,796 ---------- --------------- ---------- ---------------
- ------------------------ (1) Does not include 2,942,990 shares reserved for issuance under the Stock Option Plan and upon conversion of Class B Common Stock. 17 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial and statutory data of the Company for the periods indicated. This information should be read in conjunction with the consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The selected data as of December 31, 1995, 1994, 1993 and 1992, and for each of the four years in the period ended December 31, 1995, with the exception of pro forma net income per common share, pro forma book value per common share and the information presented under the caption "Other Data", are derived from the Company's consolidated financial statements which have been audited by Ernst & Young LLP, independent auditors. The selected data as of March 31, 1996 and 1995, and for the three months then ended and as of December 31, 1991, and for the year then ended, with the exception of the information presented under the caption "Other Data", are derived from the Company's unaudited consolidated financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the consolidated financial statements as of or for the appropriate periods in conformity with generally accepted accounting principles.
AS OF OR FOR THE THREE MONTH PERIOD ENDED MARCH 31, AS OF OR FOR THE YEAR ENDED DECEMBER 31, ------------------------ ------------------------------------------------------------ 1996 1995 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA (1): Premiums and product charges: Universal life and annuity product charges........................... $ 11,317 $ 10,632 $ 43,722 $ 42,734 $ 26,500 $ 18,967 $ 18,722 Traditional life insurance premiums.......................... 19,131 18,227 75,450 72,222 46,050 44,831 42,460 Accident and health premiums (2)... 2,652 2,383 10,161 (1,956) 46,437 23,138 20,869 Property-casualty premiums......... 4,298 4,323 18,709 17,778 16,937 14,570 13,593 ----------- ----------- ----------- ----------- ---------- ---------- ---------- Total premiums and product charges... 37,398 35,565 148,042 130,778 135,924 101,506 95,644 Net investment income................ 52,428 48,037 223,108 178,834 138,320 126,500 117,339 Realized gains (losses) on investments......................... (2,098) 1,850 5,883 9,448 3,967 12,162 5,816 Other income......................... 5,592 7,138 28,952 30,825 25,251 21,183 18,854 ----------- ----------- ----------- ----------- ---------- ---------- ---------- Total revenues....................... $ 93,320 $ 92,590 $ 405,985 $ 349,885 $ 303,462 $ 261,351 $ 237,653 ----------- ----------- ----------- ----------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- ---------- ---------- ---------- Income from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income................... $ 15,957 $ 13,934 $ 90,447 $ 59,873 $ 38,931 $ 41,232 $ 26,208 Income from continuing operations.... 10,889 9,043 59,628 35,587 22,705 26,367 17,198 Income from continuing operations per common share........................ $ 0.46 $ 0.39 $ 2.53 $ 1.52 $ 1.26 $ 1.56 $ 1.02 Net income (3)....................... $ 10,889 $ 9,043 $ 59,628 $ 42,066 $ 19,803 $ 21,435 $ 9,254 Net income per common share (3)...... $ 0.46 $ 0.39 $ 2.53 $ 1.80 $ 1.10 $ 1.27 $ 0.55 Pro forma net income per common share (4)................................. 0.50 2.92 CONSOLIDATED BALANCE SHEET DATA (1): Total investments.................... $ 2,668,001 $ 2,415,565 $ 2,646,123 $ 2,337,154 $1,757,277 $1,385,669 $1,291,986 Total assets......................... 3,120,166 2,869,806 3,090,851 2,792,535 2,142,849 1,728,963 1,592,612 Long-term debt....................... 11,776 17,445 12,604 18,519 30,638 881 835 Total liabilities.................... 2,559,643 2,406,898 2,522,050 2,357,214 1,814,206 1,452,566 1,336,967 Total stockholders' equity........... 556,020 458,323 564,298 430,743 312,277 262,582 243,994 Book value per common share.......... $ 23.30 $ 19.54 $ 23.65 $ 18.37 $ 17.07 $ 15.51 $ 14.41 Pro forma book value per common share (4)................................. 24.18 STATEMENT OF INCOME SEGMENT DATA (1): Income (loss) from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income by segment Life insurance..................... $ 15,745 $ 13,261 $ 88,500 $ 58,573 $ 38,898 $ 40,952 $ 25,709 Property-casualty insurance........ 346 676 2,083 1,288 33 280 499 Corporate.......................... (134) (3) (136) 12 -- -- -- ----------- ----------- ----------- ----------- ---------- ---------- ---------- 15,957 13,934 90,447 59,873 38,931 41,232 26,208
18
AS OF OR FOR THE THREE MONTH PERIOD ENDED MARCH 31, AS OF OR FOR THE YEAR ENDED DECEMBER 31, ------------------------ ------------------------------------------------------------ 1996 1995 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OTHER DATA (1): Adjusted operating income (5)........ $ 10,804 $ 8,304 $ 41,648 $ 29,780 $ 19,024 $ 17,067 $ 13,292 Adjusted operating income per common share (5)........................... $ 0.45 $ 0.35 $ 1.77 $ 1.27 $ 1.06 $ 1.01 $ .79 Pro forma adjusted operating income per common share (4)................ 0.50 1.96 Life insurance statutory capital and surplus (6)(7)...................... $ 296,289 $ 253,086 $ 288,302 $ 250,709 $ 177,130 $ 164,600 $ 154,075 Net statutory premiums collected by the Life Companies (6)(8)........... 70,859 59,930 233,538 230,336 218,976 168,064 157,487 Life insurance in force.............. 15,356,041 14,475,141 15,254,669 14,296,709 9,525,136 7,098,231 6,579,420 Statutory property-casualty ratios (6): Loss & loss adjustment expense (9)............................... 74.7% 68.8% 72.8% 75.6% 82.4% 86.2% 83.0% Expense (10)....................... 27.4 25.5 25.1 25.9 26.2 25.4 25.7 Combined (11)...................... 102.1 94.3 97.9 101.5 108.6 111.6 108.7
- ------------------------------ (1) As discussed in more detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations", the comparability of selected data from year to year is impacted by the acquisition of Rural Security Life in March 1993 and the acquisition of Western Life and the minority interests in FBL Insurance Company and Rural Security Life in January 1994. (2) During 1994, the Company ceased writing medical insurance business. The Company continues to sell individual disability income insurance. (3) The Company recognized net income (loss) related to its discontinued cable television operations of $6.5 million, or $0.28 per share, $(2.9) million, or $(0.16) per share, $(4.9) million, or $(0.29) per share and $(7.9) million, or $(0.47) per share for the years ended December 31, 1994, 1993, 1992 and 1991, respectively. (4) Pro forma net income per common share and pro forma adjusted operating income per common share are presented as if the increase in Utah Insurance's participation in the Farm Bureau Mutual pool and the Series A Exchange had occurred as of January 1, 1995. Pro forma book value per common share is presented as if the increase in Utah Insurance's participation in the Farm Bureau Mutual pool and the Series A Exchange had occurred as of March 31, 1996. See "Pro Forma Consolidated Financial Statements" and related notes thereto included elsewhere herein. (5) 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 realized gains (losses) on investments (less that portion of amortization of deferred policy acquisition costs and value of insurance in force acquired and income taxes attributable to such gains), discontinued operations and net income/loss from a venture capital investment company subsidiary. Adjusted operating income and adjusted operating income per common share should not be considered as necessarily being better indicators of the Company's overall operating performance than net income or net income per common share, nor are they better indicators of the Company's liquidity than cash flows. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Adjusted Operating Income." (6) 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. (7) Statutory capital and surplus reflects amounts related to Farm Bureau Life and Western Life (after 1993) only and does not include the Asset Valuation Reserve, Interest Maintenance Reserve or Mandatory Securities Valuation Reserve for the appropriate periods. (8) Net statutory premiums as presented for statutory reporting purposes include premiums collected from annuities and universal life-type products. For GAAP reporting, such premiums received are not reported as premium revenues. (9) Loss and loss adjustment expense ratio equals the sum of statutory incurred losses and loss adjustment expenses divided by statutory earned premiums. (10) Expense ratio equals all statutory expenses, including policyholder dividends and excluding loss and loss adjustment expenses, divided by statutory net written premiums. (11) Combined ratio equals the sum of the loss and loss adjustment expense and expense ratios. 19 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma consolidated statements of income are presented as if the increase in Utah Insurance's participation in the Farm Bureau Mutual pool and the Series A Exchange had occurred as of January 1, 1995. The unaudited pro forma consolidated balance sheet is presented as if the increase in Utah Insurance's participation in the Farm Bureau Mutual pool and the Series A Exchange had occurred as of March 31, 1996. The unaudited pro forma consolidated financial statements are based on the historical consolidated financial statements of the Company as of and for the three month period ended March 31, 1996 and for the year ended December 31, 1995, and should be read in conjunction with the consolidated financial statements of the Company and notes thereto included elsewhere herein. The pro forma data are not necessarily indicative of the results of operations or financial position that would have been reported if the increase in Utah Insurance's participation in the Farm Bureau Mutual pool and the Series A Exchange had occurred at the foregoing assumed dates, nor are they necessarily indicative of future results of operations or financial position of the Company. PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA HISTORICAL ADJUSTMENTS AS ADJUSTED ----------- --------------- --------------- Revenues: Universal life and annuity product charges................ $ 11,317 $ -- $ 11,317 Traditional life insurance premiums....................... 19,131 -- 19,131 Accident and health premiums.............................. 2,652 -- 2,652 Property-casualty premiums................................ 4,298 6,447(1) 10,745 Net investment income..................................... 52,428 336(2) 52,764 Realized losses on investments............................ (2,098) -- (2,098) Other income.............................................. 5,592 53(1) 5,645 ----------- --------------- --------------- Total revenues.......................................... 93,320 6,836 100,156 Benefits and expenses: Universal life and annuity benefits....................... 30,353 -- 30,353 Traditional life insurance and accident and health benefits................................................. 12,096 -- 12,096 Increase in traditional and accident and health future policy benefits.......................................... 5,294 -- 5,294 Distributions to participating policyholders.............. 6,475 43(1) 6,518 Losses and loss adjustment expenses incurred on property-casualty policies............................... 3,211 4,936(1) 8,147 Underwriting, acquisition and insurance expenses.......... 15,780 1,724(1) 17,504 Interest expense.......................................... 227 345(3) 572 Other expenses............................................ 3,927 -- 3,927 ----------- --------------- --------------- Total benefits and expenses............................. 77,363 7,048 84,411 ----------- --------------- --------------- 15,957 (212) 15,745 Income taxes................................................ (5,689) 74(4) (5,615) Minority interest in earnings of subsidiaries............... (268) -- (268) Equity income, net of related income taxes.................. 889 -- 889 ----------- --------------- --------------- Net income.................................................. 10,889 (138) 10,751 Preferred dividends......................................... -- (1,250)(5) (1,250) ----------- --------------- --------------- Net income applicable to common stock....................... $ 10,889 $ (1,388) $ 9,501 ----------- --------------- --------------- ----------- --------------- --------------- Net income per common share................................. $ 0.46 $ 0.50(6) ----------- --------------- ----------- --------------- Adjusted operating income applicable to common stock........ $ 10,804 $ (1,388) $ 9,416(6) ----------- --------------- --------------- ----------- --------------- --------------- Adjusted operating income per common share.................. $ 0.45 $ 0.50(6) ----------- --------------- ----------- --------------- Weighted average number of common shares outstanding........ 23,859,800 18,859,800(6) ----------- --------------- ----------- ---------------
See accompanying notes to the pro forma consolidated financial statements. 20 PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA HISTORICAL ADJUSTMENTS AS ADJUSTED ----------- ----------- --------------- Revenues: Universal life and annuity product charges.................... $ 43,722 $ -- $ 43,722 Traditional life insurance premiums........................... 75,450 -- 75,450 Accident and health premiums.................................. 10,161 -- 10,161 Property-casualty premiums.................................... 18,709 28,063(1) 46,772 Net investment income......................................... 223,108 1,587(2) 224,695 Realized gains on investments................................. 5,883 -- 5,883 Other income.................................................. 28,952 260(1) 29,212 ----------- ----------- --------------- Total revenues.............................................. 405,985 29,910 435,895 Benefits and expenses: Universal life and annuity benefits........................... 112,125 -- 112,125 Traditional life insurance and accident and health benefits... 49,316 -- 49,316 Increase in traditional and accident and health future policy benefits..................................................... 22,976 -- 22,976 Distributions to participating policyholders.................. 25,747 119(1) 25,866 Losses and loss adjustment expenses incurred on property-casualty policies................................... 13,621 21,795(1) 35,416 Underwriting, acquisition and insurance expenses.............. 73,431 7,056(1) 80,487 Interest expense.............................................. 1,007 1,379(3) 2,386 Other expenses................................................ 17,315 -- 17,315 ----------- ----------- --------------- Total benefits and expenses................................. 315,538 30,349 345,887 ----------- ----------- --------------- 90,447 (439) 90,008 Income taxes.................................................... (32,070) 154(4) (31,916) Minority interest in earnings of subsidiaries................... (351) -- (351) Equity income, net of related income taxes...................... 1,602 -- 1,602 ----------- ----------- --------------- Net income...................................................... 59,628 (285) 59,343 Preferred dividends............................................. -- (5,000)(5) (5,000) ----------- ----------- --------------- Net income applicable to common stock........................... $ 59,628 $(5,285) $ 54,343 ----------- ----------- --------------- ----------- ----------- --------------- Net income per common share..................................... $ 2.53 $ 2.92(6) ----------- --------------- ----------- --------------- Adjusted operating income applicable to common stock............ $ 41,648 $(5,285) $ 36,363(6) ----------- ----------- --------------- ----------- ----------- --------------- Adjusted operating income per common share...................... $ 1.77 $ 1.96(6) ----------- --------------- ----------- --------------- Weighted average number of common shares outstanding............ 23,591,100 18,591,100(6) ----------- --------------- ----------- ---------------
See accompanying notes to the pro forma consolidated financial statements. 21 PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 1996 (DOLLARS IN THOUSANDS)
PRO FORMA HISTORICAL ADJUSTMENTS AS ADJUSTED ------------ ------------- ------------ ASSETS Investments: Fixed maturities: Held for investment................................................ $ 721,083 $ -- $ 721,083 Available for sale................................................. 1,372,742 15,000 (3) 1,395,126 7,384 (7) Equity securities.................................................... 90,856 -- 90,856 Held in inventory.................................................... 21,327 -- 21,327 Mortgage loans on real estate........................................ 267,534 -- 267,534 Investment real estate, less allowances for depreciation............. 28,997 -- 28,997 Policy loans......................................................... 116,633 -- 116,633 Other long-term investments.......................................... 12,044 -- 12,044 Short-term investments............................................... 36,785 -- 36,785 ------------ ------------- ------------ Total investments.................................................. 2,668,001 22,384 2,690,385 Securities and indebtedness of related parties......................... 61,790 -- 61,790 Accrued investment income.............................................. 32,370 -- 32,370 Accounts and notes receivable.......................................... 1,804 -- 1,804 Amounts receivable from affiliates..................................... 4,194 -- 4,194 Reinsurance recoverable................................................ 33,030 -- 33,030 Deferred policy acquisition costs...................................... 146,573 2,690 (7) 149,263 Value of insurance in force acquired................................... 19,190 -- 19,190 Property and equipment, less allowances for depreciation............... 61,388 -- 61,388 Current income taxes recoverable....................................... 8,807 -- 8,807 Goodwill, less accumulated amortization................................ 10,191 -- 10,191 Other assets........................................................... 22,113 -- 22,113 Assets held in separate accounts....................................... 50,715 -- 50,715 ------------ ------------- ------------ Total assets....................................................... $ 3,120,166 $ 25,074 $ 3,145,240 ------------ ------------- ------------ ------------ ------------- ------------
See accompanying notes to the pro forma consolidated financial statements. 22 PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 1996 (DOLLARS IN THOUSANDS)
PRO FORMA HISTORICAL ADJUSTMENTS AS ADJUSTED ------------ --------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Policy liabilities and accruals: Future policy benefits: Universal life and annuity products........................... $ 1,421,972 $ -- $ 1,421,972 Traditional life insurance and accident and health products... 657,085 -- 657,085 Unearned revenue reserve...................................... 18,138 -- 18,138 Other policy claims and benefits................................ 7,776 -- 7,776 Reserve and unearned premiums on property-casualty policies..... 47,480 10,074 (7) 57,554 ------------ --------------- ------------ 2,152,451 10,074 2,162,525 Other policyholders' funds: Supplementary contracts without life contingencies.............. 119,378 -- 119,378 Advance premiums and other deposits............................. 87,025 -- 87,025 Accrued dividends............................................... 14,065 -- 14,065 ------------ --------------- ------------ 220,468 -- 220,468 Long-term debt.................................................... 11,776 15,000 (3) 26,776 Amounts payable to affiliates..................................... 13,346 -- 13,346 Deferred income taxes............................................. 30,470 -- 30,470 Other liabilities................................................. 80,417 -- 80,417 Liabilities related to separate accounts.......................... 50,715 -- 50,715 ------------ --------------- ------------ Total liabilities............................................... 2,559,643 25,074 2,584,717 Minority interest in subsidiary..................................... 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 A shares.................................................. -- 100,000 (8) 100,000 Class A Common Stock, without par value -- authorized 88,500,000 shares, issued and outstanding 22,666,810 shares historical, 17,666,810 shares as adjusted.................................... 143,773 (100,000)(8) 43,773 Class B Common Stock, without par value -- authorized 1,500,000 shares, issued and outstanding 1,192,990 shares.................. 7,567 7,567 Net unrealized investment gains................................... 13,781 -- 13,781 Retained earnings................................................. 390,899 -- 390,899 ------------ --------------- ------------ Total stockholders' equity...................................... 556,020 -- 556,020 ------------ --------------- ------------ Total liabilities and stockholders' equity...................... $ 3,120,166 $ 25,074 $ 3,145,240 ------------ --------------- ------------ ------------ --------------- ------------
See accompanying notes to the pro forma consolidated financial statements. 23 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The unaudited pro forma consolidated statements of income are presented as if the increase in Utah Insurance's participation in the Farm Bureau Mutual pool and the Series A Exchange had occurred as of January 1, 1995. The unaudited pro forma consolidated balance sheet is presented as if the increase in Utah Insurance's participation in the Farm Bureau Mutual pool and the Series A Exchange had occurred as of March 31, 1996. (1) Property-casualty premiums, other income, distributions to participating policyholders, losses and loss adjustment expenses incurred on property-casualty policies and underwriting, acquisition and insurance expenses have been increased to reflect the increase in Utah Insurance's participation in the Farm Bureau Mutual pool from 8% to 20%. With respect to property-casualty premiums, other income, distributions to participating policyholders and underwriting, acquisition and insurance expenses, the pro forma adjustment equals 12% of the Farm Bureau Mutual pool results. Historically, Utah Insurance has recorded 8% of the pool results for these items in its financial statements. Under the terms of the revised pooling agreement, on an ongoing basis Utah Insurance will record 20% of the pool results relating to these items. The pro forma adjustment to losses and loss adjustment expenses incurred on property-casualty policies equals 12% of the Farm Bureau Mutual pool results applicable to losses incurred during the period, excluding development of loss and loss adjustment expense reserves as of December 31, 1994. The calculation of the pro forma adjustment is as follows:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1996 1995 ----------------- -------------- (DOLLARS IN THOUSANDS) Total losses and loss adjustment expenses for the Farm Bureau Mutual pool........................................ $ 40,141 $ 170,269 Less: development of loss and loss adjustment expense reserves as of December 31, 1994.......................... 1,000 11,334 ------- -------------- Total losses and loss adjustment expenses excluding development of loss and loss adjustment expense reserves as of December 31, 1994 for the Farm Bureau Mutual pool... 41,141 181,603 Increase in pooling percentage............................. 12% 12% ------- -------------- Pro forma adjustment....................................... $ 4,936 $ 21,795 ------- -------------- ------- --------------
See "Business -- Property-Casualty Segment" for additional information regarding the Farm Bureau Mutual pool, including a summary of net premiums earned by product line and by state. (2) Net investment income has been adjusted to include the effect of the following:
INCREASE (DECREASE) TO NET INVESTMENT INCOME ------------------------------------ THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1996 1995 ------------------- --------------- (DOLLARS IN THOUSANDS) Assumed $15.0 million capital contribution on January 1, 1995 to Utah Insurance in connection with the increase in its pooling percentage..................................... $ 289 $ 1,182 $7.0 million received from Farm Bureau Mutual (see note 7 below)..................................................... 148 553 Foregone investment income on dividends to preferred stockholders............................................... (101) (148) ----- ------ Total..................................................... $ 336 $ 1,587 ----- ------ ----- ------
24 It is assumed the capital contribution and the cash received from Farm Bureau Mutual (see note 7 below) would have been invested and would have earned 7.81% and 7.88% during the three month period ended March 31, 1996 and the year ended December 31, 1995, respectively, the average annual return on the Company's investment portfolio during those periods. With respect to the payment of preferred dividends, it has been assumed the dividends, totaling $1.3 million for the three month period ended March 31, 1996 and $5.0 million for the year ended December 31, 1995, were declared and paid quarterly as provided for in the Certificate of Designations of Series A Cumulative Voting Preferred Stock and that such amounts would have also earned 7.81% and 7.88% during the respective periods. The net cash received from Farm Bureau Mutual as of January 1, 1995 was calculated using actual unearned premiums as of January 1, 1995 and the actual ceding commission rate in effect at that time. (3) The $15.0 million capital contribution to Utah Insurance would have been funded through an acquisition of long-term debt by one of the Company's non-insurance subsidiaries. Interest on such debt is assumed, based on an external borrowing rate quoted to the Company, to be 9.2% throughout the periods. (4) All pro forma adjustments to operations have been tax affected at a 35% tax rate. (5) The Series A Preferred Stock pays cumulative annual cash dividends of $1.00 per share, payable quarterly in cash. (6) Net income applicable to common stock used in the calculation of pro forma net income per common share and adjusted operating income applicable to common stock used in the calculation of pro forma adjusted operating income per common share have been reduced by the effect of the pro forma adjustments to net income and the dividends to preferred stockholders totaling $1.3 million for the three month period ended March 31, 1996 and $5.0 million for the year ended December 31, 1995. The weighted average number of shares outstanding used in the calculation of pro forma net income and adjusted operating income per common share was reduced by the 5,000,000 common shares exchanged for preferred shares. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Adjusted Operating Income." (7) Unearned premiums on property-casualty policies will increase as a result of the increase in the pooling percentage. Deferred policy acquisition costs will increase as a result of ceding commissions on the unearned premiums. A net cash payment of $7.4 million will be received and invested by Utah Insurance from Farm Bureau Mutual for the difference between the additional unearned premiums assumed and the related ceding commissions. (8) Series A Preferred Stock has been increased to reflect the Series A Exchange of 5,000,000 shares of Class A Common Stock for 5,000,000 shares of Series A Preferred Stock. The Series A Preferred Stock has been recorded at its liquidation value of $20.00 per share. 25 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 SELECTED CONSOLIDATED FINANCIAL DATA AND CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE HEREIN. OVERVIEW The Company is an insurance holding company formed by the stockholders of Farm Bureau Life, FBL Insurance Company, Rural Security Life and Western Life in January 1994. The Consolidated Financial Statements include the accounts of Farm Bureau Life, Western Life (from January 1, 1994), FBL Insurance Company, Rural Security Life (from April 1, 1993), Utah Insurance and various non-insurance affiliates that provide functional support to the Company and its insurance subsidiaries. Western Life and Rural Security Life are reported on a purchase GAAP basis from their respective dates of acquisition. Therefore, prior to 1994, the accounts of Western Life are not included in the consolidated statements, and prior to April 1, 1993, the accounts of Rural Security Life are not included. The Company's primary life insurance subsidiaries, Farm Bureau Life and Western Life, account for all of its current life insurance operations. The assets and liabilities of Rural Security Life and FBL Insurance Company were consolidated into Farm Bureau Life on December 31, 1994, and Rural Security Life and FBL Insurance Company were liquidated in 1995. Rural Security Life was a stock life insurance company which was incorporated in the State of Wisconsin in 1949 and engaged in the sale of life, health, accident and disability insurance in Wisconsin. In April 1993, Farm Bureau Life acquired, through a stock exchange with Rural Mutual Insurance Company, 99.5% of the outstanding voting stock of Rural Security Life in exchange for approximately 7.5% of the outstanding voting stock of Farm Bureau Life. Effective January 1, 1994, all common stock of Farm Bureau Life and Western Life was exchanged for common stock of the Company. In addition, a 25.0% minority interest in FBL Insurance Company and the 0.5% minority interest in Rural Security Life were exchanged for common stock of the Company. The prior stockholders of Farm Bureau Life, Rural Security Life and FBL Insurance Company received approximately 83% of the stock of the Company and the prior stockholders of Western Life received approximately 17% of the stock of the Company. LIFE INSURANCE OPERATIONS. The Life Companies sell universal life insurance, traditional whole life and term life insurance, disability income insurance and annuity products. Farm Bureau Life's product portfolio also includes variable universal life and variable annuities. See "Business -- Products" for a more thorough discussion of the Life Companies' products. In accordance with GAAP, universal life insurance premiums and ordinary annuity considerations received are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for universal life and ordinary annuity 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 universal life insurance and ordinary annuity policies are reflected as decreases in liabilities for policyholder account balances and not as expenses. Amounts for interest credited to universal life and ordinary annuity policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the financial statements. The Life Companies receive investment income earned from the funds deposited into account balances by universal life and annuity policyholders, a portion of which is passed through to these policyholders in the form of interest credited. Premium revenues reported for traditional life and disability income insurance products are recognized as revenues when due. 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. 26 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 interest credited to policyholder account balances and 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 in proportion to expected profits or 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 are sold at a gain prior to their anticipated maturity. Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from period to period based on the level of claims incurred under insurance retention limits. The profitability of the Life Companies is primarily affected by expense levels, investment results 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. PROPERTY-CASUALTY OPERATIONS. The Company's property-casualty product lines and the percentage of property-casualty premiums associated with such lines for the three month period ended March 31, 1996 was as follows: automobile (52.7%), homeowners (7.4%), farm and ranch owners (12.9%), workers' compensation (6.0%), crop (0.9%), reinsurance (15.0%) and other (5.1%). See "Business -- Property-Casualty Segment". Property-casualty business written in Utah through Utah Insurance is pooled with business written in Iowa, Minnesota and South Dakota by Farm Bureau Mutual and South Dakota Mutual in the Farm Bureau Mutual pool. All of the companies participating in the Farm Bureau Mutual pool are managed by the Company. The current participation of Utah Insurance in the Farm Bureau Mutual pool, which had net premiums written of $57.2 million in the three month period ended March 31, 1996 and $235.6 million in the year ended December 31, 1995, is 8%. Management anticipates that during the second quarter of 1996 the share of Utah Insurance in the Farm Bureau Mutual pool will be increased to 20%, retroactive to January 1, 1996. As a result of the increase in the Company's participation in the Farm Bureau Mutual pool, the Company's share of property-casualty premiums, net investment income (as a result of the related increase in capitalization and increased premium income), other income, distributions to participating policyholders, losses and loss adjustment expenses and underwriting, acquisition and insurance expenses will increase in 1996. Also, the Company's exposure to property-casualty catastrophic losses will be increased. In addition, effective January 1, 1996, Farm Bureau Mutual entered into a loss pooling agreement with Western Ag, which, in turn, quota share reinsures business of Western Farm Bureau Mutual. Western Ag and Western Farm Bureau Mutual are Farm Bureau affiliated companies in Arizona and New Mexico, respectively, that are also managed by the Company. Under the loss pooling agreement all direct and assumed premiums, losses and allocated loss adjustment expenses (but not acquisition and other general underwriting expenses) of Farm Bureau Mutual, Utah Insurance and South Dakota Mutual will be pooled with these same items for Western Ag and Western Farm Bureau Mutual. Thus, further geographic and business diversification of risk for Utah Insurance will be achieved without significant change in the size of the Farm Bureau Mutual pool or its total premium volume. It is anticipated that the loss pooling agreement with Western Ag will not have a significant effect on the Company's financial position or results of operations. During the second quarter of 1996 through June 10, there were a number of storms in the Company's market area. Management estimates the after-tax loss to the Company from such storms will be in the range of $500,000 to $750,000. Management expects approximately one-half of such loss to be recognized in the second quarter of 1996, with the balance being amortized over the next 12 months in accordance with retrospective accounting related to the increase in the Company's participation in the Farm Bureau Mutual pool. 27 SEGMENT INFORMATION. For information concerning amounts of revenue, operating profit and loss and identifiable assets attributable to each of the Company's segments, see Note 13 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995 A summary of the Company's premiums and product charges is as follows:
THREE MONTHS ENDED MARCH 31, -------------------- 1996 1995 --------- --------- (DOLLARS IN THOUSANDS) Premiums and product charges: Universal life and annuity product charges............................................. $ 11,317 $ 10,632 Traditional life insurance premiums.................................................... 19,131 18,227 Accident and health premiums........................................................... 2,652 2,383 Property-casualty premiums............................................................. 4,298 4,323 --------- --------- Total................................................................................ $ 37,398 $ 35,565 --------- --------- --------- ---------
Premiums and product charges increased $1.8 million, or 5.2%, to $37.4 million for the 1996 period compared to $35.6 million for the 1995 period. This increase consisted primarily of a $1.6 million, or 5.5%, increase in traditional life insurance premiums and universal life and annuity product charges which, management believes, is principally attributable to the introduction of a new incentive agent compensation program effective January 1, 1996 and to more effective and increased training of its agency force. In addition, mortality charges on universal life products increased $447,000 during the 1996 period compared to the 1995 period as a result of an increase of business in force. Accident and health premiums increased $269,000, or 11.3%, due to new sales coupled with favorable persistency. Property-casualty premiums decreased $25,000, or 0.6%, due to the nonrenewal of certain unaffiliated reinsurance assumed contracts and premium rate decreases on workers' compensation insurance. Although the life and property-casualty insurance industries are competitive, the Company has not experienced any unusual pricing pressures in its lines of business or states of operation. Net investment income increased $4.4 million, or 9.1%, to $52.4 million for the 1996 period compared to $48.0 million for the 1995 period. The increase resulted principally from an 11.2% increase in average invested assets, excluding invested assets of FBL Ventures of South Dakota Inc. (FBL Ventures), a venture capital subsidiary, to $2.7 billion in the 1996 period from $2.4 billion in the 1995 period, partially offset by a 46 basis point decline in the annualized yield earned on average invested assets (excluding yield attributable to FBL Ventures) to 7.81% in the 1996 period from 8.27% in the 1995 period. The increase in average invested assets is attributable to net positive cash flows from operating activities totaling $101.7 million during the period from March 31, 1995 to March 31, 1996 and to net positive cash flows from interest sensitive products totaling $54.0 million during the same period. The decline in yield on average invested assets is the result of investing a majority of these positive cash flows and cash from investing activities in lower yielding securities due to the general decline in interest rates during the period from March 31, 1995 to December 31, 1995. Also contributing to the increase in net investment income was a $1.9 million increase in the net investment income (loss) of FBL Ventures to $1.8 million in the 1996 period from $(105,000) in the 1995 period resulting primarily from gains recognized on five private equity investments. See "-- Adjusted Operating Income." Realized gains (losses) on investments decreased $4.0 million, or 213.4%, to a loss of $2.1 million for the 1996 period compared to a gain of $1.9 million for the 1995 period. The decrease resulted primarily from the timing of the sale of certain fixed maturity securities and a real estate investment. The level of realized gains is subject to fluctuation from period to period depending on the prevailing interest rate and economic environment and the timing of the sale of investments. 28 Other income decreased $1.5 million, or 21.7%, to $5.6 million for the 1996 period compared to $7.1 million for the 1995 period due primarily to a $1.2 million decrease in commission income from the sale of unaffiliated insurers' medical products. Effective January 1, 1996, a majority of these products are marketed through Farm Bureau Mutual. A summary of the Company's policy benefits is as follows:
THREE MONTHS ENDED MARCH 31, -------------------- 1996 1995 --------- --------- (DOLLARS IN THOUSANDS) Policy benefits: Universal life and annuity benefits.................................................... $ 30,353 $ 27,071 Traditional life insurance and accident and health benefits............................ 12,096 12,715 Increase in benefit reserves........................................................... 5,294 4,462 Distributions to participating policyholders........................................... 6,475 6,605 Property-casualty losses and loss adjustment expenses.................................. 3,211 2,974 --------- --------- Total................................................................................ $ 57,429 $ 53,827 --------- --------- --------- ---------
Policy benefits increased $3.6 million, or 6.7%, to $57.4 million for the 1996 period compared to $53.8 million for the 1995 period. Included in this increase was a $3.3 million increase in universal life and annuity benefits consisting of a $3.8 million increase in interest credited to these contracts and a $553,000 decrease in universal life death benefits. The increase in interest credited is attributable to a larger volume of business in force coupled with an increase in the interest crediting rates. During the 1996 period the weighted average crediting rate for the Company's annuity liabilities increased to 6.78% for the 1996 period from 6.51% for the 1995 period, and the weighted average crediting rate for the Company's universal life liabilities increased to 6.77% from 6.59% for the respective periods. The interest crediting rates increased despite a 46 basis point decrease in the annualized yield on average invested assets due primarily to the timing of the Company's adjustments of its interest crediting rates for fluctuations in portfolio yield. In addition, there was a $213,000 increase in traditional life and accident and health policy benefits consisting of an $832,000 increase in the change in the reserves on those products, a $679,000 decrease in surrender benefits and a $60,000 net increase in other benefits. Distributions to policyholders decreased to $6.5 million from $6.6 million due to a reduction in the average dividend rate credited to these policies to 6.35% from 6.49%, offset, in part, by an increase in the amount of business in force. Losses and loss adjustment expenses incurred on property-casualty policies increased to $3.2 million, or 8.0%, in the 1996 period from $3.0 million in the 1995 period. The loss and loss adjustment expense ratio increased in the 1996 period to 74.7% from 68.8% in the 1995 period primarily due to less favorable weather conditions in the 1996 period. A summary of the Company's underwriting, acquisition and insurance expenses is as follows:
THREE MONTHS ENDED MARCH 31, -------------------- 1996 1995 --------- --------- (DOLLARS IN THOUSANDS) Underwriting, acquisition and insurance expenses: Commission expense, net of deferrals................................................ $ 2,443 $ 1,889 Amortization of deferred policy acquisition costs................................... 2,685 2,641 Other underwriting, acquisition and insurance expenses, net of deferrals............ 10,652 15,943 --------- --------- Total........................................................................... $ 15,780 $ 20,473 --------- --------- --------- ---------
Commission expense increased $554,000, or 29.3%, to $2.4 million for the 1996 period compared to $1.9 million for the 1995 period. This increase is primarily attributable to a change in the Company's incentive agent compensation program effective January 1, 1996, under which agency managers are paid overwrite 29 commissions on first year and renewal premiums rather than a base salary. Also contributing to the increase in commission expense is a 4.4% increase in direct life and accident and health insurance premiums collected in the 1996 period compared to the 1995 period. Amortization of deferred policy acquisition costs increased $44,000, or 1.7%, to $2.7 million for the 1996 period compared to $2.6 million for the 1995 period principally due to a greater volume of business in force, partially offset by a $531,000 reduction in amortization due to realized gains (losses) on investments. Other underwriting, acquisition and insurance expenses decreased $5.2 million, or 33.2%, to $10.7 million for the 1996 period compared to $15.9 million for the 1995 period. This decrease is primarily attributable to new marketing agreements with Farm Bureau property-casualty insurance companies doing business in the Company's marketing territory whereby the property-casualty insurance companies develop and manage the Company's agency force for a fee based on first year life insurance premiums and annuity deposits. As a result of the agreements, various fixed marketing costs that were charged to expense in the 1995 period have been replaced by lower fees ($741,000 for the 1996 period) which vary based on premium volume and are deferred and amortized with other policy acquisition costs. In addition, expense reductions were realized as a result of discontinuing the sale of unaffiliated insurers' medical products (see discussion regarding other income above). Also, approximately $1.5 million of the decrease is attributable to the elimination of an agent bonus program in 1996, one-time severance benefit payments to certain employees in the 1995 period and a decrease in defined benefit plan expense allocated to the Company. Furthermore, amortization of value of insurance in force acquired decreased $569,000 in the 1996 period compared to the 1995 period due to the impact of realized gains and losses on investments. Interest expense decreased $129,000, or 36.2%, to $227,000 for the 1996 period compared to $356,000 for the 1995 period due principally to a decline in the average long-term debt balance outstanding to $12.2 million during the 1996 period from $18.0 million during the 1995 period. Other expenses decreased $73,000, or 1.8%, to $3.9 million for the 1996 period compared to $4.0 million for the 1995 period. Expenses of the Company's non-insurance support operations were relatively consistent during the periods generally due to a consistent level of operating activity. Pretax income before minority interest in earnings of subsidiaries and equity income increased $2.1 million, or 14.5%, to $16.0 million for the 1996 period compared to $13.9 million for the 1995 period. This increase was primarily the result of improved profitability of the life insurance operations and the $1.9 million increase in net investment income of FBL Ventures, offset, in part, by the impact of realized gains and losses on investments. Income taxes increased $841,000, or 17.3%, to $5.7 million for the 1996 period compared to $4.8 million for the 1995 period. The effective tax rate for the 1996 period was 35.7% compared to 34.8% for the 1995 period. The effective tax rate during the 1996 period was higher than the federal statutory rate of 35% primarily due to state income taxes and an increase in a deferred tax asset valuation allowance offset, in part, by tax exempt interest and dividend income. Net income increased $1.9 million, or 20.4%, to $10.9 million for the 1996 period compared to $9.0 million in the 1995 period. The increase was the result of the increases in pretax income discussed above and a $656,000 increase in equity income, offset, in part, by the aforementioned increase in the Company's effective tax rate. 30 1995 COMPARED TO 1994 A summary of the Company's premiums and product charges is as follows:
YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- (DOLLARS IN THOUSANDS) Premiums and product charges: Universal life and annuity product charges.............................................. $ 43,722 $ 42,734 Traditional life insurance premiums..................................................... 75,450 72,222 Accident and health premiums............................................................ 10,161 (1,956) Property-casualty premiums.............................................................. 18,709 17,778 ---------- ---------- Total................................................................................. $ 148,042 $ 130,778 ---------- ---------- ---------- ----------
Premiums and product charges increased $17.2 million, or 13.2%, to $148.0 million for 1995 compared to $130.8 million for 1994. Approximately $12.1 million of this increase was attributable to an increase in accident and health premiums due primarily to the Company's exit from the medical insurance business in 1994. In 1994 the Company recorded net negative accident and health premiums of $2.0 million, consisting of $11.9 million in disability income premiums net of $13.9 million in negative premiums from ceding the medical insurance business to other carriers, whereas in 1995, accident and health premiums totaled $10.2 million, consisting primarily of disability income business. Life insurance premiums and universal life and annuity product charges increased $4.2 million, or 3.7%, as a result of new sales coupled with favorable persistency. Property-casualty premiums increased 5.2% to $18.7 million in 1995 from $17.8 million in 1994, due to premium rate increases and a modest growth in the number of policies in force. Although the life and property-casualty insurance industries are competitive, the Company has not experienced any unusual pricing pressures in its lines of business or states of operation. Net investment income increased $44.3 million, or 24.8%, to $223.1 million for 1995 compared to $178.8 million for 1994. The increase was predominantly the result of gains recognized on two private equity investments held by FBL Ventures. During 1995, this subsidiary recognized net investment income of $25.4 million compared to a loss of $185,000 for 1994. See "-- Adjusted Operating Income." In addition, the Company's average invested assets (excluding invested assets of FBL Ventures) increased 7.8% to $2.5 billion in 1995 from $2.3 billion in 1994 and the yield on average invested assets (excluding yield attributable to FBL Ventures) increased to 7.88% in 1995 from 7.69% in 1994. The yield on average invested assets increased in 1995 despite a general decline in market interest rates during the period primarily because fixed maturity securities purchased in 1995 tended to have longer maturities than that of the existing fixed maturity portfolio and the Company increased its concentration of investments in investment grade mortgage-backed securities with higher yields. Realized gains on investments decreased $3.5 million, or 37.7%, to $5.9 million for 1995 compared to $9.4 million for 1994. This decrease resulted primarily from the timing of the sale of certain private equity investments. The level of realized gains is subject to fluctuation from period to period depending on the prevailing interest rate and economic environment and the timing of the sale of investments. A summary of the Company's policy benefits is as follows:
YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- (DOLLARS IN THOUSANDS) Policy benefits: Universal life and annuity benefits..................................................... $ 112,125 $ 97,736 Traditional life insurance and accident and health benefits............................. 49,316 48,345 Increase in benefit reserves............................................................ 22,976 12,084 Distributions to participating policyholders............................................ 25,747 24,402 Property-casualty losses and loss adjustment expenses................................... 13,621 13,441 ---------- ---------- Total................................................................................. $ 223,785 $ 196,008 ---------- ---------- ---------- ----------
31 Policy benefits increased $27.8 million, or 14.2%, to $223.8 million for 1995 compared to $196.0 million for 1994. Of this increase, $14.4 million was attributable to an increase in universal life and annuity benefits largely resulting from an increase in interest credited amounts and growth in the amount of business in force. During 1995 the weighted average crediting rate for the Company's annuity liabilities increased to 6.49% from 6.16% in 1994, and the weighted average crediting rate for the Company's universal life liabilities decreased to 6.68% from 6.71% for the respective periods. It is the Company's policy to change rates credited to policy accounts as the Company's investment portfolio yield changes. The crediting rate for universal life insurance products decreased despite an increase in the yield on average invested assets due primarily to a decrease in the rate credited to a universal life product sold by Western Life that previously had an above-market crediting rate. In addition, there was an $11.9 million increase in traditional life and accident and health policy benefits as a result of general growth in the amount of business in force. This increase included a $10.9 million increase in the change in reserves on those products, a $1.5 million increase in surrender benefits and an $923,000 increase in death benefits, offset, in part, by a $1.4 million decrease in accident and health benefits. Distributions to participating policyholders increased to $25.7 million from $24.4 million due to increases in the face amount of policies in force and an increase in the average dividend rate credited to these policies to 6.49% from 6.31%. Losses and loss expenses incurred on property-casualty policies increased to $13.6 million, or 1.3%, in 1995 from $13.4 million in 1994. The loss and loss adjustment expense ratio improved in 1995 to 72.8% from 75.6% in 1994 primarily due to more favorable loss experience resulting from premium rate increases and re-underwriting activities. A summary of the Company's underwriting, acquisition and insurance expenses is as follows:
YEAR ENDED DECEMBER 31, -------------------- 1995 1994 --------- --------- (DOLLARS IN THOUSANDS) Underwriting, acquisition and insurance expenses: Commission expense, net of deferrals................................................ $ 8,043 $ 10,340 Amortization of deferred policy acquisition costs................................... 10,727 10,066 Other underwriting, acquisition and insurance expenses, net of deferrals............ 54,661 54,246 --------- --------- Total........................................................................... $ 73,431 $ 74,652 --------- --------- --------- ---------
Commission expense decreased $2.3 million, or 22.2%, to $8.0 million in 1995 from $10.3 million in 1994. This decrease includes a $2.2 million decline in nondeferrable first year commissions and a $66,000 decline in renewal commissions. Nondeferrable first year commissions decreased due primarily to a $18.7 million decline in first year premiums received in 1995 compared to 1994. Renewal commissions decreased in 1995 compared to 1994 despite a $13.1 million increase in renewal premiums received due primarily to multi-tiered commission structures on certain life insurance products whereby renewal commission rates decline over the life of the underlying policies. Amortization of deferred policy acquisition costs increased $661,000, or 6.6%, to $10.7 million in 1995 from $10.1 million in 1994 principally due to an increase in amortization resulting from realized gains on investments. Other underwriting, acquisition and insurance expenses increased $415,000, or 0.8%, to $54.7 million in 1995 from $54.2 million in 1994. Expenses were controlled by economies of scale gained from the consolidation of Western Life and Rural Security Life operations with Farm Bureau Life and a reengineering effort designed to increase efficiency of operations and improve customer service. As a result of these initiatives, over 160 job positions were eliminated during the past two years, the benefit of which was realized in 1995. Interest expense decreased $1.1 million, or 52.2%, to $1.0 million in 1995 from $2.1 million in 1994 due principally to the decline in long-term debt to $12.6 million at December 31, 1995 from $18.5 million at December 31, 1994 and $30.6 million at January 1, 1994. Other expenses increased $71,000, or 0.4%, to $17.3 million in 1995 from $17.2 million in 1994 due primarily to general growth in the Company's non-insurance support operations. 32 Pretax income before minority interest in earnings of subsidiaries, equity income (loss) and discontinued operations increased $30.5 million, or 51.1%, to $90.4 million compared to $59.9 million for 1994. This increase was the result of growth in investment income from the private equity investments of FBL Ventures to $25.4 million compared to a loss of $185,000 for 1994, coupled with improved profitability in the life insurance lines from lower expense ratios and increased spreads. These increases were partially offset by a reduction in realized capital gains. Income taxes increased $9.6 million, or 42.8%, to $32.1 million for 1995 compared to $22.5 million for 1994. The effective tax rate in 1995 was 35.5% compared to 37.5% in 1994. The effective tax rate in 1994 was higher than the statutory rate of 35% primarily as a result of provisions for possible adjustments from routine IRS examinations, offset partially by tax-exempt interest and dividend income. The Company's effective tax rate should not, over the long term, be materially different from the effective statutory rate. Net income increased $17.5 million, or 41.7%, to $59.6 million for 1995 compared to $42.1 million for 1994. The increase was the result of increases in the pretax income discussed above, partially offset by a $6.5 million decrease in income from discontinued operations sold in 1994. In addition, equity income (loss) increased by $3.0 million to $1.6 million in 1995 compared to a loss of $1.4 million in 1994. 1994 COMPARED TO 1993 A summary of the Company's premiums and product charges is as follows:
YEAR ENDED DECEMBER 31, ---------------------- 1994 1993 ---------- ---------- (DOLLARS IN THOUSANDS) Premiums and product charges: Universal life and annuity product charges.............................................. $ 42,734 $ 26,500 Traditional life insurance premiums..................................................... 72,222 46,050 Accident and health premiums............................................................ (1,956) 46,437 Property-casualty premiums.............................................................. 17,778 16,937 ---------- ---------- Total................................................................................. $ 130,778 $ 135,924 ---------- ---------- ---------- ----------
Premiums and product charges decreased $5.1 million, or 3.8%, to $130.8 million for 1994 compared to $135.9 million for 1993. The decrease was the result of the Company's strategy to exit from the medical insurance line of business during 1994, which was the primary reason for the $48.4 million reduction in accident and health premiums. This reduction was partially offset by growth from the acquisition of Western Life resulting in an increase of $33.4 million and other increases of $9.9 million resulting partly from inclusion of a full year's premiums from Rural Security Life in 1994 versus nine months in 1993, and partly from growth of premiums from preconsolidation operations. Growth in premium and life insurance in force occurred as a result of increased first year premiums, while the Company maintained favorable, although decreased, persistency. For 1994, the life insurance lapse rate of the Company was 7.2%, compared to 5.9% for 1993. The increase in the Company's lapse rate from 1993 to 1994 was due to the addition of the Western Life block of business. Property-casualty premiums increased to $17.8 million, or 5.0%, from $16.9 million from a combination of general growth and premium rate increases. Although the life and property-casualty insurance industries are competitive, the Company has not experienced any unusual pricing pressures in its lines of business or states of operation. Net investment income increased $40.5 million, or 29.3%, to $178.8 million for 1994 compared to $138.3 million for 1993. The increase resulted from a 45.6% growth in average invested assets (excluding invested assets of FBL Ventures) to $2.3 billion in 1994 from $1.6 billion in 1993, partially offset by a decrease in yield on average invested assets (excluding yield attributable to FBL Ventures) to 7.69% in 1994 compared to 8.67% in 1993. Approximately $517 million of the increase in average invested assets in 1994 from 1993 was attributable to the acquisition of Western Life in January 1994. 33 Realized gains increased $5.4 million, or 138.2%, to $9.4 million for 1994 compared to $4.0 million for 1993. This increase resulted primarily from the timing of the sale of certain private equity investments. The level of realized gains is subject to fluctuation from period to period depending on the prevailing interest rate and economic environment and the timing of the sale of investments. A summary of the Company's policy benefits is as follows:
YEAR ENDED DECEMBER 31, ---------------------- 1994 1993 ---------- ---------- (DOLLARS IN THOUSANDS) Policy benefits: Universal life and annuity benefits..................................................... $ 97,736 $ 73,305 Traditional life insurance and accident and health benefits............................. 48,345 66,028 Increase in benefit reserves............................................................ 12,084 14,428 Distributions to participating policyholders............................................ 24,402 22,967 Property-casualty losses and loss adjustment expenses................................... 13,441 13,948 ---------- ---------- Total................................................................................. $ 196,008 $ 190,676 ---------- ---------- ---------- ----------
Policy benefits increased $5.3 million, or 2.8%, to $196.0 million for 1994 compared to $190.7 million for 1993. The acquisition of Western Life was responsible for an increase of $39.7 million, offset by reductions related to exiting the medical insurance business. In addition, further increases resulted from growth in liabilities caused by new sales and increases in the level of interest and policyholder dividends credited to existing policies. Distributions to participating policyholders increased to $24.4 million from $23.0 million, due to distributions to Western Life policyholders, which amounted to $1.6 million in 1994, and increases in policies in force, which were partially offset by a reduction in the rate credited to these policies to 6.31% in 1994 from 6.79% in 1993. During 1994 the weighted average crediting rate for the Company's annuity liabilities declined to 6.16% from 6.97% during 1993, and the weighted average crediting rate for the Company's universal life liabilities declined to 6.71% from 7.52% during the respective periods. The policy crediting rates were reduced as a result of lower yields on the investment portfolio as previously discussed. Losses and loss adjustment expenses incurred on property-casualty policies decreased to $13.4 million, or 3.6%, from $13.9 million in 1993. The loss and loss adjustment expense ratio improved in 1994 to 75.6% from 82.4% in 1993 primarily due to improved weather conditions from the prior year, premium rate increases and re-underwriting activities. A summary of the Company's underwriting, acquisition and insurance expenses is as follows:
YEAR ENDED DECEMBER 31, -------------------- 1994 1993 --------- --------- (DOLLARS IN THOUSANDS) Underwriting, acquisition and insurance expenses: Commission expense, net of deferrals................................................ $ 10,340 $ 7,886 Amortization of deferred policy acquisition costs................................... 10,066 6,023 Other underwriting, acquisition and insurance expenses, net of deferrals............ 54,246 42,723 --------- --------- Total........................................................................... $ 74,652 $ 56,632 --------- --------- --------- ---------
Commission expense increased $2.4 million, or 31.1%, to $10.3 million in 1994 from $7.9 million in 1993. The increase includes a $4.2 million increase attributable to the acquisition of Western Life offset, in part, by a $3.3 million decrease resulting from exiting the group medical insurance business in 1994. In addition, commission expense increased $1.5 million due principally to an increase in premium volume. Amortization of deferred policy acquisition costs increased $4.1 million, or 67.1%, to $10.1 million in 1994 from $6.0 million in 1993 due principally to a $2.9 million increase in amortization resulting from realized gains on investments and a $562,000 increase attributable to a greater volume of property-casualty business in force and an increase in commission rates and other underwriting expenses. In addition, 34 amortization for life business increased approximately $600,000 primarily due to a larger volume of life insurance business in force coupled with an increase in gross profits earned on this larger volume of business in force. Other underwriting, acquisition and insurance expenses increased $11.5 million, or 27.0%, to $54.2 million in 1994 from $42.7 million in 1993. Other underwriting, acquisition and insurance expenses increased due, in part, to the addition of Western Life expenses. Offsetting the increases relating to Western Life were reductions resulting from exiting the medical insurance business and from economies of scale gained from the Rural Security Life acquisition which occurred in 1993. Furthermore, during 1994 the Company undertook, with the assistance of an outside consultant, a significant reengineering effort to improve customer service and streamline operations resulting in substantial staff reductions in several major operating areas. These reengineering efforts increased expenses in 1994 because of severance payments and consulting fees. Interest expense decreased $195,000, or 8.5%, to $2.1 million in 1994 from $2.3 million in 1993 due primarily to a reduction in the outstanding balance of debt during the periods. Other expenses increased $2.3 million, or 15.6%, to $17.2 million in 1994 from $14.9 million in 1993 due primarily to an increase in the level of services provided to affiliates and others by the Company's leasing and investment advisory subsidiaries. Pretax income before minority interest in earnings of subsidiaries, equity income (loss) and discontinued operations increased $21.0 million, or 53.8%, to $59.9 million for 1994 compared to $38.9 million for 1993. The increase resulted from the following: (1) the change in investment income and net realized investment gains more than offset the change in interest credited to policyholders and other benefits and expenses incurred, (2) the addition of the profitable Western Life operations, which added $11.3 million to pretax income in 1994, and (3) pretax income from property-casualty operations improved to $1.3 million in 1994 compared to $33,000 in 1993. Income taxes increased $8.1 million, or 55.6%, to $22.5 million for 1994 compared to $14.4 million for 1993. The effective tax rate in 1994 was 37.5% compared to 37.1% in 1993. The effective tax rates in 1994 and 1993 were higher than the statutory rate of 35% primarily as a result of provisions for possible adjustments from routine IRS examinations, partially offset by tax-exempt interest and dividend income. The Company's effective tax rate should not, over the long term, be materially different from the effective statutory rate. Net income increased $22.3 million, or 112.4%, to $42.1 million for 1994 compared to $19.8 million for 1993. In addition to the items mentioned above which impacted pretax income, the Company experienced the following items which impacted net income. First, the reduction in net income due to minority interest in earnings of subsidiaries decreased to $376,000 from $2.4 million primarily as a result of the acquisition of the minority interests of FBL Insurance Company and Rural Security Life. Second, the Company experienced a $6.5 million gain from discontinued operations, compared to a $2.9 million loss from discontinued operations in the prior year (see separate discussion of discontinued operations). Offsetting these improvements, equity income (loss) net of related income taxes decreased to $(1.4) million in 1994 from $630,000 in 1993 resulting from the writedown of one investment caused by a deterioration of the underlying asset. 35 ADJUSTED OPERATING INCOME The following table reflects net income adjusted to eliminate certain items which management believes are not indicative of overall operating trends, including net realized gains on investments (less that portion of amortization of deferred policy acquisition costs and value of insurance in force acquired and income taxes attributable to such gains), net income from a venture capital investment company subsidiary and discontinued operations.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- ----------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income............................ $ 10,889 $ 9,043 $ 59,628 $ 42,066 $ 19,803 $ 21,435 $ 9,254 Adjustments: Net realized (gains) losses on investments (1).................... 1,000 (806) (2,761) (5,734) (3,842) (7,071) (2,504) Net (income) loss from FBL Ventures........................... (1,085) 67 (15,219) (73) 161 (2,229) (1,402) (Gain) losses on discontinued operations......................... -- -- -- (6,479) 2,902 4,932 7,944 --------- --------- --------- --------- --------- --------- --------- Adjusted operating income............. $ 10,804 $ 8,304 $ 41,648 $ 29,780 $ 19,024 $ 17,067 $ 13,292 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Adjusted operating income per share... $ 0.45 $ 0.35 $ 1.77 $ 1.27 $ 1.06 $ 1.01 $ 0.79 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) Represents realized gains/losses on investments less that portion of amortization of deferred policy acquisition costs and value of insurance in force acquired and income taxes attributable to such gains/ losses. FBL Ventures is a wholly owned investment company subsidiary of Farm Bureau Life which invests in start-up and mezzanine level venture capital investments in various sectors. Operating results of FBL Ventures are recognized in accordance with accounting principles for investment companies and, as such, unrealized and realized gains and losses on investments are included in net investment income. Because of the venture capital nature of the underlying investments, the results of FBL Ventures tend to fluctuate significantly from year to year and need to be evaluated over a much longer period of time. Therefore, the net income/loss is not included in adjusted operating income. During 1995, FBL Ventures experienced net investment income of $25.4 million resulting predominantly from unrealized gains on two venture capital investments which completed initial public offerings during the year. The results of FBL Ventures during the five years ended December 31, 1995, have provided significant returns to the Company. Since March 1990, when the Company began its current venture capital program, the underlying investments in FBL Ventures have generated an average annual internal rate of return of 41.3%. As of March 31, 1996 FBL Ventures had investments of $19.4 million, consisting of 29 private equity securities issued by 21 companies. Of the 21 companies in which FBL Ventures held investments on March 31, 1996, six are public and 15 are private. Of the aggregate value of $19.4 million, investment in publicly traded companies comprised $6.8 million and investment in non-publicly traded companies comprised $12.6 million. The number and percent of companies by industry and the value of the investment by industry was as follows:
PERCENT OF TOTAL INDUSTRY NUMBER CARRYING VALUE - --------------------------------------------------- --------------- ------------------- CARRYING VALUE ----------------------- (DOLLARS IN THOUSANDS) Communications technology.......................... 5 15.9 $ 3,084 Computer hardware/software......................... 4 16.6 3,220 Biotechnology...................................... 5 19.3 3,752 Healthcare/services/technology..................... 5 34.9 6,780 Specialty retail................................... 1 10.3 2,000 Agriculture........................................ 1 3.0 580
36 It is anticipated that during 1996 all or substantially all of the investments of FBL Ventures will be sold to a venture capital subsidiary of Farm Bureau Mutual at their carrying value, which management believes approximates fair value. Accordingly, the sale will not have a significant effect on the Company's operating results. The proceeds from the sale are expected to be invested in fixed maturity securities and mortgage loans. Management believes the sale of FBL Venture's investments will provide the Company with more consistent and predictable investment returns and will facilitate the Company's asset/liability management process. DISCONTINUED OPERATIONS During 1990, the Company invested in a cable television operation which provided cable service to rural communities in the midwest. The investment consisted of a direct investment in a partnership interest, notes and a guarantee of bank debt. As a result of market and other factors, the cable operation suffered substantial operating losses during each year it was owned. In December 1993, a decision was made to sell the cable operation, and at that time the operations were classified as discontinued operations for financial reporting purposes. On December 23, 1994, the cable operation was sold. LIQUIDITY AND CAPITAL RESOURCES FBL FINANCIAL GROUP, INC. FBL Financial Group, Inc.'s cash flow from operations will consist of dividends from subsidiaries, if declared and paid, and fees which it will charge the various operating subsidiaries and affiliates for management of their operations, offset by the expenses incurred for salaries and other expenses related to providing such services. No dividends were paid in 1995 or 1994 by FBL Financial Group, Inc. to its stockholders. In the future, FBL Financial Group, Inc. will rely primarily on dividends from the Life Companies to make any dividend payments to its stockholders. The ability of the Life 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 or permitted by insurance regulatory authorities of the State of Iowa for Farm Bureau Life and 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 the December 31 of the preceding year. During 1996, the maximum amount legally available for distribution to FBL Financial Group, Inc. without further regulatory approval is approximately $48.6 million from Farm Bureau Life before giving effect to a contemplated dividend of the stock of FBL Financial Services, Inc. with a statutory carrying value of approximately $21.1 million at March 31, 1996, and $5.7 million from Western Life. Similar restrictions exist with respect to the payments of dividends by Utah Insurance. Such restrictions are not considered to bear significantly on the ability of the Company to meet its obligations. INSURANCE OPERATIONS The Life Companies' cash inflows consist primarily of premium income, deposits to policyholder account balances, 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, the payment of policyholder benefits, income taxes 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 fiscal year 1995, with cash inflows at levels sufficient to provide the funds necessary to meet their obligations. 37 For property-casualty operations the major sources of cash inflow are premiums and investment income. Major sources of cash outflow are losses and loss adjustment expenses paid and other underwriting expenses. As with the Life Companies, the liquidity position of Utah Insurance continued to be favorable in 1995, with cash inflows at levels sufficient to provide the funds necessary to meet its obligations. For all 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 periods as the insurance companies' continuing operations provided funds amounting to $39.7 million in the three month period ended March 31, 1996, $106.5 million in 1995, $94.0 million in 1994, and $86.1 million in 1993. Cash inflows from financing activities are the result of the significant growth in net deposits to policyholder account balances for both universal life insurance and annuities during 1995, 1994, and 1993. These funds, along with the excess operating inflows, were primarily used to increase the insurance companies' fixed maturity investment portfolios. Matching the investment portfolio maturities to the cash flow demands of the type of insurance being provided is an important consideration for each type of life insurance. The Life Companies continually monitor benefit and claim statistics to provide projections of future cash requirements. As part of this monitoring process, the Life Companies perform cash flow testing of their assets and liabilities under various scenarios to evaluate the adequacy of reserves. 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-backed securities, 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 borrow on a line of credit available 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 $48.2 million as of March 31, 1996. Interest is payable at a current rate upon issuance. As of March 31, 1996, no line of credit agreement was open and there were no borrowings outstanding. 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-backed securities and its insurance products, are adequate to meet the Company's anticipated short-term cash obligations. 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 March 31, 1996, the Company had no material commitments for capital expenditures. The Company's investment portfolio as of March 31, 1996 had a carrying value of $2.7 billion. As of March 31, 1996, fixed maturity securities were $2.1 billion, or 78.5%, of invested assets, with public, private placement and 144A private placement fixed maturity securities constituting $1.6 billion, or 76.5%; $332.7 million, or 15.9%, and $159.2 million, or 7.6% of total fixed maturity securities, respectively. Of the Company's fixed maturity securities, based on carrying value, 64.4% were assigned NAIC designation 1 (equivalent to an S&P rating of A- or higher) and 27.4% were assigned NAIC designation 2 (equivalent to an S&P rating of BBB- to BBB+) as of March 31, 1996. Net unrealized gains on the Company's fixed maturity securities held as available for sale were $22.0 million as of March 31, 1996. The Company's mortgage and other asset-backed securities were $930.3 million, or 44.4%, of fixed maturity securities as of March 31, 1996. As of March 31, 1996, $267.5 million, or 10.0%, of the Company's invested assets were invested in mortgage loans. EFFECTS OF INFLATION AND INTEREST RATE CHANGES The Company does not believe that inflation has had a material effect on its consolidated results of operations. The Company attempts to invest new funds in securities with expected durations that match the 38 related policyholder obligations to reduce its exposure to interest rate fluctuations. In general, the market value of the Company's fixed maturity portfolio increases or decreases in inverse relationship with fluctuations in interest rates, and the yield realized by the Company on new investments increases or decreases in direct relationship with interest rate changes. Also, interest rate changes may have temporary effects on the sale and profitability of the annuity and universal life products offered by the Company. For example, if interest rates rise, competing investments (such as annuities or life insurance offered by the Company's competitors, certificates of deposit, mutual funds, and similar instruments) may become more attractive to potential purchasers of the Company's products until the Company increases the interest rate credited to holders of its annuity and universal life products. In contrast, as interest rates fall, the Company attempts to adjust its credited rates to compensate for the corresponding decline in investment income. The Company monitors interest rates and sells annuities and universal life contracts that permit flexible responses to interest rate changes as part of the Company's management of interest spreads. EMERGING ACCOUNTING AND REGULATORY MATTERS SFAS NO. 121. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and Long Lived Assets to be Disposed of." This standard establishes criteria for the identification and recognition of the impairment of certain assets to be held and used in an entity's business. The statement does not apply to financial instruments, deferred income tax assets or intangibles such as deferred policy acquisition costs and value of insurance in force acquired. It does, however, apply to assets such as property and equipment and related goodwill. SFAS No. 121 is effective for the Company's financial statements after December 31, 1995. While certain of the Company's assets are subject to the provisions of SFAS No. 121, management believes the standard will have little impact on the Company's consolidated financial statements. STATUTORY ACCOUNTING CODIFICATION. The National Association of Insurance Commissioners (NAIC) currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. Accordingly, that project, which is not expected to be completed before 1997, will likely change certain statutory accounting practices. The codification may result in changes to the permitted or prescribed accounting practices that the Company's insurance subsidiaries use to prepare their statutory-basis financial statements. REGULATORY MATTERS From time to time various proposals have been advanced for tax law changes, including the possible adoption of a so-called "flat tax" and the elimination of the deferral of income taxation on increases in the contract values of annuity products during accumulation. The effect of these proposals, or of others, if adopted, on the Company's competitive position with respect to the sale of its products, is uncertain, but could be material. See "Risk Factors -- Potential Tax Legislation." In recent years state regulation of insurance activities has increased and this increase is anticipated to continue. The Company has not experienced any material adverse results from such regulation, and does not anticipate that it will, but the scope and effect of potential future regulation, either at the state or national level, and the effects of such regulation, are uncertain. See "Risk Factors -- Regulation." The entry of banks into the insurance business is anticipated to increase. The consequences to the Company of such competition is uncertain. See "Risk Factors -- Competition." 39 BUSINESS GENERAL FBL Financial Group, Inc. was incorporated in Iowa in October 1993, and through its subsidiaries underwrites, markets and distributes life insurance, annuities, property-casualty insurance and mutual funds to individuals and small businesses in 15 midwestern and western states. The Company has exclusive marketing arrangements with the state Farm Bureau Federations in its territory and targets sales to approximately 700,000 Farm Bureau member families and other rural, small town and suburban residents through an exclusive agency force. Through acquisitions of Rural Security Life in 1993 and Western Life in 1994, the Company expanded its operations to 15 states, including Wisconsin and the eight-state Western Life area (the Western Life states). Prior to 1993 the Company operated only in Iowa, Nebraska, Minnesota, South Dakota and Utah, and in Kansas sold mutual funds only. All of the state Farm Bureau Federations in the Company's marketing area are associated with the American Farm Bureau Federation. With approximately 4.6 million member families in all 50 states, the American Farm Bureau Federation is the largest grass roots farm and ranch organization in the United States. 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. Management believes that the Company's relationship with the state Farm Bureau Federations places it in a unique position to serve the insurance and financial needs of farmers, ranchers, rural and suburban residents, and related individuals and businesses. Farm Bureau organizations in the Company's territories 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. Many of the Company's customers are self-employed individuals who are responsible for providing for their own insurance and retirement needs. Management believes that Farm Bureau insurance customers tend to be financially conservative and stable, which, management believes, has led to persistency greater than industry averages. The Company's life insurance products are currently available for sale both to Farm Bureau members and to non-members. Most of the Company's property-casualty insurance products are available for sale only to Farm Bureau members. The Company sells its insurance and mutual fund products through an exclusive Farm Bureau distribution system comprised of approximately 1,795 agents. Approximately 635 agents located in Iowa, Minnesota, South Dakota and Utah (the multi-line states) sell both life and property-casualty products offered only through the Company. Approximately 1,160 agents located in the eight Western Life states and three other states (collectively, the life-only states) sell only the Company's life insurance, annuity and mutual fund products (in Kansas only the Company's variable products) and offer property-casualty products of Farm Bureau property-casualty insurance companies not managed by the Company. Approximately 76% of all agents are licensed to sell variable life insurance, variable annuities and mutual funds. The Company offers a full range of life insurance products including universal life, variable universal life, whole life, term life and disability income insurance, together with variable and traditional annuity products. The Company is establishing variable universal life as its lead product. In the three month period ended March 31, 1996 and the year ended December 31, 1995, variable universal life accounted for 36.4% and 37.0%, respectively, of first year direct life insurance premiums collected. Since its acquisition of Western Life in 1994, the Company has pursued an aggressive program of training and licensing the agents in the Western Life states to enable them to market the Company's variable universal life insurance, variable annuities and mutual funds. The Company has recently ceased offering medical insurance products but makes those products available to its agents through affiliations with other carriers. The Company also provides a portfolio of mutual funds and asset management services to third parties. The Company's property-casualty insurance products include automobile, homeowners, farm and ranch owners and crop insurance and workers' compensation. Property-casualty business written in Utah through Utah Insurance is pooled with the business written in Iowa, Minnesota and South Dakota through two Farm Bureau related mutual insurance companies, Farm Bureau Mutual and South Dakota Mutual (the Farm 40 Bureau Mutual pool). All of the companies participating in the Farm Bureau Mutual pool are managed by the Company. The current participation of Utah Insurance in the Farm Bureau Mutual pool, which had net premiums written of $57.2 million in the three month period ended March 31, 1996 and $235.6 million in the year ended December 31, 1995, is 8%. Management anticipates that during the second quarter of 1996 the share of Utah Insurance in the Farm Bureau Mutual pool will be increased to 20% retroactive to January 1, 1996. Effective January 1, 1996, the Farm Bureau Mutual pool participates through a loss pooling agreement in business written in Arizona and New Mexico by Farm Bureau affiliated companies managed by the Company, thereby providing further geographic diversification of risk. During the three month period ended March 31, 1996, the Company had total premiums and product charges of $37.4 million, total revenues of $93.3 million, adjusted operating income of $10.8 million and net income of $10.9 million and, during the year ended December 31, 1995, the Company had total premiums and product charges of $148.0 million, total revenues of $406.0 million, adjusted operating income of $41.6 million and net income of $59.6 million. At March 31, 1996, the investment portfolio of the Company had an aggregate carrying value of $2.7 billion, and the Company's total assets and stockholders' equity were $3.1 billion and $556.0 million, respectively. For information relating to the Company's adjusted operating income, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Adjusted Operating Income." Farm Bureau Life is rated "A+ (Superior)", Western Life is rated "A (Excellent)", and the Farm Bureau Mutual pool is rated "Ap (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. See "Glossary of Selected Insurance Terms -- A.M. Best rating." BUSINESS STRATEGY The Company's current management team which was appointed in 1991 has initiated a strategy focused on enhancing profitability and expanding its market territory. The Company's strategy is designed to capitalize on the Company's exclusive association with state Farm Bureau Federations in its operating territory. Key components of the Company's strategy include: ENHANCING PRODUCT PROFITABILITY. The Company is focusing on improving its margins by analyzing its product portfolio for competitiveness and profitability. In 1994, the Company exited the unprofitable medical insurance business. Currently, the Company is reviewing its allocation of capital by product line, policyholder dividend and interest rate crediting policies, modifying its systems to accommodate alternative product designs and considering possible changes in product structure. INCREASING SALES. The Company has significant opportunity to increase its sales through cross selling life insurance products to Farm Bureau members who already own property-casualty policies offered by the Company or other Farm Bureau affiliated property-casualty companies. For example, in Iowa approximately 29% of Farm Bureau members own at least one of the Company's life products, 53% own at least one of the Company's property-casualty products, and approximately 20% own both, providing significant opportunity for cross selling. Prior to 1996, agents selling the Company's life insurance products in the Western Life states were not able to sell the Company's variable life insurance and variable annuity products. In March 1996, the Company introduced a uniform portfolio of life insurance and annuity products throughout its market territory. This portfolio improves the products available to many agents and expands the offering of variable products into all states in the Company's territory. Additionally, the Company seeks to enhance agent productivity through a restructured incentive compensation program and more effective and increased training. GROWING THROUGH ACQUISITIONS AND JOINT VENTURES. Since 1993, the Company has consolidated operations with two Farm Bureau affiliated insurance companies, resulting in a significant expansion of marketing area and revenue base. The Company will continue to pursue growth opportunities through acquisitions and mergers with Farm Bureau related and other companies. Management believes the Company's position as a publicly traded Farm Bureau affiliated insurance company will increase its attractiveness as a merger partner. Additionally, the Company seeks to leverage its position as the only Farm Bureau company with variable product expertise by entering into joint ventures and other marketing arrangements with Farm Bureau and other organizations. 41 REDUCING OPERATING EXPENSES. The Company has focused on reducing operating expenses through reengineering projects and consolidation of operations and systems. These efforts have resulted in significant cost savings and a 25% reduction in job positions over the last three years. Management intends to seek further expense improvements from continuing reengineering efforts. MARKETING MARKET AREA The following map shows the states in which the Company's operations are conducted: [Map showing multi-line states, life only states and variable products only state] The Company's 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 market which is generally familiar with Farm Bureau and the benefits of Farm 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 4.6 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 15 states in the Company's 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 territories 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. Most of the Company's property-casualty products are available only for sale to Farm Bureau members. Annual Farm Bureau memberships generally cost $30 to $140 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 President of each of the 15 state Farm Bureau federations in the Company's market territory serves on the Company's Board of Directors. Pursuant to a royalty agreement with the Company, each state Farm Bureau federation or 42 its assignee benefits from its relationship with the Company through receipt of royalties on the sale of the Company's products in the state. In the three month period ended March 31, 1996 and the year ended December 31, 1995, total royalties paid to Farm Bureau organizations were approximately $244,000 and $974,000, respectively. Beginning in 1996, the Company entered into new marketing arrangements with all of the Farm Bureau property-casualty companies in its 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 over-write commissions are generally equal to one-third of the first year commissions paid to the agent by the Company. It is anticipated that the overwrite commissions paid by Farm Bureau Life for 1996 will be approximately $3.1 million and for Western Life approximately $2.0 million. The Company is assisted in its relationships with the property-casualty organizations by an Advisory Committee, consisting of the general manager of each Farm Bureau property-casualty insurance company in the Company's market territory. The Advisory Committee meets on a regular basis to coordinate efforts and concerns 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. All of the state Farm Bureau federations in the Company's 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 The Company's life insurance, disability income insurance, property-casualty insurance and mutual funds are marketed throughout its market territory by an exclusive Farm Bureau force of approximately 1,795 agents. The Company has a written contract with each agent. 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 its affiliates; 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 multi-line states, the Company's agents are supervised by agency managers and assistant managers employed by Farm Bureau Mutual and under the direction of the Company. There are approximately 385 agents and managers in Iowa, 130 in Minnesota, 45 in South Dakota and 75 in Utah, all of whom market a full range of the Company's life insurance and property-casualty products and most of whom market the Company sponsored mutual funds. 43 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 (in Kansas, variable products only) 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 the introduction of variable products and more competitive products combined with an enhanced compensation structure will provide significant opportunities to increase life production per agent in the life-only states. In 1995 the Company began to market variable life insurance and annuities in Kansas in addition to Company sponsored mutual funds previously offered in that state, through agents of the Kansas Farm Bureau insurance companies. Over 98% of the agents in the multi-line states are NASD licensed to sell the Company's variable life and annuity products and sponsored mutual funds. Over 96% of Nebraska agents and 72% of agents in Wisconsin are also NASD licensed. The Company has initiated a training program for NASD licensing of the agents in the Western Life states. Currently 46% of Western Life's agents are NASD licensed and the Company expects a substantial additional number to become NASD licensed during 1996. 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. Effective January 1, 1996, the Company initiated a new compensation program for agents and managers. The new plan focuses on increased agent production through the reduction of the fixed portions of agent compensation and increased incentives for writing profitable property-casualty business. The new program is consistent for life insurance compensation in all 14 states, and provides a competitive basis on which to price its products. 44 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 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 1995, in the multi-line states approximately 48% of agent compensation was derived from the sale of life and annuity products. For property-casualty business written in the multi-line states, the Company's compensation system is designed to encourage production and profitability. Agents receive commissions and service fees which are increased or reduced according to production level and profitability to the Company as measured by loss ratio. An agent can earn higher property-casualty commissions for achievement of production standards in life insurance, property insurance and casualty insurance, tying compensation to production of all lines of business. In the life-only states, most of the Farm Bureau property-casualty companies also adjust property-casualty commissions according to life insurance production levels. The focus of agency managers is to recruit and train agents to achieve high levels of production 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 profitability 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. The Life Companies 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 12% to 15% of the agents qualify for the Company's annual incentive trip. In 1995, agents qualifying for the incentive trip produced approximately 28% of the Company's first year life premium. Agent recruiting, training and financing programs are designed to develop a productive agent for the long term. The three-month agency force retention rate for the quarter ended March 31, 1996 and one-year agency force retention rate for 1995 in the multi-line states were approximately 93% and 84%, respectively. 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. 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 the pool which includes Utah Insurance is rated "Ap(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. See "Glossary of Selected Insurance Terms -- A.M. Best rating." LIFE INSURANCE SEGMENT PRODUCTS The Life Companies are principally engaged in selling a varied portfolio of insurance products including traditional permanent life insurance, universal life, term life, annuities and disability income insurance to middle income individuals in the rural and suburban areas of its market territory. The Farm Bureau Life portfolio offered in the multi-line states has for several years included and emphasized variable universal life and since 1994, variable annuities. As a result of the consolidation of Farm Bureau Life and Western Life in 1994, the Company's variable products are now being introduced in the eight Western Life states. They are 45 also being sold, beginning in June 1995, in Kansas through arrangements with the Kansas Farm Bureau insurance organizations. In March 1996, the Company introduced a uniform portfolio for all new life insurance sales, which includes the plans and products described below, throughout the territory. Management believes the new uniform portfolio will produce increased sales, as well as result in increased administrative efficiencies. VARIABLE UNIVERSAL LIFE INSURANCE. The Company is establishing variable universal life insurance as its lead life insurance product. This product is offered by very few multi-line companies. 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, all managed by the Company for an additional fee, and assume 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 the three month period ended March 31, 1996 and the year ended December 31, 1995, variable universal life represented 9.1% and 7.8%, respectively, of first year direct life insurance premiums collected in the life-only states, 58.9% and 62.0%, respectively, of the Company's first year direct life premiums collected in the multi-line states and 36.4% and 37.0%, respectively, of the Company's total first year direct life insurance premiums collected. All the variable sub-accounts are managed by the Company and offer as investment options the Company's sponsored mutual funds. See "-- Variable Sub-Accounts and Mutual Funds." 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 NASD registered 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. In the three month period ended March 31, 1996 and the year ended December 31, 1995, participating life policies represented 33.5% and 35.6%, respectively, 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 rates. Historically, agents in the life-only states have sold more term insurance. In the three month period ended March 31, 1996 and the year ended December 31, 1995, sales of term insurance represented 21.9% and 22.5%, respectively, of first year direct life premiums collected in the life-only states. With the introduction of variable products in the Western Life states the Company expects the relative amount of term insurance sold will decline. 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 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 managed by the Company, thereby assuming the investment risk passed through by those sub-accounts. Approximately 63% of the Company's existing individual annuity business based on account 46 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. See "-- Variable Sub-Accounts and Mutual Funds." 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 inability to pursue the policyholder's own occupation for the first two years after disability, and 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. 47 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
FOR THE THREE MONTH PERIOD ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31, -------------------- ----------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Direct life premiums collected: Universal life First year.................................... $ 707 $ 595 $ 2,452 $ 2,321 $ 4,758 $ 2,399 $ 4,040 Renewal....................................... 11,944 12,338 47,901 49,171 24,712 20,554 20,371 --------- --------- --------- --------- --------- --------- --------- Total....................................... 12,651 12,933 50,353 51,492 29,470 22,953 24,411 Variable universal life First year.................................... 1,804 1,794 7,689 11,603 9,708 8,939 7,972 Renewal....................................... 3,983 3,120 13,625 10,054 6,914 3,303 521 --------- --------- --------- --------- --------- --------- --------- Total....................................... 5,787 4,914 21,314 21,657 16,622 12,242 8,493 Participating whole life First year.................................... 1,658 1,727 7,390 9,245 1,500 744 562 Renewal....................................... 14,390 13,527 54,743 51,058 44,362 42,823 44,866 --------- --------- --------- --------- --------- --------- --------- Total....................................... 16,048 15,254 62,133 60,303 45,862 43,567 45,428 Other First year.................................... 784 731 3,242 3,137 876 781 743 Renewal....................................... 3,135 2,988 13,891 13,622 7,136 4,318 3,760 --------- --------- --------- --------- --------- --------- --------- Total....................................... 3,919 3,719 17,133 16,759 8,012 5,099 4,503 --------- --------- --------- --------- --------- --------- --------- Total direct life......................... 38,405 36,820 150,933 150,211 99,966 83,861 82,835 Reinsurance ceded................................. (838) (786) (4,190) (3,891) (1,513) (1,271) (1,228) --------- --------- --------- --------- --------- --------- --------- Total life, net of reinsurance.................... 37,567 36,034 146,743 146,320 98,453 82,590 81,607 Direct annuity premiums collected: Traditional annuities........................... 27,778 20,396 70,810 75,154 73,973 61,362 55,718 Variable annuities.............................. 2,869 785 5,962 13,392 -- -- -- --------- --------- --------- --------- --------- --------- --------- Total annuities............................. 30,647 21,181 76,772 88,546 73,973 61,362 55,718 Reinsurance ceded................................. -- -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Total annuities, net of reinsurance............... 30,647 21,181 76,772 88,546 73,973 61,362 55,718 Direct accident and health premiums collected: Medical and disability -- individual............ 2,682 2,495 19,551 19,832 8,583 5,625 5,205 Medical and disability -- group................. 287 311 1,384 (4,370) 42,581 20,574 18,099 --------- --------- --------- --------- --------- --------- --------- Total accident and health................... 2,969 2,806 20,935 15,462 51,164 26,199 23,304 Reinsurance assumed............................... -- -- -- (52) -- 1,562 -- Reinsurance ceded................................. (324) (91) (10,912) (19,940) (4,614) (3,649) (3,142) --------- --------- --------- --------- --------- --------- --------- Total accident and health, net of reinsurance..... 2,645 2,715 10,023 (4,530) 46,550 24,112 20,162 --------- --------- --------- --------- --------- --------- --------- Total collected premiums, net of reinsurance...... $ 70,859 $ 59,930 $ 233,538 $ 230,336 $ 218,976 $ 168,064 $ 157,487 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total life insurance collected premiums, net of reinsurance, increased to $146.7 million in 1995 from $81.6 million in 1991. This growth was due to the acquisitions of Rural Security Life in 1993 and of Western Life in 1994 combined with increased production and strong persistency. Rural Security Life added life collected premium of $13.1 million in 1993 and Western Life added life collected premium of $45.4 million in 1994. Total direct collected premiums for the Company's lead product, variable universal life, increased to $21.7 million in 1994 from $8.5 million in 1991. This growth was due to the Company's continued emphasis on this product combined with a high level of consumer demand for variable products in 1993 and 1994. Total collected premiums for variable life insurance, however, declined $343,100, or 1.6%, to $21.3 million in 1995 48 from $21.7 million in 1994. Management believes sales of variable universal life were hampered by the rising interest rate environment and poor overall equity market returns in 1994. Industry sales of variable universal life declined an estimated 13% in 1995 compared to 1994 according to surveys performed by LIMRA International. Total direct collected premiums on participating whole life increased to $62.1 million in 1995 from $45.4 million in 1991. First year collected premiums, however, declined $1.9 million, or 20.1%, to $7.4 million in 1995 from $9.2 million in 1994. Management believes this decrease was caused by disruptions to marketing efforts caused by the consolidation of the insurance operations, reengineering activities and changes in the agents' compensation structure which occurred during 1995. Total direct annuity collected premiums increased to $76.7 million in 1995 from $55.7 million in 1991. The Company introduced variable annuities in January 1994 and collected premiums thereon of $13.4 million in that year. Collected premiums for variable annuities declined $7.4 milion, or 55.5%, to $6.0 million in 1995 due to similar reasons cited above for variable universal life. The Western Life acquisition also resulted in additional traditional annuity premium collections in 1994 of $25.1 million. However, this increase was offset by a $23.9 million decline in traditional annuities sold by Farm Bureau Life and FBL Insurance Company due to a change in the Company's marketing strategy in 1994 to emphasize the sale of its variable annuity products. Total direct accident and health collected premiums, net of reinsurance, decreased $10.1 million, to $10.0 million in 1995 from $20.2 million in 1991. This decline was due primarily to the Company's exiting its medical insurance business in 1994 offset by growth in disability income collected premiums. Total collected premiums, net of reinsurance, increased $10.9 million, or 18.2%, to $70.9 million for the three month period ended March 31, 1996 from $60.0 million for the three month period ended March 31, 1995 primarily due to a $7.5 million group annuity deposit collected from the Western Life pension plan during the three month period ended March 31, 1996. 49 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: LIFE INSURANCE AND ANNUITIES IN FORCE
AS OF OR FOR THE THREE MONTH PERIOD AS OF OR FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ----------------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FACE AMOUNTS IN MILLIONS) Life insurance Universal Number of policies.............. 105,386 105,256 103,623 72,224 54,302 50,452 Direct statutory premiums....... $ 18,584 $ 72,115 $ 74,852 $ 51,140 $ 37,805 $ 36,975 Policyholder account balances... 511,573 503,877 467,773 300,989 185,419 158,587 Direct face amounts............. 8,134 8,096 7,841 5,907 4,112 3,700 Traditional Number of policies.............. 266,712 267,452 267,590 207,674 186,560 192,344 Direct statutory premiums....... $ 19,813 $ 80,467 $ 76,973 $ 48,973 $ 46,123 $ 45,757 Future policy benefits.......... 622,337 617,376 597,961 488,533 423,947 411,888 Direct face amounts............. 8,190 8,113 7,380 4,056 3,258 3,128 Total life Number of policies.............. 372,098 372,708 371,213 279,898 240,862 242,796 Direct statutory premiums....... $ 38,397 $ 152,582 $ 151,825 $ 100,113 $ 83,928 $ 82,732 Face amounts.................... 16,324 16,209 15,221 9,963 7,370 6,828 Annuities Number of policies.............. 50,031 49,575 48,409 33,194 30,153 27,917 Direct statutory premiums....... $ 35,735 $ 87,655 $ 99,381 $ 86,418 $ 75,455 $ 70,337 Policyholder account balances... 798,329 779,827 731,254 508,447 454,221 406,825 Future policy benefits.......... 112,070 110,412 108,115 87,244 66,080 59,958
The Company has experienced low lapse rates compared to the life insurance industry, as indicated in the following table:
LAPSE RATE FOR THE LAPSE RATES FOR THE YEAR ENDED DECEMBER 31, THREE MONTH PERIOD ENDED MARCH 31, ---------------------------------------------------- 1996 1995 1994 1993 1992 --------------------- ------------ -------------- ---------- ---------- Company life insurance lapse rates............. 2.0% 7.9% 7.2%(1) 5.9% 6.0% Industry life insurance lapse rates............ (2) (2) 8.9 9.7 10.5
- ------------------------ (1) The increase in the Company's lapse rate from 1993 to 1994 was largely because of the acquisition of the business of Western Life in 1994. (2) The industry lapse rates for the three month period ended March 31, 1996 and the year ended December 31, 1995 are not available as of the date of this prospectus. EXIT FROM MEDICAL EXPENSE INSURANCE Prior to 1994, the Company sold indemnity medical insurance. Effective January 1, 1994, the Company transferred all of its group medical insurance to other carriers and entered into a 100% coinsurance agreement with a third party carrier for its individual medical insurance. Although there was some run-off of 50 the group medical line during 1994, the Company effectively removed itself from the medical insurance business as of January 1, 1994. The Company helps its customers meet their medical insurance needs through marketing arrangements with various non-affiliated companies. 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 eleven 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 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 nicotine 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. The increasing incidence of Acquired Immune Deficiency Syndrome (AIDS) has not adversely affected the Company's mortality experience. The Company considers AIDS information and testing results in its underwriting and pricing decisions. For all individual life insurance applications of over $100,000 face amount, the applicant must submit to a blood test which includes HIV antibody testing. The Company has incurred negligible death benefits due to known AIDS-related deaths. OPERATIONS The Company's life insurance and annuity operations have realized significant cost efficiencies as a result of reengineering and the consolidations with Rural Security Life and Western Life. Budgetary controls, service quality and business processing standards have been established and are closely monitored as a result of reengineering the Company's life operations. Detailed internal financial and transactional reporting allows analysis of all elements of the Company's life operations identifying cost savings and service improvement opportunities. The consolidation of Rural Security Life's and Western Life's operations with the Company has resulted in the centralization of most support functions such as product development, marketing, accounting and financial reporting, regulatory compliance, information technology and investment management in the home office in West Des Moines, Iowa. In addition, the underwriting, policy issue and policy service functions of Rural Security Life were moved to West Des Moines allowing a cessation of life operations in Madison, Wisconsin. In order to provide continuity of service with the agency force in Western Life's marketing area, the Company maintains a service center in Denver, Colorado to provide underwriting, policy issue and policy service. These consolidations, along with the Company's exit from the medical insurance business, have resulted in the elimination of approximately 200 job positions -- over 40% of the combined life insurance workforces. REINSURANCE In keeping with industry practices, the Company reinsures portions of its life insurance and disability income 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 51 for Farm Bureau Life are $500,000 and for Western Life are $250,000 per life. 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. There is currently no life reinsurance with affiliated insurance companies, and all reinsurance entered into is in the ordinary course of 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, 1995 is as follows:
A.M. BEST REINSURER RATING - --------------------------------------------------------------------------- ------------- AMOUNT OF IN FORCE CEDED --------------- (DOLLARS IN MILLIONS) Lincoln National Life Insurance Company.................................... A+ $ 394.4 Business Men's Assurance Company........................................... A 189.7 Frankona America Life Reassurance Company.................................. A 150.8 All other.................................................................. 218.9 ------ Total.................................................................... $ 953.8 ------ ------
POLICY RESERVES The policy liabilities reflected in the consolidated financial statements are calculated in accordance with 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 (all of which are participating), 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. INTEREST CREDITING AND PARTICIPATING DIVIDEND POLICY The Company's dividend/interest rate committee 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. Farm Bureau Life and Western Life pay dividends, credit interest and determine 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 6.77%, 6.68%, 6.71% and 7.52%, and average credited rates on annuity contracts were 6.78%, 6.49%, 6.16% and 6.97% for the three month period ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively. VARIABLE SUB-ACCOUNTS AND MUTUAL FUNDS The Company sponsors the FBL Series Fund, Inc. (the Series Fund) and FBL Variable Insurance Series Fund (the Insurance Series Fund) which are open-end, diversified series management investment companies. The Series Fund is available to the general public. The Insurance Series Fund offers its shares, 52 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. Currently, the Company is the only participating company with its variable annuity and variable universal life separate accounts investing in the Insurance Series Fund. The Company uses only the 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 with current income as a secondary objective; (2) as high a level of current income as is consistent with investment in a portfolio of debt securities deemed to be of high quality; (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) a high total investment return of income and capital appreciation by investing in common stocks, high quality debt securities and preferred stocks and high quality short-term money market instruments; (5) a 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, the managed and the money market portfolios at March 31, 1996 aggregated $170.6 million and the net assets of the bond portfolios on that date were $23.7 million. FBL Investment Advisory Services, Inc. (the Advisor), a subsidiary of the Company, receives an annual fee based on the average daily net assets of each Portfolio that ranges from 0.25% to 0.60% for the Series Fund and from 0.20% to 0.55% for the Insurance Series Fund. The Advisor also serves as distributor and principal underwriter for the 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. FBL Marketing Services, Inc., another subsidiary of the Company, serves as the principal dealer for Funds and receives commissions and service fees. The Company also sponsors a money market fund, FBL Money Market Fund, Inc. (Money Market Fund) which is a no-load open-end diversified management investment company with an investment objective of maximum current income consistent with liquidity and stability of principal. The Advisor acts as the investment advisor, manager and principal underwriter of the Money Market Fund and receives an annual management fee, accrued daily and payable monthly, on a graduated basis commencing at 0.5% of the first $200 million of average daily assets, and certain other fees. The net assets of the Money Market Fund were $21.8 million at March 31, 1996. PROPERTY-CASUALTY SEGMENT PRODUCTS The Company underwrites the following major lines of property-casualty insurance: automobile, homeowners, farm and ranch owners, workers' compensation, crop, and other. PERSONAL AND COMMERCIAL AUTOMOBILE coverage insures individuals and businesses, respectively, against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insured's vehicle, and property damage to other vehicles and other property. HOMEOWNERS INSURANCE insures individuals for losses to their residences and personal property, such as those caused by fire, wind, hail, water damage, theft and vandalism, and against third-party liability claims. FARM AND RANCH OWNERS insurance expands the personal liability and property protection of a homeowners policy to include farm and ranch liabilities, as well as farm and ranch property protection. WORKERS' COMPENSATION coverage insures employers against employee medical and indemnity claims resulting from injuries related to work. Workers' compensation policies are often written in conjunction with other commercial policies. 53 CROP INSURANCE includes crop hail and multi-peril crop insurance. Crop hail provides protection from financial loss to an insured's crop investments from hail. Multi-peril crop insurance protects from perils including drought, frost, flood and insect damage. The Company also offers a variety of other products, such as umbrella policies, personal inland marine endorsements, business owner/commercial package, garage liability, general liability and home venture coverages. The Company also participates in reinsurance arrangements. See "-- Reinsurance Arrangements." FARM BUREAU MUTUAL POOL Utah Insurance participates in the Farm Bureau Mutual pool with Farm Bureau Mutual and South Dakota Mutual, with all three companies operating under the common management of the Company. All retained insurance business of Utah Insurance and South Dakota Mutual is assumed by Farm Bureau Mutual. The combined business is then assumed by the three property-casualty companies, in specified proportions, not in excess of an amount that would create a net written premium to surplus ratio that exceeds acceptable industry standards. This allows each property-casualty company, which may write premiums directly in only one or two states, to obtain better geographic and business diversification of risk, and therefore tends to create greater stability in the underwriting results. In the pool, all premiums, losses, loss adjustment expenses, acquisition and other underwriting and administrative expenses are combined and distributed proportionately to each property-casualty company, thus providing the three companies with substantially the same underwriting results. The overall operating results of the three companies differ based on their respective investment income and other miscellaneous items. In addition, effective January 1, 1996, Farm Bureau Mutual entered into a loss pooling agreement with Western Ag, which, in turn quota share reinsures business of Western Farm Bureau Mutual. Western Ag and Western Farm Bureau Mutual are Farm Bureau affiliated companies in Arizona and New Mexico, respectively, that are also managed by the Company. Under the loss pooling agreement all direct and assumed premiums, losses and allocated loss adjustment expenses (but not acquisition and other general underwriting expenses) of Farm Bureau Mutual, Utah Insurance and South Dakota Mutual will be pooled with these same items for Western Ag and Western Farm Bureau Mutual. Thus, further geographic and business diversification of risk for Utah Insurance will be achieved without significant change in the size of the Farm Bureau Mutual pool or its total premium volume. The following table sets forth net premiums earned by the Farm Bureau Mutual pool by product line for the periods indicated:
FOR THE THREE MONTH PERIOD FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ----------------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Net premiums earned Automobile..................... $ 28,333 $ 114,468 $ 111,954 $ 104,739 $ 99,022 $ 91,899 Homeowners..................... 3,956 14,954 13,476 11,658 10,270 9,439 Farm and ranch owners.......... 6,937 26,033 24,577 23,189 21,796 20,597 Workers' compensation.......... 3,261 15,153 14,261 11,363 9,343 7,671 Crop........................... 468 16,457 10,063 12,785 8,130 12,368 Reinsurance.................... 8,037 35,325 37,564 38,675 24,266 20,478 Other.......................... 2,732 11,466 10,328 9,303 9,305 7,456 ------- ---------- ---------- ---------- ---------- ---------- Total net premiums earned...... $ 53,724 $ 233,856 $ 222,223 $ 211,712 $ 182,132 $ 169,908 ------- ---------- ---------- ---------- ---------- ---------- ------- ---------- ---------- ---------- ---------- ----------
Utah Insurance was an 8% participant in the Farm Bureau Mutual pool through March 31, 1996. It is anticipated that the Company's participation in the Farm Bureau Mutual pool will be increased to 20% during the second quarter of 1996, retroactive to January 1, 1996. 54 The following table sets forth the 8% share of Utah Insurance in the Farm Bureau Mutual pool for the periods indicated:
FOR THE THREE FOR THE YEAR ENDED DECEMBER 31, MONTH PERIOD ENDED ----------------------------------------------------- MARCH 31, 1996 1995 1994 1993 1992 1991 --------------------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Net premiums earned Automobile........................ $ 2,267 $ 9,158 $ 8,957 $ 8,379 $ 7,921 $ 7,352 Homeowners........................ 316 1,196 1,078 933 822 755 Farm and ranch owners............. 555 2,083 1,966 1,855 1,744 1,648 Workers' compensation............. 261 1,212 1,141 909 747 614 Crop.............................. 37 1,317 805 1,023 651 989 Reinsurance....................... 643 2,826 3,005 3,094 1,941 1,638 Other............................. 219 917 826 744 744 597 ------ --------- --------- --------- --------- --------- Total net premiums earned......... $ 4,298 $ 18,709 $ 17,778 $ 16,937 $ 14,570 $ 13,593 ------ --------- --------- --------- --------- --------- ------ --------- --------- --------- --------- ---------
The following table sets forth net premiums earned by the Farm Bureau Mutual pool by state for the periods indicated:
FOR THE THREE FOR THE YEAR ENDED DECEMBER 31, MONTH PERIOD ENDED ---------------------------------------------------------- MARCH 31, 1996 1995 1994 1993 1992 1991 -------------------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Iowa......................... $ 25,821 $ 116,069 $ 105,890 $ 102,670 $ 94,711 $ 92,956 Minnesota.................... 10,824 46,035 43,512 39,595 36,185 32,707 South Dakota................. 2,593 10,951 10,710 9,373 8,235 7,304 Utah......................... 6,449 25,476 24,547 21,399 18,735 16,463 Other (assumed).............. 8,037 35,325 37,564 38,675 24,266 20,478 ------- ---------- ---------- ---------- ---------- ---------- $ 53,724 $ 233,856 $ 222,223 $ 211,712 $ 182,132 $ 169,908 ------- ---------- ---------- ---------- ---------- ---------- ------- ---------- ---------- ---------- ---------- ----------
The following table sets forth the loss and loss adjustment expense (LAE), expense and combined ratios of the Farm Bureau Mutual pool for the periods indicated:
FOR THE THREE FOR THE YEAR ENDED DECEMBER 31, MONTH PERIOD ENDED ---------------------------------------------------------- MARCH 31, 1996 1995 1994 1993 1992 1991 ----------------------- ---------- ---------- ---------- ---------- ---------- Loss and LAE ratios: Automobile............................ 80.6% 76.7% 80.0% 84.9% 82.1% 83.4% Homeowners............................ 60.4 76.0 89.4 85.0 82.8 78.5 Farm and ranch owners................. 77.7 75.5 84.4 83.5 71.7 84.9 Workers' compensation................. 53.4 56.5 59.1 56.5 70.4 113.7 Crop.................................. 22.4 81.2 88.3 116.3 88.3 71.7 Reinsurance........................... 72.9 62.3 62.1 71.3 130.7 76.1 Other................................. 66.8 65.5 48.8 78.2 65.5 83.1 Total Loss and LAE ratio.............. 74.7 72.8 75.6 82.4 86.2 83.0 Expense ratio........................... 27.4 25.1 25.9 26.2 25.4 25.7 Combined ratio.......................... 102.1 97.9 101.5 108.6 111.6 108.7
55 UNDERWRITING AND PRICING Rating and classification plans for non-commercial lines are independently developed and maintained by experienced casualty actuaries. Commercial lines rates are developed from Insurance Services Office and National Council of Compensation Insurers industry data. Rates are reviewed regularly for adequacy. Auto rates are reviewed at least annually. Underwriting of new automobile business utilizes Claims Loss Underwriting Exchange, Motor Vehicle Record, and Credit Bureau Report data. Most of this data is available to agents in the field. Renewal business is monitored on an exception basis for claim frequency and severity characteristics that trigger reunderwriting activities. Because the Company stresses "total" accounts, most individual lines of business have loss-sensitive premium structures that provide multiple levels of rates by means of surcharges or discounts in order to accommodate and retain various levels of risks. Risks that cannot be directly accommodated are placed with non-affiliated sub-standard auto markets and other niche writers through a brokerage subsidiary of the Company. The Company's multi-line exclusive agents are being increasingly involved in the underwriting process with the availability of underwriting information in the field and the Company's growing emphasis upon agent entry and electronic submission of policy applications and changes (currently available for personal auto insurance only). Profitability is tracked by individual agent loss ratios. An agent's loss ratio can affect commission levels by up to plus or minus 20%. Agent profitability and compliance with underwriting rules also impact an agent's binding authority. OPERATIONS AND CLAIMS The management of insurance operations from the West Des Moines, Iowa home office facilitates uniform procedures and introduction of new technology and allows for reduced supervisory and managerial personnel. The Company is in the process of converting its multiple administration and processing systems to one common system which will substantially reduce information technology maintenance costs while improving service and turnaround times. The Company has recently reengineered the business processes associated with most of its major lines. By streamlining business flows the Company eliminated approximately 70 job positions while improving service and turnaround times. As further technological improvements are realized, business processes will be again reviewed with a view to improving accuracy and eliminating non-value added steps. Field claim activities are decentralized to ensure prompt handling of local claims. However, some claim functions are being centralized to realize processing efficiencies and expense savings. For example, first notices of loss are being directed to a centralized home office "800" phone service unit which electronically distributes loss assignments to the appropriate staff in the field. Information technology is a key component in enhancing the Company's claim service and in controlling claims costs. The Company was among the first in the United States to implement an expert system that evaluates the value of bodily injury claims. The Company also uses computerized building replacement cost and automobile physical damage cost estimators and auto glass networks. Among the innovative claim practices utilized by the Company are alternative dispute resolution to reduce litigation costs, preferred provider organizations to control auto and workers' compensation medical costs, and specialized subrogation and property loss units. REINSURANCE ARRANGEMENTS Utah Insurance participates with Farm Bureau Mutual and South Dakota Mutual, each of which are under common management with the Company, in several reinsurance agreements with American Agricultural Insurance Company (American Ag). American Ag is a reinsurance company which is owned by, and which reinsures, many of the Farm Bureau property-casualty insurance companies throughout the United States. Under these reinsurance agreements, Utah Insurance, Farm Bureau Mutual and South Dakota Mutual retain $250,000 of exposure for property risks, with the excess being ceded to American Ag (up to $19.8 million of exposure). The property-casualty companies have a property catastrophe occurrence cover for $28.0 million excess of a $3.9 million loss. They retain $400,000 for casualty exposures with the excess being ceded to 56 American Ag up to $11.5 million. The property-casualty companies maintain an excess treaty for workers' compensation to a total limit of $15.0 million. Crop hail proportional treaties exist that cede approximately 40% of the Company's crop hail premium. Utah Insurance is exposed to certain reinsurance assumptions through the Farm Bureau Mutual pool. Through quota share arrangements with other Farm Bureau property-casualty companies and miscellaneous contracts and assumptions from American Ag and various reinsurance brokers, the pool had estimated assumed reinsurance premiums for the three month period ended March 31, 1996 and the year ended December 31, 1995 of $9 million and $38 million, respectively. LOSS AND LOSS ADJUSTMENT EXPENSE The reserves for losses and LAE on property-casualty business are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate net cost of all reported and unreported losses and loss adjustment expenses that are unpaid. These reserves include estimates of future trends in claim severity, frequency and other factors that could vary as the losses are ultimately settled. Although considerable uncertainty is inherent in such estimates, management believes that the reserve for losses and loss adjustment expenses is adequate. The estimates are continually reviewed and, as adjustments to these reserves become necessary, such adjustments are reflected in current operations. The following table reflects for the companies participating in the Farm Bureau Mutual pool the development of their combined losses and LAE for the periods indicated at the end of that year and each subsequent year. The first line shows reserves, net of reinsurance, as originally reported at the end of the stated year. The section under the caption "Cumulative amount paid as of" shows the cumulative amounts paid, net of reinsurance, in respect of that reserve as of the end of each subsequent year. The section under the caption "Reserves reestimated as of" shows the original recorded reserve as adjusted as of the end of each subsequent year to reflect the cumulative amounts paid and all other facts and circumstances discovered during each such year. The line, "Net cumulative redundancy (deficiency)" reflects the difference between the latest reestimated reserve amount and the reserve amount as originally established. The line "Gross cumulative redundancy" reflects the difference between the latest reestimated reserve amount and the reserve amount as originally established, before the effect of reinsurance ceded. The table represents development by incurred year. Conditions and trends that have affected the development of these reserves in 57 the past will not necessarily recur in the future. It may not be appropriate to use this cumulative history in the projection of future performance. Utah Insurance has an 8% share in the Farm Bureau Mutual pool, which is expected to be increased to 20% during the second quarter of 1996, retroactive to January 1, 1996.
INCURRED YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 --------- --------- --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Reserves for losses and LAE...... $ 159,672 $ 152,277 $ 145,934 $ 125,424 $ 113,108 $ 104,355 $ 90,890 $ 74,979 $ 66,652 Cumulative amount paid as of One year later................. 66,910 62,684 63,319 52,452 51,193 46,000 38,794 31,031 Two years later................ 92,152 87,443 77,745 72,934 67,557 55,723 47,715 Three years later.............. 100,939 87,643 85,547 78,390 65,782 54,973 Four years later............... 93,656 90,527 85,278 70,958 56,229 Five years later............... 93,742 87,129 74,092 57,756 Six years later................ 88,382 75,074 59,705 Seven years later.............. 75,757 59,382 Eight years later.............. 60,413 Nine years later............... Reserves reestimated as of One year later................. 140,943 134,321 129,890 106,794 105,780 94,857 78,989 68,268 Two years later................ 129,791 124,502 109,354 99,967 95,964 78,885 69,718 Three years later.............. 120,672 104,988 100,975 91,938 78,564 66,379 Four years later............... 102,790 99,302 92,757 77,513 62,599 Five years later............... 98,837 92,078 78,729 61,337 Six years later................ 91,821 78,167 62,651 Seven years later.............. 78,069 61,604 Eight years later.............. 62,149 Nine years later............... Net cumulative redundancy (deficiency).................... 11,334 16,143 4,752 10,318 5,518 (931) (3,090) 4,503 Net reserve...................... $ 159,672 $ 152,277 $ 145,934 Reinsurance recoverable.......... 16,078 15,975 20,898 --------- --------- --------- Gross reserve.................... $ 175,749 $ 168,252 $ 166,832 --------- --------- --------- --------- --------- --------- Net reestimated reserve.......... $ 140,942 $ 129,791 Reestimated reinsurance recoverable..................... 13,066 22,046 --------- --------- Gross reestimated reserve........ $ 154,008 $ 151,837 --------- --------- --------- --------- Gross cumulative redundancy...... $ 14,244 $ 14,995 --------- --------- --------- --------- 1986 --------- Reserves for losses and LAE...... $ 64,358 Cumulative amount paid as of One year later................. 31,953 Two years later................ 45,769 Three years later.............. 51,875 Four years later............... 56,155 Five years later............... 58,186 Six years later................ 58,902 Seven years later.............. 59,924 Eight years later.............. 60,337 Nine years later............... 60,653 Reserves reestimated as of One year later................. 62,226 Two years later................ 63,979 Three years later.............. 62,909 Four years later............... 62,158 Five years later............... 61,833 Six years later................ 61,304 Seven years later.............. 62,074 Eight years later.............. 61,901 Nine years later............... 61,826 Net cumulative redundancy (deficiency).................... 2,532 Net reserve...................... Reinsurance recoverable.......... Gross reserve.................... Net reestimated reserve.......... Reestimated reinsurance recoverable..................... Gross reestimated reserve........ Gross cumulative redundancy......
A reconciliation of the net reserve for losses and loss adjustment expenses to the reserves and unearned premiums on property-casualty policies included in the Company's consolidated balance sheet as of December 31, 1995 and 1994 is as follows:
DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- (DOLLARS IN THOUSANDS) Reserves per the loss and loss adjustment expense reserve development table above.......................................................... $ 159,672 $ 152,277 Utah Insurance's share of the pool.................................... 8% 8% ---------- ---------- Net reserve for losses and loss adjustment expenses................... 12,774 12,182 Reinsurance recoverables.............................................. 17,210 16,646 Unearned premium reserves............................................. 15,906 15,654 ---------- ---------- Reserves and unearned premiums on property-casualty policies per the consolidated financial statements.................................... $ 45,890 $ 44,482 ---------- ---------- ---------- ----------
58 For financial reporting purposes, the reinsurance recoverables set forth in the consolidated financial statements include reinsurance recoverables by Utah Insurance from the Farm Bureau Mutual pool, whereas reinsurance recoverables for the Farm Bureau Mutual pool, set forth in the development table, only include reinsurance recoverables from non-affiliates. Utah Insurance has been an 8% participant in the Farm Bureau Mutual pool since January 1, 1990, the date the Farm Bureau Mutual pool was formed. Accordingly, the Company has, since January 1, 1990, recorded approximately 8% of the above-stated reserves for losses and LAE, amounts paid, reinsurance recoverables and resulting cumulative redundancies during the respective years. The Company's share of such amounts relating to claims incurred subsequent to the date of the pooling change will increase to 20%. The Company's share of development on claims incurred prior to the effective date of the pooling change will remain at 8%. The net cumulative deficiencies of $931,000 and $3.1 million for 1989 and 1988, respectively, were the result of general adverse claim development not anticipated when initially establishing the reserves. Since the inception of the Farm Bureau Mutual pool in 1990, management has implemented more sophisticated and frequent methodologies for establishing reserves as is evidenced by the net cumulative redundancies during 1990 through 1994. Although the Farm Bureau Mutual pool was not formed until January 1, 1990, all three companies participating in the pool have been managed by the Company during the entire period presented in the above table, with the exception of South Dakota Mutual which first entered into a management agreement with the Company in 1987. 59 INVESTMENTS 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 its investment philosophy of maintaining a largely investment grade portfolio and providing adequate liquidity for expected liability durations and other requirements. The Company's investment portfolio is summarized in the table below:
AS OF DECEMBER 31, -------------------------------------------------------------- AS OF MARCH 31, 1996 1995 1994 1993 ------------------------ ------------------------ ------------------------ ---------- CARRYING CARRYING CARRYING CARRYING VALUE PERCENT VALUE PERCENT VALUE PERCENT VALUE ---------- ------------ ---------- ------------ ---------- ------------ ---------- (DOLLARS IN THOUSANDS) Fixed maturities: Public................................ $1,601,997 60.0% $1,597,236 60.4% $1,293,590 55.3% $ 855,202 Private placement..................... 332,676 12.5 335,905 12.7 314,593 13.4 327,250 144A private placement................ 159,152 6.0 143,068 5.4 124,428 5.3 97,338 ---------- ----- ---------- ----- ---------- ----- ---------- Total fixed maturities.................. 2,093,825 78.5 2,076,209 78.5 1,732,611 74.0 1,279,790 Equity securities......................... 90,856 3.4 83,714 3.1 46,701 2.0 51,579 Held in inventory (1)..................... 21,327 0.8 21,913 0.8 18,169 0.8 17,386 Mortgage loans on real estate............. 267,534 10.0 266,623 10.1 272,537 11.7 230,897 Investment real estate Acquired for debt....................... 2,214 0.1 2,220 0.1 4,444 0.2 1,255 Investment.............................. 26,783 1.0 26,384 1.0 22,507 1.0 19,506 Policy loans.............................. 116,633 4.4 116,107 4.4 113,848 4.9 87,008 Other long-term investments............... 12,044 0.4 2,892 0.1 6,654 0.3 26,952 Short-term investments.................... 36,785 1.4 50,061 1.9 119,683 5.1 42,904 ---------- ----- ---------- ----- ---------- ----- ---------- Total investments..................... $2,668,001 100.0% $2,646,123 100.0% $2,337,154 100.0% $1,757,277 ---------- ----- ---------- ----- ---------- ----- ---------- ---------- ----- ---------- ----- ---------- ----- ---------- PERCENT ------------ Fixed maturities: Public................................ 48.7% Private placement..................... 18.6 144A private placement................ 5.5 ----- Total fixed maturities.................. 72.8 Equity securities......................... 2.9 Held in inventory (1)..................... 1.0 Mortgage loans on real estate............. 13.1 Investment real estate Acquired for debt....................... 0.1 Investment.............................. 1.1 Policy loans.............................. 5.0 Other long-term investments............... 1.5 Short-term investments.................... 2.5 ----- Total investments..................... 100.0% ----- -----
- ------------------------ (1) Held in inventory includes equity securities owned by FBL Ventures totaling $19.4, $20.1 million, $15.9 million and $15.4 million at March 31, 1996 and December 31, 1995, 1994 and 1993, respectively. As of March 31, 1996, 91.8% (based on carrying value) of the fixed maturity securities were investment grade debt securities, being in the highest two 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. Private placement securities are generally rated by the Securities Valuation Office of the NAIC. The Company regularly reviews the percentage of its portfolio which is invested in non-investment grade debt securities (NAIC 3 through 6). As of March 31, 1996, the Company's investment in non-investment grade debt was 8.2% of fixed maturity securities. At that time no single non-investment grade holding exceeded 0.6% of total investments. 60 The following table sets forth the credit quality, by NAIC designation and S & P rating equivalents, of fixed maturity securities: FIXED MATURITY SECURITIES BY NAIC DESIGNATION
AS OF DECEMBER 31, --------------------------------------------------- AS OF MARCH 31, 1996 1995 1994 ------------------------ ------------------------ ------------------------- NAIC EQUIVALENT CARRYING CARRYING CARRYING DESIGNATION S & P RATINGS (1) VALUE PERCENT VALUE PERCENT VALUE PERCENT - ------------------- ---------------------------- ---------- ------------ ---------- ------------ ----------- ------------ (DOLLARS IN THOUSANDS) 1 (AAA, AA, A)................ $1,347,416 64.4% $1,311,216 63.1% $1,039,787 60.0% 2 (BBB)....................... 574,105 27.4 582,678 28.1 541,272 31.3 ---------- ----- ---------- ----- ----------- ----- Total investment grade...... 1,921,521 91.8 1,893,894 91.2 1,581,059 91.3 3 (BB)........................ 100,264 4.8 100,622 4.8 82,402 4.8 4 (B)......................... 69,075 3.3 79,987 3.9 65,083 3.7 5 (CCC, CC, C)................ 1,626 0.1 56 -- 1,255 -- 6 In or near default.......... 1,339 -- 1,650 0.1 2,812 .2 ---------- ----- ---------- ----- ----------- ----- Total below investment grade...................... 172,304 8.2 182,315 8.8 151,552 8.7 ---------- ----- ---------- ----- ----------- ----- Total fixed maturities...... $2,093,825 100.0% $2,076,209 100.0% $1,732,611 100.0% ----- ----- ----------- ----- ---------- ----- ---------- ----- ----------- ----- ---------- ---------- 1993 ------------------------- NAIC CARRYING DESIGNATION VALUE PERCENT - ------------------- ----------- ------------ 1 $ 639,202 49.9% 2 482,428 37.7 ----------- ----- 1,121,630 87.6 3 79,991 6.3 4 51,454 4.0 5 12,594 1.0 6 14,121 1.1 ----------- ----- 158,160 12.4 ----------- ----- $1,279,790 100.0% ----------- ----- ----------- -----
- ------------------------ (1) Comparisons between NAIC designations and S & P ratings are published by the NAIC. S & P has not rated some of the fixed maturity securities in the Company's portfolio. The carrying value of the Company's portfolio of fixed maturity securities by contractual maturity are shown below: REMAINING MATURITY OF FIXED MATURITY SECURITIES
AS OF DECEMBER 31, -------------------------------------------------------------- AS OF MARCH 31, 1996 1995 1994 1993 ------------------------ ------------------------ ------------------------ ---------- CARRYING CARRYING CARRYING CARRYING MATURITY OF FIXED MATURITY SECURITIES VALUE PERCENT VALUE PERCENT VALUE PERCENT VALUE - ------------------------------------------ ---------- ------------ ---------- ------------ ---------- ------------ ---------- (DOLLARS IN THOUSANDS) Due in one year or less................... $ 50,345 2.4% $ 66,886 3.2% $ 37,359 2.1% $ 32,917 Due after one year through five years..... 178,289 8.5 181,647 8.7 159,128 9.2 146,886 Due after five years through ten years.... 277,066 13.2 287,838 13.9 296,011 17.1 255,932 Due after ten years....................... 622,913 29.8 641,527 30.9 533,268 30.8 360,301 ---------- ----- ---------- ----- ---------- ----- ---------- 1,128,613 53.9 1,177,898 56.7 1,025,766 59.2 796,036 Mortgage and asset-backed securities...... 930,272 44.4 862,245 41.5 666,026 38.4 420,169 Redeemable preferred stocks............... 34,940 1.7 36,066 1.8 40,819 2.4 63,585 ---------- ----- ---------- ----- ---------- ----- ---------- Total................................. $2,093,825 100.0% $2,076,209 100.0% $1,732,611 100.0% $1,279,790 ---------- ----- ---------- ----- ---------- ----- ---------- ---------- ----- ---------- ----- ---------- ----- ---------- MATURITY OF FIXED MATURITY SECURITIES PERCENT - ------------------------------------------ ------------ Due in one year or less................... 2.6% Due after one year through five years..... 11.5 Due after five years through ten years.... 20.0 Due after ten years....................... 28.1 ----- 62.2 Mortgage and asset-backed securities...... 32.8 Redeemable preferred stocks............... 5.0 ----- Total................................. 100.0% ----- -----
Mortgage-backed securities constitute a significant portion of the Company's portfolio of securities. These mortgage-backed securities are diversified as to collateral types, cash flow characteristics, and maturity. At March 31, 1996, the Company held $532.7 million (20.0% of total investments) in residential mortgage-backed securities and $301.8 million (11.3% of total investments) in commercial mortgage-backed securities. At March 31, 1996, the Company held residential collateralized mortgage obligation (CMO) investments with a market value of $482.1 million as part of its mortgage-backed securities holdings. CMOs consist of pools of mortgages divided into sections or "tranches" which provide sequential retirement of the bonds. To provide call protection and more stable average lives, the Company invests in planned amortization classes (PACs), which provide more predictable cash flows within a range of prepayment speeds (the rate of individuals refinancing their home mortgages at lower rates) by shifting the prepayment risks to support tranches. The Company also invests in sequential tranches, which provide stability in that repayments of 61 principal do not occur until the previous tranches are paid off. As of March 31, 1996, 74.7% of the Company's CMO investments are in PAC and sequential pay securities. The Company does not purchase certain types of collateralized mortgage obligations. These include, but are not limited to, interest only, principal only, floater, inverse floater, PAC II, Z or support tranches. At March 31, 1996, the Company held $267.5 million or 10.0% of invested assets in mortgage loans. These mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. At March 31, 1996, mortgages more than 60 days delinquent accounted for 1.5% 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 March 31, 1996 include Mountain (25%) which includes Arizona, Colorado, Idaho, New Mexico, Nevada, Utah and Wyoming; Pacific (23%) which includes California and Oregon; and West South Central (18%) which includes Texas and Oklahoma. Mortgage loans on real estate have also been analyzed by collateral types with retail facilities (34%) and office buildings (40%) representing the largest holdings at March 31, 1996. The Company's investment portfolio at March 31, 1996, also included $36.8 million of short-term investments, plus $211.6 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. The Company's asset-liability management program includes (i) designing and developing products which encourage persistency and, as a result, creating a stable liability structure; and (ii) structuring the investment portfolio with duration and cash flow characteristics consistent with the duration and cash flow characteristics of the Company's insurance liabilities. At March 31, 1996, the weighted average life of the fixed maturity portfolio, based on market values excluding convertible bonds, was approximately 7.9 years. Based on the results of the fixed income analytical system utilized by the Company, including its mortgage backed prepayment assumptions, the effective duration of the fixed income portfolio was 4.67 as of March 31, 1996. FBL Ventures is a wholly owned investment company subsidiary of Farm Bureau Life which invests in start-up and mezzanine level venture capital investments in various sectors. Operating results of FBL Ventures are recognized in accordance with accounting principles for investment companies and, as such, unrealized and realized gains and losses on investments are included in net investment income. Because of the venture capital nature of the underlying investments, the results of FBL Ventures tend to fluctuate significantly from year to year and need to be evaluated over a much longer period of time. During 1995, FBL Ventures experienced net investment income of $25.4 million resulting predominantly from unrealized gains on two venture capital investments which completed initial public offerings during the year. Therefore, the net income (loss) is not included in adjusted operating income. The results of FBL Ventures during the five years ended December 31, 1995, have provided significant returns to the Company. Since March 1990, when the Company began its current venture capital program, the underlying investments in FBL Ventures have generated an average annual internal rate of return of 41.3%. As of March 31, 1996, FBL Ventures had investments of $19.4 million, consisting of 29 private equity securities issued by 21 companies. Of the 21 companies in which FBL Ventures held investments on March 31, 1996, six are public and 15 are private. Of the aggregate value of $19.4 million, investment in publicly traded companies comprised $6.8 million and investment in non-publicly traded companies comprised $12.6 million. The number and percent of companies by industry and the value of the investment by industry was as follows:
PERCENT OF TOTAL INDUSTRY NUMBER CARRYING VALUE - --------------------------------------------------- --------------- ------------------- CARRYING VALUE ----------------------- (DOLLARS IN THOUSANDS) Communications technology.......................... 5 15.9 $ 3,084 Computer hardware/software......................... 4 16.6 3,220 Biotechnology...................................... 5 19.3 3,752 Healthcare/services/technology..................... 5 34.9 6,780 Specialty retail................................... 1 10.3 2,000 Agriculture........................................ 1 3.0 580
62 It is anticipated that during 1996 all or substantially all of the investments of FBL Ventures will be sold to a venture capital subsidiary of Farm Bureau Mutual at their carrying value, which management believes approximates fair market value. Accordingly, the sale will not have a significant effect on the Company's operating results. The proceeds from the sale are expected to be invested in fixed maturity securities and mortgage loans. Management believes the sale of FBL Venture's investments will provide the Company with more consistent and predictable investment returns and will facilitate the Company's asset/liability management process. 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 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, particularly to Farm Bureau members, its ability to develop competitive and profitable products, and its maintenance of high ratings of its claims paying ability from A.M. Best. In connection with the development and sale of its products, the Company encounters significant competition from other insurance companies, many of whom have financial resources substantially greater than those of the Company, as well as from other investment alternatives available to its customers. REGULATION The Company's insurance subsidiaries are subject to regulation and supervision by the states in which they transact business. State insurance laws generally establish supervisory agencies with broad administrative and supervisory powers related to granting and revoking licenses, transacting business, establishing guaranty fund associations, licensing agents, approving policy forms, regulating premium rates for some lines of business, establishing reserve requirements, prescribing the form and content of required financial statements and reports, determining the reasonableness and adequacy of statutory capital and surplus, and regulating the type and amount of investments permitted. Every state in which the Life Companies are licensed administers a guaranty fund, which provides for assessments of licensed insurers for the protection of policyholders of insolvent insurance companies. There has been an increase in the number of insurance companies that are under supervision which has resulted in an increase in the amount of assessments to cover losses to policyholders of such companies. Assessments can be partially recovered through a reduction in future premium taxes in some states. In these situations, the amounts are capitalized and amortized against future reductions in premium taxes. Assessments paid by the Company amounted to $436,000 in the three month period ended March 31, 1996, $1.4 million in 1995, $1.6 million in 1994 and $708,000 in 1993. Management cannot reasonably predict the amount of future assessments, if any. Recently, the insurance regulatory framework has been placed under increased scrutiny by various states, the federal government and the NAIC. Various states have considered or enacted legislation which changes, and in many cases increases, the state's authority to regulate insurance companies. Although legislation has been under consideration for several years in Congress which, if enacted, would result in the federal government assuming some role in the regulation of insurance companies, management does not expect the current Congress to enact federal insurance regulation. The NAIC, in conjunction with state regulators, has been reviewing existing insurance laws and regulations. The NAIC recently approved and recommended to the states for adoption and implementation several regulatory initiatives designed to reduce the risk of insurance company insolvencies. Through the NAIC accreditation program, these recommendations for state legislation have taken on an increased significance. Two such initiatives are risk-based capital standards (RBC) which have been adopted by the NAIC, and a model investment law which is currently under consideration. The RBC standards were adopted by the NAIC in 1992 for life insurance companies and in 1993 for property-casualty insurance companies and require insurance companies to calculate and report for statutory basis financial statements information under a risk-based capital formula. The formula is embodied in the 63 NAIC Model Act, which has been adopted by many states and it is anticipated that the NAIC RBC standards will apply to all of the Company's insurance subsidiaries in 1996. RBC requirements are intended to allow insurance regulators to identify at an early stage inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the company's operations. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. The RBC requirements are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized companies for the purpose of initiating regulatory actions. They are not designed as a ranking mechanism for adequately capitalized companies. In addition, the formula defines a new minimum capital standard which supplements the low, fixed minimum capital and surplus requirements previously implemented on a state-by-state basis. The RBC requirements provide for four levels of regulatory attention, depending on the ratio of the company's total adjusted capital (defined as the total of its statutory capital, surplus, asset valuation reserve and certain other adjustments) to its RBC. If a company's total adjusted capital is less than 100 percent but greater than or equal to 75 percent of its RBC, or if a negative trend has occurred (as defined by the regulations) and total adjusted capital is less than 125 percent of its RBC (the "Company Action Level"), the company must submit a comprehensive plan to the regulatory authority which discusses proposed corrective actions to improve its capital position. If a company's total adjusted capital is less than 75 percent but greater than or equal to 50 percent of its RBC (the "Regulatory Action Level"), the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. If a company's total adjusted capital is less than 50 percent but greater than or equal to 35 percent of its RBC (the "Authorized Control Level"), the regulatory authority may take any action it deems necessary, including placing the company under regulatory control. If a company's total adjusted capital is less than 35 percent of its RBC (the "Mandatory Control Level"), the regulatory authority is mandated to place the company under its control. The total adjusted capital of Farm Bureau Life and Western Life was 2.7 and 4.8 times the Company Action Level, respectively, at December 31, 1995. The Life/Health Task Force of the NAIC recently adopted Actuarial Guideline GGG(Guideline) which defines minimum reserves for certain annuity products (including certain of the Company's annuity products) which have multiple benefit streams. The requirements of the Guideline affect the accounting for applicable contracts issued on or after January 1, 1981 in financial statements prepared for state regulatory authorities for years ending on or after December 31, 1995. The Guideline will have no material impact on the Company. Approximately once every three to five years as part of their routine regulatory oversight process, insurance departments conduct detailed examinations of the books, records and accounts of insurance companies domiciled in their states. Such examinations are generally conducted in cooperation with the departments of two or three other states, under guidelines promulgated by the NAIC. The Life Companies have been examined for all years through 1992. A committee of the NAIC is developing model legislation to govern insurance company investments. Several discussion drafts have been released over the past two to three years. Implementation of any investment model law is not expected until 1996 or later. Management believes that if the current discussion draft were adopted without modification it would not have a material impact on the Company. The Company, certain of its subsidiaries and certain funds, policies and contracts offered by them are subject to various levels of regulation under the federal securities laws administered by the Securities and Exchange Commission and certain state securities laws. FBL Investment Advisory Services, Inc. is an investment advisor registered under the Investment Advisors Act. In addition, the Company sponsors certain mutual funds which are registered under the Investment Company Act of 1940, as amended. FBL Marketing Services, Inc. is a subsidiary of the Company which serves as the principal dealer for the sponsored funds, as well as certain of its variable insurance and annuity products. Certain annuity contracts and insurance policies issued by the Life Companies are registered under the Securities Act, and FBL Marketing Services, Inc. is registered as a broker-dealer under the Exchange Act. 64 These laws and regulations are primarily intended to benefit investors in the securities markets and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. The Company and its subsidiaries may also be subject to similar laws and regulations in the states in which they provide investment advisory services, offer the products described above or conduct other securities-related activities. FEDERAL INCOME TAX CONSIDERATIONS Certain of the life and annuity products marketed and issued by the Life Companies enjoy income tax advantages as compared to other savings investments, such as certificates of deposit and taxable bonds. One important tax advantage is the deferral of income taxation on any increases in the contract values during the accumulation phase of the annuity products in contrast to the current taxation of all earnings on many other savings and investment products. In the event that the federal income tax laws are changed so that accumulated earnings on these annuities do not enjoy the tax deferral described above, or so that additional savings and investment products achieve similar tax deferral status, or so that tax rates were significantly lower so that the annuitant's ability to defer income tax on annuity earnings was no longer a significant factor for the policyholder, consumer demand for the affected products could decline materially or be eliminated. From time to time, Congress has considered proposals to revise or eliminate this tax deferral. There is no such proposal currently pending in Congress, nor has the current administration announced any consideration of such proposals. Legislation that would treat all interest and dividend income as tax-free to the recipient has been proposed in Congress as part of the comprehensive tax reform proposals (i.e., the "flat tax"). If legislation were enacted to eliminate the tax advantages of life and annuity products, such a change could have an adverse effect on the ability of the Company to sell those products. PROPERTIES The principal operations of the Company and its subsidiaries are conducted from owned property consisting of approximately 430,000 square feet of space on a 45 acre site located at 5400 University Avenue, West Des Moines, Iowa 50266. Approximately 59,000 square feet of this property are leased to an unaffiliated company under a lease expiring in 1998 and approximately 76,000 square feet are leased to the Iowa Farm Bureau Federation and affiliated companies under a lease which is expected to be continued from year to year indefinitely. The Company also leases office space of 29,000 square feet for a service center in Denver, Colorado. This lease, with the state of Colorado, is for a portion of the former home office building of Western Life. The Company is locating replacement space to move into at the termination of the lease on December 31, 1996. Management considers the current facilities to be adequate for the foreseeable needs of the Company. EMPLOYEES At May 1, 1996 the Company had approximately 1,000 employees. Many employees and the executive officers of the Company also provide services to Farm Bureau Mutual and other affiliates of the Company. None of the employees are members of a collective bargaining unit. Management believes that relations with its employees are good. 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. 65 MANAGEMENT DIRECTORS The current Directors and persons chosen to become Directors of the Company upon completion of this Offering are as follows:
NAME AGE POSITION AND DATE ELECTED AS A DIRECTOR - ------------------------- --- ---------------------------------------------------------- Edward M. Wiederstein 48 Chairman of the Board and Director (1995) Thomas R. Gibson 51 Executive Vice President, General Manager, Chief Executive Officer and Director (1996) Eugene R. Maahs 64 Senior Vice President, Secretary, Treasurer and Director (1996) Stephen M. Morain 50 Senior Vice President, General Counsel and Director (1996) V. Thomas Geary 68 First Vice Chair and Director (1994) Roger Bill Mitchell 51 Second Vice Chair and Director (1994) Kenneth R. Ashby 56 Director (1994) Jerry L. Chicoine 53 Director (1996) (1) Al Christopherson 55 Director (1994) John W. Creer 56 Director (1996) (1) Kenny J. Evans 50 Director (1995) Gary Hall 46 Director (1995) Karen J. Henry 50 Director (1995) Richard Kjerstad 53 Director (1995) David L. McClure 56 Director (1994) H. Eldon Merklin 63 Director (1994) Bryce P. Neidig 64 Director (1994) Howard D. Poulson 60 Director (1994) Howard G. Schmid 59 Director (1994) John J. Van Sweden 49 Director (1994) John E. Walker 58 Director (1996) (1)
- ------------------------ (1) Messrs. Chicoine, Creer and Walker will become Class A Directors effective upon the completion of this Offering. Set forth below is a description of the business experience, principal occupation and employment during the last five years of the Directors of the Company: Edward M. Wiederstein is the Chairman of the Board and a Class B Director of the Company. He has been a director of the Iowa Farm Bureau Federation since 1986 and in 1995 was elected President of the Iowa Farm Bureau Federation. He is also a director and president of Farm Bureau Mutual and a director of Western Ag. Mr. Wiederstein owns and operates a 1,200 acre farm near Audubon, Iowa where he has been engaged in the business of cattle and hog feeding and grain farming since 1973. Thomas R. Gibson, FSA, CLU, FLMI, is the Executive Vice President, General Manager and Chief Executive Officer of the Company and of its major operating subsidiaries and a Class B Director of the Company. Mr. Gibson was the Chairman of the Board of the Greater Des Moines Chamber of Commerce during 1995. Mr. Gibson has been employed by the Company and its affiliates since 1966. 66 Eugene R. Maahs is Senior Vice President, Secretary and Treasurer of the Company and its major operating subsidiaries and a Class B Director of the Company. He is Executive Director, Secretary and Treasurer of the Iowa Farm Bureau Federation; Senior Vice President and Assistant Secretary and Treasurer of South Dakota Mutual, and Vice President and Treasurer of Farm Bureau Management Corporation (Management Corp.), a subsidiary of the Iowa Farm Bureau Federation. Mr. Maahs is a co-owner of Country Gardens, a fruit and vegetable farm and market. Mr. Maahs has been employed by the Company and its affiliates since 1990, and by the Iowa Farm Bureau Federation since 1958. Stephen M. Morain is Senior Vice President and General Counsel of the Company and a Class B Director. He also serves as General Counsel and Assistant Secretary of the Iowa Farm Bureau Federation; General Counsel, Secretary and director of Management Corp.; and Senior Vice President and General Counsel of the Company's major operating subsidiaries. Mr. Morain is also a director of Computer Aided Design Software, Inc., a director of Iowa Business Development Finance Corporation, and chairman and a director of Edge Technologies, Inc. Mr. Morain has been employed by the Company and its affiliates since 1977. V. Thomas Geary is the First Vice Chair and a Class B Director of the Company. He has been the President of the Idaho Farm Bureau Federation since 1983, and President of Western Life since 1986. Mr. Geary has owned and operated Morningstar Farms near Burley, Idaho since 1954, which includes a cow-calf ranch and a mink ranch. He is also President and a director of Idaho Farm Bureau Mutual Insurance Company, Farm Bureau Insurance Service Company of Idaho and Farm Bureau Finance Company (Idaho) and a director of Western Ag, Western Farm Bureau Life and the American Farm Bureau Federation. Roger Bill Mitchell is a Class B Director and the Second Vice Chair of the Company. He has been President of the Colorado Farm Bureau since November 1988. Mr. Mitchell is also a director of Western Ag and Colorado Farm Bureau Mutual Insurance Company and a member of the Colorado Water Quality Control Commission. Kenneth R. Ashby is a Class B Director of the Company and has been the President of the Utah Farm Bureau Federation since November 1986. He has been a Vice President of Utah Insurance and a director of Farm Bureau Life. Mr. Ashby has been President and General Manager of Ashby's Valley View Farms since September 1966. Jerry L. Chicoine is a Class A Director of the Company. He is Senior Vice President and Chief Financial Officer of Pioneer Hi-Bred International, Inc. (seed corn business), a position he has held since 1988. Mr. Chicoine was Senior General Counsel of Pioneer Hi-Bred International, Inc. from 1986 to 1988. Prior thereto he was a partner in the accounting firm of McGladrey & Pullen from 1969 to 1986. Mr. Chicoine is a lawyer and a certified public accountant. He is also a member of the board of directors of AmerUs Bank and Edge Technologies, Inc. Al Christopherson is a Class B Director of the Company. He has been President of the Minnesota Farm Bureau Federation since December 1988 and is also a director of Farm Bureau Mutual and American Ag. Mr. Christopherson is also a director of the American Farm Bureau Federation and serves on a number of agricultural boards including the Agricultural Utilization and Research Institute. Mr. Christopherson is a diversified grain and livestock farmer from Pennock, Minnesota, where he operates nearly 1,800 acres on the family farm, raising hogs, corn, soybeans, and wheat. John W. Creer is a Class A Director of the Company. Since 1980, he has been President and Chief Executive Officer of the Farm Management Company, the agricultural real estate holding and management company wholly owned by the Church of Jesus Christ of Latter-day Saints (Mormon). As such he is responsible for management of a substantial multi-national resource. He is also Secretary of the worldwide church's Investment Policy Committee. Mr. Creer is a lawyer and received a doctorate of laws degree from the University of Munich. Kenny J. Evans is a Class B Director of the Company. He is President and a director of the Arizona Farm Bureau Federation. Mr. Evans, a farmer, corporate executive and business owner, is also Chairman of the 67 National Agricultural Labor Advisory Committee and a former Chairman of the Arizona Commission of Agriculture and Horticulture. He is a director of Farm Bureau Insurance Service Company of Arizona, Western Life, Western Ag, and Western Farm Bureau Mutual. Gary Hall is a Class B Director of the Company. He has been the President of the Kansas Farm Bureau Federation and affiliated companies, including Kansas Farm Bureau Life Insurance Company and Kansas Farm Bureau Mutual Insurance Company, since 1994. Mr. Hall is also a director of Western Ag. He has been a self-employed farmer and stockman since 1974, and he served as Kansas Secretary of Agriculture in 1990 and 1991. Karen J. Henry is a Class B Director of the Company. She was elected as President of the Wyoming Farm Bureau Federation in 1995, after having served as a director since 1992. Ms. Henry is a director and President of Mountain West Farm Bureau Mutual Insurance Company and a director of Western Life and of Western Ag. She is involved in a family ranch and cattle operation. Richard Kjerstad is a Class B Director of the Company. He and his family have extensive farming and cattle ranching operations in Western South Dakota. Mr. Kjerstad was elected President of the South Dakota Farm Bureau Federation in 1995. He is also President and a director of South Dakota Mutual and a director of Farm Bureau Life. David L. McClure is a Class B Director of the Company. He is a farmer-rancher raising wheat, barley, hay, and cattle in the Lewistown, Montana area. Mr. McClure has been President of the Montana Farm Bureau Federation since 1987 and is also a director and Vice President of Mountain West Farm Bureau Mutual Insurance Company, a director of American Ag and Western Ag and a director and Vice President of Western Life. He has been a member of the board of directors of the American Farm Bureau Federation since 1993, and a member of its Audit Committee since 1994. H. Eldon Merklin is a Class B Director of the Company. He has been President of the Oklahoma Farm Bureau Federation, and of the Oklahoma Farm Bureau Mutual Insurance Company since November 1993 and served on the Oklahoma Farm Bureau board of directors since 1975. Mr. Merklin was elected to a two-year term as a member of the board of directors of the American Farm Bureau Federation in 1995. He is a director of American Ag and Western Ag. In 1986, United States Secretary of Agriculture Richard Lyng appointed Mr. Merklin to the national Cattlemen's Beef Promotion and Research Board, where he served for seven years. Mr. Merklin resides near Mutual, Oklahoma, where he raises wheat and alfalfa, and stocker cattle and an Angus cow-calf herd. Bryce P. Neidig is a Class B Director. He has been President of the Nebraska Farm Bureau Federation and of Farm Bureau Insurance Company of Nebraska since 1981. He is also a director of Farm Bureau Life, American Ag and Western Ag. Mr. Neidig is also a director of the American Farm Bureau Federation and Chairman of its Trade Advisory Committee, and a director of Nebraska Blue Cross Blue Shield. He raises irrigated and dry land corn as well as soybeans and alfalfa on his Madison County farm. Howard D. (Dan) Poulson, a Class B Director of the Company, has been President and Administrator of the Wisconsin Farm Bureau Federation and President of its affiliated companies, including Rural Mutual Insurance Company, since August 1991. He has served on the board of directors of Wisconsin Farm Bureau since 1969. He was appointed to the State of Wisconsin Department of Natural Resources Board in October 1995. Mr. Poulson is also a director of Farm Bureau Life. He and his wife operate a 250 acre hog and grain farm near Palmyra in Jefferson County, Wisconsin. Howard G. Schmid is a Class B Director of the Company. He has been a director of the North Dakota Farm Bureau and Nodak Mutual Insurance Company since 1988 and was elected President of both organizations in 1990. Mr. Schmid is a director of Western Life and Western Ag. He and his wife have owned and operated a farm at Oberon, which is in north central North Dakota, since 1958, raising Durham wheat, hard red spring wheat, barley, sunflowers, and canola. John J. Van Sweden is a Class B Director of the Company. Mr. Van Sweden is President and a director of the New Mexico Farm and Livestock Bureau, President and a director of Western Farm Bureau Mutual, 68 Chairman of Western Farm Bureau Management Corp. and a director of Western Life and Western Ag. He is also President of V7 Ranch Co., Inc., which has been in his family for five generations since 1868. This is a cow/ calf/yearling and ranch operation, producing approximately 650 tons of hay per year, in the area of Raton, New Mexico. John E. Walker is a Class A Director of the Company. Mr. Walker retired January 1, 1996 from Business Men's Assurance (BMA), Kansas City, Missouri, where he had been the Managing Director of Reinsurance Operations since 1979. He had been a member of the board of directors of BMA for 11 years before his retirement, and a member of its executive committee. Mr. Walker is also a director of Lab One, Inc., Lenexa, Kansas, a publicly traded blood and urine testing business. ELECTION OF DIRECTORS The Articles of Incorporation provide for a Board of Directors composed of three to five Class A Directors, to be elected by the Class A Common stockholders and the Series A Preferred stockholders voting together as a single voting group, and ten to twenty Class B Directors to be elected by the Class B Common stockholders. All Directors are elected for a one-year term. A person who is an employee, officer or director of a Class B Common stockholder or any other Farm Bureau organization is not eligible to be elected as a Class A Director. Class B Directors are affiliated with Farm Bureau organizations. The Class B Common Stockholder Agreement obligates the Class B Common stockholders to elect the Presidents of the 15 state Farm Bureau federations in the states in which the Company's operations are conducted as Class B Directors. The Class B Common Stockholder Agreement also obligates the Class B Common stockholders to elect the President of the Iowa Farm Bureau Federation as Chairman of the Board and to elect the Chief Executive Officer of the Company and two other officers of the Company nominated by the Chairman of the Board as Class B Directors. See "Certain Transactions and Relationships -- Stockholders' Agreement Regarding Management and Transfer of Shares of Class B Common Stock." ADVANCE NOTICE REQUIREMENTS The Bylaws establish advance notice procedures with regard to (i) the nomination, other than by or at the direction of the Company's Board of Directors, of candidates for election to the Company's Board of Directors (the Nomination Provision) and (ii) certain business to be brought before an annual meeting of stockholders of the Company (the Business Provision). The Nomination Provision, by requiring advance notice of nominations by stockholders, affords the Company's Board of Directors a meaningful opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Company's Board of Directors, to inform stockholders about such qualifications. The Business Provision, by requiring advance notice of business proposed to be brought before an annual meeting, provides a more orderly procedure for conducting annual meetings of stockholders and provides the Company's Board of Directors with a meaningful opportunity prior to the meeting to inform stockholders, to the extent deemed necessary or desirable by the Company's Board of Directors, of any business proposed to be conducted at such meeting, together with any recommendation of the Board of Directors. The Business Provision does not affect the right of stockholders to make stockholder proposals for inclusion in proxy statements for the Company's annual meetings of stockholders pursuant to the rules of the Securities and Exchange Commission. In addition, neither the Nomination Provision nor the Business Provision will prevent any stockholder or stockholders holding at least 10% of the shares entitled to vote on a particular matter from requesting a special meeting with respect to such matter in accordance with the Iowa Business Corporation Act. Although these Bylaw provisions do not give the Company's Board of Directors any power to approve or disapprove of stockholder nominations for the election of Class A Directors or of any other business desired by stockholders to be conducted at an annual meeting of stockholders if the proper procedures are followed, these Bylaw provisions may have the effect of precluding a nomination of a Class A Director or precluding the conducting of business at a particular annual meeting, and may make it difficult for a third party to conduct a solicitation of proxies to elect its own slate of Class A Directors or otherwise attempt to obtain control of the Company, even if such a solicitation or attempt might be beneficial to the Company and its stockholders. 69 COMMITTEES OF THE BOARD OF DIRECTORS Committees of the Board include an Executive Committee, Audit Committee, Class A Director Nominating Committee, Compensation Committee, and a Budget Committee. The Company has established an Executive Committee composed of Messrs. Wiederstein (Chairman), Gibson, Maahs and Morain. The Executive Committee may exercise all powers of the Board of Directors during intervals between meetings of the Board, except for matters reserved to the Board by the Iowa Business Corporation Act, and except for removal or replacement of the Chairman or Chief Executive Officer. The Company has established an Audit Committee composed of Class A Directors Messrs. Chicoine, Creer and Walker, with Mr. Chicoine serving as Chairman. The Audit Committee must include only Class A Directors who are independent of management and free from any relationships that would interfere with the exercise of independent judgment. The Audit Committee reviews the professional services to be provided by the Company's independent auditors and the independence of such auditors from management of the Company. The Audit Committee also reviews the scope of the audit by the Company's independent auditors, the annual financial statements of the Company, the Company's system of internal accounting controls and such other matters with respect to the accounting, auditing and financial reporting practices and procedures of the Company as it may find appropriate or as may be brought to its attention, and meets from time to time with member of the Company's internal audit staff. In addition to the usual and customary functions of an Audit Committee governed by the requirements of the New York Stock Exchange, the Audit Committee is required to review with the auditors and management any material transaction or series of similar transactions to which the Company was, within the past year, or is currently expected to be, a party, and with respect to which a director, executive officer, or holder of more than five percent of any class of stock of the Company is a party. If the Audit Committee determines that any transaction or proposed transaction between the Company and Farm Bureau Mutual is unfair to the Company, the Company is required to submit the matter to a coordinating committee for resolution. The Company has established a Class A Directors Nominating Committee which nominates candidates for election to the Board of Directors as Class A Directors. The Committee members are nominated by the Chairman of the Board, and include Messrs. Merklin, Ashby, McClure, Walker and Creer, with Mr. Merklin serving as Chairman of the Committee. The Committee must include at least two-thirds of the Class A Directors and may consist of up to five members of the Board nominated by the Chairman of the Board. 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 the Committee. The Company has established a Compensation Committee of the Board of Directors which has oversight responsibility with respect to compensation matters involving executive officers of the Company. The Compensation Committee is composed of Messrs. Wiederstein, Evans, Neidig, Chicoine and Creer, with Mr. Wiederstein serving as the Chairman of the Committee. The Company has established a Budget Committee designated by the Chairman of the Board and composed of Messrs. Poulson, Mitchell, Van Sweden, Chicoine and Walker, with Mr. Poulson as Chairman. The Budget Committee reviews all budgets proposed by management and makes recommendations thereon to the Board of Directors. The Company has also established an Investment Committee, a Class B Directors Nominating Committee and an Advisory Committee, and may establish other committees in its discretion. The Advisory Committee is composed of the general managers of the Farm Bureau affiliated property-casualty insurance companies in the Company's market territory. DIRECTOR COMPENSATION After the Offering, all non-employee Directors will receive an annual retainer of $2,000, a fee of $1,000 for each board meeting attended and a fee of $500 for each committee meeting attended. In addition, Class A Directors will receive an annual retainer of $13,333. All Directors will be reimbursed for travel expenses incurred in attending board or committee meetings. Upon completion of the Offering, all non-employee Directors will receive an option to purchase 2,000 shares of Class A Common Stock of the Company. Thereafter, each new non-employee Director will receive an option to purchase 2,000 shares of Class A Common Stock of the Company upon initial election to the Board of Directors of the Company. See "Management Compensation -- 1996 Class A Common Stock Compensation Plan." 70 EXECUTIVE OFFICERS Commencing January 1, 1996, most of the executive and other officers of the Company devote all of their time to the affairs of the Company. Services performed for affiliates of the Company are charged to such affiliates on the basis of a time allocation and the affiliates are required to reimburse the Company for the cost of such services, plus one-half of one percent. Two officers, Mr. Maahs and Mr. Morain, do not devote all of their time to the affairs of the Company as they are also employed by Management Corp., a wholly owned subsidiary of the Iowa Farm Bureau Federation, and they are compensated by the Company for their services to the Company and by the Iowa Farm Bureau Federation for their services to it based on the portion of their time expected to be expended on behalf of each entity. The current executive officers of the Company are as follows:
NAME AGE POSITION - ------------------------- --- -------------------------------------------------- Edward M. Wiederstein 48 Chairman of the Board and Director Thomas R. Gibson 51 Executive Vice President, General Manager, Chief Executive Officer and Director Eugene R. Maahs 64 Senior Vice President, Secretary and Treasurer and Director Stephen M. Morain 50 Senior Vice President and General Counsel and Director William J. Oddy 52 Vice President, Assistant General Manager and Chief Operating Officer Timothy J. Hoffman 46 Vice President, Chief Marketing Officer Richard D. Warming 62 Vice President, Chief Investment Officer and Assistant Treasurer James W. Noyce 40 Vice President, Chief Financial Officer Thomas E. Burlingame 51 Vice President, Associate General Counsel W. Kent Fairchild 54 Vice President, Product Development and Marketing Services Ronald C. Price 44 Vice President, Agency Monte R. Roumpf 56 Vice President, Information Technology JoAnn W. Rumelhart 43 Vice President, Life Operations Robert L. Tatge 49 Vice President, Property-Casualty Operations F. Walter Tomenga 49 Vice President, Corporate Affairs Lynn E. Wilson 46 Vice President, Multi-State Sales
Set forth below is a description of the business experience, principal occupation and employment during the last five years of the executive officers of the Company: Biographical information for Messrs. Wiederstein, Gibson, Maahs and Morain is set forth above under "-- Directors." William J. Oddy, FSA, MAAA, is Vice President, Chief Operating Officer and Assistant General Manager of the Company and of its major operating subsidiaries. Mr. Oddy has been employed by the Company and its affiliates since 1968. Timothy J. Hoffman, FSA, CLU, ChFC, FLMI, LLIF, MAAA, is Vice President, Chief Marketing Officer of the Company and its major operating subsidiaries. Mr. Hoffman has been employed by the Company and its affiliates since 1971. 71 Richard D. Warming is Vice President, Chief Investment Officer and Assistant Treasurer of the Company and of the major operating subsidiaries. He is chairman of the Investment Committee of each of the companies. Mr. Warming has been employed by the Company and its affiliates since 1959. James W. Noyce, CPA, FCAS, ASA, FLMI, MAAA, was named Vice President, Chief Financial Officer of the Company and its major operating subsidiaries in December 1995, having served as Vice President -- Controller since January 1991. He is the Chairman of the Benefits Administration Committee for each of the companies. Mr. Noyce has been employed by the Company and its affiliates since 1985. Thomas E. Burlingame is Vice President, Associate General Counsel of the Company and its major operating subsidiaries. Mr. Burlingame has been employed by the Company and its affiliates since 1980. W. Kent Fairchild was named Vice President, Product Development and Marketing Services in April 1994, after serving as Senior Vice President Life Operations of Western Life from 1987 to 1994. Ronald C. Price, CLU, LUTCF, LLIF, is Vice President, Agency for the Company and its major operating subsidiaries. He has been employed by the Company since 1975 as a career agent, agency manager, and a state sales director before assuming his present position in 1988. Monte R. Roumpf, CPCU, FLMI, has been employed by the Company since 1968 and has been its Vice President, Information Technology since 1991. JoAnn W. Rumelhart, FSA, MAAA, became Vice President -- Life Operations of the Company and its major operating subsidiaries in July of 1994. She began working for the Company in 1978, and served as Vice President -- Client Services from January 1991. Robert L. Tatge, FCAS, MAAA, CLU, became Vice President -- Property-Casualty Operations for the Company and its major operating subsidiaries in July 1994. He has been employed by the Company since 1968 and previously served as Vice President -- Underwriting and Claims from 1991. F. Walter Tomenga is the Company's Vice President, Corporate Affairs, a position he has held since June 1994. He has been employed by the Company since 1989, previously serving as Member Health Services Vice President and as Vice President -- Research and Development. Lynn E. Wilson, CLU, CHFC, MSFS, has been Vice President, Multi-State Sales since July 1994. From 1989 to July 1994 he was Senior Vice President of Marketing for Western Farm Bureau Life. He was an agent, and an agency manager for the Company from 1973 to 1985. MANAGEMENT COMPENSATION EXECUTIVE OFFICER COMPENSATION As described herein, the Company has adopted a Stock Option Plan and made awards thereunder to become effective on the date of this Offering. The following table summarizes the compensation paid by the Company and certain affiliates to the Chief Executive Officer and to the Company's four most highly compensated executive officers, other than the Chief Executive Officer, who were serving on December 31, 1995, for services rendered to the Company and these affiliates in all capacities during the fiscal year ended December 31, 1995. No "long-term compensation" was paid to any executive officer of the Company in 1995. 72 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------- ALL OTHER NAME AND PRINCIPAL POSITION (1) YEAR SALARY BONUS COMPENSATION - ------------------------------------------------------------------ --------- ---------- --------- -------------- Thomas R. Gibson ................................................. 1995 $ 275,000 $ 73,123 $ 24,662(2) Executive Vice President, General Manager and Chief Executive Officer Stephen M. Morain ................................................ 1995 235,000 25,216 14,683(3) Senior Vice President and General Counsel William J. Oddy .................................................. 1995 227,000 60,360 22,581(4) Vice President, Assistant General Manager and Chief Operating Officer Timothy J. Hoffman ............................................... 1995 171,000 32,478 15,879(5) Vice President and Chief Marketing Officer Richard D. Warming ............................................... 1995 163,000 30,959 30,360(6) Vice President, Chief Investment Officer and Assistant Treasurer
- ------------------------ (1) In 1995, each person named was employed by Management Corp., a subsidiary of the Iowa Farm Bureau Federation, and, in addition to providing services to the Company, also provided services to affiliates of the Company such as Farm Bureau Mutual, South Dakota Mutual, and the Iowa Farm Bureau Federation, the financial results of which are not included in the Company's consolidated financial statements. The compensation expenses for these executives were allocated among the Company and each of the affiliates to which services were provided based primarily on the amount of time the executive devoted to each entity's affairs. For 1995, for each of the named persons, the portion of such executive's total compensation allocated to the Company was as follows: Gibson, 70.8%; Morain, 51.7%; Oddy, 63.6%; Hoffman, 77.0%; and Warming, 98.2%. In 1996, these executives became employees of the Company and, accordingly, receive their total compensation from the Company (except for Mr. Morain who is an employee of the Company (as to approximately 60% of his compensation) and of Management Corp.). The Company will charge a management fee for services provided by these executives to the Company's affiliates. See "Certain Transactions and Relationships -- Service Agreement with Farm Bureau Management Corporation." (2) Mr. Gibson's "all other compensation" provided by the Company in 1995 included 70.8% of (i) $16,173 for the cost of life insurance coverage; (ii) $6,286 for the value of personal use of a Company fleet automobile, and (iii) $2,203 under a Company flex cash (cafeteria plan) account. (3) Mr. Morain's "all other compensation" provided by the Company in 1995 included 51.7% of (i) $8,447 for the cost of life insurance coverage, (ii) $4,976 for the value of personal use of a Company fleet automobile, and (iii) $1,260 under a Company flex cash (cafeteria plan) account. (4) Mr. Oddy's "all other compensation" provided by the Company in 1995 included 63.6% of (i) $12,952 for the costs of life insurance coverage, (ii) $7,772 for the value of personal use of a Company fleet automobile, and (iii) $1,857 under a Company flex cash (cafeteria plan) account. (5) Mr. Hoffman's "all other compensation" provided by the Company in 1995 included 77.0% of (i) $7,256 for the cost of life insurance coverage, (ii) $8,398 for the value of personal use of a Company fleet automobile and (iii) $225 for an educational bonus. (6) Mr. Warming's "all other compensation" provided by the Company in 1995 included 98.2% of (i) $21,459 for the cost of life insurance coverage, (ii) $6,859 for the value of personal use of a Company fleet automobile, and (iii) $2,042 under a Company flex cash (cafeteria plan) account. 73 STOCK OPTIONS No stock options, freestanding stock appreciation rights (SARs) or other equity-based awards were granted to any executive officer or other persons by the Company prior to 1996. AWARD TABLE Set forth below is a table of the option grants approved under the Stock Option Plan for each of the named executive officers, the non-employee Directors of the Company as a group, the non-employee directors of first tier subsidiaries of the Company as a group, all executive officers as a group, all employees as a group and the members of the Advisory Committee. Each of these options will become effective on the date on which the Shares are first offered to the public pursuant to this Offering (the Effective Date), have a term of up to 10 years, become exercisable in five approximately equal annual installments on each of the first, second, third, fourth and fifth anniversaries of the date of grant (except that the options granted to non-employee directors of the Company and its subsidiaries become fully exercisable six months after the date of grant) and have an exercise price per share equal to the initial public offering price. Except as to options for 2,000 shares granted to each non-employee Director of the Company and its first tier subsidiaries and to the members of the Advisory Committee, all of which are nonqualified stock options (NQSOs), the actual number of option shares to be granted will depend upon the initial public offering price of the Shares. The option grants to executive officers and employees will generally qualify as incentive stock options (ISOs), except to the extent that the aggregate exercise price with regard to options that first become exercisable in one year exceeds $100,000; any such excess options will be treated as NQSOs.
ASSUMED NUMBER OF NAME OPTION SHARES (1) - ------------------------------------------------------------------------------------- ----------------- Thomas R. Gibson..................................................................... 63,568 Stephen M. Morain.................................................................... 40,736 William J. Oddy...................................................................... 52,108 Timothy J. Hoffman................................................................... 29,352 Richard D. Warming................................................................... 28,056 All non-employee Directors as a group (17 persons)................................... 34,000 All non-employee directors of first tier subsidiaries as a group (25 persons)........ 50,000 All executive officers as a group (16 persons)....................................... 451,596 All other employees as a group (33 persons).......................................... 206,612 The members of the Advisory Committee, as a group (9 persons)........................ 18,000
- ------------------------ (1) Based on an assumed offering price of $18.50. 1996 CLASS A COMMON STOCK COMPENSATION PLAN In March 1996 the Company's Board of Directors adopted and the shareholders of the Company approved the 1996 Class A Common Stock Compensation Plan (Stock Option Plan or the Plan). Awards under the Stock Option Plan (Awards) are designated as ISOs, NQSOs, bonus stock, restricted stock or SARs. Awards may be granted to consultants, advisors, Directors of the Company and its first tier subsidiaries (whether or not they are employees of the Company), employees and officers of the Company. No awards will be granted after the expiration of ten years from the effective date of the registration statement of which this Prospectus is a part. The Plan is administered by the Board. The Board, within the limitations of the Plan, determines the persons to whom Awards will be granted, the number of shares to be covered by each Award, whether the Awards granted are intended to be ISOs, the duration and rate of exercise of each Award, the option purchase price per share and the manner of exercise, the time, manner and form of payment upon exercise of an Award and whether restrictions such as repurchase rights of the Company are to be imposed on shares subject to Awards. All stock options and SARs granted under the Plan will have an exercise price or base price, respectively, no less than 85% of the fair market value of the Class A Common Stock on the date of grant. The Board also has authority to interpret the Plan and any instrument or agreement entered into under the Plan, to establish such rules and regulations relating to the administration of the Plan as it deems appropriate and 74 to make all other determinations which may be necessary or advisable for the administration of the Plan. The Board of Directors may terminate, amend or modify the Plan in a manner consistent with the Plan's provisions, provided such changes do not violate the federal or state securities laws. The plan provides that 1,750,000 shares of Class A Common Stock are available for grant under the Plan. If any Award terminates, expires or lapses without the issuance of any Class A Common Stock the underlying stock shall again become available for grant. In the event of a change in the Company's corporate structure that affects the shares (for example, a merger, recapitalization, or stock dividend), the Board shall make adjustments to the number of shares available to the Plan and to the number and or price of outstanding Awards to prevent dilution or enlargement of rights. The Plan provides that the terms of Awards of restricted stock or SARs may be established by the Board, in its discretion, at the time of grant. The Plan provides for the automatic grant of nonqualified stock options for 2,000 Shares to each person who is a non-employee Director of the Company and/or of its first tier subsidiaries on the Effective Date, at the initial public offering price set forth on the cover page of this Prospectus. Recipients of nonqualified stock options include the 17 non-employee Directors of the Company and 25 non-employee Directors of the Company's first tier subsidiaries, with respect to a total of 84,000 shares. Subsequent to the date of this Prospectus, automatic grants of nonqualified stock options for 2,000 shares will be awarded to new non-employee Directors of the Company and of its first tier subsidiaries, at the time of initial election or appointment, at an exercise price equal to 100% of the fair market value of the shares on the date of grant. Non-employee Director options vest in full on the date of grant, and are exercisable for a term of 10 years from the date of grant or, if earlier, three years from the date such non-employee Director ceases to serve as a Director. The Board of Directors will have no discretion regarding the grants or terms of non-employee Director options. Nonqualified stock options for 2,000 shares each have been granted to the nine members of the Advisory Committee. The purchase price of Shares purchased pursuant to exercise of an Option by an employee must be paid in full upon exercise, in cash, by check, or in the discretion of the Board and upon such terms and conditions as the Board shall approve, by transferring Shares to the Company, or by a combination of the foregoing methods. The Board is also empowered to authorize the Company to withhold shares for the payment of income taxes on the exercise of options. The Company may also make loans to Plan participants to allow them to exercise options subject to specified terms, and secured by a pledge of the shares. The Plan provides that the right to purchase all shares subject to an employee option will vest in five equal installments on each of the first five anniversaries of the date of grant or, if earlier, upon the death, disability or retirement after age 55 with a combination of age and years of service with the Company and other Farm Bureau organizations of at least 85 (a Qualifying Retirement). Upon termination of employment for any reason other than death, disability or Qualifying Retirement, options must be exercised within thirty days or they will expire. If a participant's termination of employment is due to death, disability or Qualifying Retirement, the option is exercisable for a period of three years after termination. The Plan also provides for the immediate vesting of all outstanding Awards upon the occurrence of a Change in Control as defined in the Plan. Awards under the Plan, therefore, may affect the extent to which and the means by which a potential acquiror of the Company may be able to acquire control of the Company and may discourage potential acquirors from making proposals which certain of the Company's stockholders might find attractive due to the increased percentage of ownership of the Company by executive officers and directors. It is anticipated that prior to completion of the Offering, options for the purchase of a total of 760,208 shares of Class A Common Stock (assuming an initial public offering price of $18.50), each with a per share exercise price equal to the initial public offering price set forth on the cover page of this Prospectus, will be granted, leaving, approximately 989,792 shares of Class A Common Stock available for grant as additional Awards under the Plan. To date, no grants of SARs or stock bonuses have been made under the Plan. 75 FEDERAL INCOME TAX ASPECTS. The following is a brief summary of the federal income tax consequences of awards made under the Stock Option Plan based upon the federal income tax laws in effect on the date hereof. This summary is not intended to be exhaustive and does not describe state or local tax consequences. INCENTIVE STOCK OPTIONS. No taxable income is realized by the grantee upon the grant or exercise of an ISO. If a grantee does not sell the stock received upon the exercise of an ISO (ISO Shares) for at least two years from the date of grant and within one year from the date of exercise, when the ISO Shares are sold any gain or loss realized will be treated as long-term capital gain or loss. In such circumstances, no deduction will be allowed to the Company for federal income tax purposes. If ISO Shares are disposed of prior to the expiration of the holding periods described above, the grantee generally will realize ordinary income at that time equal to the lesser of the excess of the fair market value of the shares at exercise over the price paid for such ISO Shares or the actual gain on the disposition. The Company will generally be entitled to deduct any such recognized amount. Any further gain or loss realized by the grantee will be taxed as short-term capital gain or loss. Subject to certain exceptions for disability or death, if an ISO is exercised more than three months following the termination of the grantee's employment, the ISO will generally be taxed as a nonqualified stock option. NONQUALIFIED STOCK OPTIONS. No income is realized by the grantee at the time a nonqualified stock option is granted. Generally upon exercise of a nonqualified stock option, the grantee will realize ordinary income in an amount equal to the difference between the price paid for the shares and the fair market value of the shares on the date of exercise. The Company will generally be entitled to a tax deduction in the same amount and at the same time as the grantee recognizes ordinary income. Any appreciation or depreciation after the date of exercise will be treated as either short-term or long-term capital gain or loss, depending upon the length of time that the grantee has held the shares. OTHER AWARDS. The Stock Option Plan authorizes the issuance of awards other than ISOs and nonqualified stock options, including stock appreciation rights, restricted stock and stock bonuses. No awards other than ISOs and nonqualified stock options have been granted under the Plan. SECTION 162(M). Awards paid to certain executive officers may be subject to the limitations under Section 162(m) of the Internal Revenue Code that prohibit the deduction of certain compensation paid in excess of $1,000,000 in any taxable year. The application of such section to awards made under plans adopted and approved prior to the time at which a company's stock becomes publicly traded is not clear. The Company believes that compensation payable pursuant to options granted under the Stock Option Plan should not be limited as to deductibility by reason of Section 162(m) and that compensation payable in respect to other awards may fail to be deductible for federal income tax purposes unless such awards qualify for certain exemptive relief that may be available for grants made prior to the first meeting of stockholders of the Company at which Directors are elected in 1999. BENEFITS Employees are generally covered under the Iowa Farm Bureau Federation and Affiliated Companies Retirement Plan, the Supplemental Retirement Plan and the Iowa Farm Bureau Federation Affiliates Supplemental Retirement Plan (Pension Plans). The three plans operate as a single plan to provide total benefits to all participants. The former two are qualified plans under Section 401(a) and the latter plan is a nonqualified plan which provides benefits according to the overall plan formulas, but includes compensation exceeding $150,000 under Section 401(a)(1) and provides benefits provided by the formula which are otherwise limited by Section 415 of the Internal Revenue Code. The pension plans are available to all employees and officers generally and provide for the same method of allocation of benefits between management and non- 76 management participants. Active participants include employees over age 21 who have worked at least one year and provided at least 1,000 hours of service during that year. The pension table below reflects the total pension benefits provided according to remuneration and completed years of service. ANNUAL PENSION PLAN BENEFITS
ASSUMED HIGH YEARS OF SERVICE 36 MONTH AVERAGE ---------------------------------------------------------- ANNUAL SALARY 15 20 25 30 35 - ---------------------- ---------- ---------- ---------- ---------- ---------- $125,000 $ 40,625 $ 56,250 $ 71,875 $ 87,500 $ 87,500 150,000 48,750 67,500 86,250 105,000 105,000 175,000 56,875 78,750 100,625 122,500 122,500 200,000 65,000 90,000 115,000 140,000 140,000 225,000 73,125 101,250 129,375 157,500 157,500 250,000 81,250 112,500 143,750 175,000 175,000 300,000 97,500 135,000 172,500 210,000 210,000 350,000 113,750 157,500 201,250 245,000 245,000
The credited years of service as of December 31, 1995 for Messrs. Gibson, Morain, Oddy, Hoffman and Warming were 29, 18, 27, 24 and 36, respectively. The plan is a defined benefit plan which provides monthly income to retirees who have worked for at least 10 years and attained age 55. The amount provided is a percentage of the high 36 consecutive month average salary calculated according to the following formula: 2% per year for the first 10 years of service, plus 2 1/2% for each year above 10 years of service up to 30 years of service. Unreduced early retirement benefits are provided after 30 years of service or upon attainment of 85 age plus service points. Years of service include all years in which an individual first exceeds 1,000 hours of service and any year thereafter in which he exceeds 500 hours of service. The plan formula provides a monthly benefit for life with a guarantee of 120 monthly payments. Other options, including lump sum, are available to the retiree on an actuarially equivalent basis. The compensation covered by the Pension Plan is calculated based upon total salary and bonuses paid to the participant during the given year. The Company does not make any 401(k) salary reduction contributions. The annual benefits shown in the above table are not reduced to reflect the limitations imposed by federal tax laws, which place upper limits on the benefits which may be provided to any individual by tax qualified pension plans. The Iowa Farm Bureau Affiliates Supplemental Retirement Plan is an unfunded, non-qualified plan, which provides that it will pay directly the difference between the retirement benefit normally calculated under the Iowa Farm Bureau Federation and Affiliated Companies Retirement Plan and the Supplemental Retirement Plan, consistent with federal tax law. In 1995, Messrs. Gibson, Morain, Oddy, Hoffman and Warming received allocations under the Supplemental Plan for services provided to the Company of $44,017, $16,488, $30,941, $6,045 and $55,363, which amounts are not included in the Summary Compensation Table set forth above, and which represents the percentage of total benefits they received in 1995 multiplied by the percentage of their time allocated to the Company. OTHER COMPENSATION PLANS Farm Bureau Mutual sponsors a bonus plan for all employees, which includes a management performance (bonus) plan in which executives, department heads and managers of Farm Bureau Mutual and its affiliates, including the Company and its subsidiaries, participate. On an annual basis, the Company establishes various and distinct goals for its executives, division heads and managers. Goals generally relate to such matters as life insurance and property-casualty new business production, expense levels and earnings. Attainment of individual goals can result in payment of cash bonuses ranging up to 50% of base salary for Mr. Gibson and Mr. Oddy and up to 12% for managers. Payment of the performance incentive is made annually in a single, separate lump sum payment on or before February 14th of the ensuing year. 77 PRINCIPAL AND SELLING STOCKHOLDERS All of the 4,000,000 Shares of Class A Common Stock offered hereby are being sold by the Selling Stockholders. The Selling Stockholders will receive all of the net proceeds from the sale of the Shares being sold by them. The following tables indicate ownership of the Company's Class A Common Stock, Class B Common Stock, and Series A Preferred Stock immediately prior to the Offering but after giving effect to the Series A Exchange and immediately following completion of the Offering by (i) each person who is known by the Company to be the beneficial owner of 5% or more of the outstanding shares of each class, (ii) each Selling Stockholder, (iii) each director of the Company, and (iv) all executive officers and directors as a group. No Common Stock of either class is owned of record by any director or officer, and no director or officer has any vested options or options that will vest within 60 days. For information regarding options held by officers and directors, see "Management Compensation -- Stock Options." CLASS A COMMON STOCK
SHARES BENEFICIALLY SHARES TO BE OWNED BENEFICIALLY OWNED PRIOR TO THE OFFERING AFTER THE OFFERING ----------------------- ----------------------- NUMBER OF # OF SHARES NUMBER OF NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES % BEING OFFERED SHARES % - ----------------------------------------------------- ------------ --------- -------------- ------------ --------- Iowa Farm Bureau Federation (2)...................... 9,475,245 53.6 -- 9,475,245 53.6 Farm Bureau Mutual................................... 3,550,454 20.1 2,094,950 1,455,504 8.2 Rural Mutual Insurance Company....................... 874,000 4.9 874,000 -- -- Farm Bureau Insurance Company of Nebraska............ 484,500 2.7 334,000 150,500 * Colorado Farm Bureau Mutual Insurance Company........ 423,700 2.4 211,850 211,850 1.2 Mountain West Farm Bureau Mutual Insurance Company... 482,600 2.7 140,000 342,600 1.9 Western Ag........................................... 482,600 2.7 140,000 342,600 1.9 Farm Bureau Finance Company, Inc. (Idaho)............ 115,900 * 115,900 -- -- Nodak Mutual Insurance Company....................... 178,600 1.0 89,300 89,300 * Edward M. Wiederstein (3)............................ 13,508,299 76.5 -- 11,273,349 63.8 Thomas R. Gibson..................................... -- -- -- -- -- Eugene R. Maahs...................................... -- -- -- -- -- Stephen M. Morain.................................... -- -- -- -- -- V. Thomas Geary (4).................................. 1,525,681 8.6 -- 1,269,781 7.2 Roger Bill Mitchell (5).............................. 908,200 5.1 -- 556,350 3.1 Kenneth R. Ashby (6)................................. 7,790 * -- 7,790 * Jerry L. Chicoine.................................... -- -- -- -- -- Al Christopherson (7)................................ 4,109,039 23.3 -- 2,014,085 11.4 John W. Creer........................................ -- -- -- -- -- Kenny J. Evans (8)................................... 507,794 2.9 -- 367,794 2.1 Gary Hall (9)........................................ 615,600 3.5 -- 475,600 2.7 Karen J. Henry (10).................................. 967,100 5.5 -- 687,100 3.9 Richard Kjerstad (11)................................ 1,900 * -- 1,900 * David C. McClure (12)................................ 1,523,781 8.6 -- 1,243,781 7.0 H. Eldon Merklin (13)................................ 1,523,781 8.6 -- 1,383,781 7.8 Bryce P. Neidig (14)................................. 1,525,681 8.6 -- 1,051,681 6.0 Howard D. Poulson (15)............................... 880,308 5.0 -- 6,308 * Howard G. Schmid (16)................................ 663,100 3.8 -- 433,800 2.5 John J. Van Sweden (17).............................. 509,732 2.9 -- 369,732 2.1 John E. Walker....................................... -- -- -- -- -- All directors and executive officers as a group (33 persons)............................................ 17,666,810 100.0 -- 13,666,810 77.4
78 CLASS B COMMON STOCK
SHARES BENEFICIALLY OWNED ----------------------- NUMBER OF NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES % - ----------------------------------------------------- ------------ --------- Iowa Farm Bureau Federation (2)...................... 761,855 63.9 Farm Bureau Mutual................................... 186,866 15.7 Rural Mutual Insurance Company....................... 46,000 3.9 Farm Bureau Insurance Company of Nebraska............ 25,500 2.1 Colorado Farm Bureau Mutual Insurance Company........ 22,300 1.9 Mountain West Farm Bureau Mutual Insurance Company... 25,400 2.1 Western Ag........................................... 25,400 2.1 Farm Bureau Finance Company, Inc. (Idaho)............ 6,100 * Nodak Mutual Insurance Company....................... 9,400 * Edward M. Wiederstein (3)............................ 974,121 81.7 Thomas R. Gibson..................................... -- -- Eugene R. Maahs...................................... -- -- Stephen M. Morain.................................... -- -- V. Thomas Geary (4).................................. 80,299 6.7 Roger Bill Mitchell (5).............................. 47,800 4.0 Kenneth R. Ashby (6)................................. 410 * Jerry L. Chicoine.................................... -- -- Al Christopherson (7)................................ 216,265 18.1 John W. Creer........................................ -- -- Kenny J. Evans (8)................................... 26,726 2.2 Gary Hall (9)........................................ 32,400 2.7 Karen J. Henry (10).................................. 50,900 4.3 Richard Kjerstad (11)................................ 100 * David C. McClure (12)................................ 80,199 6.7 H. Eldon Merklin (13)................................ 80,199 6.7 Bryce P. Neidig (14)................................. 80,299 6.7 Howard D. Poulson (15)............................... 46,332 3.9 Howard G. Schmid (16)................................ 34,900 2.9 John J. Van Sweden (17).............................. 26,828 2.2 John E. Walker....................................... -- -- All directors and executive officers as a group (33 persons)............................................ 1,192,990 100.0
SERIES A PREFERRED STOCK
SHARES BENEFICIALLY OWNED ----------------------- NUMBER OF NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES % - ----------------------------------------------------- ------------ --------- Iowa Farm Bureau Federation (2)...................... 5,000,000 100.0
79 - ------------------------ * Less than 1%. (1) The address of each officer and director of the Company is 5400 University Avenue, West Des Moines, IA 50266, unless otherwise noted. (2) The Iowa Farm Bureau Federation owns 9,475,245 shares of Class A Common Stock, 53.6% of the class, and 5,000,000 shares of Series A Preferred Stock, 100% of such class. The Series A Preferred Stock votes as a single class with the Class A Common Stock on most matters, and the Iowa Farm Bureau Federation owns 63.9% of the Class A Voting Rights. The remaining holders of Class A Common Stock thereby have a proportionately lower percentage of Class A Voting Rights as compared to their percentage ownership of the Class A Common Stock. (3) Represents shares beneficially owned by Iowa Farm Bureau Federation, Farm Bureau Mutual and Western Ag. Mr. Wiederstein is a director of each of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (4) Represents shares beneficially owned by American Ag, Western Ag, Farm Bureau Insurance Service Company of Idaho, Farm Bureau Finance Company, Inc. (Idaho), and the Idaho Farm Bureau Federation. Mr. Geary is a director of each of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (5) Represents shares beneficially owned by Western Ag, Colorado Farm Bureau Mutual Insurance Company and the Colorado Farm Bureau Federation. Mr. Mitchell is a director of each of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (6) Represents shares beneficially owned by the Utah Farm Bureau Federation. Mr. Ashby is a director of said company and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (7) Represents shares beneficially owned by Farm Bureau Mutual, American Ag and by the Minnesota Farm Bureau Federation. Mr. Christopherson is a director of each of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (8) Represents shares beneficially owned by Western Ag, Western Farm Bureau Mutual and Farm Bureau Insurance Service Company of Arizona. Mr. Evans is a director of each of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (9) Represents shares beneficially owned by Kansas Farm Bureau Life Insurance Company and by Western Ag. Mr. Hall is a director of both of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (10) Represents shares beneficially owned by Western Ag, Mountain West Farm Bureau Mutual Insurance Company and the Wyoming Farm Bureau Federation. Mrs. Henry is a director of each of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and she may be deemed a beneficial owner of such shares. (11) Represents shares beneficially owned by the South Dakota Farm Bureau Federation. Mr. Kjerstad is a director of said organization and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. 80 (12) Represents shares beneficially owned by American Ag, Western Ag, Mountain West Farm Bureau Mutual Insurance Company and the Montana Farm Bureau Federation. Mr. McClure is a director of each of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (13) Represents shares beneficially owned by American Ag, Western Ag, Oklahoma Farm Bureau Mutual Insurance Company and the Oklahoma Farm Bureau Federation. Mr. Merklin is a director of each of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (14) Represents shares beneficially owned by American Ag, Western Ag, Farm Bureau Insurance Company of Nebraska and the Nebraska Farm Bureau Federation. Mr. Neidig is a director of each of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (15) Represents shares beneficially owned by Rural Mutual Insurance Company and the Wisconsin Farm Bureau Federation. Mr. Poulson is a director of both of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (16) Represents shares beneficially owned by Western Ag, Nodak Mutual Insurance Company and the North Dakota Farm Bureau Federation. Mr. Schmid is a director of each of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. (17) Represents shares beneficially owned by Western Ag, Western Farm Bureau Mutual, Farm Bureau Insurance Service Company of Arizona and the New Mexico Farm and Livestock Bureau. Mr. Van Sweden is a director of each of said companies and in such capacity exercises shared investment and voting power with respect to all such shares, and he may be deemed a beneficial owner of such shares. None of the outstanding shares of Common Stock are currently subject to registration rights. Immediately prior to the Offering there were 27 holders of Class A Common Stock and Class B Common Stock of the Company. All of the stockholders are Farm Bureau organizations. Prior to the Offering, Class A Common Stock represented 95% and Class B Common Stock represented 5% of the shares of common stock owned by each shareholder. None of the Class B Common Stock can be sold other than to a Farm Bureau organization, except by first being converted to Class A Common Stock. See "Certain Transactions and Relationships -- Stockholders' Agreement Regarding Management and Transfer of Shares of Class B Common Stock." CERTAIN TRANSACTIONS AND RELATIONSHIPS ORGANIZATION OF THE COMPANY FBL Financial Group, Inc. was incorporated as an Iowa corporation in 1993. In March 1996, and in anticipation of this Offering, the Company's shareholders approved a restatement of its articles of incorporation and each share of outstanding common stock was split into 1,900 shares of Class A Common Stock and 100 shares of Class B Common Stock. The information set forth herein reflects this 2,000-for-1 stock split. In 1994 the Company issued 23,335,600 shares of common stock to 27 stockholders in exchange for all the outstanding shares of Farm Bureau Life and Western Life, and all minority interests in FBL Insurance Company and Rural Security Life which were not already owned by Farm Bureau Life. It also issued 118,000 shares to five additional Farm Bureau organizations for cash at statutory book value. The assets and liabilities of FBL Insurance Company and Rural Security Life were assumed by Farm Bureau Life at December 31, 1994, and in 1995 FBL Insurance Company and Rural Security Life were liquidated. An additional 400,000 shares were issued to an existing shareholder in 1995 for cash at equivalent statutory book values, and 6,200 shares were issued to acquire minority interests in Utah Insurance. Each of the shareholders is a Farm Bureau organization. 81 In December 1995, the stock of Utah Insurance was transferred by FBL Financial Services, Inc. through Farm Bureau Life, and Utah Insurance thereby became a direct subsidiary of the Company. Management anticipates that during the second quarter of 1996 the Farm Bureau Mutual pool will be revised to increase the percentage of the pool attributable to Utah Insurance from 8% to 20% with an effective date retroactive to January 1, 1996. Also, contingent upon effectiveness of this Offering, Farm Bureau Life will transfer the stock of FBL Financial Services, Inc. under which all of the Company's noninsurance operations are conducted, which will thereby become a direct subsidiary of the Company. Upon completion of this Offering, the Series A Exchange will be consummated. See "Prospectus Summary -- The Series A Exchange." SERVICES AGREEMENT WITH FARM BUREAU MANAGEMENT CORPORATION The Company is a party to a Services Agreement (Services Agreement) with Management Corp. which extends through December 31, 2005. Under the Services Agreement, Management Corp. provides to the Company building services and equipment repair and maintenance, food service, administrative services, child care services, telephone services, stores and mailroom services, wellness and purchasing services. The Company provides to Management Corp. most of the personnel used by Management Corp. in its operations, as well as human resources services, legal services, and the use of certain property and equipment. The Services Agreement is terminable by either party upon 180 days prior written notice to the other party, or immediately in the event of certain insolvency events with respect to either party. The services provided by Management Corp. are to be provided in accordance with policies, directives, and final approval authority of the Board of Directors of the Company. For such services the Company or Management Corp., as the case may be is reimbursed for all expenses incurred in providing such services (billed quarterly in advance based on Management Corp.'s current fiscal year budget and payable within 15 days of the beginning of the quarter) and receives a fee equal to one-half of one percent of all such expenses. The Company provides similar service to its subsidiaries and to Farm Bureau Mutual and South Dakota Mutual, pursuant to similiar service agreements which provide for cost reimbursement and a fee of one-half of one percent thereof to be paid to the Company. The services described above together with substantial additional services were provided to the Company and its subsidiaries by Management Corp. prior to January 1, 1996 pursuant to the provisions of management services agreements which were terminated by agreement of the parties as of December 31, 1995. During 1995 all of the personnel providing services to the Company and its subsidiaries were employees of Management Corp. In 1996 most of these employees (approximately 1,000) became employees of the Company. The cost of the services provided to the Company by Management Corp. prior to January 1, 1996 was allocated based on time and other factors, and 100% of the expenses incurred by Management Corp. on behalf of the Company or its subsidiaries was paid to Management Corp. During the three month period ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993 such payments to Management Corp. (inclusive of wage and salary reimbursement of the transferred employees) were $1.0 million, $29.7 million, $3.1 million, and $3.0 million, respectively. After the transfer of employees to the Company in 1996, the fees paid to Management Corp. by the Company will be negligible. FARM BUREAU MUTUAL POOL Utah Insurance participates in the Farm Bureau Mutual pool with Farm Bureau Mutual and South Dakota Mutual with all three companies operating under the common management of the Company. All retained insurance business of Utah Insurance and South Dakota Mutual is assumed by Farm Bureau Mutual. The combined business is then assumed by the three property-casualty companies, in specified proportions, not in excess of an amount that would create a net written premium to surplus ratio that exceeds acceptable industry standards. In the pool, all premiums, losses, loss adjustment expenses, acquisition and other underwriting and administrative expenses are combined and distributed proportionately to each property-casualty company, thus providing the three companies with substantially the same underwriting results. The overall operating results of the three companies differ based on their respective investment income and other miscellaneous items. 82 In addition, effective January 1, 1996, Farm Bureau Mutual entered into a loss pooling agreement with Western Ag, which, in turn quota share reinsures business of Western Farm Bureau Mutual. Western Ag and Western Farm Bureau Mutual are Farm Bureau affiliated companies in Arizona and New Mexico, respectively, that are also managed by the Company. Under the loss pooling agreement all direct and assumed premiums, losses and allocated loss adjustment expenses (but not acquisition and other general underwriting expenses) of Farm Bureau Mutual, Utah Insurance and South Dakota Mutual will be pooled with these same items for Western Ag and Western Farm Bureau Mutual. STOCKHOLDERS' AGREEMENT REGARDING MANAGEMENT AND TRANSFER OF SHARES OF CLASS B COMMON STOCK Subsequent to the Offering all of the Class B Common Stock of the Company will be owned by Farm Bureau organizations. As holders of all of the Class B Common Stock of the Company, these organizations have entered into the Stockholders' Agreement regarding management and the transfer of the Class B Common Stock (Stockholders' Agreement). The Stockholders' Agreement provides that the holders of the Class B Common Stock will vote for the election, as Class B Directors of the Company, of (i) the Presidents of each of the 15 state Farm Bureau Federations which own or are affiliated with the owners of the Class B Common Stock and (ii) the Chief Executive Officer of the Company and two additional officers of the Company nominated by the Chairman of the Board. The Stockholders' Agreement also provides that as long as a single state Farm Bureau Federation and its affiliates own in excess of 50% of the outstanding shares of Class B Common Stock (the Iowa Farm Bureau Federation will own approximately 63.9% of the Class B Common Stock immediately after the Offering), the Class B Common Stockholders will direct the Class B Directors to elect the President of such state Farm Bureau Federation as the Chairman of the Board, and to elect persons nominated by the Chairman to serve as Chief Executive Officer, Secretary and Treasurer. In the event that a Class B Director chooses to vote other than as directed pursuant to the requirements of the Shareholders' Agreement, the holders of not less than 10% of the Class B Common Stock may request a special meeting of the Class B Common Stockholders, for the purpose of removing the Class B Director, and either replacing such director with a qualified person or leaving the position vacant. The holders of Class B Common Stock may not transfer the stock to any person which is not a Farm Bureau organization, and any attempted transfer in violation of the Stockholder's Agreement causes the Class B Common Stock so transferred to automatically be converted to Class A Common Stock. The holders of 90% of the Class B Common Stock, together with the Company, may amend the Stockholders' Agreement. RELATIONSHIP WITH FARM BUREAU ORGANIZATIONS American Farm Bureau Federation is a national federation of member organizations having as a major objective and purpose to promote, protect and represent the business, economic, social and educational interests of farmers and ranchers of the nation, and to develop agriculture, and a further objective to correlate Farm Bureau activities and strengthen member state Farm Bureau Federations. Through a membership agreement the Iowa Farm Bureau Federation (the Company's principal stockholder) and similar state Farm Bureau Federations throughout the country agree to cooperate in reaching these objectives. American Farm Bureau Federation is the owner of the "Farm Bureau" and "FB" trade names and related trademarks and service marks including "FB design" which has been registered as a service mark with the U.S. Patent and Trademark Office. Under the state membership agreements, use of such trade names and marks in each state is restricted to members of the federation and their approved affiliates. Farm Bureau Life is licensed by the Iowa Farm Bureau Federation to use the "Farm Bureau" and "FB" designations in Iowa, and pursuant thereto royalties of $91,000, $299,000, $300,000 and $271,000, respectively, were paid to the Iowa Farm Bureau Federation for the three month period ended March 31, 1996 and for the years ended December 31, 1995, 1994, and 1993. The Company's subsidiaries have similar arrangements with Farm Bureau organizations in the other states of the market territory. Total royalties paid to Farm Bureau organizations other than the Iowa Farm Bureau Federation in 1995, 1994 and 1993 were $620,000, $693,000 and 83 $672,000, respectively. Royalty payments in excess of $60,000 were made to Farm Bureau organizations in Minnesota (1995 -- $148,000; 1994 -- $177,000 and 1993 - -- $145,000), Nebraska (1994 -- $78,000 and 1993 -- $126,000), Oklahoma (1995 -- $94,000; 1994 -- $98,000 and 1993 -- $93,000), and South Dakota (1994 -- $66,000). HOME OFFICE BUILDING AND CERTAIN OTHER EXPENSE ALLOCATIONS The Company shares home office facilities, as well as certain management personnel, with the Iowa Farm Bureau Federation and certain of its affiliates, including Farm Bureau Mutual and various service companies. Costs are allocated by factors such as the amount of space used for functions of the various companies, and time studies and estimates of time spent by personnel for each of the companies. Costs allocated to life insurance activities are further divided between Farm Bureau Life and Western Life based on relative amounts of direct written premiums attributable to each. The allocations are reviewed and approved by the boards of directors of the respective companies. The Company and its subsidiaries provide a number of services to, and receive certain services from, other Farm Bureau organizations, including the Company's two largest stockholders, the Iowa Farm Bureau Federation and Farm Bureau Mutual. The Company providing such services is reimbursed based on an allocation of the cost of providing such services. The Company's home office facilities are owned by Farm Bureau Life which leases a portion of such facilities to the Iowa Farm Bureau Federation and Farm Bureau Mutual. In 1995, 1994 and 1993, the Iowa Farm Bureau Federation paid Farm Bureau Life rent of approximately $61,000, $62,000 and $63,000, respectively. In 1995, 1994 and 1993, Farm Bureau Mutual paid Farm Bureau Life approximately $1,468,000, $1,413,000 and $1,444,000, respectively, in rent. Farm Bureau Life owns aircraft which are available for use by the Company's affiliates. In 1995, 1994 and 1993, Farm Bureau Mutual paid the Company approximately $78,000, $73,000 and $91,000, respectively, for use of such aircraft. The Company provided education and training services to Farm Bureau Mutual through its subsidiary FBL Educational Services, Inc. In 1995, 1994 and 1993, Farm Bureau Mutual paid the Company approximately $95,000, $90,000 and $78,000, respectively, for such services. Through its subsidiary, FBL Leasing Services, Inc., the Company owns and leases computer equipment, furniture and automobiles to other Farm Bureau organizations. In 1995, 1994 and 1993, the Iowa Farm Bureau Federation paid approximately $339,000, $354,000 and $344,000, respectively, in aggregate leasing fees. Farm Bureau Mutual paid aggregate leasing fees of approximately $1,984,000, $1,857,000 and $1,867,000, respectively. Through its investment advisor subsidiary, FBL Investment Advisory Services, Inc., the Company provides investment advice and related services. Farm Bureau Mutual paid the Company approximately $275,000, $232,000 and $293,000 for such services in 1995, 1994 and 1993, respectively. 84 DESCRIPTION OF CAPITAL STOCK The following description does not purport to be complete and is qualified in its entirety by this reference to the Company's Restated Articles of Incorporation, as amended (Articles), a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Company is authorized to issue 10,000,000 shares of preferred stock, without par value (Preferred Stock), 88,500,000 shares of Class A Common Stock, without par value (Class A Common Stock) and 1,500,000 shares of Class B Common Stock, without par value (Class B Common Stock). References herein to "Common Stock" include both the Class A Common Stock and the Class B Common Stock. Effective March 19, 1996, the Company effected a 2,000 for 1 stock split resulting in the issuance of 1,900 shares of Class A Common Stock and 100 shares of Class B Common Stock for each previously outstanding share. As a result of the stock split, as of March 19, 1996, the Company had issued and outstanding 22,666,810 shares of Class A Common Stock and 1,192,990 shares of Class B Common Stock, all owned by Farm Bureau organizations. On April 29, 1996, the Company designated 5,000,000 shares of its Preferred Stock as Series A Preferred Stock. The Company has offered 5,000,000 shares of its Series A Preferred Stock in exchange for 5,000,000 shares of its Class A Common Stock subject to the completion of this Offering. The offer was made on a pro rata basis to its existing shareholders. The Iowa Farm Bureau Federation has agreed to exchange 5,000,000 shares of Class A Common Stock for all 5,000,000 shares of Series A Preferred Stock, none of which was taken up by other existing shareholders in the Series A Exchange. In addition, 1,750,000 shares of Class A Common Stock are reserved for issuance under options granted or available for grant under the Stock Option Plan, subject to the completion of the Offering, and 1,192,990 shares of Class A Common Stock are reserved for issuance upon conversion of Class B Common Stock. Following the closing of this Offering, assuming that the Underwriters' over-allotment option will not be exercised, there will be 17,666,810 shares of Class A Common Stock outstanding, 77.4% of which will be owned by Farm Bureau organizations and 22.6% of which will be owned by the public, 5,000,000 shares of Series A Preferred Stock outstanding, all of which will be owned by the Iowa Farm Bureau Federation, and 1,192,990 shares of Class B Common Stock outstanding, all of which will be owned by Farm Bureau organizations. SERIES A PREFERRED STOCK The holders of the Series A Preferred Stock will be entitled to vote on all matters submitted to a vote of the holders of the Common Stock of the Company, voting together with the holders of the Class A Common Stock as one voting group. Each share of Series A Preferred Stock is entitled to one vote, subject to antidilution adjustment, so long as it is held by a Farm Bureau organization. The approval of an amendment to the Company's Articles which would change the powers, preferences, or special rights of the Series A Preferred Stock would require the affirmative vote of a majority of the Class A Common Stock and the Series A Preferred Stock voting as a single voting group, the affirmative vote of a majority of the Class B Common Stock, and the affirmative vote of a majority of each class adversely affected, voting separately. All voting rights, except those established by law, of the Series A Preferred Stock terminate automatically with respect to any of such shares which cease to be beneficially owned, directly or indirectly, by a Farm Bureau organization. The Series A Preferred Stock has a cumulative annual dividend of $1.00 per share, which is paid on the last business day of each calendar quarter, and it ranks senior to the Common Stock as to the payment of dividends. In the event of a liquidation of the Company, the holders of the Series A Preferred Stock are entitled to receive $20.00 per share plus accrued and unpaid dividends prior to any distribution to the holders of Common Stock. Any shares of Series A Preferred Stock which cease to be beneficially owned, directly or indirectly, by a Farm Bureau organization may be redeemed at the option of the Company, at a price of $20.00 per share plus accrued and unpaid dividends. The holders of the Series A Preferred Stock have no preemptive rights. The Series A Preferred Stock is not registered and is not traded. 85 COMMON STOCK Holders of Common Stock are entitled to one vote for each share held of record. A majority of the votes entitled to be cast on a matter by a class constitutes a quorum of that class. The holders of the Class A Common Stock and the holders of the Series A Preferred Stock constitute a single voting group for most purposes. The holders of the Class B Common Stock also constitute a single voting group for most purposes. If a quorum exists, action on a matter other than the election of directors, by a voting group, is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action. Directors are elected by a majority of the votes by the voting group entitled to vote in the election of such directors at a meeting at which a quorum of such voting group is present. Thus, Class A directors are elected by a majority of the vote of the Class A Common Stock and the Series A Preferred Stock voting together as a single voting group, and the Class B directors are elected by a majority vote of the Class B Common Stock in accordance with the Stockholders' Agreement. Following the closing of this Offering, assuming that the Underwriters' over-allotment option will not be exercised, the Iowa Farm Bureau Federation will own 53.6% of the Class A Common Stock and 100% of the Series A Preferred Stock. Voting is noncumulative. Consequently, the Iowa Farm Bureau Federation will be able to elect all of the Class A Directors. Subsequent to this Offering, the Iowa Farm Bureau Federation will hold 63.9% of the Company's Class B Common Stock. Various aspects of the ownership of the Company's Class B Common Stock are governed by the Stockholders' Agreement. See "Certain Transactions and Relationships -- Class B Common Stockholders' Agreement regarding Management and Transfer of Shares of Class B Common Stock." 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 dividends, when, as and if declared by the Board out of funds legally available therefor declared payable to holders of Common Stock, subject to the prior payment of all dividends accrued on Preferred Stock. See "Dividend Policy." The holders of Class A Common Stock and Class B Common Stock are entitled upon liquidation of the Company to share ratably on a share-for-share basis in the net assets available for distribution, subject to the prior rights of any Preferred Stock then outstanding. All outstanding shares of Common Stock are, and the Shares of Class A Common Stock offered hereby are, fully paid and nonassessable. Shares of Common Stock are not redeemable and have no preemptive or similar rights to subscribe for additional shares. CERTAIN PROVISIONS OF COMPANY'S ARTICLES The Company's Articles include certain provisions that could have anti-takeover effects, which are in addition to the anti-takeover effects inherent in the inability of the non-Farm Bureau organization holders of the Class A Common Stock to elect a majority of the Company's Board of Directors, including the requirement of separate voting by the holders of the Class A Common Stock and Series A Preferred Stock voting as one voting group, and the holders of the Class B Common Stock voting as a separate voting group. See "Risk Factors -- Relationship with Farm Bureau Organizations; Control by the Iowa Farm Bureau Federation; Anti-takeover Effects." PREFERRED STOCK The Board of Directors of the Company is authorized, subject to any limitations prescribed by law, from time to time to issue up to an aggregate of 10,000,000 shares of Preferred Stock in one or more series, each of such series to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and such qualifications, limitations or restrictions thereof, as shall be determined by the Board of Directors in a resolution or resolutions providing for the issue of such Preferred Stock. Thus, any series may, if so determined by the Board of Directors, have full voting rights with the Common Stock (as in the case of the Series A Preferred Stock and the Class A Common Stock) or superior or limited voting rights, be convertible into Common Stock or another security of the Company, and have such other relative rights, preferences and limitations as the Company's Board of Directors shall determine. As a result, any class or series of Preferred Stock could have rights which would 86 adversely affect the rights of the holders of the Common Stock. The shares of any class or series of Preferred Stock need not be identical. The issuance of a new series of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions or other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. Upon completion of the Offering 5,000,000 shares of Series A Preferred Stock will be issued and outstanding. The Company has no present plan to issue any additional Preferred Stock. STATE STATUTORY PROVISIONS Under Chapter 502 of the Iowa Code a person making a "takeover offer," defined as an offer to acquire any equity securities of a "target company" (defined as a public company with substantial assets in Iowa that is at least 20% owned by Iowa residents) from an Iowa resident pursuant to a tender offer is required to file a registration statement with the designated Iowa public official if the bidder would then own 10% of any class of outstanding equity securities. Chapter 502 contains antifraud provisions and prohibits the acquisition of equity securities from an Iowa resident within two years following a takeover offer unless the holders are afforded a reasonable opportunity to sell to the offeror upon substantially equivalent terms as those provided in the earlier takeover offer. The Iowa Business Corporation Act provides that in considering acquisition proposals, directors may consider the effects on the Company's employees, suppliers, creditors, customers and the communities in which it operates, as well as the long-term and short-term interests of the Company. Consideration of any or all community interest factors is not a violation of the business judgment rule, even if the directors reasonably determine that effects on a community or other factors outweigh the financial or other benefits to the Company or a shareholder or group of shareholders. The Act also includes authorization of "poison pills" which include, without limitation, provisions that preclude or limit the exercise, transfer or receipt of stock rights by persons owning or offering to acquire a specified number or percentage of a corporation's outstanding shares. Unlike most states, Iowa does not presently have a "business combination" law prohibiting business combinations with a stockholder who holds over a specified percentage of stock for less than a specified period after crossing the threshhold. The foregoing provisions of state law could have the effect of delaying, deferring or preventing a change in control of the Company if the Board of Directors determines that a change of control is not in the best interest of the Company, its stockholders and other constituencies. In addition, the regulatory restrictions on acquisition of securities of the Company may also deter attempts to effect, or prevent the consummation of, a change in control of the Company. INDEMNIFICATION AND LIMITATION OF LIABILITY The Company's Articles provide that no director of the Company shall be liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as a director, except to the extent otherwise required by the Iowa Business Corporation Act. This provision does not prevent stockholders from obtaining injunctive or other equitable relief against directors nor does it shield directors from liability under Federal or state securities laws. In addition, the Articles provide that the Company shall, to the maximum extent permitted by law, indemnify any person by reason of the fact that he is or was or has agreed to be a director or officer of the Company or while a director or officer of the Company is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, subject to such person having met the standards of conduct required for such indemnification under Iowa law. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Class A Common Stock is Boatmen's Trust Company. NEW YORK STOCK EXCHANGE LISTING The Shares have been authorized for listing on the New York Stock Exchange under the symbol FFG, subject to official notice of issuance. 87 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 17,666,810 shares of Class A Common Stock outstanding. Of these shares, the 4,000,000 Shares sold in this Offering will be freely tradable without restriction or registration under the Securities Act, except any shares purchased by an "affiliate of the Company." The remaining 13,668,810 shares of Class A Common Stock outstanding on the date of this Prospectus (and all of the Series A Preferred Stock and Class B Common Stock) (Restricted Shares), are deemed to be "restricted securities," as that term is defined under Rule 144 promulgated under the Securities Act, in that such shares were issued and sold by the Company in private transactions in reliance upon exemptions from registration under Section 4(2) of the Securities Act, and may not be resold unless they are registered, or sold pursuant to an applicable exemption from registration, such as Rule 144 under the Securities Act. All of the stockholders, directors and executive officers of the Company, and the purchasers of reserved shares have agreed in writing with the Company and the Representatives not to sell, transfer, or otherwise dispose of, or agree to sell, transfer or otherwise dispose of, any shares of Common Stock during the 180 day period commencing on the date of this Prospectus without the prior written consent of Alex. Brown & Sons Incorporated. These 180-day lock-up agreements take precedence over the limitations on sale under the Securities Act. Beginning 180 days after the date of this Prospectus, substantially all of the Restricted Shares subject to the 180-day lock-up agreements will become eligible for sale in the public market pursuant to Rule 144. None of the shares of Class B Common Stock may be sold except to a Farm Bureau organization, without becoming automatically converted to Class A Common Stock. In general, under Rule 144 as currently in effect, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company (or persons whose shares are aggregated), who has owned restricted shares of Class A Common Stock beneficially for at least two years is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of then outstanding shares of the Company's Class A Common Stock (176,668 shares immediately after this Offering) or the average weekly trading volume in the Company's Class A Common Stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. A person who has not been an affiliate of the Company at any time during the three months immediately preceding the sale and who has beneficially owned shares of Class A Common Stock for at least three years is entitled to sell such shares under Rule 144(k) without regard to any of the limitations described above. Prior to this Offering, there has been no public market for the Common Stock, and there can be no assurance that an active public market for the Class A Common Stock will develop or be sustained after the Offering. Sales of substantial amounts of Class A Common Stock in the public market may adversely affect the prevailing market prices for the Class A Common Stock and could impair the Company's future ability to raise capital through the sale of its equity securities. 88 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the Underwriters), through their Representatives Alex. Brown & Sons Incorporated, Everen Securities, Inc. and Smith Barney Inc., have severally agreed to purchase from the Selling Stockholders the following respective numbers of shares of Class A Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
UNDERWRITER NUMBER OF SHARES - ------------------------------------------------------------------------------------ ------------------ Alex. Brown & Sons Incorporated..................................................... Everen Securities, Inc.............................................................. Smith Barney Inc.................................................................... ---------- Total............................................................................. 4,000,000 ---------- ----------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of the Class A Common Stock offered hereby if any of such shares are purchased. The Company and the Selling Stockholders have been advised by the Representatives of the Underwriters that the Underwriters propose to offer the shares of Class A Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the Representatives of the Underwriters. Certain of the Selling Stockholders have granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 600,000 additional shares of Class A Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Class A Common Stock to be purchased by it shown in the above table bears to 4,000,000, and certain of the Selling Stockholders will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the Class A Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 4,000,000 shares are being offered. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Company has requested that the Underwriters reserve up to 200,000 Shares of the Offering for purchase by certain directors, officers, employees and other persons having a relationship with the Farm Bureau organizations. Such reserved Shares will be offered on the same terms as the Shares offered to the public hereby. The Company, its Directors and executive officers, the Selling Stockholders and the purchasers of reserved Shares, have agreed not to offer, sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Alex. Brown & Sons Incorporated. See "Shares Eligible for Future Sale." Prior to this Offering, there has been no established public market for the Class A Common Stock of the Company. Consequently, the initial public offering price for the Class A Common Stock has been determined by negotiations between the Company, the Selling Stockholders and the Representatives of the Underwriters. Among the factors considered in determining the initial public offering price were prevailing market conditions, the results of operations of the Company in recent periods, the market capitalizations of other companies which the Company and the Representatives of the Underwriters believed to be comparable to the Company, estimates of the business potential of the Company, and such other factors deemed relevant. 89 The Representatives of the Underwriters have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority without the prior written approval of the customer. The Shares have been authorized for listing on the New York Stock Exchange under the symbol FFG, subject to official notice of issuance. In order to meet one of the requirements for listing the Shares on the New York Stock Exchange, the Underwriters have undertaken to sell lots of 100 or more Shares to a minimum of 2,000 beneficial holders. VALIDITY OF COMMON STOCK The validity of the Common Stock offered hereby will be passed upon for the Company by Davis, Brown, Koehn, Shors & Roberts, P.C., Des Moines, Iowa, and for the Underwriters by Debevoise & Plimpton, New York, New York. Debevoise & Plimpton will rely, as to matters of Iowa law, upon the opinion of Davis, Brown, Koehn, Shors & Roberts, P.C. EXPERTS The consolidated financial statements and schedules of FBL Financial Group, Inc. at December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (Commission) a registration statement on form S-1 (together with all exhibits, schedules and amendments thereto, the "Registration Statement") under the Securities Act of 1933, as amended (Securities Act), and the rules and regulations promulgated thereunder, for the registration of the Shares offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. The Registration Statement may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at 7 World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained upon written request from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. As a result of the Offering, the Company will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended (Exchange Act) and, in accordance with the Exchange Act, thereafter will be required to file reports, proxy statements and other information with the Commission. Such reports, proxy statements and information may be inspected and copied at the public reference facilities maintained by the Commission referenced above. The Company intends to furnish to its stockholders annual reports containing audited consolidated financial statements as well as quarterly reports for the first three fiscal quarters of each fiscal year containing unaudited financial information. 90 GLOSSARY OF SELECTED INSURANCE TERMS The following Glossary includes definitions of certain general insurance terms as well as terms relating specifically to the Company. Adjusted operating income.............. Net income adjusted to eliminate certain items which management believes are not indicative of overall operating trends, including realized gains on investments (less that portion of amortization of deferred policy acquisition costs and value of insurance in force acquired and income taxes attributable to such gains), net income or loss from a venture capital investment company subsidiary and discontinued operations. A.M. Best rating....................... A.M. Best financial condition ratings are opinions of an insurance company's financial strength, operating performance and ability to meet its obligations to policyholders. Such ratings are based upon a comprehensive review of a company's financial performance, which is supplemented by certain data, including responses to A.M. Best's questionnaires, quarterly NAIC filings, state insurance department examination reports, loss reserve reports, annual reports and reports filed with state insurance departments. A.M. Best undertakes a quantitative evaluation based on profitability, leverage and liquidity and a qualitative evaluation based upon the composition of a company's book of business or spread of risk, the amount, appropriateness and soundness of reinsurance, the quality, diversification and estimated market value of its assets, the adequacy of its loss reserves and policyholders' surplus and the experience and competence of its management. A.M. Best uses the following rating scale:
A++ and A+ Superior A and A- Excellent B++ and B+ Very Good B and B- Adequate C++ and C+ Fair C and C- Marginal D Very vulnerable Under state E supervision F In liquidation
American Farm Bureau Federation........ An Illinois not-for-profit corporation formed to promote agriculture and to correlate and strengthen the various State Farm Bureau Federations, County Farm Bureau organizations and any other state organizations controlled by or under common control with any of such Federations. Annuity................................ A contract that pays a periodic income benefit for the life of a person (the annuitant), the lives of two or more persons or a specified period of time.
91 Capital and surplus.................... As determined in accordance with statutory accounting practices, the amount remaining after all liabilities, including reserves, are subtracted from all admitted assets. Cash value............................. The amount of cash available to a policyholder on the surrender of a life insurance policy or annuity contract. Catastrophe loss....................... A severe loss, usually affecting many insureds, involving many risks such as conflagration, earthquake, windstorm, explosion and other similar events. Ceded or ceding........................ The transfer of all or a portion of a risk from one insurer to another. Combined ratio......................... A combination of the underwriting expense ratio and the loss and loss adjustment expense (LAE) ratio, determined in accordance with Statutory Accounting Practices, applied to property-casualty insurance operations. The underwriting expense ratio measures the ratio of underwriting expenses to net premiums written. The loss and LAE ratio measures the ratio of incurred losses and LAE to net premiums earned. Crediting rates........................ Interest rates applied to life insurance policies and annuity contracts, whether contractually guaranteed or currently declared for a specified period. Cross selling.......................... Determining the additional insurance and savings needs of existing policyowners and marketing products to meet their needs. Deferred policy acquisition costs...... Commissions and other selling expenses which vary with and are directly related to the production of business. These acquisition costs are deferred and amortized to achieve a matching of revenues and expenses when reported in financial statements prepared in conformity with GAAP. Direct collected premiums.............. Total cash received for insurance written for a given period before any adjustments for ceded amounts. Disability income insurance............ A form of accident and health insurance that provides periodic payments when the insured is unable to work as a result of illness, disease or injury. Farm Bureau organization............... The American Farm Bureau Federation, the State Farm Bureau Federations, the County Farm Bureau organizations, and all corporations, partnerships, and other entities controlled by or under common control with the American Farm Bureau Federation, any State Farm Bureau Federation, or any County Farm Bureau organization, or entity authorized by the American Farm Bureau to use the trade-names, "Farm Bureau" or "FB" in its name or operations. Flexible premium deferred annuities.... Annuities, not currently paying benefits, that permit the addition of premium payments by the policyowner at any time.
92 GAAP................................... United States generally accepted accounting principles, including those applicable to stock life insurance companies. In force............................... The total face amount of insurance coverage under contracts that have not expired. Iowa Farm Bureau Federation............ An Iowa not-for-profit corporation formed to promote agriculture and to correlate and strengthen the various County Farm Bureau organizations in the State of Iowa and other entities in the State of Iowa controlled by or under common control with any of such organizations. Lapse.................................. Termination of a policy because of surrender, failure to pay a premium or lack of sufficient cash value to maintain in force status. Loss ratio............................. A loss ratio is determined by dividing the amount of benefits incurred by the amount of premium earned for a given line of coverage of business in total. NASD................................... The National Association of Securities Dealers, Inc. Persistency............................ Percentage of life insurance policies or annuity contracts in force at the beginning of a period remaining in force until completion of the term for which the policy or contract was written. Personal lines......................... The insurance coverages commonly maintained by most households including life insurance, annuities, auto insurance, and homeowners. Policy acquisition costs............... Costs incurred in the acquisition of new and renewal insurance contracts. Acquisition costs deferred include those costs that vary with and are primarily related to the acquisition of insurance contracts (for example, agent and broker commissions, certain underwriting and policy issue costs, and medical and inspection fees). Premium................................ The amount of money that the policyholder pays to the insurance company for an insurance policy or annuity. For statutory accounting purposes, such premiums are reported as revenues. Under GAAP, premiums on universal life and annuity products increase the policyholder liability and therefore are not reported as revenues. Reinsurance............................ The arrangement in which one insurance company (called the reinsurer), generally upon receipt of a premium, agrees to indemnify another (called the ceding insurer) for part or all of the policy obligations of the ceding insurer as the issuer of the reinsured policies. Reserves for future policyholder benefits.............................. Liabilities established by insurers to reflect the estimated benefits to the policyholders or beneficiaries. For universal life and annuity products, the amounts represent accumulated values. For other policies, the reserves represent the discounted present value of benefits less the estimated future value of premiums.
93 Retention.............................. In a reinsurance context, the amount or portion of risk which a ceding insurer retains for its own account. Losses paid by a ceding insurer in excess of the retention level are then owed to the insurer by the reinsurer. Separate accounts...................... Investment accounts maintained by an insurer to which funds have been allocated for certain policies under provisions of relevant state law. The investments in each separate account are maintained separately from those in other separate accounts and the general account. The investment results of the separate account assets are passed through directly to the separate account policyholders, so that an insurer derives management and other fees from, but bears no investment risk on, these assets; except the risk on a small number of products on which returns on separate assets will not meet the relatively low minimum rate guaranteed on these products. Statutory accounting practices......... Accounting practices prescribed or permitted by state insurance regulatory authorities. Statutory accounting practices emphasize solvency rather than matching revenues and expenses during an accounting period and are liquidation/solvency based rather than profit based. Supplementary contracts................ An agreement between the Company and either the insured or the beneficiary to provide for the settlement of an amount payable under another contract with the Company. Surrender charge....................... The charge imposed for the early termination of a life insurance or annuity contract. Term life insurance.................... Life insurance protection during a certain number of years, but expiring without policy cash value if the insured survives the stated period. Underwriting........................... The process of reviewing applications submitted for insurance coverage, deciding whether to accept all or part of the coverage requested, and determining the applicable premiums. Universal life insurance............... A flexible premium life insurance policy under which the policyholder may change the death benefit from time to time (with satisfactory evidence of insurability for increases) and vary the amount or timing of premium payments. Premiums, less expense and mortality charges, are credited to a cash value or accumulative account to which interest is credited at rates which may change from time to time.
94 Variable annuity....................... Annuity in which premium payments are used to purchase accumulation units. The value of a unit fluctuates in accordance with the investment experience of a separate account. Variable annuity contracts typically include a general account guaranteed interest investment option. At the time of the payment of benefits to the annuitant, the annuitant can generally elect from a number of payment options which provide either fixed or variable benefit payments. Variable universal life................ Life insurance combining the characteristics of both universal and variable life insurance in that excess interest credited to the cash value account depends on investment results of separate accounts. Whole life insurance................... Permanent life insurance offering guaranteed death benefits and guaranteed cash values.
95 FBL FINANCIAL GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 Report of Independent Auditors........................................................ F-2 Consolidated Financial Statements Consolidated Balance Sheets........................................................... F-3 Consolidated Statements of Income..................................................... F-5 Consolidated Statements of Changes in Stockholders' Equity............................ F-6 Consolidated Statements of Cash Flows................................................. F-7 Notes to Consolidated Financial Statements............................................ F-9
F-1 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As described in Notes 1 and 4 to the consolidated financial statements, in 1994 the Company changed its method of accounting for certain investments in debt securities. /s/ Ernst & Young LLP Des Moines, Iowa March 12, 1996 F-2 FBL FINANCIAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31, ----------- ---------------------- 1996 1995 1994 ----------- ---------- ---------- (UNAUDITED) ASSETS Investments: Fixed maturities: Held for investment, at amortized cost (market: 1996 -- $728,944; 1995 -- $712,476; 1994 -- $500,849).... $ 721,083 $ 683,149 $ 532,376 Available for sale, at market (amortized cost: 1996 -- $1,350,756; 1995 -- $1,325,608; 1994 -- $1,252,189)......................................... 1,372,742 1,393,060 1,200,235 Equity securities, at market (cost: 1996 -- $86,771; 1995 -- $77,038; 1994 -- $49,985)..................... 90,856 83,714 46,701 Held in inventory, at estimated fair value (amortized cost: 1996 -- $19,936; 1995 -- $21,555; 1994 -- $17,731), substantially all held for sale in 1996..... 21,327 21,913 18,169 Mortgage loans on real estate.......................... 267,534 266,623 272,537 Investment real estate, less allowances for depreciation of $1,853 in 1996, $1,839 in 1995 and $1,170 in 1994........................................ 28,997 28,604 26,951 Policy loans........................................... 116,633 116,107 113,848 Other long-term investments............................ 12,044 2,892 6,654 Short-term investments................................. 36,785 50,061 119,683 ----------- ---------- ---------- Total investments........................................ 2,668,001 2,646,123 2,337,154 Cash and cash equivalents................................ -- -- 5,963 Securities and indebtedness of related parties........... 61,790 74,506 76,333 Accrued investment income................................ 32,370 32,711 30,242 Accounts and notes receivable............................ 1,804 2,009 2,821 Amounts receivable from affiliates....................... 4,194 2,422 2,294 Reinsurance recoverable.................................. 33,030 31,845 37,717 Deferred policy acquisition costs........................ 146,573 135,061 137,649 Value of insurance in force acquired..................... 19,190 14,449 20,908 Property and equipment, less allowances for depreciation of $45,145 in 1996, $45,417 in 1995 and $44,924 in 1994.................................................... 61,388 60,184 63,608 Current income taxes recoverable......................... 8,807 14,114 10,100 Deferred income tax benefit.............................. -- -- 11,772 Goodwill, less accumulated amortization of $1,707 in 1996, $1,556 in 1995 and $932 in 1994................... 10,191 10,342 10,966 Other assets............................................. 22,113 22,296 16,965 Assets held in separate accounts......................... 50,715 44,789 28,043 ----------- ---------- ---------- Total assets..................................... $3,120,166 $3,090,851 $2,792,535 ----------- ---------- ---------- ----------- ---------- ----------
F-3
MARCH 31, DECEMBER 31, ----------- ---------------------- 1996 1995 1994 ----------- ---------- ---------- (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Policy liabilities and accruals: Future policy benefits: Universal life and annuity products................ $1,421,972 $1,394,116 $1,307,142 Traditional life insurance and accident and health products.......................................... 657,085 651,827 634,962 Unearned revenue reserve........................... 18,138 17,350 17,962 Other policy claims and benefits..................... 7,776 8,149 8,070 Reserves and unearned premiums on property-casualty policies............................................ 47,480 45,890 44,482 ----------- ---------- ---------- 2,152,451 2,117,332 2,012,618 Other policyholders' funds: Supplementary contracts without life contingencies... 119,378 114,471 98,679 Advance premiums and other deposits.................. 87,025 87,093 87,731 Accrued dividends.................................... 14,065 13,678 13,165 ----------- ---------- ---------- 220,468 215,242 199,575 Short-term borrowings.................................. -- -- 6,388 Long-term debt......................................... 11,776 12,604 18,519 Amounts payable to affiliates.......................... 13,346 10,443 8,716 Deferred income taxes.................................. 30,470 39,645 -- Other liabilities...................................... 80,417 81,995 83,355 Liabilities related to separate accounts............... 50,715 44,789 28,043 ----------- ---------- ---------- Total liabilities................................ 2,559,643 2,522,050 2,357,214 Commitments and contingencies Minority interest in subsidiaries........................ 4,503 4,503 4,578 Stockholders' equity: Class A Common Stock, without par value -- authorized 88,500,000 shares, issued and outstanding 22,666,810 shares in 1996........................................ 143,773 -- -- Class B Common Stock, without par value -- authorized 1,500,000 shares, issued and outstanding 1,192,990 shares in 1996........................................ 7,567 -- -- Common stock, par value $100.00 per share -- authorized 100,000 shares, issued and outstanding 11,929.90 shares in 1995 and 11,726.80 shares in 1994........... -- 1,193 1,173 Additional paid-in capital............................. -- 145,288 141,026 Net unrealized investment gains (losses)............... 13,781 37,807 (31,838) Retained earnings...................................... 390,899 380,010 320,382 ----------- ---------- ---------- Total stockholders' equity........................... 556,020 564,298 430,743 ----------- ---------- ---------- Total liabilities and stockholders' equity....... $3,120,166 $3,090,851 $2,792,535 ----------- ---------- ---------- ----------- ---------- ----------
See accompanying notes. F-4 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------ ------------------------------- 1996 1995 1995 1994 1993 ----------- ----------- --------- --------- --------- (UNAUDITED) (UNAUDITED) Revenues: Universal life and annuity product charges.................................... $ 11,317 $ 10,632 $ 43,722 $ 42,734 $ 26,500 Traditional life insurance premiums......... 19,131 18,227 75,450 72,222 46,050 Accident and health premiums................ 2,652 2,383 10,161 (1,956) 46,437 Property-casualty premiums.................. 4,298 4,323 18,709 17,778 16,937 Net investment income....................... 52,428 48,037 223,108 178,834 138,320 Realized gains (losses) on investments...... (2,098) 1,850 5,883 9,448 3,967 Other income................................ 5,592 7,138 28,952 30,825 25,251 ----------- ----------- --------- --------- --------- Total revenues............................ 93,320 92,590 405,985 349,885 303,462 Benefits and expenses: Universal life and annuity benefits......... 30,353 27,071 112,125 97,736 73,305 Traditional life insurance and accident and health benefits............................ 12,096 12,715 49,316 48,345 66,028 Increase in traditional and accident and health future policy benefits.............. 5,294 4,462 22,976 12,084 14,428 Distributions to participating policyholders.............................. 6,475 6,605 25,747 24,402 22,967 Losses and loss adjustment expenses incurred on property-casualty policies.............. 3,211 2,974 13,621 13,441 13,948 Underwriting, acquisition and insurance expenses................................... 15,780 20,473 73,431 74,652 56,632 Interest expense............................ 227 356 1,007 2,108 2,303 Other expenses.............................. 3,927 4,000 17,315 17,244 14,920 ----------- ----------- --------- --------- --------- Total benefits and expenses............... 77,363 78,656 315,538 290,012 264,531 ----------- ----------- --------- --------- --------- 15,957 13,934 90,447 59,873 38,931 Income taxes.................................. (5,689) (4,848) (32,070) (22,462) (14,439) Minority interest in earnings of subsidiaries................................. (268) (276) (351) (376) (2,417) Equity income (loss), net of related income taxes........................................ 889 233 1,602 (1,448) 630 ----------- ----------- --------- --------- --------- Income from continuing operations............. 10,889 9,043 59,628 35,587 22,705 Discontinued operations: Loss from cable television operations, net of related income taxes.................... -- -- -- -- (2,902) Gain on disposal of cable television operations, net of related income taxes.... -- -- -- 6,479 -- ----------- ----------- --------- --------- --------- Net income.................................... $ 10,889 $ 9,043 $ 59,628 $ 42,066 $ 19,803 ----------- ----------- --------- --------- --------- ----------- ----------- --------- --------- --------- Net income (loss) per common share (after giving effect for 2,000-for-1 stock split): Continuing operations....................... $0.46 $0.39 $2.53 $1.52 $1.26 Discontinued operations..................... -- -- -- .28 (.16) ----------- ----------- --------- --------- --------- Net income per common share................... $0.46 $0.39 $2.53 $1.80 $1.10 ----------- ----------- --------- --------- --------- ----------- ----------- --------- --------- ---------
See accompanying notes. F-5 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
NET UNREALIZED CLASS A CLASS B ADDITIONAL INVESTMENT TOTAL COMMON COMMON COMMON PAID-IN GAINS RETAINED STOCKHOLDERS' STOCK STOCK STOCK CAPITAL (LOSSES) EARNINGS EQUITY ----------- ----------- ----------- ----------- ----------- ----------- -------------- Balance at January 1, 1993.................... $ -- $ -- $ 1,105 $ 18 $ 2,946 $ 258,513 $ 262,582 Issuance of 1,783.48 shares of common stock in exchange for 99.5% of common stock of Rural Security Life Company............... -- -- 89 27,012 -- -- 27,101 Net income for 1993.... -- -- -- -- -- 19,803 19,803 Change in net unrealized investment gains/losses.......... -- -- -- -- 2,791 -- 2,791 ----------- ----------- ----------- ----------- ----------- ----------- -------------- Balance at December 31, 1993.................... -- -- 1,194 27,030 5,737 278,316 312,277 Issuance of 9,146.91 shares of common stock of FBL Financial Group, Inc. upon formation, in exchange for outstanding common stock of Farm Bureau Life Insurance Company............... -- -- (279) 279 -- -- -- Issuance of 551.89 shares of common stock in exchange for minority interest in FBL Insurance Company and Rural Security Life Insurance Company............... -- -- 55 24,647 -- -- 24,702 Issuance of 1,969.00 shares of common stock in exchange for all outstanding common stock of Western Farm Bureau Life Insurance Company............... -- -- 197 87,933 -- -- 88,130 Cumulative effect on prior years (to December 31, 1993) of change in method of accounting for fixed maturity securities... -- -- -- -- 38,913 -- 38,913 Net income for 1994.... -- -- -- -- -- 42,066 42,066 Change in net unrealized investment gains/losses.......... -- -- -- -- (76,488) -- (76,488) Issuance of 59.00 shares of common stock for cash.............. -- -- 6 1,137 -- -- 1,143 ----------- ----------- ----------- ----------- ----------- ----------- -------------- Balance at December 31, 1994.................... -- -- 1,173 141,026 (31,838) 320,382 430,743 Net income for 1995.... -- -- -- -- -- 59,628 59,628 Change in net unrealized investment gains/losses.......... -- -- -- -- 69,645 -- 69,645 Issuance of 200.00 shares of common stock for cash.............. -- -- 20 4,169 -- -- 4,189 Issuance of 3.10 shares of common stock in exchange for minority interest in Utah Farm Bureau Insurance Company............... -- -- -- 93 -- -- 93 ----------- ----------- ----------- ----------- ----------- ----------- -------------- Balance at December 31, 1995.................... -- -- 1,193 145,288 37,807 380,010 564,298 Recapitalization, conversion of common stock................. 139,157 7,324 (1,193) (145,288) -- -- -- Net income for three month period ended March 31, 1996........ -- -- -- -- -- 10,889 10,889 Change in net unrealized investment gains/losses.......... -- -- -- -- (24,026) -- (24,026) Adjustment resulting from capital transaction of equity investee.............. 4,616 243 -- -- -- -- 4,859 ----------- ----------- ----------- ----------- ----------- ----------- -------------- Balance at March 31, 1996 (unaudited)............. $ 143,773 $ 7,567 $ -- $ -- $ 13,781 $ 390,899 $ 556,020 ----------- ----------- ----------- ----------- ----------- ----------- -------------- ----------- ----------- ----------- ----------- ----------- ----------- --------------
Note: Share amounts set forth in the above statement have not been restated to reflect the 2,000-for-1 stock split approved by the Company's Board of Directors on March 12, 1996 and effective March 19, 1996. See accompanying notes. F-6 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 THREE MONTHS ENDED MARCH ----------- ----------- ----------- 31, -------------------------- 1996 1995 ------------ ------------ (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES Continuing operations: Net income........................................ $ 10,889 $ 9,043 $ 59,628 $ 35,587 $ 22,705 Adjustments to reconcile net income to net cash provided by continuing operations: Adjustments related to interest sensitive products: Interest credited to account balances......... 26,353 23,020 97,244 89,899 67,806 Charges for mortality and administration...... (11,525) (10,886) (44,462) (43,912) (27,876) Deferral of unearned revenues................. 424 459 1,696 2,058 1,933 Amortization of unearned revenue reserve...... (216) (205) (956) (880) (557) Provision for depreciation and amortization..... 3,920 3,863 15,040 19,727 9,411 Net gains and losses related to investments held in inventory................................... (1,831) (8) (25,801) 206 (74) Realized (gains) losses on investments.......... 2,098 (1,850) (5,883) (9,448) (3,967) Increase in traditional, accident and health and property-casualty benefit accruals............. 6,879 5,297 23,810 16,554 20,032 Policy acquisition costs deferred............... (6,998) (5,705) (25,918) (24,186) (17,524) Amortization of deferred policy acquisition costs.......................................... 2,685 2,641 10,727 10,066 6,023 Provision for deferred income taxes............. 1,147 45 13,914 6,287 (3,408) Other........................................... 3,270 16,097 (12,646) (7,949) 11,619 ------------ ------------ ----------- ----------- ----------- Net cash provided by continuing operations.......... 37,095 41,811 106,393 94,009 86,123 Discontinued operations: Net income (loss)................................. -- -- -- 6,479 (2,902) Adjustments to reconcile net income (loss) to net cash provided by (used in) discontinued operations....................................... -- -- -- (10,293) 6,286 ------------ ------------ ----------- ----------- ----------- Net cash provided by (used in) discontinued operations......................................... -- -- -- (3,814) 3,384 ------------ ------------ ----------- ----------- ----------- Net cash provided by operating activities........... 37,095 41,811 106,393 90,195 89,507 INVESTING ACTIVITIES Sale, maturity or repayment of investments: Fixed maturities -- held for investment........... 6,920 3,972 20,890 43,528 393,476 Fixed maturities -- available for sale............ 72,811 87,235 262,000 380,849 -- Equity securities................................. 9,973 3,491 30,674 58,317 29,831 Held in inventory................................. 6,815 1,150 8,045 7,106 103 Mortgage loans on real estate..................... 8,028 7,392 23,774 32,816 15,970 Investment real estate............................ 11 386 5,751 2,240 5,441 Policy loans...................................... 6,961 7,551 24,798 21,448 18,710 Other long-term investments....................... 319 646 3,564 31,608 6,796 Short-term investments -- net..................... 13,276 54,886 69,622 -- -- ------------ ------------ ----------- ----------- ----------- 125,114 166,709 449,118 577,912 470,327
F-7 FBL FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- THREE MONTHS ENDED MARCH 31, -------------------------- 1996 1995 ------------ ------------ (UNAUDITED) (UNAUDITED) INVESTING ACTIVITIES (CONTINUED) Acquisition of investments: Fixed maturities -- held for investment........... $ (44,630) $ (47,339) $ (170,926) $ (207,060) $ (490,113) Fixed maturities -- available for sale............ (99,363) (140,734) (334,270) (344,866) -- Equity securities................................. (17,395) (7,177) (30,742) (39,077) (22,688) Held in inventory................................. (4,398) (2,011) (13,618) (6,698) (4,036) Mortgage loans on real estate..................... (9,085) (5,040) (23,456) (13,705) (72,581) Investment real estate............................ (1,370) (704) (8,073) (710) (204) Policy loans...................................... (7,487) (8,395) (27,057) (24,377) (17,845) Other long-term investments....................... (3) -- (14) (13,654) -- Short-term investments -- net..................... -- -- -- (47,261) (22,907) ------------ ------------ ----------- ----------- ----------- (183,731) (211,400) (608,156) (697,408) (630,374) Proceeds from disposal, repayments of advances and other distributions from entities accounted for by the equity method.................................. 12,507 4,531 32,193 45,184 28,281 Investments in and advances to entities accounted for by the equity method........................... (4,485) (11,257) (21,463) (39,418) (26,247) Net cash received (paid) for acquisitions........... -- -- -- (3,065) 272 Other............................................... (3,339) (2,776) (5,579) (5,321) (8,499) Investing activities of discontinued operations..... -- -- -- 29,539 (539) ------------ ------------ ----------- ----------- ----------- Net cash used in investing activities............... (53,934) (54,193) (153,887) (92,577) (166,779) FINANCING ACTIVITIES Receipts from interest sensitive products credited to policyholder account balances................... 66,889 58,283 198,031 219,501 179,480 Return of policyholder account balances on interest sensitive products................................. (48,954) (44,402) (148,047) (157,894) (110,959) Proceeds from short-term borrowings................. -- 8 8 8,288 6,806 Repayments of short-term borrowings................. -- (6,396) (6,396) (10,379) (6,198) Proceeds from long-term debt........................ -- -- -- -- 21,122 Repayments of long-term debt........................ (828) (1,074) (5,915) (12,119) (4,255) Distributions to minority interests................. (268) -- (339) (380) -- Issuance of common stock for cash................... -- -- 4,189 1,143 -- Financing activities of discontinued operations..... -- -- -- (44,000) (5,000) ------------ ------------ ----------- ----------- ----------- Net cash provided by financing activities........... 16,839 6,419 41,531 4,160 80,996 ------------ ------------ ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents.... -- (5,963) (5,963) 1,778 3,724 Cash and cash equivalents at beginning of period.... -- 5,963 5,963 4,185 461 ------------ ------------ ----------- ----------- ----------- Cash and cash equivalents at end of period........ $ -- $ -- $ -- $ 5,963 $ 4,185 ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid (received) during the period for: Interest.......................................... $ 155 $ 356 $ 1,086 $ 2,163 $ 2,766 Income taxes...................................... (444) 586 23,032 26,451 14,600
See accompanying notes. F-8 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 1995 1. SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS FBL Financial Group, Inc. (the Company) was incorporated in the State of Iowa on October 13, 1993. The Company, through its principal subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and Western Farm Bureau Life Insurance Company (Western Life), operates predominantly in the individual life and annuity area of the life insurance industry. The Company markets its products to Farm Bureau members and other individuals and businesses in 15 midwestern and western states. Farm Bureau Life has several subsidiaries which support various functional areas of Farm Bureau Life, Western Life and other affiliates, including investment advisory, marketing and distribution, and leasing. As these functions relate directly to the primary business activities, these entities have been included in the life insurance business segment. The Company also owns Utah Farm Bureau Insurance Company (Utah Insurance), a property-casualty insurance company providing individual and small business coverages. The operations of Utah Insurance have been treated as a separate segment for financial reporting purposes. ORGANIZATION AND BASIS OF PRESENTATION As more fully described in Note 3, effective January 1, 1994, the Company acquired 100% of the outstanding common stock of Farm Bureau Life in a transaction treated as a reorganization, and Western Life in a transaction treated as a purchase, in exchange for equivalent shares of newly issued common stock of the Company. Additionally, the Company acquired the minority interests in Farm Bureau Life's subsidiaries, FBL Insurance Company and Rural Security Life Insurance Company (Rural Security Life) for equivalent shares of newly issued common stock of the Company. The minority interests were contributed to Farm Bureau Life; and FBL Insurance Company and Rural Security Life were subsequently merged into Farm Bureau Life and liquidated. At December 31, 1995, the Iowa Farm Bureau Federation owns 63.9% of the outstanding common stock of the Company. 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 period. Actual results could differ from those estimates. 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. INTERIM FINANCIAL INFOMATION The consolidated financial statements as of March 31, 1996 and for the three month periods ended March 31, 1996 and 1995 and related disclosures in these notes have not been audited. The interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals unless noted otherwise herein) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. F-9 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONSOLIDATION The consolidated financial statements include the Company and its direct and indirect subsidiaries. All significant intercompany transactions have been eliminated. INVESTMENTS FIXED MATURITIES AND EQUITY SECURITIES Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Prior to the adoption of SFAS No. 115, all of the Company's fixed maturity securities were classified as "held for investment". Pursuant to SFAS No. 115, fixed maturity securities (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, net of certain adjustments (see Note 4). 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 a prepayment assumption to estimate the securities' expected lives. Equity securities (common and non-redeemable preferred stocks) are reported at market. The change in unrealized appreciation and depreciation of marketable equity securities (net of related deferred income taxes, if any) is included directly in stockholders' equity. HELD IN INVENTORY The Company has certain subsidiaries involved as broker-dealers and another as a venture capital investment company. In accordance with accounting practices for these specialized industries, marketable securities 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's investments held in inventory portfolio includes securities with carrying values of $18,574 and $13,735 at December 31, 1995 and 1994, respectively, for which market quotations are not readily available and for which fair value is determined in good faith by the Board of Directors of FBL Ventures of South Dakota, Inc., the venture capital investment company subsidiary holding the securities. In determining fair value for securities not readily marketable, investments are initially stated at cost until significant subsequent events require a change in valuation. Among the factors considered by the Board of Directors in determining fair value of investments are the cost of the investment, developments since the acquisition of the investment, the sale price of recently issued securities, the financial condition and operating results of the issuer, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded and other factors generally pertinent to the valuation of investments. The Board of Directors, in making its evaluation, has relied on financial data of investees provided by the management of the investee companies. On occasion, transfers will be made to or from the venture capital investment company. Such transfers typically occur when a previously private issue goes public, or when a private equity security is purchased or otherwise received by another member of the consolidated group. The Company records transfers to or from F-10 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the venture capital investment company at fair value at the date of transfer, re-establishing a new cost basis for the security. During the year ended December 31, 1995, two securities with a total fair value of $27,630 were transferred out of the venture capital investment company. During the year ended December 31, 1994, two securities with a fair value of $1,397 were transferred to the venture capital investment company. A realized gain (recognized in net investment income) of $24,628 was recognized on the 1995 transfers, although neither transfer had an impact on net income, and no realized gains or losses were recognized on the 1994 transfers. It is anticipated that during 1996 all or substantially all of the investments of the venture capital investment company will be sold to a subsidiary of Farm Bureau Mutual Insurance Company, an affiliate, at their carrying value ($19.4 million at March 31, 1996), which management believes approximates fair value. 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 has been 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), the loan's observable market price, 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 charged or credited to income. INVESTMENT REAL ESTATE Investment real estate, which includes real estate acquired through foreclosure, is reported at cost less allowances for depreciation. Real estate acquired through foreclosure, or in-substance foreclosure, 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 restored should the fair value of the property increase. Changes in this valuation allowance are charged or credited to income. At December 31, 1995 and 1994, the Company had valuation allowances totaling $180 and $100, respectively. OTHER INVESTMENTS Policy loans are reported at unpaid principal. Other long-term investments (consisting principally of Title One home improvement loans) and short-term investments are reported at cost adjusted for amortization of premiums and accrual of discounts. Investments accounted for by the equity method include investments in, and advances to, various joint ventures and partnerships and are reported as securities and indebtedness of related parties. 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 and charged to income. Realized gains and losses on sales are determined on the basis of specific identification of F-11 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. MARKET VALUES Market values, as reported herein, of publicly traded fixed maturity securities are as reported by an independent pricing service. Market values of conventional mortgage-backed securities not actively traded in a liquid market are estimated using a matrix calculation assuming a spread over U. S. Treasury bonds based upon the expected average lives of the securities. Market values of private placement bonds are estimated using a matrix that assumes 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, at values which are representative of the market values of issues of comparable yield and quality. CASH AND CASH EQUIVALENTS For purposes of the consolidated statement 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 is an asset that arose with the acquisition of Western Life and Rural Security Life discussed in Note 3. 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 6.50% to 6.79%. For participating traditional life insurance and universal life insurance and investment products, 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. The deferred policy acquisition costs for property-casualty insurance are amortized over the effective period of the related insurance policies; deferred policy acquisition costs for these policies are expensed when such costs are deemed not to be recoverable from the related unearned premiums and any related investment income. PROPERTY AND EQUIPMENT Property and equipment are reported at cost less allowances for depreciation. Depreciation expense is computed primarily using the straight-line method over the estimated useful lives of the assets. 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 the years ended December 31, 1995, 1994 or 1993. F-12 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 2.0% to 6.0%. 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 45% of receipts from policyholders during the year ended December 31, 1995 and represented 21% of life insurance inforce at December 31, 1995. The liabilities for future policy benefits for accident and health insurance are computed using a net level or two-year preliminary term 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 universal life insurance and investment 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 universal life and investment products ranged from 4.00% to 7.50% in 1995, 4.00% to 7.25% in 1994, and 4.00% to 8.25% in 1993. 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 universal life 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. RESERVES AND UNEARNED PREMIUMS ON PROPERTY-CASUALTY POLICIES Unpaid property-casualty losses and loss adjustment expenses represent the estimated liability for reported claims plus those incurred but not yet reported and the related estimated adjustment expenses. The reserve for unpaid claims and related adjustment expenses is determined using case-basis evaluations and statistical analyses and represents estimates of the ultimate cost of all unpaid losses incurred through December 31 of each year. Although considerable variability is inherent in such estimates, management believes that the reserve for unpaid losses and related loss adjustment expenses is adequate. The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current operations and are accounted for as changes in estimates. Salvage and subrogation recoverables are estimated using statistical analysis. The salvage and subrogation recoverable amounts, which have been offset against reserves and unearned premiums on property-casualty policies in the accompanying consolidated balance sheets, were $716 and $718 at December 31, 1995 and 1994, respectively. Property-casualty insurance unearned premiums are calculated on a pro rata basis based upon the unexpired terms of the underlying policies. 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. F-13 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 investment risk. The separate account assets and liabilities are carried at fair value. Revenues and expenses related to the separate account assets and liabilities, to the extent of benefits paid or provided to the separate account policyholders, are excluded from the amounts reported in the accompanying consolidated statements of income. RECOGNITION OF PREMIUM REVENUES AND COSTS 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, losses and expenses are reported net of reinsurance ceded. Revenues for universal life and annuity 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 during the period. Expenses related to these products include interest credited to policyholder account balances and benefit claims incurred in excess of policyholder account balances. Property-casualty insurance premiums are recognized pro rata over the terms of the policies. All insurance-related revenues and costs are reported net of reinsurance. 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. The Company's property-casualty operations assume and cede reinsurance, principally as a participant in a reinsurance pooling agreement with two affiliates. The Company's contracts are prospective and the cost of insurance is amortized over the contract periods in proportion to the amount of insurance protection provided. OTHER INCOME AND OTHER EXPENSES Other income and other expenses include revenue and expenses generated by the Company's various non-insurance subsidiaries for services related to investment advisory, marketing and distribution, and leasing. 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 (including Farm Bureau Life and Western Life) have been classified as other income. During the years ended December 31, 1995, 1994 and 1993, revenues of the insurance subsidiaries included as other income aggregated $9,814, $12,626 and $9,774 , respectively. NET INCOME PER SHARE OF COMMON STOCK Net income per share is based on the weighted average number of shares of common stock outstanding during each period (three months ended March 31, 1996 - 23,859,800; three months ended March 31, 1995 - 23,453,600; 1995 - 23,591,100; 1994 - 23,394,260; and 1993 -17,956,880). The weighted average number of shares and amounts reported for earnings per share for the three month period ended March 31, 1995 and for the years ended December 31, 1995, 1994 and 1993 have been restated to give retroactive effect to a 2,000-for-1 common stock split resulting from the recapitalization (see Note 3), approved by the Company's F-14 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Board of Directors on March 12, 1996 and effective on March 19, 1996. In addition, such shares have been adjusted to treat the shares of common stock issued in connection with the acquisition of Farm Bureau Life (treated as a reorganization) as equivalent shares issued throughout the periods presented. 2. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards 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 sheet, for which it is practicable to estimate that 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. SFAS 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 values obtained from independent pricing services or, in the case of private placements, are estimated by discounting the expected future cash flows using current market rates applicable to the coupon rate, credit, and maturity of the investments. 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 issues of comparable yield and quality. HELD IN INVENTORY: The fair values for investments held in inventory 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. MORTGAGE LOANS ON REAL ESTATE: Fair values are estimated by discounting expected cash flows using interest rates currently being offered for similar loans. POLICY LOANS: The Company has not determined the fair values associated with its policy loans. Policy loans with a carrying value of $26,221 and $23,524 at December 31, 1995 and 1994, respectively, provide for variable interest rates. Management believes any differences between the Company's carrying value and the fair values of its other policy loans are immaterial to the Company's F-15 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) financial position and, accordingly, the cost to provide such disclosure is not worth the benefit to be derived. At December 31, 1995 and 1994, amounts outstanding related to policy loans, summarized by interest rates, are as follows:
DECEMBER 31 ---------------------- RATE 1995 1994 - ---------------- ---------- ---------- 3.50% - 4.99% $ -- $ 734 5.00% - 5.99% 39,158 41,712 6.00% - 6.99% 18,084 17,859 7.00% - 7.99% 23,580 42,848 8.00% - 8.99% 35,285 10,695 ---------- ---------- $ 116,107 $ 113,848 ---------- ---------- ---------- ----------
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the consolidated balance sheet for these instruments approximate their fair values. ASSETS AND LIABILITIES OF SEPARATE ACCOUNTS: Separate account assets and liabilities are reported at estimated fair value in the Company's consolidated balance sheet. 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 and supplementary contracts), are stated at the cost the Company would incur to extinguish the liability; i.e., the cash surrender value. The Company is not required to estimate the fair value of its liabilities under other contracts. RESERVES AND UNEARNED PREMIUMS ON PROPERTY-CASUALTY POLICIES: The fair value of reserves and unearned premiums on property-casualty policies approximate carrying value as the Company's policies are substantially all short-duration contracts. SHORT-TERM BORROWINGS 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. DEPOSIT ADMINISTRATION FUNDS: The Company administers the funded portion of certain employee benefit plans of its affiliates through deposit administration funds. The fair value of the deposit administration funds attributed to the Agent's Career Incentive Plan are stated at amounts which are estimated to be currently vested, based on service and production criteria. Other funds are stated at carrying value. OFF-BALANCE SHEET INSTRUMENTS: The Company has entered into lines of credit, both as a lender and borrower. The Company has not attempted to place fair values on these obligations as management believes losses have already been accrued to the extent that they eventually are expected to be realized. F-16 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) 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 of Financial Accounting Standards No. 107:
DECEMBER 31 ------------------------------------------------------ 1995 1994 -------------------------- -------------------------- CARRYING CARRYING VALUE FAIR VALUE VALUE FAIR VALUE ------------ ------------ ------------ ------------ ASSETS Fixed maturities: Held for investment.......................... $ 683,149 $ 712,476 $ 532,376 $ 500,849 Available for sale........................... 1,393,060 1,393,060 1,200,235 1,200,235 Equity securities.............................. 83,714 83,714 46,701 46,701 Held in inventory.............................. 21,913 21,913 18,169 18,169 Mortgage loans on real estate.................. 266,623 281,900 272,537 274,924 Policy loans................................... 116,107 116,107 113,848 113,848 Cash and short-term investments................ 50,061 50,061 125,646 125,646 Assets held in separate accounts............... 44,789 44,789 28,043 28,043 LIABILITIES Future policy benefits......................... $ 885,119 $ 854,928 $ 834,229 $ 805,948 Reserves and unearned premiums on property-casualty policies.................... 45,890 45,890 44,482 44,482 Other policyholders' funds..................... 200,348 200,348 185,497 185,497 Short-term borrowings.......................... -- -- 6,388 6,388 Long-term debt................................. 12,604 12,490 18,519 17,179 Deposit administration funds................... 38,119 35,088 29,829 27,266 Liabilities related to separate accounts....... 44,789 44,789 28,043 28,043
3. REORGANIZATION AND RECAPITALIZATION REORGANIZATION On February 26, 1993, the Company entered into a stock exchange agreement with Rural Mutual Insurance Company. Under terms of the agreement, the Company acquired 99.5% of the issued and outstanding common stock of Rural Security Life in exchange for newly issued common stock of the Company. The transaction was accounted for as a purchase and the purchase price of $27,101 (based upon the appraised value of the Company's stock at the time of purchase) was allocated to the assets and liabilities acquired. This allocation resulted in goodwill of approximately $6,988, which is being amortized over 20 years. In January 1994, the Boards of Directors of Farm Bureau Life and Western Life approved an agreement, pursuant to which, effective January 1, 1994, the acquisition of Western Life was consummated through Farm Bureau Multi-State Services, Inc., a holding company which was incorporated in the State of Iowa on October 13, 1993. In March, 1996, Farm Bureau Multi-State Services, Inc. was renamed to FBL Financial Group, Inc. Under the agreement, 100% of the common stock of Farm Bureau Life and Western Life were exchanged for stock in the holding company. In addition, in 1994, the minority interests of FBL Insurance Company and Rural Security Life were exchanged for equivalent value in the holding company and, in 1995, FBL Insurance Company and Rural Security Life were liquidated. Goodwill associated with Rural Security Life remains attributable to the still existing operations in Wisconsin which include a license to do business in F-17 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 3. REORGANIZATION AND RECAPITALIZATION (CONTINUED) Wisconsin, an active agency force, customer lists, a marketing relationship with the Wisconsin Farm Bureau Federation and an exclusive use of the Farm Bureau trademark in Wisconsin in connection with life insurance and annuity products. At the effective date of the aforementioned affiliation agreement, Farm Bureau Life had assets of $2,142,849 and Western Life had assets of $549,993. Subsequent to the agreement, many administrative functions of Western Life were assumed by, and consolidated with those of, Farm Bureau Life. Additionally, the former majority owners of Farm Bureau Life continue to be majority owners of the Company. As a result, the Company has treated the issuance of holding company stock in exchange for the stock of Farm Bureau Life as a reorganization for accounting purposes, thereby applying the principles of the pooling method for business combinations. The issuance of holding company stock in exchange for the stock of Western Life has been accounted for as a purchase and the purchase price of $88,130, based upon the appraised value of the Company's stock at the time of purchase, was allocated to the assets and liabilities acquired. Additionally, the issuance of holding company stock in exchange for the minority interests of FBL Insurance Company and Rural Security Life has been accounted for as a purchase and the purchase price of $24,702, based upon the appraised value of the Company's stock at the time of purchase, was allocated to the assets and liabilities acquired. These allocations resulted in goodwill of approximately $4,419, which is being amortized over 20 years. In December 1995, the .83% minority interest in Utah Insurance was exchanged for equivalent value in the holding company in a transaction that was accounted for as a purchase. RECAPITALIZATION SUBSEQUENT TO DECEMBER 31, 1995 On March 12, 1996, the Company's shareholders 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. F-18 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share data) (3) REORGANIZATION AND RECAPITALIZATION (CONTINUED) In 1996, the Company designated 5,000,000 shares of its preferred stock as Series A Preferred Stock and offered such shares to existing stockholders in exchange for 5,000,000 shares of Class A Common Stock. Each share of Series A Preferred Stock has a liquidation preference of $20 and voting rights similar to that of Class A Common Stock. The Series A Preferred Stock pays cumulative annual cash dividends of $1 per share, payable quarterly in cash, and is redeemable by the Company at $20 per share plus unpaid dividends if the stock ceases to be beneficially owned by a Farm Bureau organization. The Iowa Farm Bureau Federation has guaranteed that all 5,000,000 shares will be exchanged subject to the sale of approximately 4,000,000 shares of Class A Common Stock by certain stockholders through an initial public offering that is expected to be completed during 1996. Holders of the Class A Common Stock and Series A Preferred Stock, together as a group, and Class B Common Stock are entitled to vote as separate classes on all issues, except that only holders of the Class A Common Stock and Series A 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 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. 4. INVESTMENT OPERATIONS FIXED MATURITIES, EQUITY SECURITIES AND INVESTMENTS HELD IN INVENTORY The following tables contain amortized cost and market value information on fixed maturities (bonds and redeemable preferred stocks) and equity securities (common and nonredeemable preferred stocks) at December 31, 1995 and 1994:
HELD FOR INVESTMENT ---------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ------------ ----------- ----------- ------------ DECEMBER 31, 1995 Bonds: United States Government and agencies -- mortgage-backed securities.............................................. $ 220,768 $ 11,612 $ (603) $ 231,777 Industrial and miscellaneous: Mortgage-backed securities............................. 457,381 20,336 (2,302) 475,415 Other.................................................. 5,000 284 -- 5,284 ------------ ----------- ----------- ------------ Total fixed maturities..................................... $ 683,149 $ 32,232 $ (2,905) $ 712,476 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
F-19 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 4. INVESTMENT OPERATIONS (CONTINUED)
AVAILABLE FOR SALE ---------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ------------ ----------- ----------- ------------ DECEMBER 31, 1995 Bonds: United States Government and agencies: Mortgage-backed securities............................. $ 94,766 $ 4,510 $ (540) $ 98,736 Other.................................................. 181,716 3,612 (651) 184,677 State, municipal and other governments................... 28,496 1,268 (332) 29,432 Public utilities......................................... 172,672 9,593 (1,252) 181,013 Industrial and miscellaneous: Mortgage and asset-backed securities................... 80,821 4,922 (383) 85,360 Other.................................................. 730,851 58,746 (11,821) 777,776 Redeemable preferred stock................................. 36,286 877 (1,097) 36,066 ------------ ----------- ----------- ------------ Total fixed maturities..................................... $ 1,325,608 $ 83,528 $ (16,076) $ 1,393,060 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------ Equity securities.......................................... $ 77,038 $ 7,306 $ (630) $ 83,714 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------ HELD FOR INVESTMENT ---------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ------------ ----------- ----------- ------------ DECEMBER 31, 1994 Bonds: United States Government and agencies -- mortgage-backed securities.............................................. $ 198,724 $ 809 $ (8,066) $ 191,467 Industrial and miscellaneous -- mortgage-backed securities.............................. 333,652 922 (25,192) 309,382 ------------ ----------- ----------- ------------ Total fixed maturities..................................... $ 532,376 $ 1,731 $ (33,258) $ 500,849 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------ AVAILABLE FOR SALE ---------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ------------ ----------- ----------- ------------ DECEMBER 31, 1994 Bonds: United States Government and agencies: Mortgage-backed securities............................. $ 83,259 $ 2,583 $ (1,850) $ 83,992 Other.................................................. 173,592 259 (14,043) 159,808 State, municipal and other governments................... 36,852 303 (2,233) 34,922 Public utilities......................................... 151,356 1,466 (9,856) 142,966 Industrial and miscellaneous: Mortgage and asset-backed securities................... 50,052 1 (395) 49,658 Other.................................................. 713,607 13,262 (38,799) 688,070 Redeemable preferred stock................................. 43,471 893 (3,545) 40,819 ------------ ----------- ----------- ------------ Total fixed maturities..................................... $ 1,252,189 $ 18,767 $ (70,721) $ 1,200,235 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------ Equity securities.......................................... $ 49,985 $ 4,226 $ (7,510) $ 46,701 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
F-20 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 4. INVESTMENT OPERATIONS (CONTINUED) 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, 1995, 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 -------------------------- AMORTIZED MARKET AMORTIZED ESTIMATED COST VALUE COST MARKET VALUE ----------- ----------- ------------ ------------ Due in one year or less..................................... $ -- $ -- $ 67,136 $ 66,886 Due after one year through five years....................... -- -- 176,585 181,647 Due after five years through ten years...................... -- -- 275,055 287,838 Due after ten years......................................... 5,000 5,284 594,959 636,527 ----------- ----------- ------------ ------------ 5,000 5,284 1,113,735 1,172,898 Mortgage and asset-backed securities........................ 678,149 707,192 175,587 184,096 Redeemable preferred stocks................................. -- -- 36,286 36,066 ----------- ----------- ------------ ------------ $ 683,149 $ 712,476 $ 1,325,608 $ 1,393,060 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------
The unrealized appreciation or depreciation on fixed maturity and equity securities available for sale are reported as a separate component of stockholders' equity, reduced by 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, a provision for deferred income taxes and amounts attributable to minority interests in subsidiaries. Net unrealized investment gains (losses) as reported were comprised of the following:
DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- Unrealized appreciation (depreciation) on fixed maturity and equity securities available for sale............................................................. $ 74,128 $ (55,238) Adjustments for assumed changes in amortization pattern of: Deferred policy acquisition costs............................................. (12,700) 5,079 Value of insurance in force acquired.......................................... (4,451) 1,337 Unearned revenue reserve...................................................... 1,189 (163) Provision for deferred income taxes............................................. (20,359) 17,144 Amounts attributable to minority interest in subsidiaries....................... -- 3 ---------- ---------- Net unrealized investment gains (losses)........................................ $ 37,807 $ (31,838) ---------- ---------- ---------- ----------
Amortized cost of securities held in inventory was $21,555 and $17,731 at December 31, 1995 and 1994, respectively. Net unrealized appreciation on securities held in inventory as of December 31, 1995 and 1994, included gross unrealized gains of $1,613 and $1,719 and gross unrealized losses of $1,255 and $1,281, respectively. MORTGAGE LOANS ON REAL ESTATE The Company's mortgage loan portfolio consists principally of commercial mortgage loans. The Company's lending policies establish limits on the amount that can be loaned to one borrower and require F-21 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 4. INVESTMENT OPERATIONS (CONTINUED) diversification by geographic location and collateral type. Regions in which at least 20% of the Company's mortgage loan portfolio is invested during the years presented include Mountain (27% in 1995 and 1994), which includes Arizona, Colorado, Idaho, New Mexico, Nevada, Utah and Wyoming; Pacific (22% in 1995 and 19% in 1994), which includes California and Oregon; and West South Central (19% in 1995 and 22% in 1994) which includes Texas and Oklahoma. Mortgage loans on real estate have also been analyzed during the years presented by collateral types with retail facilities (34% in 1995, 35% in 1994) and office buildings (39% in 1995, 32% in 1994), representing the largest holdings. The Company has also provided an allowance for possible losses against its mortgage loan portfolio. An analysis of this allowance for loan losses is as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Balance at beginning of year................................................... $ 800 $ 600 $ 600 Realized losses during year.................................................... 10 248 388 Current year chargeoffs, net of recoveries..................................... (10) (48) (388) --------- --------- --------- Balance at end of year......................................................... $ 800 $ 800 $ 600 --------- --------- --------- --------- --------- ---------
Securities and indebtedness of related parties include mortgage loans and similar advances to joint ventures and limited partnerships in which the Company maintains an equity interest. Such indebtedness aggregated $33,960 and $34,738 at December 31, 1995 and 1994, respectively. These loans and advances were made at similar interest rates and under similar terms as other mortgage loans. NET INVESTMENT INCOME Components of net investment income are as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- Fixed maturities: Held for investment.............................................. $ 50,050 $ 35,065 $ 106,897 Available for sale............................................... 108,748 101,683 -- Equity securities.................................................. 1,163 1,971 2,178 Held in inventory.................................................. 25,868 (130) 183 Mortgage loans on real estate...................................... 23,850 24,870 19,805 Investment real estate............................................. 4,970 6,385 5,090 Policy loans....................................................... 7,189 6,894 5,400 Other long-term investments........................................ 381 2,668 3,197 Short-term investments............................................. 3,344 3,919 1,202 Other.............................................................. 5,667 4,000 3,997 ---------- ---------- ---------- 231,230 187,325 147,949 Less investment expenses........................................... (8,122) (8,491) (9,629) ---------- ---------- ---------- Net investment income.............................................. $ 223,108 $ 178,834 $ 138,320 ---------- ---------- ---------- ---------- ---------- ----------
F-22 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 4. INVESTMENT OPERATIONS (CONTINUED) Investment income of investments held in inventory is comprised of:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Dividends, interest and other income..................................... $ 138 $ 205 $ 312 Net realized gain from investment transactions........................... 25,810 4,026 -- Change in unrealized appreciation/depreciation of investments............ (80) (4,361) (129) --------- --------- --------- $ 25,868 $ (130) $ 183 --------- --------- --------- --------- --------- ---------
REALIZED AND UNREALIZED GAINS AND LOSSES Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The cumulative effect of this change in accounting method was to increase stockholders' equity by $38,913, net of offsets aggregating $39,993. Realized gains (losses) and the change in unrealized appreciation/depreciation on investments (excluding amounts attributed to investments held in inventory discussed above) are summarized below:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 ---------- ----------- --------- REALIZED Fixed maturities: Held for investment............................................... $ -- $ (6) $ (287) Available for sale................................................ 5,524 2,279 -- Equity securities................................................... (647) 8,380 5,498 Mortgage loans on real estate....................................... (10) (248) (388) Investment real estate.............................................. (1) (415) (40) Other long-term investments......................................... (158) (1,773) (330) Equity investments.................................................. 1,182 2,864 -- Notes receivable.................................................... -- (1,624) -- Other............................................................... (7) (9) (486) ---------- ----------- --------- Realized gains on investments....................................... $ 5,883 $ 9,448 $ 3,967 ---------- ----------- --------- ---------- ----------- --------- UNREALIZED Fixed maturities: Held for investment............................................... $ 60,854 $ (55,973) $ 38,399 Available for sale................................................ 119,406 (130,860) -- Equity securities................................................... 9,960 (12,095) 4,329 ---------- ----------- --------- Change in unrealized appreciation/depreciation of investments....... $ 190,220 $ (198,928) $ 42,728 ---------- ----------- --------- ---------- ----------- ---------
F-23 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 4. INVESTMENT OPERATIONS (CONTINUED) An analysis of sales, maturities and principal repayments of the Company's fixed maturities portfolio for the years ended December 31, 1995, 1994, and 1993 is as follows:
GROSS GROSS AMORTIZED REALIZED REALIZED COST GAINS LOSSES PROCEEDS ----------- --------- ----------- ---------- Year ended December 31, 1995: Scheduled principal repayments and calls: Available for sale................................... $ 121,276 $ 12 $ (44) $ 121,244 Held for investment.................................. 20,890 -- -- 20,890 Sales -- available for sale............................ 134,986 7,371 (1,601) 140,756 ----------- --------- ----------- ---------- Total.............................................. $ 277,152 $ 7,383 $ (1,645) $ 282,890 ----------- --------- ----------- ---------- ----------- --------- ----------- ---------- Year ended December 31, 1994: Scheduled principal repayments and calls: Available for sale................................... $ 158,294 $ 12 $ (167) $ 158,139 Held for investment.................................. 43,534 -- (6) 43,528 Sales -- available for sale............................ 220,276 9,248 (6,814) 222,710 ----------- --------- ----------- ---------- Total.............................................. $ 422,104 $ 9,260 $ (6,987) $ 424,377 ----------- --------- ----------- ---------- ----------- --------- ----------- ---------- Year ended December 31, 1993: Scheduled principal repayments and calls............... $ 257,310 $ 5 $ (3) $ 257,312 Sales.................................................. 126,196 11,407 (1,439) 136,164 ----------- --------- ----------- ---------- Total.............................................. $ 383,506 $ 11,412 $ (1,442) $ 393,476 ----------- --------- ----------- ---------- ----------- --------- ----------- ----------
Realized losses totaling $214 and $10,257 were incurred during the years ended December 31, 1995 and 1993 as a result of writedowns for other than temporary impairment of fixed maturity securities. No such writedowns were incurred during 1994. Income taxes during the years ended December 31, 1995, 1994 and 1993 include a provision of $2,059, $3,307 and $1,388, respectively, for the tax effect of realized gains. OTHER In February 1996, an equity investee of the Company completed an initial public offering which resulted in an increase of $4,859, net of $2,617 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. As a result of the public offering, the Company's voting stock interest in the investee declined to an amount less than 20%. Accordingly, the Company discontinued the use of the equity method of accounting for this investment and has classified the investment as equity securities in the balance sheet for that portion of the investment (carrying value $8,286 at March 31, 1996) that is available for sale and as a long-term investment in the balance sheet for that portion (carrying value $9,499 and market value $46,004 at March 31, 1996) that the Company is restricted from selling within one year due to trading restrictions under applicable securities laws. At December 31, 1995, the investment had a carrying value of $4,891 and was classified as securities and indebtedness of related parties in the balance sheet. At December 31, 1995, affidavits of deposits covering bonds with a carrying value of $1,416,113, preferred stocks with a carrying value of $6,422, mortgage loans (including those made to related parties) with an unpaid balance of $253,558, real estate with a book value of $26,241 and policy loans with an unpaid F-24 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 4. INVESTMENT OPERATIONS (CONTINUED) balance of $88,526 were on deposit with state agencies to meet regulatory requirements. The Company has pledged bonds with a carrying value of $5,855 as collateral against the guarantee of a loan agreement with a bank arising from the sale of a real estate property to an unrelated party (see Note 12). At December 31, 1995, the Company had committed to provide additional funding for mortgage loans on real estate aggregating $10,475. 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, 1995, include fixed maturities -- $1,650, and mortgage loans on real estate -- $3,343. No investment in any person or its affiliates (other than bonds issued by agencies of the United States Government) exceeded 10% of stockholders' equity at December 31, 1995. 5. PROPERTY AND EQUIPMENT Property and equipment are comprised of:
DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- Land............................................................................ $ 1,191 $ 2,327 Home office building and claims center.......................................... 37,752 41,720 Leasehold improvements.......................................................... 166 166 Furniture and equipment......................................................... 66,492 64,319 ---------- ---------- 105,601 108,532 Allowances for depreciation..................................................... (45,417) (44,924) ---------- ---------- $ 60,184 $ 63,608 ---------- ---------- ---------- ----------
6. REINSURANCE AND POLICY PROVISIONS LIFE INSURANCE OPERATIONS The value of insurance in force acquired is an asset that represents the present value of future profits on business acquired. An analysis of the value of insurance in force acquired for the years ended December 31, 1995, 1994 and 1993 is as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Excluding impact on net unrealized investment gains and losses: Balance at beginning of year............................................ $ 19,571 $ 117 $ -- Additions resulting from acquisitions................................... -- 19,534 157 Accretion of interest during the year................................... 1,250 1,275 7 Amortization of asset................................................... (1,921) (1,355) (47) --------- --------- --------- Balance prior to impact on net unrealized investment gains and losses..... 18,900 19,571 117 Offset against net unrealized investment gains and losses................. (4,451) 1,337 -- --------- --------- --------- Balance at end of year.................................................... $ 14,449 $ 20,908 $ 117 --------- --------- --------- --------- --------- ---------
F-25 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 6. REINSURANCE AND POLICY PROVISIONS (CONTINUED) 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: 1996 -- $834; 1997 -- $1,005; 1998 -- $1,006; 1999 -- $1,166; 2000 -- $1,261; and thereafter, through 2023 -- $13,628. 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 $500 of coverage per individual life. The Company does not use financial or surplus relief reinsurance. At December 31, 1995, life insurance in force ceded on a consolidated basis amounted to $953,828 or approximately 5.9% of total life insurance in force. 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, and because such receivables, either individually or in the aggregate, are not material to the Company's operations. Insurance premiums and product charges have been reduced by $14,854, $23,080 and $6,973 and insurance benefits have been reduced by $8,454, $12,033 and $3,809 during the years ended December 31, 1995, 1994 and 1993, respectively, as a result of the cession agreements. The amount of reinsurance assumed is not significant. Effective January 1, 1994, Farm Bureau Life and Rural Security Life transferred all of their group accident and health business to other carriers. However, there was some run-off of the group accident and health line during 1995 and 1994. Also, effective January 1, 1994, Farm Bureau Life and Western Life entered into a 100% coinsurance agreement with an unaffiliated third party to administer the remaining individual medical business. Farm Bureau Life and Western Life effectively removed themselves from the medical business as of December 31, 1993 other than stop-loss coverages for self-insured groups of certain related companies. The Company continues to write individual disability income policies which are classified as accident and health herein. F-26 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 6. REINSURANCE AND POLICY PROVISIONS (CONTINUED) Unpaid claims on accident and health policies 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, ------------------------------- 1995 1994 1993 --------- --------- --------- Unpaid claims liability, net of related reinsurance, at beginning of year.................................................................. $ 11,982 $ 16,116 $ 9,863 Add: Provision for claims occurring in the current year, net of reinsurance......................................................... 5,522 4,169 37,786 Increase (decrease) in estimated expense for claims occurring in the prior years, net of reinsurance..................................... 2,251 (2,534) 3,437 --------- --------- --------- Incurred claim expense during the current year, net of reinsurance..... 7,773 1,635 41,223 Unpaid claims liability of companies acquired.......................... -- 4,519 5,065 Deduct expense payments for claims, net of reinsurance, occurring during: Current year......................................................... 2,306 2,589 31,614 Prior years.......................................................... 2,485 7,699 8,421 --------- --------- --------- 4,791 10,288 40,035 --------- --------- --------- Unpaid claims liability, net of related reinsurance, at end of year.... 14,964 11,982 16,116 Active life reserve.................................................... 15,871 16,502 19,162 --------- --------- --------- Net accident and health reserves....................................... 30,835 28,484 35,278 Reinsurance ceded...................................................... 1,819 7,854 1,510 --------- --------- --------- Gross accident and health reserves..................................... $ 32,654 $ 36,338 $ 36,788 --------- --------- --------- --------- --------- ---------
The Company's unpaid claims reserve was increased (decreased) by $2,251, $(2,534) and $3,437 for the years ended December 31, 1995, 1994 and 1993, respectively, for claims that occurred prior to those balance sheet dates. A substantial portion of these claims are related to the disability income block of business. The establishment of disability income reserves is dependent upon factors that attempt to project future payments based upon experience to date. These factors tend to increase as the length of the disability increases. Accordingly, deficiencies noted above resulted primarily from experience less favorable than assumed in the reserve basis. PROPERTY-CASUALTY OPERATIONS Risks are reinsured with other companies to permit the recovery of a portion of losses and loss adjustment expenses incurred and are treated (to the extent of the reinsurance) as risks for which the Company is not liable; however, the Company remains liable to the extent that reinsuring companies cannot meet their obligations under these reinsurance contracts. Utah Insurance is a participant with Farm Bureau Mutual Insurance Company and South Dakota Farm Bureau Mutual Insurance Company, another affiliate, in a reinsurance pooling agreement (the Farm Bureau Mutual pool). Under the terms of the agreement, Utah Insurance and South Dakota Farm Bureau Mutual Insurance Company cede to Farm Bureau Mutual Insurance Company all of their insurance business and F-27 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 6. REINSURANCE AND POLICY PROVISIONS (CONTINUED) assume back from Farm Bureau Mutual Insurance Company an amount equal to their participation in the pooling agreement. Also, losses, loss adjustment expenses, and other underwriting and administrative expenses are prorated among the companies on the basis of their participation in the pooling agreement. For the years ended December 31, 1995, 1994 and 1993, Utah Insurance was an 8% participant in the pool. Property-casualty premiums earned and losses and loss adjustment expenses incurred, reflect the following reinsurance amounts:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- PREMIUMS EARNED Direct premiums written............................................. $ 26,244 $ 26,427 $ 22,866 Assumed from non-affiliates......................................... 5 8 47 Ceded to non-affiliates............................................. (615) (541) (475) Assumed from Farm Bureau Mutual pool................................ 18,851 18,339 17,722 Ceded to Farm Bureau Mutual pool.................................... (25,634) (25,894) (22,438) ---------- ---------- ---------- Net premiums written................................................ 18,851 18,339 17,722 Increase in reserve for unearned premiums........................... (150) (582) (824) Increase in accrued retrospective premiums.......................... 8 21 39 ---------- ---------- ---------- Total premiums earned............................................... $ 18,709 $ 17,778 $ 16,937 ---------- ---------- ---------- ---------- ---------- ---------- LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED Direct losses and loss adjustment expenses paid..................... $ 18,532 $ 18,033 $ 16,434 Net ceded to non-affiliates......................................... 91 (175) -- Assumed from Farm Bureau Mutual pool................................ 13,030 12,933 12,866 Ceded to Farm Bureau Mutual pool.................................... (18,623) (17,858) (16,434) ---------- ---------- ---------- Net losses and loss adjustment expenses paid........................ 13,030 12,933 12,866 Increase in losses and loss adjustment expense reserves............. 591 508 1,082 ---------- ---------- ---------- Total losses and loss adjustment expenses incurred.................. $ 13,621 $ 13,441 $ 13,948 ---------- ---------- ---------- ---------- ---------- ----------
F-28 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 6. REINSURANCE AND POLICY PROVISIONS (CONTINUED) The following table provides a reconciliation of the beginning and ending reserve balances, net of reinsurance and salvage and subrogation recoverables:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- Reserves and unearned premiums (gross) on property- casualty policies, at beginning of year............................ $ 44,482 $ 40,012 $ 34,408 Less: Reinsurance recoverables on unpaid losses and loss adjustment expenses, at beginning of year................................... (16,646) (14,616) (11,931) Unearned premium reserve, at beginning of year.................... (15,654) (13,721) (11,884) ---------- ---------- ---------- Reserves for losses and loss adjustment expenses, net of related reinsurance and salvage and subrogation recoverables, at beginning of year............................................................ 12,182 11,675 10,593 Add: Provision for losses and loss adjustment expenses for claims occurring in the current year, net of reinsurance and salvage and subrogation...................................................... 14,529 14,368 14,148 Decrease in estimated losses and loss adjustment expenses for claims occurring in the prior years, net of reinsurance and salvage and subrogation.......................................... (908) (927) (200) ---------- ---------- ---------- Incurred losses and loss adjustment expenses during the current year, net of reinsurance and salvage and subrogation............... 13,621 13,441 13,948 Deduct loss and loss adjustment expense payments for claims, net of reinsurance and salvage and subrogation, occurring during: Current year...................................................... (7,678) (7,917) (7,799) Prior years....................................................... (5,351) (5,017) (5,067) ---------- ---------- ---------- (13,029) (12,934) (12,866) ---------- ---------- ---------- Reserve for losses and loss adjustment expenses, net of related reinsurance and salvage and subrogation recoverables, at end of year............................................................... 12,774 12,182 11,675 Reinsurance recoverables on unpaid losses and loss adjustment expenses, at end of year........................................... 17,210 16,646 14,616 Unearned premium reserve, at end of year............................ 15,906 15,654 13,721 ---------- ---------- ---------- Reserves and unearned premiums (gross) on property-casualty policies, at end of year........................................... $ 45,890 $ 44,482 $ 40,012 ---------- ---------- ---------- ---------- ---------- ----------
The Company has no known liability for environmental remediation exposures as of December 31, 1995 and does not expect any future impact on results of operations, liquidity or cash flow as a result of such exposures. 7. FEDERAL INCOME TAXES The Company files a consolidated federal income tax return with Utah Insurance and Farm Bureau Life and all of its majority-owned subsidiaries, except FBL Insurance Company and Rural Security Life. The Company and its direct and indirect subsidiaries included in the consolidated federal income tax return each F-29 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 7. FEDERAL INCOME TAXES (CONTINUED) 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. The Company files a separate state income tax return. Western Life, FBL Insurance Company and Rural Security Life (the latter two prior to their liquidation in 1995) file a separate federal income tax return. Deferred income taxes have been established by the Company and its subsidiaries based upon the temporary differences, the reversal of which will result in taxable or deductible amounts in future years when the related asset or liability is recovered or settled, within each entity. Income tax expenses (credits) are included in the consolidated financial statements as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 --------- ---------- --------- Taxes provided in consolidated statements of income on: Income from continuing operations before minority interest in earnings of subsidiaries and equity income (loss): Current........................................................... $ 19,230 $ 22,205 $ 17,643 Deferred.......................................................... 12,840 257 (3,204) --------- ---------- --------- 32,070 22,462 14,439 Equity income (loss): Current........................................................... (212) 309 (188) Deferred.......................................................... 1,074 (1,107) 513 --------- ---------- --------- 862 (798) 325 Discontinued operations: Current........................................................... -- (3,649) (975) Deferred.......................................................... -- 7,137 (587) --------- ---------- --------- -- 3,488 (1,562) Taxes provided in consolidated statement of changes in stockholders' equity: Cumulative effect of change in method of accounting for certain debt securities -- deferred............................................. -- 20,954 -- Amounts attributable to net unrealized investment gains and losses during year -- deferred............................................ 37,503 (41,182) 1,540 --------- ---------- --------- 37,503 (20,228) 1,540 --------- ---------- --------- $ 70,435 $ 4,924 $ 14,742 --------- ---------- --------- --------- ---------- ---------
F-30 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 7. FEDERAL INCOME TAXES (CONTINUED) The effective tax rate on income from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income (loss) is different from the prevailing federal income tax rate as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Income from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income (loss)......... $ 90,447 $ 59,873 $ 38,931 --------- --------- --------- --------- --------- --------- Income tax at federal statutory rate (35%)............................. $ 31,657 $ 20,956 $ 13,626 Tax effect (decrease) of: Tax-exempt interest income........................................... (586) (569) (563) Tax-exempt dividend income........................................... (803) (648) (546) Possible adjustments from IRS examinations........................... -- 2,766 1,786 State taxes.......................................................... 1,337 (112) (32) Other items.......................................................... 465 69 168 --------- --------- --------- Income tax expense..................................................... $ 32,070 $ 22,462 $ 14,439 --------- --------- --------- --------- --------- ---------
During 1994, Farm Bureau Life reached partial settlement with the Internal Revenue Service (IRS) for tax years 1988 through 1990 and the IRS is in the process of conducting examinations for 1991 through 1994. All tax years 1992 and prior are settled for Western Life. During the years ended December 31, 1994 and 1993, the Company provided $2,766 and $1,786, respectively, for possible adjustments from routine IRS examinations. During the year ended December 31, 1994, the Company paid $2,766 for settlement of certain items arising from the examination of prior years. Management believes that amounts provided in the income tax provision for IRS examinations are adequate to settle any adjustments raised by the IRS. The tax effect of temporary differences giving rise to the Company's deferred income tax assets and liabilities at December 31, 1995 and 1994, is as follows:
DECEMBER 31, ----------------------- 1995 1994 ----------- ---------- Deferred tax assets: Fixed maturity and equity securities............................... $ -- $ 12,057 Future policy benefits............................................. 40,193 38,980 Accrued dividends.................................................. 2,593 4,017 Accrued pension costs.............................................. 12,140 10,867 Other.............................................................. 6,499 11,152 ----------- ---------- 61,425 77,073 Deferred tax liabilities:............................................ Fixed maturity and equity securities............................... (35,533) -- Deferred policy acquisition costs.................................. (37,590) (39,660) Value of insurance in force acquired............................... (4,889) (7,318) Deferred investment gains.......................................... (9,521) (4,814) Other.............................................................. (13,537) (13,509) ----------- ---------- (101,070) (65,301) ----------- ---------- Deferred income tax asset (liability)................................ $ (39,645) $ 11,772 ----------- ---------- ----------- ----------
F-31 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 7. FEDERAL INCOME TAXES (CONTINUED) 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, 1995 was $11,148 and $740 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 $235,284 and $110,162, respectively, such excess would be subject to federal income taxes at rates then effective. Deferred income taxes of $4,161 have not been provided on amounts included in this memorandum account since the Company contemplates no action and can foresee no events that would create such a tax. Deferred income taxes were also reported on equity income (loss) and on the income (loss) from discontinued operations during these periods. These taxes arise from the recognition of income and losses differently for purposes of filing federal income tax returns than for financial reporting purposes. 8. CREDIT ARRANGEMENTS SHORT-TERM BORROWINGS As an investor in the Federal Home Loan Bank (FHLB), the Company has the right to borrow up to $48,229 from the FHLB as of March 31, 1996 and December 31, 1995. As of March 31, 1996 and December 31, 1995, the Company had no outstanding borrowings under this credit arrangement. LONG-TERM DEBT Long-term debt consists of:
DECEMBER 31, -------------------- 1995 1994 --------- --------- Lease-backed notes payable, 4.98%, scheduled principal and interest payments through December 1996, secured by rentals to be received under certain operating leases from members of consolidated group and other affiliates....................................... $ 12,516 $ 16,145 Mortgage loan payable to insurance company, 10.25%, due in monthly installments of $25 through June 1995 when balloon payment of approximately $2,250 was due.......................................... -- 2,282 Note payable to Rural Mutual Insurance Company, 10%, due through December 2000, collateralized by an interest in note receivable with a carrying value of $288......................................... 88 92 --------- --------- $ 12,604 $ 18,519 --------- --------- --------- ---------
F-32 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 8. CREDIT ARRANGEMENTS (CONTINUED) At December 31, 1995, the annual maturities of long-term debt during the next five years ending on December 31 are as follows: Years ending December 31: 1996..................................................... $ 12,521 1997..................................................... 6 1998..................................................... 6 1999..................................................... 7 2000..................................................... 64 --------- $ 12,604 --------- ---------
9. RETIREMENT AND COMPENSATION PLANS The Company participates with several other 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 required contribution to 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 $6,140, $6,171 and $5,109 for the years ended December 31, 1995, 1994 and 1993, respectively. During the year ended December 31, 1994, the Company introduced a new supplemental plan that increased the annual expense by approximately $3,193. In addition, during the year ended December 31, 1993, the Company offered early retirement to a select group of employees that resulted in a non-recurring charge of approximately $2,928. The Company provides benefits to agents of the Company and certain of its affiliates through the Agents' Career Incentive Plan. Company contributions to the plan are based upon the individual agent's earned commissions and vary based upon the overall production level and the number of years of service. Company contributions charged to expense with respect to this plan during the years ended December 31, 1995, 1994 and 1993 were $1,421, $1,648 and $1,388, respectively. The Company has established deferred compensation plans for certain key current and former employees and has certain other benefit plans which provide for retirement and other benefits. These plans have been accrued or funded as deemed appropriate by management of the Company. 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 liability for deferred compensation and other employee benefits 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. The Company and affiliates allocate postretirement benefit expense in a manner consistent with pension expense discussed above. Pension expense aggregated $132, $96 and $34 for the years ended December 31, 1995, 1994 and 1993, respectively, with respect to postretirement benefits. F-33 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 10. STOCKHOLDERS' EQUITY OF SUBSIDIARIES REDEEMABLE PREFERRED STOCK OF WESTERN LIFE Western Life is authorized to issue up to 100,000 shares of redeemable preferred stock in series at $200.00 per share and with an annual dividend rate not to exceed $30.00 per share. The preferred stock is redeemable at Western Life's option after it has been issued and outstanding for a period of five years or more. Currently, all series of the preferred stock have been issued and outstanding for more than five years and, therefore, are redeemable at $200.00 per share at Western Life's option. Under certain circumstances and with respect to certain matters, the holders of redeemable preferred stock are entitled to vote separately as a class. The annual dividend rate and shares issued and outstanding (which are included as minority interest in subsidiary) by series are as follows:
SHARES OUTSTANDING DIVIDENDS SHARES AT DECEMBER 31, PAYABLE PER ISSUED TO -------------------- SHARE DATE 1995 1994 ------------ ----------- --------- --------- Series A.................................................... $14.00 3,000 2,500 2,500 Series B.................................................... 15.00 4,250 4,000 4,000 Series C.................................................... 15.00 7,250 6,650 6,650 Series D.................................................... 15.00 337 337 337 Series E.................................................... Variable 13,915 9,030 9,030 ----------- --------- --------- 28,752 22,517 22,517 ----------- --------- --------- ----------- --------- ---------
Dividends on Series E redeemable preferred stock are based upon the average of the Moody's high and medium grade industrial preferred stock yields, with a minimum annual rate of 7.5% (or $15.00 per share) and a maximum annual rate of 15.0% (or $30.00 per share). 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 1996, Farm Bureau Life and Western Life could pay dividends to the parent company of approximately $48,552 and $5,671, respectively, without prior approval of statutory authorities. Also, the amount ($208,801 and $60,670 for Farm Bureau Life and Western Life, respectively, at December 31, 1995) by which the stockholder's equity stated in conformity with generally accepted accounting principles exceeds statutory capital and surplus as reported is restricted and cannot be distributed. Similar restrictions exist with respect to the payments of dividends by Utah Farm Bureau Insurance Company. Such restrictions are not considered to bear significantly on the ability of the Company to meet the obligations of any member of the consolidated group. 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), available-for-sale (carried at fair value), and trading (reported 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 universal life and annuity products are based on full F-34 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 10. STOCKHOLDERS' EQUITY OF SUBSIDIARIES (CONTINUED) account values, rather than discounting methodologies utilizing statutory interest rates; (e) on certain lines of property-casualty insurance, reserves in excess of the amounts considered adequate by the Company may be necessary to conform with statutory requirements; (f) reinsurance amounts are shown as gross amounts, net of an allowance for uncollectible amounts, on the consolidated balance sheet rather than netted against the corresponding receivable or payable; (g) deferred income taxes are provided for the difference between the financial statement and income tax bases of assets and liabilities; (h) net realized gains or losses attributed to changes in the level of interest rates in the market are recognized as gains or losses in the statement of income when the sale is completed rather than deferred and amortized over the remaining life of the fixed maturity security or mortgage loan; (i) declines in the estimated realizable value of investments are charged to the statement of income for declines in value, when such declines in value 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; (j) agents' balances and certain other assets designated as "non-admitted assets" for statutory purposes are reported as assets rather than being charged to surplus; (k) revenues for universal life and annuity 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; (l) pension income or expense is recognized in accordance with SFAS No. 87, "Employers' Accounting for Pensions" rather than in accordance with rules and regulations permitted by the Employee Retirement Income Security Act of 1974; (m) expenses for postretirement benefits other than pensions are recognized in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" rather than the statutory method which does not accrue for non-vested employees; (n) adjustments to federal income taxes of prior years are reported as a component of expense in the statement of income rather than as charges or credits to surplus; (o) the financial statements of subsidiaries are consolidated with those of the insurance subsidiary; (p) 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; and (q) operating results of discontinued operations are segregated from those of continuing operations. Capital and surplus as of December 31, 1995 and 1994, and net income (loss) for the years ended December 31, 1995, 1994 and 1993, as determined in accordance with statutory accounting practices for the Company's insurance subsidiaries, is as follows:
CAPITAL AND SURPLUS NET INCOME (LOSS) DECEMBER 31, YEAR ENDED DECEMBER 31, ---------------------- -------------------------------- 1995 1994 1995 1994 1993 ---------- ---------- --------- ---------- --------- Life insurance subsidiaries: Farm Bureau Life........................... $ 231,596 $ 206,859 $ 47,372 $ (11,013) $ 17,861 Western Life............................... 56,706 43,850 7,008 (1,021) -- Universal Assurors Life Insurance Company................................... 3,200 3,109 92 78 43 FBL Insurance Company...................... -- 5,721 -- 165 9,740 Rural Security Life........................ -- 6,394 -- (3,070) 296 Property-casualty insurance subsidiary -- Utah Farm Bureau Insurance Company.......... 9,236 7,829 1,454 799 (226)
The statutory balances listed above include amounts attributable to minority interest, as applicable. The National Association of Insurance Commissioners currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. That project, which is not expected to be completed before 1997, will likely change, to F-35 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 10. STOCKHOLDERS' EQUITY OF SUBSIDIARIES (CONTINUED) some extent, statutory accounting practices. The codification may result in changes to the permitted or prescribed accounting practices that the Company's insurance subsidiaries use to prepare their statutory-basis financial statements. 11. MANAGEMENT AND SERVICES 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 occupancy costs. In addition, the Company participates in a management agreement with Farm Bureau Management Corporation (wholly owned by the Iowa Farm Bureau Federation). Under this agreement, Farm Bureau Management Corporation provides general business, administrative analysis, and management services to the Company. During the years ended December 31, 1995, 1994 and 1993, the Company incurred expenses under this contract of $3,667, $3,076 and $2,961, respectively. Prior to February, 1995, Western Life maintained a management services agreement with Western Farm Bureau Management Corporation. Under the terms of the agreement, Western Farm Bureau Management Corporation provided all management, investment advisory, administrative, underwriting, policyholder services, legal, actuarial and other management-related services for Western Life. Some of these activities are now provided by Farm Bureau Management Corporation. 12. COMMITMENTS AND CONTINGENCIES ICG Partners, an affiliated joint venture, maintains a line of credit with Farm Bureau Life and an affiliate, Farm Bureau Mutual Insurance Company, in the amounts of $25,500 and $4,500, respectively. At March 31, 1996 and December 31, 1995 and 1994, ICG Partners had borrowed $2,684, $4,167 and $5,024, respectively, from Farm Bureau Life against the line of credit. Interest (11.25% at March 31, 1996 and 11.5% at December 31, 1995) is payable at an annual rate equal to the prime rate of The Chase Manhattan Bank, N.A., plus 3.00%. The line of credit is collateralized by lease receivables and substantially all other assets of ICG Partners, subject to senior positions. In connection with the sale of certain real estate property, Rural Security Life agreed to act as guarantor of a mortgage loan between the purchaser and a bank. Farm Bureau Life has now taken the position of Rural Security Life with respect to the guarantee. Pursuant to the agreement, the Company, through Farm Bureau Life, is required to deposit securities in a trust in an amount at least equal to the outstanding balance of the mortgage loan. Should the purchaser default on the mortgage, the bank has the ability to withdraw the securities at which time the Company would secure a first interest in the underlying property. At December 31, 1995, the outstanding balance of the mortgage loan is $5,105 ($4,973 at March 31, 1996). The mortgage loan, which is current at March 31, 1996 and December 31, 1995, requires monthly payments at the lenders' prime commercial rate through December 31, 1996, at which time a balloon payment of $4,563 is due. In connection with the sale of the aforementioned real estate property, a subsidiary of the Company entered into a real estate management agreement whereby it agreed to pay any cash flow deficiencies (as defined in the agreement) through 1997. The agreement also provided that the subsidiary would receive 35% of any excess cash flow generated during the same period. At December 31, 1995, the Company assessed the probability and amount of future cash payments pursuant to the agreement and determined that an accrual of $555 ($302 at March 31, 1996) was appropriate. While such future amounts are subject to the actual experience of the underlying retail facility, management believes that assumptions utilized in establishing the accrual are reasonable in all material respects. F-36 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 March 31, 1996 and December 31, 1995, management is not aware of any claims for which a material loss is reasonably possible. Assessments are, from time to time, levied on the insurance subsidiaries of the Company by life and health guaranty associations in most states in which the subsidiaries are licensed 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. Assessments have not been material to the Company's financial statements prior to 1991. However, the economy and other factors have caused a number of failures of substantially larger companies since that time. The Company has not been able to reasonably estimate potential future assessments, so no amounts have been provided for in the accompanying financial statements. Assessments paid by the Company amounted to $1,360, $1,561 and $708 during the years ended December 31, 1995, 1994 and 1993, respectively. 13. SEGMENT INFORMATION AND DISCONTINUED OPERATIONS The Company currently operates in two principal segments -- life insurance (including traditional and universal life, annuity and accident and health coverages) and property-casualty insurance. Prior to 1995, the Company was also involved in cable television operations. On December 23, 1994, the Company sold substantially all operating assets and certain liabilities of its cable television subsidiary, Vantage Cable Associates, L.P., to Galaxy Telecom, L.P. for $38,400, of which $32,016 was paid in cash and $6,384 was represented by a Class D limited partnership interest in Galaxy Telecom, L.P. The Company recognized a gain on the sale of approximately $15,400, after expenses, closing adjustments and post-closing adjustments of approximately $1,400. Revenues of the discontinued operations aggregated $10,224 and $10,436 for the period from January 1, 1994 through December 22, 1994 and the year ended December 31, 1993, respectively. Interest expense has been allocated to discontinued operations based on debt that can be identified as specifically attributed to those operations. For the period from January 1, 1994 through December 22, 1994 and the year ended December 31, 1993, interest expense related to discontinued operations was $2,884 and $2,227, respectively. F-37 FBL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 13. SEGMENT INFORMATION AND DISCONTINUED OPERATIONS (CONTINUED) Information concerning the Company's continuing business segments for the years ended December 31, 1995, 1994 and 1993 is as follows:
PROPERTY- CORPORATE AND LIFE CASUALTY DISCONTINUED CONSOLIDATED INSURANCE INSURANCE OPERATIONS ------------- ------------ ----------- -------------- Revenues, year ended December 31: 1995....................................... $ 405,985 $ 385,480 $ 20,489 $ 16 1994....................................... 349,885 330,422 19,448 15 1993....................................... 303,462 284,876 18,586 -- Income (loss) from continuing operations before income taxes, minority interest in earnings of subsidiaries and equity income (loss), year ended December 31: 1995....................................... 90,447 88,500 2,083 (136) 1994....................................... 59,873 58,573 1,288 12 1993....................................... 38,931 38,898 33 -- Identifiable assets, December 31: 1995....................................... 3,090,851 3,029,817 60,250 784 1994....................................... 2,792,535 2,735,788 56,708 39 1993....................................... 2,142,849 2,064,421 50,965 27,463
Capital expenditures and depreciation and amortization are not considered material. Corporate assets consist principally of cash and short-term investments. F-38 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. -------------- TABLE OF CONTENTS
PAGE --------- Prospectus Summary............................. 3 Risk Factors................................... 9 The Company.................................... 16 Use of Proceeds................................ 17 Dividend Policy................................ 17 Capitalization................................. 17 Selected Consolidated Financial Data........... 18 Pro Forma Consolidated Financial Statements.... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 26 Business....................................... 40 Management..................................... 66 Management Compensation........................ 72 Principal and Selling Stockholders............. 78 Certain Transactions and Relationships......... 81 Description of Capital Stock................... 85 Shares Eligible for Future Sale................ 88 Underwriting................................... 89 Validity of Common Stock....................... 90 Experts........................................ 90 Available Information.......................... 90 Glossary of Selected Insurance Terms........... 91 Index to Consolidated Financial Statements..... F-1
-------------- UNTIL , 1996, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 4,000,000 SHARES [LOGO] FBL FINANCIAL GROUP, INC. CLASS A COMMON STOCK ------------ PROSPECTUS ------------ ALEX. BROWN & SONS INCORPORATED SMITH BARNEY INC. EVEREN SECURITIES, INC. , 1996 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee.
SELLING REGISTRANT STOCKHOLDERS* TOTAL ----------- -------------- ---------- SEC Registration fee................................. $ -- $ 30,931 $ 30,931 NASD fee............................................. -- 9,470 9,470 Printing expenses.................................... 250,000 -- 250,000 Accounting fees and expenses......................... 100,000 -- 100,000 Legal fees and expenses.............................. 150,000 -- 150,000 Fees and expenses for qualification under state securities laws..................................... 20,000 -- 20,000 Transfer Agent's and Registrar's fees................ 10,000 -- 10,000 NYSE listing fees.................................... 138,000 -- 138,000 Miscellaneous........................................ 41,599 -- 41,599 ----------- ------- ---------- Total............................................ $ 709,599 $ 40,401 $ 750,000 ----------- ------- ---------- ----------- ------- ----------
- ------------------------ * Each Selling Stockholder will pay its pro rata share of the SEC registration fee and the NASD fee which is allocable to the inclusion of such Selling Stockholder's shares in the Offering, based upon the number of shares being sold by such Selling Stockholder. The Company will pay all other expenses of issuance. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Sections 851 and 856 of the Iowa Business Corporation Act provide that a corporation has the power to indemnify its directors and officers against liabilities and expenses incurred by reason of such person serving in the capacity of director or officer, if such person has acted in good faith and in a manner reasonably believed by the individual to be in or not opposed to the best interests of the corporation, and in any criminal proceeding if such person had no reasonable cause to believe the individual's conduct was unlawful. The foregoing indemnity provisions notwithstanding, in the case of actions brought by or in the right of the corporation, no indemnification shall be made to such director or officer with respect to any matter as to which such individual has been adjudged to be liable to the corporation unless, and only to the extent that, a court determines that indemnification is proper under the circumstances. Article VIII of the Company's Restated Articles of Incorporation provide that the Company shall indemnify its directors to the fullest extent possible under the Iowa Business Corporation Act. Article V of the Company's Restated By-laws extends the same indemnity to its officers. Article VII of the Articles provides that no director shall be liable to the Company or its stockholders for monetary damages for breach of the individual's fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for any transaction in which the director derived an improper personal benefit, or (iv) under the Iowa Business Corporation Act provisions relating to improper distributions. The Company maintains a directors' and officers' liability insurance policy to insure against losses arising from claims made against its directors and officers, subject to the limitations and conditions as set forth in the policies. II-1 The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, and the Underwriters have agreed to indemnify the Company, the Selling Stockholders, and the directors and officers of the Company who have signed the registration statement against certain matters. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. A. In connection with its plan of organization, the Company issued Common Stock in 1994 in return for (a) all of the stock of Farm Bureau Life Insurance Company, (b) all of the stock of Western Farm Bureau Life Insurance Company, (c) 25% of the stock of FBL Insurance Company, (d) 0.5% of the stock of Rural Security Life Insurance Company and (e) cash. There were no underwriting discounts or commissions paid in connection with the issuance of any such stock. All of the Common Stock thus issued was issued to 27 Farm Bureau organizations in reliance upon the exemption from registration for transactions not involving a public offering contained at Section 4(2) of the Securities Act of 1993, as amended. The number of shares issued, adjusted to reflect the 2,000 for 1 split effective March 19, 1996 and aggregating the Class A shares (95%) and Class B shares (5%) thereby issued to each Stockholder, and the consideration received is shown in the following table:
NUMBER OF SHARES OF COMMON STOCK DATE OF SALE STOCKHOLDER ISSUED CONSIDERATION - ---------------------- ---------------------------- ------------------ ---------------------------- January-March, 1994 Iowa Farm Bureau Federation 15,235,100 100% of the common stock of Farm Bureau Mutual Insurance 1,692,180 Farm Bureau Life Insurance Company 1,366,540 Company, valued at book Rural Mutual Insurance value as of December 31, Company 1993 January, 1994 Twenty Farm Bureau 3,938,000 100% of the common stock of organizations (including Western Farm Bureau Life Iowa Farm Bureau Federation Insurance Company valued at and Farm Bureau Mutual appraised value of the Insurance Company) Company as of December 31, consisting of the former 1993. shareholders of Western Farm Bureau Life Insurance Company January-March, 1994 Wisconsin Farm Bureau 6,640 0.5% of the common stock of Federation, Cooperative Rural Security Life Insurance Company valued at appraised value of the Company as of December 31, 1993 January-March, 1994 Farm Bureau Mutual Insurance 1,097,140 25% of the common stock of Company FBL Insurance Company valued at appraised value of the Company as of December 31, 1993 January-March, 1994 Five Farm Bureau 58,000 $9.68 cash per share based organizations on statutory book value as of December 31, 1993
II-2 B. Subsequent to the organization of the Company, the Company issued common stock for cash or stock of Utah Farm Bureau Insurance Company as set forth below to two existing shareholders, in reliance on the exemption from registration for transactions not involving a public offering contained in Section 4(2) of the Securities Act of 1993, as amended:
NUMBER OF COMMON STOCK DATE OF SALE STOCKHOLDER SHARES ISSUED CONSIDERATION - ------------------------- ---------------------------- --------------- ---------------------------- December 27, 1994 Farm Bureau Insurance 460,000 $9.68 cash per share based to September 18, 1995 Company of Nebraska on statutory book value as of December 31, 1993 for shares purchased before 1995, and $10.47 cash per share based on statutory book value as of December 31, 1994 for shares purchased in 1995. December 14, 1995 Utah Farm Bureau Federation 6,200 0.83% of the common stock of Utah Farm Bureau Insurance Company valued at appraised value of the Company as of December 31, 1994.
C. In April 1996, the Company offered to exchange 5,000,000 shares of Series A Preferred Stock for 5,000,000 shares of its outstanding Class A Common Stock (the Series A Exchange). The offer was made to its 27 existing stockholders on a pro rata basis in reliance upon the exemption from registration for transactions not involving a public offering contained at Section 4(2) of the Securities Act of 1933, as amended. None of the offerees accepted the offer except the Iowa Farm Bureau Federation, which has agreed to accept all 5,000,000 shares of Series A Preferred Stock. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits 1.1 Form of Underwriting Agreement. 3.1 Restated Articles of Incorporation of the Registrant.+ 3.2 Amendment to Restated Articles of Incorporation of the Registrant Designating Series A Preferred Stock.+ 3.3 Restated Bylaws of the Registrant.+ 4.1 Form of Class A Common Stock Certificate of the Registrant.+ 4.2 Stockholders' Agreement Regarding Management and Transfer of Shares of Class B Common Stock dated as of May 1, 1996.+ 5.1 Opinion of Davis, Brown, Koehn, Shors & Roberts, P.C.+ 10.1 Amended and Restated 1996 Class A Common Stock Compensation Plan. 10.2 Trademark License from the American Farm Bureau Federation to Farm Bureau Life Insurance Company dated May 20, 1987.+ 10.3 Membership Agreement between the American Farm Bureau Federation and the Iowa Farm Bureau Federation dated February 13, 1987.+ 10.4 Form of Royalty Agreement with Farm Bureau organizations.+
II-3 10.5 Reinsurance Pooling Agreement dated as of January 1, 1990 among Farm Bureau Mutual Insurance Company, Utah Farm Bureau Insurance Company and South Dakota Farm Bureau Mutual Insurance Company.+ 10.6 Loss Pooling Agreement between Farm Bureau Mutual Insurance Company and Western Agricultural Insurance Company, to be dated as of January 1, 1996. 10.7 Services Agreement between FBL Financial Group, Inc. and Farm Bureau Management Corporation, to be dated as of January 1, 1996. 10.8 Management Services Agreement between FBL Financial Group, Inc. and Farm Bureau Mutual dated as of January 1, 1996.+ 10.9 Management Performance Plan (1995) sponsored by Farm Bureau Mutual Insurance Company.+ 10.10 Management Performance Plan (1996) sponsored by Farm Bureau Mutual Insurance Company.+ 10.11 Lease between Farm Bureau Life and Iowa Farm Bureau Federation dated January 1, 1990.+ 10.12 Back-up Agreement dated April 30, 1996 between Iowa Farm Bureau Federation and FBL Financial Group, Inc. 21 Subsidiaries of the Registrant. 23 (a) Consent of Davis, Brown, Koehn, Shors & Roberts, P.C. (included in Exhibit 5).+ (b) Consent of Ernst & Young LLP. 24 Power of Attorney (contained at Signature Page II-6).+ 27 Financial Data Schedule.+ 99 Consents of Messrs. Chicoine, Creer and Walker to be named as proposed Directors of the Company.+
- ------------------------ + Previously filed. (b) Financial Statement Schedules Report of Independent Auditors on Schedules Schedule I Summary of Investments -- Other than Investment in Related Parties. Schedule II Condensed Financial Information of Registrant. Schedule III Supplementary Insurance Information. Schedule IV Reinsurance.
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions described in Item 14, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its II-4 counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement or amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of West Des Moines, State of Iowa, on July 12, 1996. FBL Financial Group, Inc. By /s/ THOMAS R. GIBSON -------------------------------------- Thomas R. Gibson EXECUTIVE VICE PRESIDENT Pursuant to the requirements of the Securities Act of 1933, this Registration Statement or amendment thereto has been signed by the following persons in the capacities and on the dates indicated. Executed below by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ------------------------------------------------ -------------------------------------------- ----------------- /s/ THOMAS R. GIBSON Executive Vice President, General Manager, -------------------------------------- Chief Executive Officer, and Director July 12, 1996 Thomas R. Gibson (Principal Executive Officer) /s/ JAMES W. NOYCE Vice President, Chief Financial Officer -------------------------------------- (Principal Financial and Accounting July 12, 1996 James W. Noyce Officer) * -------------------------------------- Chairman of the Board and Director July 12, 1996 Edward M. Wiederstein * -------------------------------------- First Vice Chair and Director July 12, 1996 V. Thomas Geary * -------------------------------------- Second Vice Chair and Director July 12, 1996 Roger Bill Mitchell * -------------------------------------- Director July 12, 1996 Kenneth R. Ashby * -------------------------------------- Director July 12, 1996 Al Christopherson
II-6
SIGNATURE TITLE DATE - ------------------------------------------------ -------------------------------------------- ----------------- * -------------------------------------- Director July 12, 1996 Kenny J. Evans * -------------------------------------- Director July 12, 1996 Gary Hall * -------------------------------------- Director July 12, 1996 Karen J. Henry * -------------------------------------- Director July 12, 1996 Richard Kjerstad * -------------------------------------- Director July 12, 1996 David L. McClure * -------------------------------------- Director July 12, 1996 Howard D. Poulson * -------------------------------------- Director July 12, 1996 John J. Van Sweden * -------------------------------------- Senior Vice President, Secretary, Treasurer July 12, 1996 Eugene R. Maahs and Director * -------------------------------------- Senior Vice President, General Counsel and July 12, 1996 Stephen M. Morain Director *By: /s/ THOMAS R. GIBSON ------------------------------- Thomas R. Gibson ATTORNEY-IN-FACT
II-7 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, 1995 and 1994, 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, 1995, and have issued our report thereon dated March 12, 1996 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedules listed in Item 16(b) of this Registration Statement. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Des Moines, Iowa March 12, 1996 S-1 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES FBL FINANCIAL GROUP, INC. DECEMBER 31, 1995
COLUMN D --------------- COLUMN A COLUMN B COLUMN C AMOUNT AT WHICH - -------------------------------------------------------------------- ------------ ------------ SHOWN IN THE TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET - -------------------------------------------------------------------- ------------ ------------ --------------- (DOLLARS IN THOUSANDS) Fixed maturity securities, held for investment: Bonds: United States Government and government agencies and authorities.................................................... $ 220,768 $ 231,777 $ 220,768 Corporate mortgage-backed securities............................ 457,381 475,415 457,381 All other corporate bonds....................................... 5,000 5,284 5,000 ------------ ------------ --------------- Total......................................................... 683,149 $ 712,476 683,149 ------------ ------------ Fixed maturity securities, available-for-sale: Bonds: United States Government and government agencies and authorities.................................................... 276,482 $ 283,413 283,413 States, municipalities, and political subdivisions.............. 28,496 29,432 29,432 Public utilities................................................ 172,672 181,013 181,013 Corporate mortgage and asset-backed securities.................. 80,821 85,360 85,360 Convertible bonds............................................... 5,670 5,439 5,439 All other corporate bonds....................................... 725,181 772,337 772,337 Redeemable preferred stocks....................................... 36,286 36,066 36,066 ------------ ------------ --------------- Total......................................................... 1,325,608 $ 1,393,060 1,393,060 ------------ ------------ Equity securities, available-for-sale: Common stocks: Public utilities................................................ 1,882 $ 1,833 1,833 Banks, trusts, and insurance companies.......................... 13,407 20,235 20,235 Industrial, miscellaneous, and all other........................ 59,074 60,574 60,574 Nonredeemable preferred stocks.................................... 2,675 1,072 1,072 ------------ ------------ --------------- Total......................................................... 77,038 $ 83,714 83,714 ------------ ------------ Held in inventory: Bonds............................................................. 807 $ 818 818 Redeemable preferred stocks....................................... 14,692 15,828 15,828 Common stocks..................................................... 6,056 5,267 5,267 ------------ ------------ --------------- Total......................................................... 21,555 $ 21,913 21,913 ------------ ------------ Mortgage loans on real estate....................................... 267,423 266,623(2) Investment real estate.............................................. 28,784 28,604(2) Policy loans........................................................ 116,107 116,107 Other long-term investments......................................... 2,892 2,892 Short-term investments.............................................. 50,061 50,061 ------------ --------------- $ 2,572,617 $ 2,646,123 ------------ --------------- ------------ ---------------
- ------------------------ (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. S-2 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT FBL FINANCIAL GROUP, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, -------------------------- 1995 1994 ------------ ------------ ASSETS Cash and cash equivalents............................................................. $ 455 $ 39 Investments in subsidiaries (eliminated in consolidation)............................. 563,871 430,723 Current income taxes recoverable...................................................... 90 -- Other assets.......................................................................... 239 -- ------------ ------------ Total assets...................................................................... $ 564,655 $ 430,762 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accrued expenses and other liabilities.............................................. $ 304 $ 4 Current income taxes payable........................................................ -- 15 Deferred income taxes............................................................... 53 -- ------------ ------------ Total liabilities..................................................................... 357 19 Stockholders' equity: Common stock........................................................................ 1,193 1,173 Additional paid-in capital.......................................................... 145,288 141,026 Net unrealized investment gains (losses) of subsidiaries............................ 37,807 (31,838) Retained earnings................................................................... 380,010 320,382 ------------ ------------ Total stockholders' equity........................................................ 564,298 430,743 ------------ ------------ Total liabilities and stockholders' equity...................................... $ 564,655 $ 430,762 ------------ ------------ ------------ ------------
See accompanying notes to condensed financial statements. S-3 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, ------------------------------- 1995 1994 1993 --------- --------- --------- Revenues: Universal life and annuity product charges..................................... $ -- $ -- $ 21,331 Traditional life insurance premiums............................................ -- -- 41,801 Accident and health premiums................................................... -- -- 25,703 Net investment income.......................................................... 16 47 84,390 Realized gains on investments.................................................. -- -- 2,955 Other income................................................................... -- -- 9,444 --------- --------- --------- Total revenues............................................................... 16 47 185,624 Benefits and expenses: Universal life and annuity benefits............................................ -- -- 37,442 Traditional life insurance and accident and health benefits.................... -- -- 47,462 Increase in traditional and accident and health future policy benefits......... -- -- 12,664 Distributions to participating policyholders................................... -- -- 21,901 Underwriting, acquisition and insurance expenses............................... -- -- 40,819 Interest expense............................................................... -- -- 666 Other expenses................................................................. 152 3 -- --------- --------- --------- Total benefits and expenses.................................................. 152 3 160,954 --------- --------- --------- (136) 44 24,670 Income taxes..................................................................... 52 (15) (8,635) --------- --------- --------- Income (loss) before equity in undistributed income of subsidiaries and income from other equity investments................................................... (84) 29 16,035 Equity income, net of related income taxes....................................... -- -- 1,319 Equity in undistributed income of subsidiaries (eliminated in consolidation)..... 59,712 42,037 2,449 --------- --------- --------- Net income................................................................... $ 59,628 $ 42,066 $ 19,803 --------- --------- --------- --------- --------- ---------
See accompanying notes to condensed financial statements. S-4 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, --------------------------------- 1995 1994 1993 --------- --------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................ $ (75) $ 48 $ 40,099 INVESTING ACTIVITIES Sale, maturity or repayment of investments: Fixed maturities............................................................. -- -- 246,024 Equity securities............................................................ -- -- 29,681 Mortgage loans on real estate................................................ -- -- 5,779 Investment real estate....................................................... -- -- 190 Policy loans................................................................. -- -- 16,877 Other long-term investments.................................................. -- -- 344 --------- --------- ----------- -- -- 298,895 Acquisition of investments: Fixed maturities............................................................. -- -- (269,582) Equity securities............................................................ -- -- (22,420) Mortgage loans on real estate................................................ -- -- (53,203) Investment real estate....................................................... -- -- (9) Policy loans................................................................. -- -- (16,131) Short-term investments -- net................................................ -- -- (16,037) --------- --------- ----------- -- -- (377,382) Investments in subsidiaries (eliminated in consolidation)...................... (3,698) (1,152) (11,084) Return of capital from subsidiary (eliminated in consolidation)................ -- -- 5,616 Proceeds from disposal, repayment of advances and other distributions from entities accounted for by the equity method................................... -- -- 26,756 Investments in and advances to entities accounted for by the equity method..... -- -- (25,793) Other.......................................................................... -- -- (606) --------- --------- ----------- Net cash used in investing activities.......................................... (3,698) (1,152) (83,598) FINANCING ACTIVITIES Receipts from interest sensitive products credited to policyholder account balances...................................................................... -- -- 89,775 Return of policyholder account balances on interest sensitive products......... -- -- (45,532) Proceeds from short-term borrowings............................................ -- -- 6,806 Repayment of short-term borrowings............................................. -- -- (6,198) Repayment of long-term debt.................................................... -- -- (132)
S-5 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) FBL FINANCIAL GROUP, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 ---------------------------------- 1995 1994 1993 --------- ------------ --------- FINANCING ACTIVITIES (CONTINUED) Issuance of common stock for cash.............................................. $ 4,189 $ 1,143 $ -- Cash held by former parent at time of reorganization (eliminated in consolidation)................................................................ -- (1,220) -- --------- ------------ --------- Net cash provided by financing activities...................................... 4,189 (77) 44,719 --------- ------------ --------- Increase (decrease) in cash and cash equivalents............................... 416 (1,181) 1,220 Cash and cash equivalents at beginning of year................................. 39 1,220 -- --------- ------------ --------- Cash and cash equivalents at end of year....................................... $ 455 $ 39 $ 1,220 --------- ------------ --------- --------- ------------ --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest..................................................................... $ -- $ -- $ 666 Income taxes................................................................. -- -- 9,074 Noncash investing and financing activities: Noncash activity resulting from reorganization: Investment in subsidiaries................................................. -- (232,302) -- Other investments.......................................................... -- 1,010,219 -- Other non-cash assets...................................................... -- 278,573 -- Policyholder liabilities................................................... -- (990,257) -- Other liabilities.......................................................... -- (67,453) -- --------- ------------ --------- -- (1,220) -- Acquisition of Rural Security Life Insurance Company through stock exchange.................................................................... -- -- 27,101
See accompanying notes to condensed financial statements. S-6 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) FBL FINANCIAL GROUP, INC. (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 1995 1. ORGANIZATION AND 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. The Company was incorporated in the State of Iowa on October 13, 1993, and, effective January 1, 1994, acquired 100% of the outstanding common stock of Farm Bureau Life Insurance Company (Farm Bureau Life) in a transaction that was treated as a reorganization. Accordingly, the 1993 financial statements presented herein are those of Farm Bureau Life. See Notes 1 and 3 to the Company's consolidated financial statements for additional information regarding the reorganization. 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 1994, Western Life Insurance Company paid common stock dividends of $32 ($16.00 per share) to the parent company. S-7 SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION FBL FINANCIAL GROUP, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ---------------------------------------- ----------- ------------ ----------- ----------- ----------- FUTURE POLICY BENEFITS, DEFERRED LOSSES, POLICY CLAIMS, AND OTHER ACQUISITION LOSS UNEARNED POLICYHOLDER PREMIUM COSTS EXPENSES REVENUES FUNDS REVENUE ----------- ------------ ----------- ----------- ----------- (DOLLARS IN THOUSANDS) December 31, 1995: Life insurance........................ $ 134,040 $2,054,092 $ 17,350 $ 215,242 $ 129,333 Property-casualty insurance........... 1,021 29,984 15,906 -- 18,709 ----------- ------------ ----------- ----------- ----------- Total................................... $ 135,061 $2,084,076 $ 33,256 $ 215,242 $ 148,042 ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- December 31, 1994: Life insurance........................ $ 136,653 $1,950,174 $ 17,962 $ 199,575 $ 113,000 Property-casualty insurance........... 996 28,828 15,654 -- 17,778 ----------- ------------ ----------- ----------- ----------- Total................................... $ 137,649 $1,979,002 $ 33,616 $ 199,575 $ 130,778 ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- December 31, 1993: Life insurance........................ $ 120,834 $1,426,837 $ 16,621 $ 163,538 $ 118,987 Property-casualty insurance........... 980 26,291 13,721 -- 16,937 ----------- ------------ ----------- ----------- ----------- Total................................... $ 121,814 $1,453,128 $ 30,342 $ 163,538 $ 135,924 ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- -----------
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K - -------------------------------------------- ----------- ----------- ----------- ----------- ----------- BENEFITS, AMORTIZATION CLAIMS, OF DEFERRED NET LOSSES, AND POLICY OTHER INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS INCOME EXPENSES COSTS EXPENSES WRITTEN ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) December 31, 1995: Life insurance............................ $ 221,525 $ 184,417 $ 7,736 $ 60,991 Property-casualty insurance............... 1,583 13,621 2,991 1,713 $ 18,851 ----------- ----------- ----------- ----------- ----------- ----------- Total....................................... $ 223,108 $ 198,038 $ 10,727 $ 62,704 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- December 31, 1994: Life insurance............................ $ 177,310 $ 158,165 $ 6,837 $ 63,130 Property-casualty insurance............... 1,524 13,441 3,229 1,456 $ 18,339 ----------- ----------- ----------- ----------- ----------- ----------- Total....................................... $ 178,834 $ 171,606 $ 10,066 $ 64,586 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- December 31, 1993: Life insurance............................ $ 136,825 $ 153,761 $ 3,356 $ 48,712 Property-casualty insurance............... 1,495 13,948 2,667 1,897 $ 17,722 ----------- ----------- ----------- ----------- ----------- ----------- Total....................................... $ 138,320 $ 167,709 $ 6,023 $ 50,609 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
S-8 SCHEDULE IV -- REINSURANCE FBL FINANCIAL GROUP, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ---------------------------------------- ----------- ----------- ----------- ----------- ----------- PERCENT OF CEDED TO ASSUMED AMOUNT GROSS OTHER FROM OTHER ASSUMED TO AMOUNT COMPANIES COMPANIES NET AMOUNT NET ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Year ended December 31, 1995: Life insurance in force, at end of year................................. $16,208,497 $ 953,828 $ -- $15,254,669 -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Insurance premiums and other considerations: Universal life and annuity product charges............................ $ 45,505 $ 1,783 $ -- $ 43,722 -- Traditional life insurance and accident and health premiums....... 98,682 13,071 -- 85,611 -- Property-casualty premiums.......... 26,093 26,240 18,856 18,709 100.8% ----------- ----------- ----------- ----------- ----------- $ 170,280 $ 41,094 $ 18,856 $ 148,042 12.7% ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Year ended December 31, 1994: Life insurance in force, at end of year................................. $15,221,217 $ 924,508 $ -- $14,296,709 -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Insurance premiums and other considerations: Universal life and annuity product charges............................ $ 44,432 $ 1,698 $ -- $ 42,734 -- Traditional life insurance and accident and health premiums....... 91,629 21,382 19 70,266 -- Property-casualty premiums.......... 25,846 26,415 18,347 17,778 103.2% ----------- ----------- ----------- ----------- ----------- $ 161,907 $ 49,495 $ 18,366 $ 130,778 14.0% ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Year ended December 31, 1993: Life insurance in force, at end of year................................. $ 9,963,157 $ 438,021 $ -- $ 9,525,136 -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Insurance premiums and other considerations: Universal life and annuity product charges............................ $ 27,685 $ 1,185 $ -- $ 26,500 -- Traditional life insurance and accident and health premiums....... 98,347 5,788 (72) 92,487 -- Property-casualty premiums.......... 22,042 22,874 17,769 16,937 104.9% ----------- ----------- ----------- ----------- ----------- $ 148,074 $ 29,847 $ 17,697 $ 135,924 13.1% ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
S-9 EXHIBIT INDEX
EXHIBITS PAGE - ----------- --------- 1.1 Form of Underwriting Agreement.+ 3.1 Restated Articles of Incorporation of the Registrant. 3.2 Amendment to Restated Articles of Incorporation of the Registrant Designating Series A Preferred Stock. 3.3 Restated Bylaws of the Registrant. 4.1 Form of Class A Common Stock Certificate of the Registrant. 4.2 Form of Stockholders' Agreement Regarding Management and Transfer of Shares of Class B Common Stock dated as of May 1, 1996. 5.1 Opinion of Davis, Brown, Koehn, Shors & Roberts, P.C.+ 10.1 Form of Amended and Restated 1996 Class A Common Stock Compensation Plan. 10.2 Trademark License from the American Farm Bureau Federation to Farm Bureau Life Insurance Company dated May 20, 1987.+ 10.3 Membership Agreement between the American Farm Bureau Federation and the Iowa Farm Bureau Federation dated February 13, 1987.+ 10.4 Form of Royalty Agreement with Farm Bureau organizations.+ 10.5 Reinsurance Pooling Agreement dated as of January 1, 1990 among Farm Bureau Mutual Insurance Company, Utah Farm Bureau Insurance Company and South Dakota Farm Bureau Mutual Insurance Company.+ 10.6 Form of Loss Pooling Agreement between Farm Bureau Mutual Insurance Company and Western Agricultural Insurance Company, to be dated as of January 1, 1996. 10.7 Form of Services Agreement between FBL Financial Group, Inc. and Farm Bureau Management Corporation, to be dated as of January 1, 1996. 10.8 Management Services Agreement between FBL Financial Group, Inc. and Farm Bureau Mutual dated as of January 1, 1996.+ 10.9 Management Performance Plan (1995) sponsored by Farm Bureau Mutual Insurance Company.+ 10.10 Management Performance Plan (1996) sponsored by Farm Bureau Mutual Insurance Company.+ 10.11 Lease between Farm Bureau Life and Iowa Farm Bureau Federation dated January 1, 1990.+ 10.12 Back-up Agreement dated April 30, 1996 between Iowa Farm Bureau Federation and FBL Financial Group, Inc. 21 Subsidiaries of the Registrant. 23 (a) Consent of Davis, Brown, Koehn, Shors & Roberts, P.C. (included in Exhibit 5).+ (b) Consent of Ernst & Young LLP. 24 Power of Attorney (contained at Signature Page II-6).+ 27 Financial Data Schedule.+ 99 Consents of Messrs. Chicoine, Creer and Walker to be named as proposed Directors of the Company.+
- ------------------------ + Previously filed. EX-1.1 2 EXHIBIT 1.1 4,000,000 Shares FBL Financial Group, Inc. Class A Common Stock (Without Par Value) UNDERWRITING AGREEMENT July , 1996 Alex. Brown & Sons Incorporated Everen Securities, Inc. Smith Barney Inc. As Representatives of the Several Underwriters c/o Alex. Brown & Sons Incorporated 135 East Baltimore Street Baltimore, Maryland 21202 Gentlemen: Certain shareholders (the "Selling Shareholders") of FBL Financial Group, Inc., an Iowa corporation (the "Company"), propose to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of 4,000,000 shares of the Company's Class A Common Stock, without par value (the "Firm Shares"). The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto, and the respective amounts to be sold by the Selling Shareholders are set forth opposite their names in Schedule II hereto. The Selling Shareholders set forth in Schedule III also propose to sell at the Underwriters' option an aggregate of up to 600,000 additional shares of the Company's Class A Common Stock (the "Option Shares") as set forth below. As the Representatives, you have advised the Company and the Selling Shareholders (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." The Class A Common Stock and the Class B Common Stock are together referred to as the "Common Stock". In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING SHAREHOLDERS. (a) The Company represents and warrants to each of the Underwriters as follows: (i) A registration statement on Form S-1 (File No. 333-4332) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462 (b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (A) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (B) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares, together with the term 2 sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." Any reference herein to the Registration Statement, any Preliminary Prospectus or to the Prospectus shall be deemed to refer to and include any documents incorporated by reference therein, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, and any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rules 424(b) or 430A, and prior to the termination of the offering of the Shares by the Underwriters. (ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Iowa, and has corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement, to execute and deliver this Agreement, perform its obligations hereunder and consummate the transactions contemplated hereby. Each of the subsidiaries of the Company as listed in Exhibit A hereto (collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Subsidiaries are the only subsidiaries, direct or indirect, of the Company. The Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification. The outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and to the extent shown in Exhibit A hereto are owned by the Company or another Subsidiary free and clear of all liens, encumbrances and equities and claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding. 3 (iii) The outstanding shares of Common Stock of the Company, including all shares to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. (iv) The information set forth under the caption "Capitalization" in the Registration Statement is true and correct. The capital stock conforms to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the requirements of the corporate law of the jurisdiction of the Company's incorporation and of the New York Stock Exchange Inc. ("NYSE"). Except as described in the Registration Statement, there are no outstanding: (A) securities or obligations of the Company or any of its Subsidiaries convertible into or exchangeable for any capital stock of the Company, (B) warrants, rights or options to subscribe for or purchase from the Company or any of its Subsidiaries any such capital stock or any such convertible or exchangeable securities or obligations, or (C) obligations for the Company or any of its Subsidiaries to issue such shares, any such convertible or exchangeable securities or obligations, or any such warrants, rights or obligations. (v) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform, to the requirements of the Act and the Rules and Regulations. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, 4 and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (vi) The consolidated financial statements of the Company and the Subsidiaries, together with related notes and schedules as set forth or incorporated by reference in the Registration Statement, present fairly the consolidated financial position, results of operations and cash flows of the Company and its Subsidiaries, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with United States generally accepted accounting principles, consistently applied throughout the periods involved, except as disclosed therein, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data included in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. The pro forma financial statements and other pro forma financial information included in the Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (vii) Ernst & Young LLP, who have certified certain of the financial statements filed with the Commission as part of, or incorporated by reference in, the Registration Statement, are independent public 5 accountants as required by the Act and the Rules and Regulations. (viii) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (ix) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of the Subsidiaries or any Related Entity (as hereinafter defined) before any court or administrative agency or otherwise which if determined adversely to the Company or any of its Subsidiaries or any Related Entity might have a material adverse effect on, or might be expected to have a prospective material adverse effect on the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and of the Subsidiaries taken as a whole (a "Material Adverse Effect") or to prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. For the purposes of this Agreement, each of the Iowa Farm Bureau Federation, Farm Bureau Mutual Insurance Company, Farm Bureau Management Corporation and South Dakota Farm Bureau Mutual Insurance Company is a "Related Entity" and collectively are referred to herein as "Related Entities." (x) The Company and its Subsidiaries have good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company and the Subsidiaries occupy their 6 leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement. The Company and its Subsidiaries enjoy peaceful and undisturbed possession under all such leases under which any of them is lessee with such exceptions as do not materially interfere with the use made thereof in the business and there are no defaults thereunder by the Company or any Subsidiary, except for such as are not material. (xi) The Company and the Subsidiaries have filed all Federal, State, local and foreign income tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due and are not being contested in good faith and for which adequate reserves have been provided. All tax liabilities have been adequately provided for in the financial statements of the Company. (xii) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any change or any development involving a prospective change that would individually or in the aggregate have a Material Adverse Effect, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company or the Subsidiaries, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Company's financial statements which are included in the Registration Statement. (xiii) Neither the Company nor any of the Subsidiaries is or with the giving of notice or lapse of time or both, will be, in violation of or in default under its Articles of Incorporation or by-laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default might have a Material Adverse Effect. The execution and delivery of this Agreement and the con- 7 summation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party, or of the Articles of Incorporation or by-laws of the Company or any statute, order, rule or regulation applicable to the Company or any Subsidiary of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction over the Company or any Subsidiary or any of their respective property. (xiv) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (xv) Neither the Company nor any of the Subsidiaries has infringed any patents, patent rights, trade names, trademarks, service marks or copyrights, which infringement is material to the business of the Company and the Subsidiaries taken as a whole. The Company and each of its Subsidiaries have the right to use the trade names, trademarks, service marks, copyrights and insurance products reasonably necessary to operate their businesses as presently conducted and as proposed to be conducted. The Company knows of no material infringement by others of patents, patent rights, trade names, trademarks, service marks or copyrights owned by or licensed to the Company. (xvi) Neither the Company nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder and none of the Company and its Subsidiaries will become, as a result of the consummation of the transactions 8 contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, such a company. (xvii) The Company and each of its Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (xviii) The Company and each of its Subsidiaries is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; none of the Company and its Subsidiaries has incurred and none expects to incur liability under (A) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (B) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company or any of its Subsidiaries would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (xix) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92- 198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such 9 business or change, as appropriate, in a form acceptable to the Department. (xx) The Company, each of its Subsidiaries and each Related Entity has such permits, licenses, franchises, approvals, orders, certificates and authorizations of governmental or regulatory authorities (including, without limitation, all permits, licenses, franchises, approvals, orders, certificates and authorizations of all applicable insurance regulatory agencies or bodies) (collectively, "permits") as are necessary to own, lease and operate its respective properties and to conduct its business in each jurisdiction where it is required to be so licensed or admitted to conduct its business as described in the Registration Statement and Prospectus; the Company, each of its Subsidiaries and each Related Entity has fulfilled and performed all of its obligations with respect to such permits (including, without limitation, having made all required declarations and filings with all insurance regulatory authorities, commissions, governmental authorities, all self-regulatory organizations and all courts and other tribunals) and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other impairment of the rights of the holder of any such permit; and, except as described in the Prospectus, such permits contain no restrictions that are materially burdensome to the operation of the business of the Company or any of its Subsidiaries as currently conducted. None of the Company, any of its Subsidiaries or any Related Entity has received any notification from any insurance authority, commission or other insurance regulatory body or any other governmental authority to the effect that any additional consent, authorization, approval, order, license, certificate or permit from such authority, commission or body is needed to be obtained by any of the Company, any of its Subsidiaries or any Related Entity or that such authority, commission or body is considering limiting, suspending or revoking any such consent, authorization, approval, order, license, certificate or permit. (xxi) This Agreement has been duly authorized, executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company. 10 (xxii) No stamp, stamp duty reserve or other taxes, duties, assessments, fees or other charges are payable by or on behalf of the Underwriters in connection with the sale and delivery of the Shares or any agreement or document executed or delivered in connection with the consummation of the transactions contemplated hereunder. (xxiii) The Company has filed an application to list the Shares on the NYSE, and has received notification that such listing has been approved, subject to notice of sale and delivery hereunder. (xxiv) The reinsurance agreements currently in effect between any Subsidiary of the Company and reinsurer include such coverages as are adequate for the needs of the Company's Subsidiaries. None of the Company's Subsidiaries is in violation of or in default in any material respect under any term or provision of any such agreement and no other party to any such agreement is in default or breach thereof in any material respect. (b) Each of the Selling Shareholders severally represents and warrants as follows: (i) Such Selling Shareholder is duly organized, validly existing and in good standing under the laws of its state of incorporation and is duly qualified to transact business and in good standing in all jurisdictions in which the conduct of its business requires such qualification. (ii) Such Selling Shareholder now has and at each Closing Date (as hereinafter defined) will have good and marketable title to the Shares to be sold by such Selling Shareholder, free and clear of any liens, encumbrances, equities and claims, and full right, power and authority to effect the sale and delivery of such Shares; and upon the delivery of, against payment for, such Shares pursuant to this Agreement, the Underwriters will acquire good and marketable title thereto, free and clear of any liens, encumbrances, equities and claims. (iii) Such Selling Shareholder has full right, power and authority to execute and deliver this Agreement, the Selling Shareholder's Agreement and Power of Attorney, and the Custodian Agreement referred to below 11 and to perform its obligations under such Agreements, including but not limited to the delivery and sale of the Shares hereunder or thereunder. The execution and delivery of this Agreement and the consummation by such Selling Shareholder of the transactions herein contemplated and the fulfillment by such Selling Shareholder of the terms hereof will not require any consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body (except as may be required under the Act, state securities laws or Blue Sky laws) and will not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, organizational documents of such Selling Shareholder, if not an individual, or any indenture, mortgage, deed of trust or other agreement or instrument to which such Selling Shareholder is a party, or of any statute, order, rule or regulation applicable to such Selling Shareholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction over the Selling Shareholder or its property. (iv) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to, or which has constituted, or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Common Stock of the Company and, other than as permitted by the Act, the Selling Shareholder will not distribute any prospectus or other offering material in connection with the offering of the Shares. (v) Without having undertaken to determine independently the accuracy or completeness of either the representations and warranties of the Company contained herein or the information contained in the Registration Statement, such Selling Shareholder has no reason to believe that the representations and warranties of the Company contained in this Section 1 are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement which has adversely affected or may adversely affect the business of the Company or any of the Subsidiaries; and the sale of the Shares by such Selling Shareholder pursuant hereto is not prompted by any information concerning the Company or any of the Subsidiaries which is not set forth in the Registration 12 Statement or the documents incorporated by reference therein. The information pertaining to such Selling Shareholder under the caption "Principal and Selling Stockholders" in the Prospectus is complete and accurate in all material respects. 2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Selling Shareholders agree to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $_____ net price per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. The number of Firm Shares to be purchased by each Underwriter from each Selling Shareholder shall be as nearly as practicable in the same proportion to the total number of Firm Shares being sold by such Selling Shareholder as the number of Firm Shares being purchased by such Underwriter bears to the total number of Shares to be sold hereunder, adjusted by you in such manner as to avoid fractional shares. The obligations of each of the Selling Shareholders shall be several and not joint. (b) Certificates in negotiable form for the total number of the Shares to be sold hereunder by the Selling Shareholders have been placed in custody with Boatmen's Trust Company as custodian (the "Custodian") pursuant to the Custodian Agreement executed by each Selling Shareholder for delivery of all Shares to be sold hereunder by the Selling Shareholders. Each of the Selling Shareholders specifically agrees that the Shares represented by the certificates held in custody for the Selling Shareholders under the Custodian Agreement are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Shareholders for such custody are to that extent irrevocable, and that the obligations of the Selling Shareholders hereunder shall not be terminable by any act or deed of the Selling Shareholders (or by any other person, firm or corporation including the Company, the Custodian or the Underwriters) or by operation of law (including the death of an individual Selling Shareholder or the dissolution of a corporate Selling Shareholder) or by the occurrence of any other event or events, except as set forth in the Custodian 13 Agreement. If any such event should occur prior to the delivery to the Underwriters of the Shares hereunder, certificates for the Shares shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such event has not occurred. The Custodian is authorized to receive and acknowledge receipt of the proceeds of sale of the Shares held by it against delivery of such Shares. (c) Payment for the Firm Shares to be sold hereunder is to be made in New York Clearing House funds by certified or bank cashier's checks drawn to the order of Boatmen's Trust Company, "as Custodian" against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business day after the date of this Agreement or at such other place, time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Initial Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the second full business day prior to the Initial Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Initial Closing Date. (d) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Selling Shareholders set forth on Schedule III hereby grant an option to the several Underwriters to purchase the respective amounts of Option Shares set forth opposite their names on Schedule III hereof at the price per share as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part by giving written notice (A) at any time before the Initial Closing Date and (B) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to an Attorney-in-Fact as named 14 in the Selling Shareholder's Agreement and Power of Attorney setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date", and the Initial Closing Date and any such Option Closing Date being collectively referred to herein as a "Closing Date"). If the date of exercise of the option is three or more days before the Initial Closing Date, the notice of exercise shall set the Initial Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the total number of Firm Shares, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Attorney-in-Fact. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of Boatmen's Trust Company, "as Custodian") against delivery of certificates therefor at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland. 3. OFFERING BY THE UNDERWRITERS. It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any 15 Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS. (a) The Company covenants and agrees with the several Underwriters that: (i) The Company will (A) use its best efforts to cause the Registration Statement to become effective at the earliest possible time or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations and (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations and (C) file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Company with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Shares by the Underwriters. (ii) The Company will advise the Representatives promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose, and (E) of the happening of any event during the period 16 referred to in clause (v) below which makes any statement of a material fact contained in the Registration Statement untrue or which results in the Registration Statement as of its effective date not containing a material fact required to be stated therein or necessary to make the statements therein not misleading. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (iii) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), including documents incorporated by reference therein, and of all amendments thereto, as the Representatives may reasonably request. 17 (v) The Company will comply with the Act and the Rules and Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"), and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (vi) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (vii) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Securities Exchange Act of 1934, as amended and copies of annual reports filed by the Company or any of its Subsidiaries or Related Entities with the Insurance Department of the State of Iowa or any other state insurance commission or department. The Company 18 will deliver to the Representatives similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements and with respect to the Related Entities. (viii) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or any derivative of Common Stock (or agreement for such) will be made and no registration statement with respect to any of the foregoing will be filed for a period of 180 days after the date of this Agreement, directly or indirectly, by the Company otherwise than with respect to the offer and sale of the Shares hereunder or with the prior written consent of Alex. Brown & Sons Incorporated, other than with respect to the offer and sale of Common Stock to employees of the Company pursuant to the Company's 1996 Class A Common Stock Compensation Plan. (ix) The Company will use its best efforts to list, subject to notice of sale and delivery hereunder, the Shares on the NYSE and to maintain the inclusion of the Shares for a period of five years after the effective date of the Registration Statement, it being understood that the Underwriters will use best efforts to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders. (x) The Company has caused each officer and director and shareholder of the Company specified by the Representatives to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such person shall agree not to offer, sell, sell short or otherwise dispose of any shares of Common Stock of the Company or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Stock or derivative of Common Stock owned by such person (or as to which such person has the right to direct the disposition) or file for or request the Company to effect the registration of the offer or sale of any of the foregoing for a period of 180 days after the date of this Agreement, directly or indirectly, except with the prior written consent of Alex. Brown & Sons Incorporated ("Lockup Agreements"). 19 (xi) [intentionally omitted] (xii) The Company shall not take any action as would require the Company or any of the Subsidiaries to register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). (xiii) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Class A Common Stock. (xiv) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (b) Each of the Selling Shareholders covenants and agrees with the several Underwriters that: (i) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other capital stock of the Company or other securities convertible, exchangeable or exercisable for Common Stock or derivative of Common Stock owned by the Selling Shareholder (or as to which the Selling Shareholder has the right to direct the disposition) and no request for the registration of the offer or sale of any of the foregoing will be made for a period of 180 days after the date of this Agreement, directly or indirectly, by such Selling Shareholder otherwise than with respect to the offer and sale of the Shares hereunder or with the prior written consent of Alex. Brown & Sons Incorporated. (ii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, each of the Selling Shareholders agrees to deliver to you prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). 20 (iii) Such Selling Shareholder will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company and the Selling Shareholders under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company and the Selling Shareholders; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters' Selling Memorandum, the Underwriters' Invitation Letter, the Listing Application, the preliminary and final Blue Sky Survey and any supplements or amendments to any of the foregoing; the filing fees of the Commission; the filing fees and expenses (including legal fees and disbursements) incident to securing any required review by the NASD of the terms of the sale of the Shares; the Listing Fee of the New York Stock Exchange; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. The Selling Shareholders have agreed with the Company to reimburse the Company for a portion of such expenses. To the extent, if at all, that any of the Selling Shareholders engage legal counsel to represent them in connection with this offering, the fees and expenses of such counsel shall be borne by such Selling Shareholder. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Selling Shareholders pro rata. The Company agrees to pay all costs and expenses of the Underwriters incident to the offer and sale of directed shares of the Class A Common Stock by the Underwriters to employees and persons having business relationships with the Company and its Subsidiaries. Neither the Company nor the Selling Shareholders shall be required to pay for any of the Underwriters expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or 21 because this Agreement is terminated by the Representatives pursuant to Section 11 hereof, or by reason of any failure, refusal or inability on the part of the Company or the Selling Shareholders to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on their part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company and the Selling Shareholders shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several obligations of the Underwriters to purchase the Shares on the Initial Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of such Closing Date of the representations and warranties of the Company and the Selling Shareholders contained herein, and to the performance by the Company and the Selling Shareholders of their covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company or the Selling Shareholders, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the applicable Closing Date which would prevent the sale of the Shares. 22 (b) The Representatives shall have received on the Initial Closing Date or the Option Closing Date, as the case may be, the opinions of Davis, Brown, Koehn, Shors & Roberts, P.C., counsel for the Company and those Selling Shareholders which are also Related Entities, dated the Initial Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Iowa, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; each of the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; each of the Selling Shareholders which is a Related Entity is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, with corporate power and authority to own its properties and conduct its business as described in the Registration Statement; the Company, each of the Subsidiaries and each of the Selling Shareholders which is a Related Entity is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, or in which the failure to qualify might result in a Material Adverse Effect; and the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable and are owned by the Company or a Subsidiary; and, to the best of such counsel's knowledge, the outstanding shares of capital stock of each of the Subsidiaries is owned free and clear of all liens, encumbrances, equities and claims, and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in the Subsidiaries are outstanding. 23 (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's capital stock have been duly authorized; the outstanding shares of the Company's Common Stock, including the Shares to be sold by the Selling Shareholders (including the Option Shares, if any), have been duly authorized and validly issued and are fully paid and non- assessable; all of the capital stock conforms to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they are in the form filed with the Commission, are in due and proper form; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. 24 (v) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules and other financial and statistical information included therein). (vi) The statements under the captions "Description of Capital Stock," "Dividend Policy," "Business--Regulation" and "Shares Eligible for Future Sale" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to such documents and provisions. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (viii) Such counsel knows of no (A) material action, suit or proceeding pending or threatened before or by any court or governmental agency or body (including, without limitation, any insurance regulatory agency or body) or official against or affecting the Company or any of the Subsidiaries except as set forth in the Prospectus or to which any of their respective properties is subject, which is required to be described in the Registration Statement or the Prospectus and is not so described or (B) statute, rule, regulation or order that has been enacted, adopted or issued by any governmental agency or body, and no injunction, restraining order or order of any nature by a court of competent jurisdiction that has been issued, that (Y) is required to be disclosed in Registration Statement or the Prospectus and that is not so disclosed or (Z) in 25 any manner seeks to challenge the validity of the Underwriting Agreement, or the Shares. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Articles of Incorporation or by-laws of the Company, the Subsidiaries or any Related Entity, or any agreement or instrument known to such counsel to which the Company or any of the Subsidiaries or any Related Entity is a party or by which the Company or any of the Subsidiaries or any Related Entity may be bound. (x) This Agreement has been duly authorized, executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) The Company and each of its Subsidiaries has the right to use the Farm Bureau and FB trademarks, service marks and trade names in their businesses as presently conducted and as proposed to be conducted. (xiii) None of the Company and its Subsidiaries is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and none will become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, such a company. 26 (xiv) This Agreement has been duly authorized, executed and delivered on behalf of each Selling Shareholder which is a Related Entity and constitutes a legal, valid and binding obligation of each such Selling Shareholder. (xv) Each Selling Shareholder which is a Related Entity has full legal right, power and authority, and any approval required by law (other than as required by State securities and Blue Sky laws as to which such counsel need express no opinion), to sell, assign, transfer and deliver the portion of the Shares to be sold by such Selling Shareholder. (xvi) The Custodian Agreement and the Selling Shareholder's Agreement and Power of Attorney executed and delivered by each Selling Shareholder which is a Related Entity is valid and binding on such Selling Shareholder. (xvii) The Underwriters (assuming that they are bona fide purchasers within the meaning of the Iowa Uniform Commercial Code) have acquired good and marketable title to the Shares being sold by each Selling Shareholder which is a Related Entity on the applicable Closing Date, free and clear of all liens, encumbrances, equities and claims. (xviii) The Company, each of its Subsidiaries and each Related Entity has such permits, licenses, franchises, approvals, orders, certificates and authorizations of governmental or regulatory authorities (including, without limitation, all permits, licenses, franchises, approvals, orders, certificates and authorizations of all applicable insurance regulatory agencies or bodies) (collectively, "permits") as are necessary to own, lease and operate its respective properties and to conduct its business in each jurisdiction where it is required to be so licensed or admitted to conduct its business as described in the Registration Statement and Prospectus; the Company, each of its Subsidiaries and each Related Entity has fulfilled and performed all of its obligations with respect to such permits (including, without limitation, having made all required declarations and filings with all insurance regulatory authorities, 27 commissions, governmental authorities, all self-regulatory organizations and all courts and other tribunals) and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other impairment of the rights of the holder of any such permit; and, except as described in the Prospectus, such permits contain no restrictions that are materially burdensome to the operation of the business of the Company or any of its Subsidiaries as currently conducted. None of the Company, any of its Subsidiaries or any Related Entity has received any notification from any insurance authority, commission or other insurance regulatory body or any other governmental authority to the effect that any additional consent, authorization, approval, order, license, certificate or permit from such authority, commission or body is needed to be obtained by any of the Company, any of its Subsidiaries or any Related Entity or that such authority, commission or body is considering limiting, suspending or revoking any such consent, authorization, approval, order, license, certificate or permit. (xix) No stamp, stamp duty reserve or other taxes, duties, assessments, fees or other charges are payable by or on behalf of the Underwriters in connection with the authorization, issuance and delivery of the Shares or any agreement or document executed or delivered in connection with the consummation of the transactions contemplated hereunder. (xx) The Company has filed an application to list the Shares on the NYSE, and has received notification that such listing has been approved, subject to notice of sale and delivery hereunder. In rendering such opinion Davis, Brown, Koehn, Shors & Roberts, P.C. may rely (A) as to matters governed by the laws of states other than Iowa or Federal laws on local counsel in such jurisdictions, (B) upon a certificate of the Company or a Selling Shareholder that is a Related Entity certifying as to the accuracy of the representations in respect of matters of fact made by the Company or such Selling Shareholder, respectively, herein and (C) on certificates provided by public officials as to matters 28 within the scope of such public officials' authority; provided that in each case Davis, Brown, Koehn, Shors & Roberts, P.C. shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (Y) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the applicable Closing Date contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (Z) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the applicable Closing Date contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Davis, Brown, Koehn, Shors & Roberts, P.C. may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received on the Initial Closing Date or the Option Closing Date, as the case may be, the opinions of counsel for each Selling Shareholder that is not a Related Entity, dated the Initial Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Selling Shareholder is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, with corporate power and authority to own its properties and conduct its business; the Selling Shareholder is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, or in which the failure to qualify might result in a Material Adverse Effect. 29 (ii) The Custodian Agreement and the Selling Shareholder's Agreement and Power of Attorney have been duly executed and delivered by each Selling Shareholder and constitute valid and binding obligations of such Selling Shareholder. (iii) This Agreement has been duly authorized, executed and delivered on behalf of the Selling Shareholder and constitutes a legal, valid and binding obligation of such Selling Shareholder. (iv) The execution and delivery of this Agreement, the sale of the Shares to be sold by the Selling Shareholder hereunder and the compliance by such Selling Shareholder with all of the provisions of this Agreement, and the Custodian Agreement and the Selling Shareholder's Agreement and Power of Attorney and the consummation of the transactions herein and therein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Articles of Incorporation or by-laws of the Selling Shareholder, or any agreement or instrument known to such counsel to which the Selling Shareholder is a party or by which the Selling Shareholder may be bound. (v) Each Selling Shareholder has full legal right, power and authority, and any approval required by law (other than as required by State securities and Blue Sky laws as to which such counsel need express no opinion), to sell, assign, transfer and deliver the portion of the Shares to be sold by such Selling Shareholder. (vi) The Underwriters (assuming that they are bona fide purchasers within the meaning of the Uniform Commercial Code) have acquired good and marketable title to the Shares being sold by each Selling Shareholder on the Initial Closing Date, or the Option Closing Date, as the case may be, free and clear of all liens, encumbrances, equities and claims. In rendering such opinion such counsel may rely (A) as to matters governed by the laws of states other than the state of incorporation of the Selling 30 Shareholder or Federal laws on local counsel in such jurisdictions, (B) upon a certificate of the Selling Shareholder certifying as to the accuracy of the representations in respect of matters of fact made by such Selling Shareholder herein and (C) on certificates provided by public officials as to matters within the scope of such public officials' authority, provided that in each case such counsel shall state that they believe that they and the Underwriters are justified in relying on such other counsel. (d) The Representatives shall have received from Debevoise & Plimpton, counsel for the Underwriters, an opinion dated the Initial Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ii), (iii), (iv), (v) and (x) of Paragraph (b) of this Section 6, and that the Company is a duly organized and validly existing corporation under the laws of the State of Iowa. In rendering such opinion Debevoise & Plimpton may rely as to all matters governed other than by the laws of the State of New York or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (A) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) as of each Closing Date contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein), and (B) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Debevoise & Plimpton may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. 31 (e) The Representatives shall have received at or prior to the Initial Closing Date from Debevoise & Plimpton a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (f) You shall have received, on each of the date hereof, and the applicable Closing Date, a letter dated the date hereof or such Closing Date, as the case may be, in form and substance satisfactory to you, of Ernst & Young LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (g) The Representatives shall have received on the applicable Closing Date, a certificate or certificates of the Chief Executive Officer and the principal financial officer of the Company to the effect that, as of such Closing Date: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) Such officer does not know of (A) any litigation instituted or threatened against the Company of a character required to be disclosed in the Registration Statement which is not so disclosed (B) any material contract required to be filed as an exhibit to the Registration Statement which is not so filed; and the representations and 32 warranties of the Company contained in Section 1 hereof are true and correct as of the Initial Closing Date or the Option Closing Date, as the case may be; (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; (iv) Such officer has carefully examined the Registration Statement and the Prospectus and, is of the opinion that, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any change or any development involving a prospective change that might result in a Material Adverse Effect, whether or not arising in the ordinary course of business. (h) The Representatives shall have received on the applicable Closing Date a certificate or certificates of the Chief Executive Officer and the principal financial officer of each of the Selling Shareholders to the effect that, as of such Closing Date, the representations and warranties of the Selling Shareholders contained in Section 1 hereof are true and correct as of such Closing Date. (i) The Representatives shall have received on or prior to the applicable Closing Date, from each Selling Shareholder, a properly completed and executed United States Treasury Department Form W-9 (or other applicable form statement specified by Treasury Department regulations in lieu thereof). 33 (j) The Company and the Selling Shareholders shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. (k) The Shares shall have been approved for listing on the New York Stock Exchange, subject to official notice of sale and delivery hereunder. (l) The NASD, upon review of the terms of the public offering of the Shares shall not have objected to the Underwriters' participation in such offering. (m) The Lockup Agreements described in Section 4(a)(viii) and (x) and Section 4(b)(i) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Debevoise & Plimpton, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company and the Attorney-in-Fact for the Selling Shareholders of such termination in writing or by telegram at or prior to the applicable Closing Date. In such event, the Selling Shareholders, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE SELLING SHAREHOLDERS. The obligations of the Selling Shareholders to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the applicable Closing Date no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 34 8. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company will not be liable (A) in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof or (B) with respect to any Preliminary Prospectus to the extent that any such loss, claim, damage or liability of such Underwriter or controlling person results solely from the fact that such Underwriter sold Shares to a person as to whom the Company shall establish that there was not sent by commercially reasonable means, at or prior to the written confirmation of such sale, a copy of the Prospectus in any case where such delivery is required by the Act, if the Company has previously furnished copies thereof in sufficient quantity to such Underwriter and the loss, claim, damage or liability of such Underwriter or controlling person results from an untrue statement or omission of a material fact 35 contained in the Preliminary Prospectus that was corrected in the Prospectus. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each of the Selling Shareholders, severally and not jointly, agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that such Selling Shareholder will not be liable (A) in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof or (B) with respect to any Preliminary Prospectus to the extent that any such loss, claim, damage or liability of such Underwriter or controlling person results solely from the fact that such Underwriter sold Shares to a person as to whom the Company shall establish that there was not sent by commercially reasonable means, at or prior to the written confirmation of such sale, a copy of the Prospectus in any case where such delivery is required 36 by the Act, if the Company has previously furnished copies thereof in sufficient quantity to such Underwriter and the loss, claim, damage or liability of such Underwriter or controlling person results from an untrue statement or omission of a material fact contained in the Preliminary Prospectus that was corrected in the Prospectus; and provided further that the liability of any Selling Shareholder under this subsection (b) shall be limited to an amount equal to the total proceeds received by such Selling Shareholder from the offering of the Shares sold by such Selling Shareholder under this Agreement. This indemnity agreement will be in addition to any liability which such Selling Shareholder may otherwise have. (c) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, the Selling Shareholders, and each person, if any, who controls the Company or the Selling Shareholders within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, Selling Shareholder or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, Selling Shareholder or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically 37 for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a), (b) or (c) shall be available to any party who shall fail to give notice as provided in this Section 8(d) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a), (b) or (c). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is 38 understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) or (b) and by the Company and the Selling Shareholders in the case of parties indemnified pursuant to Section 8(c). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (e) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a), (b) or (c) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholders on the one hand and the Under- 39 writers on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(e), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation, and (iii ) no Selling Shareholder shall be required to contribute any amount in excess of the proceeds received by such 40 Selling Shareholder from the Underwriters in the offering. The Underwriters' obligations in this Section 8(e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. DEFAULT BY UNDERWRITERS. If on the Initial Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company or a Selling Shareholder), you, as Representatives of the Underwriters, shall use your 41 reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Selling Shareholders such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company and the Selling Shareholders or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company or of the Selling Shareholders except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Initial Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, 42 will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention: Peter F. de Vos, with a copy to Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention: General Counsel; if to the Company or the Selling Shareholders, to FBL Financial Group, Inc., 5400 University Avenue, West Des Moines, Iowa 50266, Attention: Stephen M. Morain, General Counsel. 11. TERMINATION. This Agreement may be terminated by you by notice to the Company and the Selling Shareholders as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Initial Closing Date if any of the following has occurred: (I) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any change or any development involving a prospective material adverse change that might have a Material Adverse Effect, whether or not arising in the ordinary course of business, (II) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Shares or to enforce contracts for the sale of the Shares, or (iii) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion might have a Material Adverse Effect, (v) declaration of a banking moratorium by United States or New York State authorities, (vi) any downgrading in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for 43 purposes of Rule 436(g) under the Exchange Act), (vii) the suspension of trading of the Company's common stock by the Commission on the New York Stock Exchange or (viii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. This Agreement also may be terminated by you, by notice to the Company and the Selling Shareholders, as to any obligation of the Underwriters to purchase the Option Shares, upon the occurrence at any time prior to the Option Closing Date of any of the events described in subparagraph (b) above or as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters, the Company and the Selling Shareholders and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. The Company, the Selling Shareholders and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation S-K under the Act and the information contained in the third paragraph of text under the caption "Underwriting" in the Prospectus, concerning the terms of the offering by the Underwriters. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force 44 and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Selling Shareholders, the Company and the several Underwriters in accordance with its terms. Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Shareholder represents by so doing that he has been duly appointed as Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-Fact to take such action. 45 Very truly yours, FBL FINANCIAL GROUP, INC. By ------------------------ Chief Executive Officer Selling Shareholders listed on Schedule II By -------------------------- Attorney-in-Fact The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. ALEX. BROWN & SONS INCORPORATED EVEREN SECURITIES, INC. SMITH BARNEY INC. As Representatives of the several Underwriters listed on Schedule I By: Alex. Brown & Sons Incorporated By: ---------------------- Authorized Officer 46 SCHEDULE I SCHEDULE OF UNDERWRITERS Underwriter Number of Firm Shares ----------- to be Purchased Alex. Brown & Sons Incorporated ---------------------- Everen Securities, Inc. Smith Barney Inc. Total 47 SCHEDULE II SCHEDULE OF SELLING SHAREHOLDERS Name of Number of Firm Shares Selling Shareholder to be Sold - ------------------- --------------------- Farm Bureau Mutual Insurance Company Rural Mutual Insurance Company Farm Bureau Insurance Company of Nebraska Colorado Farm Bureau Mutual Insurance Company Mountain West Farm Bureau Mutual Insurance Company Western Agricultural Insurance Company Nodak Mutual Insurance Company Farm Bureau Finance Company, Inc. (Idaho) 48 SCHEDULE III SCHEDULE OF SELLING SHAREHOLDERS Name of Number of Option Shares Selling Shareholder to be Sold - ------------------- ------------------------ 49 EXHIBIT A Name of Number of Shares of Subsidiary Owned Capital Stock Outstanding - ---------------- ------------------------- 50 EX-10.1 3 EXHIBIT 10.1 AMENDED AND RESTATED FBL FINANCIAL GROUP, INC. 1996 CLASS A COMMON STOCK COMPENSATION PLAN (July 10, 1996) Effective Date: July, 1996 AMENDED AND RESTATED FBL FINANCIAL GROUP, INC. 1996 CLASS A COMMON STOCK COMPENSATION PLAN 1. PURPOSE. The purpose of the Plan is to provide additional incentive to those officers, employees, advisors and consultants of the Company and its Subsidiaries whose substantial contributions are essential to the continued growth and success of the Company's business in order to strengthen their commitment to the Company and its Subsidiaries, to motivate them to faithfully and diligently perform their assigned responsibilities and to attract and retain competent and dedicated individuals whose efforts will result in the long-term growth and profitability of the Company. An additional purpose of the Plan is to build a proprietary interest among the Non-Employee Directors of the Company and its First Tier Subsidiaries and thereby secure for the Company's stockholders the benefits associated with common stock ownership by those who will oversee the Company's future growth and success. To accomplish such purposes, the Plan provides that the Company may grant Incentive Stock Options, Nonqualified Stock Options, Restricted Stock, Stock Bonuses or Stock Appreciation Rights. The provisions of the Plan are intended to satisfy the requirements of Section 16(b) of the Exchange Act. 2. DEFINITIONS. For purposes of this Plan: (a) "Advisor" or "Consultant" means an advisor or consultant who is an independent contractor with respect to the Company or a Subsidiary, and who provides bona fide services (other than in connection with the offer or sale of securities in a capital raising transaction) to the executive officers or Board of Directors with regarding to major functions, portions or operations of the Company's business; who is not an employee, officer, director or holder of more than 10% of the outstanding voting securities of the Company; and whose services the Committee determines is of vital importance to the overall success of the Company. (b) "Agreement" means the written agreement evidencing the grant of an Award and setting forth the terms and conditions thereof. (c) "Award" means, individually or collectively, a grant under this Plan of Options, Stock Appreciation Rights, Restricted Stock or Stock Bonuses. (d) "Board" means the Board of Directors of the Company. (e) "Change in Capitalization" means any increase, reduction, or change or exchange of Shares for a different number or kind of shares or other securities of the Company by reason of a reclassification, recapitalization, merger, consolidation, reorganization, issuance of warrants or rights, stock dividend, stock split or reverse stock split, combination or exchange of Shares, repurchase of Shares, change in corporate structure or otherwise. (f) "Change in Control" means one of the following events: (i) any "person" (as defined in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary, or any corporation owned, directly or indirectly, by the stockholders of the Company, in substantially the same proportions as their ownership of stock of the Company, acquires "beneficial ownership" (as defined in rule 13d-3 under the Exchange Act) of securities representing 35% of the combined voting power of the Company; or (ii) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board and any new directors (other than any director 2 designated by a person who has entered into an agreement with the Company to effect a transaction described in subsections 2(f)(i), 2(f)(iii), or 2(f)(iv) of this Plan) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) the stockholders of the Company approve a merger other than (A) a merger that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary, at least 50% of the combined voting power of all classes of stock of the Company or such surviving entity outstanding immediately after such merger or (B) a merger effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or a sale of all or substantially all of the assets of the Company. (g) "Code" means the Internal Revenue Code of 1986, as amended. (h) "COMMITTEE" means a committee which may be appointed by the Board to administer the Plan to perform the functions set forth herein, composed of two or more directors who are Non- Employee Directors, as defined in paragraph (b)(3)(i) of Rule 16b-3 under the Exchange Act. Unless and until the Board appoints such Committee, the Board shall administer the Plan and perform the functions set forth herein, and references herein to the Committee shall be deemed to refer to the Board. (i) "Company" means FBL Financial Group, Inc., an Iowa corporation, or any successor thereto. (j) "Disability" means the inability, due to illness or injury, to engage in any gainful occupation for which the individual is suited by education, training or experience, which condition continues for at least six (6) months. (k) "Effective Date of this Plan" shall be the date on which the Registration Statement relating to Class A Common Stock of the Company becomes effective under the Securities Act. (l) "Eligible Employee" means any officer, employee, advisor or consultant of the Company or a Subsidiary of the Company designated by the Committee as eligible to receive Awards subject to the conditions set forth herein. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Executive Officer" shall mean an officer of the Company named by the Board of Directors as an executive officer for purposes of required reporting under Section 16 of the Exchange Act. (o) "Fair Market Value" means the fair market value of the Shares as determined by the Committee in its sole discretion; provided, however, that (A) if the Shares are then admitted to trading on a national securities exchange, the Fair Market Value on any date shall be the last sale price reported for the Shares on such exchange on such date or on the last date preceding such date on which a sale was reported, (B) if the Shares are admitted to quotation on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or other comparable quotation system and have been designated as a National Market System ("NMS") security, the Fair Market Value on any date shall be 3 the last sale price reported for the Shares on such system on such date or on the last day preceding such date on which a sale was reported or (C) if the Shares are admitted to quotation on NASDAQ and have not been designated an NMS security, the Fair Market Value on any date shall be the average of the highest bid and lowest asked prices of the shares on such system on such date. (p) "First Tier Subsidiary" means a corporation 50% or more of whose stock possessing voting power is owned directly by the Company. (q) "Farm Bureau Organization" means the American Farm Bureau Federation (an Illinois non-profit corporation), each state Farm Bureau Federation associated with the American Farm Bureau Federation, each county Farm Bureau associated with any such state Farm Bureau Federation, and all corporations, partnerships and other entities controlled by, or under common control with any such organization, or authorized by the American Farm Bureau Federation to use the tradename "Farm Bureau" or "FB" in its name or operations. (r) "Incentive Stock Option" means an Option within the meaning of Section 422 of the Code. (s) "Non-Employee Director" means a member of the Board or a member of the board of directors of a First Tier Subsidiary, who is not an employee of the Company or a Subsidiary. (t) "Nonqualified Stock Option" means an Option which is not an Incentive Stock Option. (u) "Option" means an Incentive Stock Option, a Nonqualified Stock Option, or either or both of them, as the context requires. (v) "Participant" means a person to whom an Award has been granted under the Plan. (w) "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is restricted in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, at its discretion), and is subject to a substantial risk of forfeiture, as provided in Section 10 below. (x) "Plan" means the FBL Financial Group, Inc. 1996 Class A Common Stock Compensation Plan, as amended from time to time. (y) "Predecessor" means any Farm Bureau Organization. (z) "Registration Statement" means the first registration statement to become effective under the Securities Act relating to Class A Common Stock of the Company. (aa) "Restricted Stock" means a Stock Award granted to a Participant pursuant to Section 10 below which the Committee has determined should be subject to one or more restrictions on transfer for a specified Period of Restriction. (bb) "Retirement" means termination of employment of a Participant by the Company (other than as a result of death or disability) if the Participant is at least 55 years of age and the Participant's combined (i) years of employment with the Company, its Subsidiaries and Predecessors and (ii) age, equals or exceeds eighty-five (85). (cc) "Securities Act" means the Securities Act of 1933, as amended. 4 (dd) "Shares" means shares of the Class A Common Stock, without par value of the Company (including any new, additional or different stock or securities resulting from a Change in Capitalization), as the case may be. (ee) "Stock Appreciation Right" means a right to receive all or some portion of the increase in the value of Shares as provided in Section 7 hereof. (ff) "Stock Bonus" shall mean a grant of Shares to an Employee, Advisor or Consultant pursuant to Section 10 below. (gg) "Subsidiary" means any corporation in a descending, unbroken chain of corporations, beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (hh) "Ten-Percent Stockholder" means an Eligible Employee, who, at the time an Incentive Stock Option is to be granted to such Eligible Employee, owns (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, a parent or a Subsidiary within the meaning of Sections 424(e) and 424(f), respectively, of the Code. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board or, if the Board so determines, by a Committee, which Committee shall at all times satisfy the provisions of Rule 16b-3 under the Exchange Act. The Committee shall hold meetings at such times as may be necessary for the proper administration of the Plan. The Committee shall keep minutes of its meetings. A majority of the Committee shall constitute a quorum and a majority of a quorum may authorize any action. Any decision reduced to writing and signed by all of the members of the Committee shall be fully effective as if it had been made at a meeting duly held. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, Options, or Stock Appreciation Rights, and all members of the Committee shall be fully indemnified by the Company with respect to any such action, determination or interpretation. The Company shall pay all expenses incurred in the administration of the Plan. (b) Subject to the express terms and conditions set forth herein, the Committee shall have the power from time to time: (i) to determine those Eligible Employees to whom Awards shall be granted under the Plan and the number of Shares subject to such Awards to be granted to each Eligible Employee and to prescribe the terms and conditions (which need not be identical) of each Award, including the purchase price per share of each Award, and the forfeiture provisions, if any, if the Employee leaves the employment of the Company or a Subsidiary within a prescribed time or acts against the interests of the Company within a prescribed time; (ii) to construe and interpret the Plan, the Awards granted hereunder and to establish, amend and revoke rules and regulations for the administration of the Plan, including, but not limited to, correcting any defect or supplying any omission, or reconciling any inconsistency in the Plan or in any Agreement, and (subject to the provisions of Section 13 below) to amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan, in the manner and to the extent it shall deem necessary or advisable to make the Plan fully effective, and all decisions and determinations by the Committee in the 5 exercise of this power shall be final and binding upon the Company or a Subsidiary, and the Participants, as the case may be; (iii)to determine the duration and purposes for leaves of absence which may be granted to a Participant without constituting a termination of employment or service for purposes of the Plan; and (iv) generally, to exercise such powers and to perform such acts as are deemed necessary or advisable to promote the best interests of the Company with respect to the Plan. 4. STOCK SUBJECT TO PLAN. (a) The maximum number of Shares that may be issued or transferred pursuant to Awards granted under this Plan is one million seven hundred fifty thousand (1,750,000) (or the number and kind of shares of stock or other securities that are substituted for those Shares or to which those Shares are adjusted upon a Change in Capitalization), and the Company shall reserve for the purposes of the Plan, out of its authorized but unissued Shares, such number of Shares as shall be determined by the Board. (b) Whenever any outstanding Award or portion thereof expires, is canceled or is otherwise terminated (other than by exercise of the Award ), the Shares allocable to the unexercised portion of such Award may again be the subject of Awards hereunder, to the extent permitted by Rule 16b-3 under the Exchange Act. 5. ELIGIBILITY. Subject to the provisions of the Plan, the Committee shall have full and final authority to select those Eligible Employees who will receive Awards. 6. OPTIONS. The Committee may grant Options in accordance with the Plan, the terms and conditions of which shall be set forth in an Agreement. Each Option and Agreement shall be subject to the following conditions: (a) PURCHASE PRICE. The purchase price or the manner in which the purchase price is to be determined for Shares under each Option shall be set forth in the Agreement; provided, however, that the purchase price per Share under each Nonqualified Stock Option shall not be less than 85% of the Fair Market Value of a Share at the time the Option is granted, 100% in the case of an Incentive Stock Option generally and 110% in the case of an Incentive Stock Option granted to a Ten-Percent Stockholder. (b) DURATION. Options granted hereunder shall be for such term as the Committee shall determine; provided, however, that no Option shall be exercisable after the expiration of ten (10) years from the date it is granted (five (5) years in the case of an Incentive Stock Option granted to a Ten-Percent Stockholder). The Committee may, subsequent to the granting of any Option, extend the term thereof but in no event shall the term as so extended exceed the maximum term provided for in the preceding sentence. (c) NON-TRANSFERABILITY. No Option granted hereunder shall be transferable by the Participant to whom such Option is granted otherwise than (i) except for an Incentive Stock Option, by gift, to an immediate family member or members, or to a partnership or limited liability company consisting only of immediate family members, or to a trust solely for the benefit of the Participant and/or immediate family members, (a "donee" or "assignee"), (ii) by will or the laws of descent and distribution, or (iii) pursuant to a qualified domestic relations order as defined in the Code, and an Option may be exercised during the lifetime of such Participant only by the Participant, the Participant's donee, or such Participant's guardian or legal representative. The terms of such Option shall be binding upon the beneficiaries, executors, administrators, heirs, donees and successors of the Participant. 6 (d) VESTING. Subject to subsection 6(e) below, unless otherwise set forth in the Agreement, each Option shall become exercisable upon the earlier of (i) as to all of the Shares covered by the Option on the death, Retirement or Disability of the Participant; (ii) as to 20 percent of the Shares covered by the Option on the first anniversary of the date the Option was granted and as to an additional 20 percent of the Shares covered by the Option on each of the following four (4) anniversaries of such date of grant. To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires. The Committee may accelerate the exercisability of any Option or portion thereof at any time. (e) ACCELERATED VESTING. Notwithstanding the provisions of subsection 6(d) above, each Option granted to a Participant shall become immediately exercisable in full upon the occurrence of a Change in Control. (f) TERMINATION OF EMPLOYMENT. In the event that a Participant ceases to be employed by the Company or any Subsidiary, any outstanding Options held by such Participant shall, unless this Plan or the Agreement evidencing such Option provides otherwise, terminate as follows: (i) If the Participant's termination of employment is due to his death, Disability, or Retirement, the Option shall be exercisable for a period of three (3) years following such termination of employment, and shall thereafter terminate; and (ii) If the Participant's termination of employment is for any other reason (including a Participant's ceasing to be employed by a Subsidiary as a result of the sale of such Subsidiary or an interest in such Subsidiary), the Option (to the extent exercisable at the time of the Participant's termination of employment) shall be exercisable for a period of thirty (30) days following such termination of employment, and shall thereafter terminate. Notwithstanding the foregoing, the Committee may provide, either at the time an Option is granted or thereafter, that the Option may be exercised after the periods provided for in this Section 6(f), but in no event beyond the term of the Option. (g) METHOD OF EXERCISE. The exercise of an Option shall be made only by a written notice delivered to the SECRETARY of the Company at the Company's principal executive office, specifying the number of shares to be purchased and accompanied by payment therefor and otherwise in accordance with the Agreement pursuant to which the Option was granted. The purchase price for any Shares purchased pursuant to the exercise of an Option shall be paid in full upon such exercise in cash, by check, or, at the discretion of the Committee and upon such terms and conditions as the Committee shall approve, by transferring Shares to the Company or by such other method as the Committee may determine. Any Shares transferred to the Company as payment of the purchase price under an Option shall be valued at their Fair Market Value on the day preceding the date of exercise of such Option. If requested by the Committee, the Participant shall deliver the Agreement evidencing the Option or the Agreement evidencing any Stock Appreciation Right to the SECRETARY of the Company who shall endorse thereon a notation of such exercise and return such Agreement to the Participant. Not less than 100 Shares may be purchased at any time upon the exercise of an Option unless the number of Shares so purchased constitutes the total number of Shares then purchasable under the Option. (h) CONVERSION OF OPTION. (i) In addition to, and without limiting, the other rights of the Participant, the Participant may, in the discretion of the Committee, be given the right (the "Conversion Right") to convert an Option into Option Shares at any time during the term thereof. Upon 7 exercise of the Conversion Right, the Company shall deliver to the Participant, without payment by the Participant of any purchase price or any cash or other consideration, that number of Option Shares computed using the following formula: X=Y (A-B) ----- A Where: X= The number of Option Shares to be issued to the Participant Y= The number of Option Shares purchasable pursuant to the Participant's Option A= The Fair Market Value of one Option Share as of the Conversion Date B= The Stock Purchase Price The Conversion Right may be exercised by the Participant by the surrender of the Option Award to the Company at its principal office, together with a written notice specifying that the Participant intends to exercise the Conversion Right and indicating conversion shall be effective upon the Company's receipt of the Option Award, together with the conversion notice, or on such later date as is specified in the conversion notice (the "Conversion Date"). Certificates for the Option Shares so acquired shall be delivered to the Participant within a reasonable time, not exceeding fifteen (15) days after the Conversion Date. If applicable, the Company shall, upon surrender of the Option award for cancellation, deliver a new Option evidencing the rights of the Participant to purchase the balance of the Option Shares which the Participant is entitled to purchase thereunder. (i) RIGHTS OF PARTICIPANTS. No Participant shall be deemed for any purpose to be the owner of any Shares subject to any Option unless and until (i) the Option shall have been exercised pursuant to the terms thereof, (ii) the Company shall have issued and delivered the Shares to the Participant, and (iii) the Participant's name shall have been entered as a stockholder of record on the books of the Company. Thereupon, the Participant shall have full voting, dividend and other ownership rights with respect to such Shares. 7. STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant a Stock Appreciation Right alone (a "Free Standing Stock Appreciation Right") or in conjunction with the grant of an Option (a "Related Stock Appreciation Right"), in either case, in accordance with the Plan, and the terms and conditions of such Stock Appreciation Right shall be set forth in an Agreement. A Related Stock Appreciation Right shall cover the same Shares covered by the related Option (or such lesser number of Shares as the Committee may determine) and shall, except as provided in this Section 7 be subject to the same terms and conditions as the related Option. (a) GRANT OF STOCK APPRECIATION RIGHTS. (i) TIME OF GRANT OF RELATED STOCK APPRECIATION RIGHT. A Related Stock Appreciation Right may be granted either at the time of grant, or at any time thereafter during the term of the Option; PROVIDED, HOWEVER, that Related Stock Appreciation Rights related to Incentive Stock Options may only be granted at the time of grant of the Option. (ii) PURCHASE PRICE. The purchase price or the manner in which the purchase price is to be determined for Shares covered by each Free Standing Stock Appreciation Right shall be set forth in the Agreement; PROVIDED, HOWEVER, that the purchase price per Share under each Free Standing Stock Appreciation Right shall not be less than 85% of the Fair Market Value of a Share at the time the Free Standing Stock Appreciation Right is granted. The purchase price or the manner in which the purchase price is to be 8 determined for Shares covered by each Related Stock Appreciation Right shall be set forth in the Agreement for the related Option. (iii)PAYMENT. A Stock Appreciation Right shall entitle the holder thereof, upon exercise of the Stock Appreciation Right or any portion thereof, to receive payment of the amount computed pursuant to Section 7 (a) (vi) below. (iv) EXERCISE. Free Standing Stock Appreciation Rights generally will be exercisable at such time or times, and may be subject to such other terms and conditions, as shall be determined by the Committee, in its discretion, and such terms and conditions shall be set forth in the Agreement; PROVIDED, HOWEVER, that no Free Standing Stock Appreciation Right shall be exercisable after the expiration of ten (10) years from the date it is granted. No Free Standing Stock Appreciation Right granted hereunder shall be transferable by the Participant to whom such right is granted otherwise than by will or the laws of descent and distribution, and a Free Standing Stock Appreciation Right may be exercised during the lifetime of such Participant only by the Participant or such Participant's guardian or legal representative. The terms of such Free Standing Stock Appreciation Right shall be binding upon the beneficiaries, executors, administrators, heirs and successors of the Participant. Subject to subsection 7(a)(v) below, a Related Stock Appreciation Right shall be exercisable at such time or times and only to the extent that the related Option is exercisable, and will not be transferable except to the extent the related Option may be transferable. A Related Stock Appreciation Right granted in conjunction with an Incentive Stock Option shall be exercisable only if the Fair Market Value of a Share on the date of exercise exceeds the purchase price specified in the related Incentive Stock Option. (v) ACCELERATED VESTING. Notwithstanding the provisions of subsection 7(a)(iv) above, each Stock Appreciation Right granted to a Participant shall become immediately exercisable in full upon the occurrence of a Change in Control. (vi) AMOUNT PAYABLE. Upon the exercise of a Stock Appreciation Right, the Participant shall be entitled to receive an amount determined by multiplying (A) the excess of the Fair Market Value of a Share on the date of exercise of such Stock Appreciation Right over (i) with respect to a Related Stock Appreciation Right, the per Share purchase price under the related Option, and (ii) with respect to a Free Standing Stock Appreciation Right, the per Share purchase price set forth in the Agreement by (B) the number of Shares as to which such Stock Appreciation Right is being exercised. Notwithstanding the foregoing, the Committee may limit in any manner the amount payable with respect to any Stock Appreciation Right by including such a limit at the time it is granted. (vii)TREATMENT OF RELATED OPTIONS AND RELATED STOCK APPRECIATION RIGHTS UPON EXERCISE. Upon the exercise of a Related Stock Appreciation Right, the related Option shall be canceled to the extent of the number of Shares as to which the Related Stock Appreciation Right is exercised and upon the exercise of an Option granted in conjunction with a Related Stock Appreciation Right, the Related Stock Appreciation Right shall be canceled to the extent of the number of Shares as to which the related Option is exercised or surrendered. (b) METHOD OF EXERCISE. Stock Appreciation Rights shall be exercised by a Participant only by a written notice delivered in person or by mail to the Secretary of the Company at the Company's principal executive office, specifying the number of Shares with respect to which the Stock Appreciation 9 Right is being exercised. If requested by the Committee, the Participant shall deliver the Agreement evidencing the Stock Appreciation Right being exercised and with respect to a Related Stock Appreciation Right, the Agreement evidencing any related Option to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Agreement or Agreements to the Participant. (c) FORM OF PAYMENT. Payment of the amount determined under Sections 7(a)(vi) above, may be made solely in whole Shares in a number determined based upon their Fair Market Value on the date of exercise of the Stock Appreciation Right or, alternatively, at the sole discretion of the Committee, solely in cash, or in a combination of cash and Shares as the Committee deems advisable. In the event that a Stock Appreciation Right is exercised within the sixty-day period following a Change in Control, any amount payable shall be solely in cash. If the Committee decides to make full payment in Shares, and the amount payable results in a fractional Share, payment for the fractional Share will be made in cash. 8. LOANS. (a) The Company or any or Subsidiary may make loans to a Participant in connection with the exercise of an Option, subject to the following terms and conditions and such other terms and conditions not inconsistent with the Plan including the rate of interest, if any, as the Committee shall impose from time to time. (b) No loan made under the Plan shall exceed the sum of (i) the aggregate purchase price payable pursuant to the Option with respect to which the loan is made, plus (ii) the amount of the reasonably estimated income taxes payable by the Participant with respect to the exercise of the Option reduced by (iii) the aggregate part of the purchase price of the Shares being acquired pursuant to exercise of the Option not allocated to Additional Paid in Capital. In no event may any such loan exceed the Fair Market Value, at the date of exercise, of the Shares received pursuant to such exercise. (c) No loan shall have an initial term exceeding ten (l0) years; provided, however, that loans under the Plan shall be renewable at the discretion of the Committee; and provided, however, that the indebtedness under each loan shall become due and payable, as the case may be, on a date no later than (i) one (1) year after termination of the Participant's employment due to death or disability, or (ii) the date of termination of the Participant's employment for any reason other than death or disability. (d) Loans under the Plan may be satisfied by a Participant, as determined by the Committee, in cash or, with the consent of the Committee, in whole or in part by the transfer to the Company of Shares whose Fair Market Value on the date of such payment is equal to part or all of the outstanding balance of such loan. (e) A loan shall be secured by a pledge of Shares with a Fair Market Value of not less than the principal amount of the loan. After any repayment of a loan, pledged Shares no longer required as security may be released to the Participant. (f) Every loan shall meet all applicable laws, regulations and rules of the Federal Reserve Board and any other governmental agency having jurisdiction. 9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. (a) In the event of a Change of Capitalization, the Committee shall conclusively determine the appropriate adjustments, if any, to the maximum number and class of shares of stock with respect to which Awards may be granted under the Plan, and to the number and class of shares of stock as to which Awards have been granted under the Plan, and the purchase price therefor, if applicable. 10 (b) Any such adjustment in the Shares or other securities subject to outstanding Incentive Stock Options (including any adjustments in the purchase price) shall be made in such manner as not to constitute a modification as defined by Section 424(h)(3) of the Code and only to the extent otherwise permitted by Sections 422 and 424 of the Code. 10. STOCK BONUSES. (a) GRANT OF STOCK BONUSES. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares to Employees, Advisors and Consultants either outright or subject to such restrictions as the Committee shall determine pursuant to this Section 10, and in such amounts as the Committee shall determine. (b) RESTRICTED STOCK AGREEMENT. If the Committee grants Shares subject to restrictions, each such grant shall be evidenced by a Restricted Stock Agreement that shall specify the Period of Restriction, or Periods, the number of Shares of Restricted Stock granted, and such other provisions as the Committee shall determine. (c) TRANSFERABILITY. Except as provided in this Section 10, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee and specified in the Restricted Stock Agreement, or upon earlier satisfaction of any other conditions, as specified by the Committee in its sole discretion and set forth in the Restricted Stock Agreement. However, in no event may any Restricted Stock granted under this Plan to an Executive Officer or Director become vested in a Participant prior to twelve (12) months following the date of its grant. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be available during his or her lifetime only by such Participant. (d) OTHER RESTRICTIONS. The Committee shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, restrictions based upon the achievement of specific (Company-wide, divisional, and/or individual) performance goals, and/or restrictions under applicable Federal or state securities laws; and may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. (e) CERTIFICATE LEGEND. In addition to any legends placed on certificates pursuant to subsection 10(d), each certificate representing Shares of Restricted Stock granted pursuant to the Plan shall bear the following legend: "The sale or other transfer of the Shares of Stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer as set forth in the FBL Financial Group, Inc. 1996 Class A Common Stock Compensation Plan and in a Restricted Stock Agreement dated ____________. A copy of the Plan and such Restricted Stock Agreement may be obtained from the Secretary of FBL Financial Group, Inc." (f) REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Section, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the Period of Restriction. Once the Shares are released from the restrictions, the Participant shall be entitled to have the legend required by subsection 10(e) removed from his Stock certificate. (g) VOTING RIGHTS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise voting rights, if any, with respect to those Shares. (h) DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder shall be entitled to receive all dividends and other 11 distributions paid with respect to those Shares while they are so held. If any such dividends or distributions are paid in Shares of Stock, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid. (i) TERMINATION OF EMPLOYMENT. In the event that a Participant experiences a termination of employment with the Company for any reason, including death, Disability, or Retirement, (as defined herein or under the then-established rules of the Company), any and all of the Participant's Shares of Restricted Stock still subject to restrictions as of the date of termination shall automatically be forfeited and returned to the Company; provided, however, that the Committee, in its sole discretion, may waive the restrictions remaining on any or all Shares of Restricted Stock, pursuant to this Section 10, and add such new restrictions to those Shares of Restricted Stock as it deems appropriate. 11. NON-EMPLOYEE DIRECTOR OPTIONS. Notwithstanding any of the other provisions of the Plan to the contrary, the provisions of this Section 11 shall apply only to grants of Options to Non-Employee Directors. Except as set forth in this Section 11, the other provisions of the Plan shall apply to grants of Options to Non-Employee Directors to the extent not inconsistent with this Section. For purposes of interpreting Section 6 of this Plan, a Non-Employee Director's service as a member of the Board of Directors of the Company or of a First Tier Subsidiary shall be deemed to be employment with the Company or its Subsidiaries. (a) GENERAL. Non-Employee Directors shall receive Nonqualified Stock Options in accordance with this Section 11 and may not be granted Stock Appreciation Rights or Incentive Stock Options under this Plan. Prior to the Registration Date, the purchase price or the manner in which the purchase price is to be determined for Shares purchasable under Options granted to Non-Employee Directors shall be determined by the Board. On and after the Registration Date, the purchase price per Share purchasable under Options granted to Non-Employee Directors shall be the Fair Market Value of a Share on the date of grant. No Agreement with any Non- Employee Director may alter the provisions of this Section and no Option granted to a Non-Employee director may be subject to a discretionary acceleration of exercisability. (b) GRANTS TO CURRENT NON-EMPLOYEE DIRECTORS. Each Non-Employee Director and each Non-Employee Director of a First Tier Subsidiary on the Effective Date of this Plan will, without action by the Committee, be granted automatically an Option to purchase 2,000 Shares at the price at which Shares are first offered to the public pursuant to the Registration Statement. (c) GRANTS TO NEW NON-EMPLOYEE DIRECTORS. Each Non-Employee Director who, after the Effective Date of this Plan is elected or appointed to the Board of the Company or to the board of directors of a First Tier Subsidiary for the first time will, at the time such director is so elected or appointed and duly qualified, be granted automatically, without action by the Committee, an Option to purchase 2,000 Shares. (d) VESTING. Each Option granted to Non-Employee Directors shall be immediately exercisable as to all of the Shares covered by the Option. Sections 6(d) and 6(f) of this Plan shall not apply to Options granted to Non-Employee Directors. (e) DURATION. Subject to the immediately following sentence, each Option granted to a Non-Employee Director shall be for a term of 10 years. Upon the cessation of a Non-Employee Director's membership on the Board for any reason, Options granted to such Non-Employee Director shall expire upon the earlier of (i) three (3) years from the date of such cessation of Board membership or (ii) expiration of the term of the Option. The Committee may not provide for an extended exercise period beyond the periods set forth in this Section 11(e). 12 (f) DECLINING AWARDS. Notwithstanding any automatic grant of an Award to a Non-Employee Director under this Section 11, a Non-Employee Director may elect, at any time before the automatic Award would otherwise be made, to decline an automatic Award under this Plan or to revoke a previous election to decline an automatic grant of an Award. A Non-Employee Director who elects to decline the automatic grant of an Award under this Plan shall receive nothing in lieu of such Award (either at the time of such election or at any time thereafter). 12. RELEASE OF FINANCIAL INFORMATION. A copy of the Company's annual report to stockholders shall be delivered to each Participant if and at the time any such report is distributed to the Company's stockholders. Upon request, by any Participant, the Company shall furnish to such Participant a copy of its most recent annual report and each quarterly report and current report filed under the Exchange Act since the end of the Company's prior fiscal year. 13. TERMINATION AND AMENDMENT OF THE PLAN. The Plan shall terminate on the day preceding the tenth anniversary of its Effective Date, except with respect to Awards outstanding on such date, and no Awards may be granted thereafter. The Board may sooner terminate or amend the Plan at any time, and from time to time; provided, however, that, except as provided in Section 9 hereof, no amendment shall be effective unless approved by the stockholders of the Company where stockholder approval of such amendment is required (a) to comply with Rule 16b-3 under the Exchange Act subsequent to the Registration Date or (b) to comply with any other law, regulation or stock exchange rule. Notwithstanding anything in this Section 13 to the contrary, subsequent to the registration of a class of equity securities of the Company under Section 12 of the Exchange Act, Section 11 relating to Options for Non Employee Directors shall not be amended more than once in any six-month period, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules or regulations thereunder. Except as provided in Section 9 hereof, rights and obligations under any Award granted before any amendment of the Plan shall not be adversely altered or impaired by such amendment, except with the consent of the Participant. 14. NON-EXCLUSIVITY OF THE PLAN. The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. 15. LIMITATION OF LIABILITY. As illustrative of the limitations of liability of the Company, but not intended to be exhaustive thereof, nothing in the Plan shall be construed to: (a) give any employee any right to be granted an Award other than at the sole discretion of the Committee; (b) give any person any rights whatsoever with respect to Shares except as specifically provided in the Plan; (c) limit in any way the right of the Company or its Subsidiaries to terminate the employment of any person at any time; or (d) be evidence of any agreement or understanding, expressed or implied, that the Company, or its Subsidiaries, will employ any person in any particular position, at any particular rate of compensation or for any particular period of time. 13 16. REGULATIONS AND OTHER APPROVALS; GOVERNING LAW. (a) This Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Iowa. (b) The obligation of the Company to sell or deliver Shares with respect to Options granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee. (c) Subsequent to the Registration Date, any provisions of the Plan inconsistent with Rule l6b-3 under Exchange Act shall be inoperative and shall not affect the validity of the Plan. (d) Except as otherwise provided in Section 13, the Board may make such changes as may be necessary or appropriate to comply with the rules and regulations of any government authority or to obtain for Participants granted Incentive Stock Options, the tax benefits under the applicable provisions of the Code and regulations promulgated thereunder. (e) Each Award is subject to the requirement that, if at any time the Committee determines, in its absolute discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Award or the issuance of Shares, no Awards shall be granted or payment made or Shares issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions as acceptable to the Committee. (f) In the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act or regulations thereunder, and the Committee may require a Participant receiving Shares pursuant to the Plan, as a condition precedent to receipt of such Shares, to represent to the Company in writing that the Shares acquired by such Participant are acquired for investment only and not with a view to distribution. 17. MISCELLANEOUS. (a) MULTIPLE AGREEMENTS. The terms of each Award may differ from, other Awards granted under the Plan at the same time, or at any other time. The Committee may also grant more than one Award to a given Participant during the term of the Plan, either in addition to, or in substitution for, one or more Awards previously granted to that Participant. The grant of multiple Awards may be evidenced by a single Agreement or multiple Agreements, as determined by the Committee. (b) WITHHOLDING OF TAXES. The Company shall have the right to deduct from any payment of cash to any Participant an amount equal to the federal, state and local income taxes and other amounts required by law to be withheld with respect to any Award. Notwithstanding anything to the contrary contained herein, if a Participant is entitled to receive Shares upon exercise of an Option or Stock Appreciation Right, the Company shall have the right to require such Participant, prior to the delivery of such Shares, to pay to the Company the amount of any federal, state or local income taxes and other amounts that the Company is required by law to withhold. Participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value, on the date the tax is to be determined, equal to the amount required to be withheld. All elections shall be irrevocable, and be made in writing, signed by the Participant in advance of the day that the transaction becomes taxable. The Agreement evidencing any Incentive Stock Options granted under this Plan shall provide that if the Participant makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share 14 or Shares issued to such Participant pursuant to such Participant's exercise of the Incentive Stock Option, and such disposition occurs within the two-year period commencing on the day after the date of grant of such Option or within the one-year period commencing on the day after the date of transfer of the Share or Shares to the Participant pursuant to the exercise of such Option, such Participant shall, within ten (10) days of such disposition, notify the Company thereof and thereafter immediately deliver to the Company any amount of federal, state or local income taxes and other amounts that the Company informs the Participant the Company is required to withhold. (c) DESIGNATION OF BENEFICIARY. Each Participant may, with the consent of the Committee, designate a person or persons to receive in the event of such Participant's death, any Award or any amount of Shares payable pursuant thereto, to which such Participant would then be entitled. Such designation shall be made upon forms supplied by and delivered to the Company and may be revoked or changed in writing. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such Options, Stock Appreciation Rights, Restricted Stock and/or amounts payable to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such Options, Stock Appreciation Rights, Restricted Stock and/or amounts payable to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. (d) GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. (e) SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. (f) SUCCESSORS. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. 18. EFFECTIVE DATE. This Plan shall become effective on the Effective Date of this Plan. 15 EX-10.6 4 EXH. 10.6 Exhibit 10.6 LOSS POOLING AGREEMENT BETWEEN FARM BUREAU MUTUAL INSURANCE COMPANY AND WESTERN AGRICULTURAL INSURANCE COMPANY EFFECTIVE JANUARY 1, 1996 This AGREEMENT is made by and between FARM BUREAU MUTUAL INSURANCE COMPANY (Farm Bureau) and WESTERN AGRICULTURAL INSURANCE COMPANY (Western Ag) (collectively "the Companies") this 1st day of January, 1996. WHEREAS, Farm Bureau is a mutual insurance company with its principal place of business in West Des Moines, Iowa, and is engaged in the business of property and casualty insurance in the states of Iowa and Minnesota; and WHEREAS, Western Ag is a stock insurance company with its principal place of business in Phoenix, Arizona, and is engaged in the business of property and casualty insurance in the state of Arizona; and WHEREAS, the Companies are Farm Bureau affiliated companies authorized to sell property and casualty insurance in their respective states; and WHEREAS, the Companies have entered into reinsurance agreements with other Farm Bureau affiliated property and casualty companies with whom they each share common management, and with other non-affiliated companies; and WHEREAS, the Companies wish to enter into a reinsurance agreement which will allow them to spread, geographically, the risks insured and reinsured by each; WHEREAS, the Companies therefore agree to cede and assume business to each and from each other subject to the terms and conditions as set forth in the balance of the agreement. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, it is agreed as follows: ARTICLE I - DEFINITIONS A. PREMIUMS: 1. The term Premiums, as used in this agreement shall mean the sum of the following: a. Direct written premiums of the Companies on all policies, except those risks and kinds of insurance specifically excluded pursuant to Article XI. b. Except for amounts excluded pursuant to paragraph 2, immediately below, all written premiums on reinsurance assumed, less written premiums ceded. c. Unearned premiums of each of the Companies on those risks and kinds of insurance subject to this agreement at the beginning of each month less the amount of unearned premiums as of the end of that same month. 2 2. The following sums shall not be included in the calculation of Premiums, as that term is used in this Agreement: a. Premiums ceded by Farm Bureau pursuant to a certain Pooling Agreement between Farm Bureau, South Dakota Farm Bureau Mutual Insurance Company and Utah Farm Bureau Insurance Company dated 1-1-90. b. Premiums ceded by Western Ag pursuant to a certain Reinsurance Contract issued to Western Farm Bureau Mutual Insurance Company by Western Ag dated January 1, 1989. c. Premiums ceded by Farm Bureau or Western Ag pursuant to a certain agreement entitled Standard Automobile Reinsurance Pool Contracts, to which the Companies are parties, which agreement is dated 1-1-93. B. LOSSES: 1. The term Losses, as used in this agreement shall mean the sum of the following: a. Amounts the Companies pay or advance or become liable to pay pursuant to insurance or reinsurance contracts as the result of losses incurred on or after 12:01 a.m., on 1-1-96, in settlement of claims and suits and in satisfaction of judgments. b. Interest accrued prior to judgment on any amount paid pursuant to the preceding paragraph. c. "Direct Allocated Expenses of Litigation and Adjustment" as that term is defined in the NAICs Accounting Practices and Procedures Manual for Property and Casualty Insurance Companies. 2. In calculating Losses, however, the sum of the following shall be subtracted from the amounts calculated pursuant to paragraph 1 of this definition: a. Amounts paid to, or expected to be paid to the Companies as the result of salvage, subrogation, reinsurance recoveries other than for the Agreements identified in paragraphs A(2)(a), (b) and (c) of this Article I, or any other similar recoveries. b. Amounts the Companies pay or advance or become liable to pay, including interest accrued prior to judgment, on insurance policies issued by the Companies, which result from losses on risks or the kinds of insurance which are excluded from this agreement pursuant to Article XI. C. COMBINED PREMIUMS: The term Combined Premiums, when used in this agreement shall mean the year-to-date sum of the Premiums of the Companies as of the end of any given month. 3 D. COMBINED LOSSES: The term Combined Losses, when used in this agreement shall mean the year-to-date sum of the Losses of the Companies as of the end of any given month. E. PROPORTIONATE SHARE: The term Proportionate Share, when used in this agreement shall mean the percentage which results from dividing the calendar year-to-date Premiums of each of the Companies' as of the end of any given month by the Combined Premiums as of the end of that same month. The Proportionate Share will be determined and set on a calendar year basis with the Proportionate Share for each year established at the end of each year of the Agreement. All claims incurred during the calendar year will be settled accordingly. F. RETAINED LOSSES: The term Retained Losses, when used in this agreement shall mean the number resulting from multiplying the Proportionate Share of each of the Companies times the Combined Losses. ARTICLE II - EFFECTIVE DATE AND TERM This agreement shall be effective beginning January 1, 1996. The agreement is a continuing one and is unlimited as to duration, but may be terminated upon mutual consent of the parties at any time, or by 90 day prior written notice by either party. In the event of termination, all liabilities reinsured hereunder shall continue to the same extent and in the same manner as if the agreement had not been terminated, except as provided in Article XIII. ARTICLE III - PAYMENT OBLIGATIONS At the conclusion of each month, the Retained Losses and Combined Losses of the Companies shall be calculated for the immediately completed month. If one of the Companies' Retained Losses exceeds its Losses for that month, it shall pay an amount equal to the difference between its Retained Losses and its Losses to the other Company. Payment shall be made pursuant to Article IV. ARTICLE IV - REPORTS AND SETTLEMENTS Each of the Companies shall provide to the other all necessary data regarding Premium and Losses in sufficient detail to allow for completion of the annual statement. Data provided pursuant to this Article IV shall include the following: a. Monthly report: Western Ag shall provide a monthly report which shall be received by Farm Bureau by the tenth day of the month following the month for which the report is given (except the monthly report for December of each year, which shall be due on the following January 20), providing the following data regarding its Premiums and Losses: 4 1) Written premium 2) Unearned premium reserve 3) Net case losses a) Paid b) Reserved 4) Net IBNR loss reserves. 5) Allocated loss adjustment expenses a) Paid b) Reserved Farm Bureau shall provide a monthly report which shall be received by Western Ag by the fifteenth (15th) day of the month following the month for which the report is given (except the monthly report for December of each year, which shall be due on January 30), providing the following data regarding the Companies' Premiums and Losses: 1) Written premium 2) Unearned premium reserve 3) Net case losses a) Paid b) Reserved 4) Net IBNR loss reserves 5) Allocated loss adjustment expense information a) Paid b) Reserved b. MonthlyAccount and Settlement 1) Within thirty (30) days after the close of each month, Farm Bureau shall render a monthly account based on the monthly reports for that month, setting off paid losses, net of any recoveries, due to or from Western Ag. 2) Farm Bureau's remittance for any balance payable to Western Ag or Western Ag's remittance for any balance payable to Farm Bureau shall be made within 30 days of the rendering of the monthly account. c. Additional Reports In addition to the Monthly Report, the Companies shall furnish to each other such additional information in such form as may be reasonably required for the completion of quarterly and annual statements, internal records and reports to each of their own respective insurers. Such additional information shall be provided within 30 days after the close of each Calendar Quarter. 5 ARTICLE V - OFFSET The obligations of the Companies under this Agreement may be offset by reciprocal obligations so that the net amount only shall be required to be transferred, except no offset shall be valid under circumstances prohibited by Section 7427, New York Insurance Laws. An accounting on all transactions shall be rendered monthly, and the settling of balances shall be made no later than 60 days subsequent to the close of each quarter.. ARTICLE VI - CONDITIONS OF REINSURANCE The conditions of reinsurance hereunder shall in all cases be identical with the conditions of the original insurance or as changed during the term of insurance. ARTICLE VII - INSOLVENCY Each of the Companies hereto, as the assuming insurer, hereby agrees that all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall be payable by the assuming insurer on the basis of the liability of the ceding insurer under the policy or contract reinsured without diminution because of the insolvency of the ceding insurer; provided that such reinsurance shall be payable directly to the ceding insurer or to its liquidator, receiver or other statutory successor, except as provided by Section 4118 of New York Insurance Law or except (a) where the contract specifically provides another payee for such reinsurance in the event of the insolvency of the ceding insurer and (b) where the assuming insurer, with consent of the direct insured or insureds, has assumed such policy obligations of the ceding insurer as direct obligations of the assuming insurer to the payees under such policies and in substitution for the obligations of the ceding insurer to such payee; and further provided that the liquidator, receiver or statutory successor of the ceding insurer shall give written notice of the pendency of any claim against the insolvent ceding insurer on the policy or contract reinsured within a reasonable time after such claim; and the assuming insurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the ceding insurer or its liquidator, receiver or statutory successor, the expense thus incurred by the assuming insurer to be chargeable, subject to court approval, against the insolvent ceding insurer as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the ceding insurer solely as a result of the defense undertaken by the assuming insurer. ARTICLE IX - ACCESS TO RECORDS Each of the Companies shall allow the other party to inspect, at reasonable times, its records relevant to the business reinsured under this Agreement, including files concerning claims, losses or legal proceedings which involve or are likely to involve the other party. ARTICLE X - ARBITRATION 6 As a condition precedent to any right of action hereunder, any dispute arising out of this Agreement shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire, meeting in West Des Moines, Iowa, unless otherwise agreed by the parties. The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies. Each party shall appoint its arbitrator and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nomination, each of them shall name three of whom the other shall decline two and the decision shall be made by drawing lots. The claimant shall submit its initial brief within 20 days from appointment of the umpire. The respondent shall submit its brief within 20 days after receipt of the claimant's brief and the claimant may submit a reply brief within 10 days after receipt of the respondent's brief. The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence, but in which cross examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearings unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties in the proceedings. Judgment may be entered upon the award of the board in any court having jurisdiction thereof. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. ARTICLE XI - EXCLUSIONS The risks and kinds of insurance excluded from coverage under this agreement are those exclusions listed in the 1-1-95 version of American Agricultural Insurance Company's Basic Provision Section of the Property and Casualty Reinsurance Treaties as amended, copies of which are attached as Exhibits A and B, and incorporated herein by reference. These exclusions do not apply to the business assumed by the Companies which is described in Article I, section A(1)(c). ARTICLE XII - PRIOR REINSURANCE AGREEMENTS Except for agreement described in Article I, section A(2)(c), above, dated January 1, 1988, to which the Companies are parties, upon the execution of this agreement, the parties hereto simultaneously terminate any and all reinsurance agreements by and between them heretofore existing, upon the understanding that this Agreement shall supersede and exist in substitution for any such prior agreements. ARTICLE XIII - COMMUTATION OF LOSS Either party hereto may request commutation of the ceded reserves for outstanding losses as of any date during the term of this contract. In the event the other party agrees to commutation, and upon payment by the parties of mutually agreed upon amounts representing the commuted value of the ceded reserves for outstanding losses, the parties shall be relieved of any further liability hereunder 7 with respect to losses occurring prior to the date of commutation. In the event of any irreconcilable differences of opinion as to the commuted value of the ceded reserves for outstanding losses, the party requesting commutation may request arbitration and the matter shall be resolved in accordance with the provisions of Article X. WESTERN AGRICULTURAL INSURANCE COMPANY By /s/ Robert S. Condie Date 6/24/96 --------------------------- ---------- Executive Vice President --------------------------- FARM BUREAU MUTUAL INSURANCE COMPANY By /s/ William J. Oddy Date 6/18/96 --------------------------- ---------- Vice President, Chief Operating Officer and Assistant General Manager --------------------------- 8 EX-10.7 5 EXH. 10.7 Exhibit 10.7 SERVICES AGREEMENT THIS AGREEMENT is entered into by and between FBL FINANCIAL GROUP, INC. (formerly known as "Farm Bureau Multi-State Services, Inc."), an Iowa corporation, (hereinafter referred to as "FBL"), and FARM BUREAU MANAGEMENT CORPORATION, an Iowa corporation, (hereinafter referred to as "Management Corp."). WHEREAS, FBL is an insurance holding company and management services company, which, through its subsidiaries, underwrites, markets and distributes life insurance, annuities, property-casualty insurance and mutual funds to individuals and small businesses in 15 midwestern and western states; and WHEREAS, Management Corporation is a management company organized for the purpose of providing centralized management and other financial services for the Iowa Farm Bureau Federation and some of its subsidiaries and affiliates, and WHEREAS, the Iowa Farm Bureau Federation is the majority shareholder of FBL and Management Corp. wishes to retain the services of FBL in order to assist it in providing or arranging for the provision of quality, cost efficient services necessary for the operation of the Iowa Farm Bureau Federation, and some of its subsidiaries and affiliates; and WHEREAS, it is the intent of this Agreement that FBL will provide services to Management Corp. as described below in accordance with sound business practices; NOW, THEREFORE, in consideration of the mutual promises stated in this Agreement and intending to be legally bound, the parties agree as follows: 1. SERVICES PROVIDED BY FBL 1.1 FBL shall provide personnel competent to perform services for Management Corp. as provided in this Agreement. FBL's personnel shall at all times perform their duties in accordance with the Bylaws of Management Corp. and subject to the overall policy direction of Management Corp.'s Board of Directors. FBL shall be responsible for the proper performance of duties by its personnel and shall be responsible for compensating all personnel assigned to perform services for Management Corp. 1.2 FBL shall consider any request by Management Corp. consistent with the requirements of applicable law, to remove employees on FBL's staff whose performance negatively affects Management Corp. 1.3 Personnel necessary for providing services for Management Corp. pursuant to this agreement shall be employed by and shall be employees of FBL. FBL shall recruit, hire, train, promote, assign, set the compensation for, and, except as otherwise specifically provided in this Agreement, shall be solely responsible for discharging such personnel, in order to carry out the terms of this Agreement. 1.4 FBL shall provide human resources services for Management Corp. including, but not limited to recruiting, hiring and training Management Corp. personnel. 1.5 FBL shall provide such additional personnel as may be required by Management Corp. so that Management Corp. may continue performing certain services including, but not limited to the following: building services, food services, administrative services, child care, telephone services, stores and mailroom services, wellness and purchasing. 1.6 LEGAL SERVICES. 1.6.1 FBL shall provide or arrange for the provisions of legal services as are necessary to meet the legal needs of Management Corp. 1.6.2 FBL shall have authority to initiate, at the direction of and in the name of Management Corp., such legal actions or proceedings as are ordinary, necessary and advisable in the normal course of business. 1.6.3 FBL shall arrange for the legal defense of Management Corp., the Iowa Farm Bureau Federation, its subsidiaries and affiliates, as may reasonably be required or necessary, in any and all legal proceedings, including administrative proceedings and arbitrations, brought against Management Corp., the Iowa Farm Bureau Federation, its subsidiaries and affiliates. 1.7 PROPERTY AND EQUIPMENT. Except for physical property and equipment owned by Management Corp., FBL shall negotiate, contract for and supervise the repair and maintenance of physical property and equipment used by Management Corp., as shall be reasonably necessary to keep and maintain such property in good working order and condition. 1.8 FARM BUREAU RELATIONS. FBL shall promote and maintain a productive and harmonious relationship with the organizations affiliated with the Iowa Farm Bureau Federation. 1.9 CONFIDENTIALITY OF RECORDS. FBL shall use all reasonable efforts to protect the confidentiality of the records of those entities for whom it provides services under this Agreement and shall comply with all applicable federal, state and local laws and regulations relating to such records. 2. FBL'S RIGHTS AND OBLIGATIONS. 2.1 CONTROL. Management Corp., acting through its Board of Directors, shall, at all times, exercise ultimate control over the assets and operation of Management Corp. FBL shall perform the services and functions described in this Agreement in accordance with policies, directives, resolutions and Bylaws adopted by Management Corp. Management Corp. retains the final authority and responsibility regarding the powers, duties and responsibilities vested in it by law and regulation. In particular, without limiting the foregoing, Management Corp. shall continue to exercise final approval authority over the following: (a) selection of all members of Management Corp.'s Board of Directors; 2 (b) selection of Management Corp.'s officers and the right to require FBL to remove any FBL employees who are Management Corp. officers upon request of Management Corp.; (c) selection of auditors of Management Corp.'s accounts; (d) to the extent required under procedures and parameters established by Management Corp.'s Board of Directors, the terms of all Management Corp. contracts; (e) investment activities of Management Corp.. 2.2 SERVICES BY MANAGEMENT CORP. From time to time, Management Corp. will provide various services for FBL. In the event services are provided by Management Corp. for FBL, FBL shall reimburse Management Corp. for 100% of all expenses incurred in providing those services, plus a fee equal to one- half of one percent of all such expenses. Fees and reimbursements required by this agreement shall be billed monthly. 2.3 MAINTENANCE OF SOUND OPERATIONS. 2.3.1 Management Corp. shall conduct its affairs in accordance with state and federal law. Management Corp. shall honor all legitimate debts and obligations to its creditors. 2.3.2 Management Corp. shall cooperate with and assist FBL, to the extent of any available resources, in meeting goals and objectives under this Agreement. 2.3.3 During the term of this Agreement, Management Corp. agrees not to enter into any arrangement with any other person or entity that will directly or indirectly infringe upon or diminish the rights, duties or responsibilities of FBL hereunder. 3. COMPENSATION Management Corp. shall reimburse FBL for 100% of all expenses incurred by FBL in providing services for Management Corp. pursuant to this Agreement. In addition, Management Corp. shall pay FBL a fee equal to one-half of one percent of all such expenses. With respect to contributions to non- qualified deferred compensation plans on behalf of FBL employees, only those amounts actually paid to participants of those non-qualified deferred compensation plans will be considered expenses. Fees and reimbursements required by this agreement shall be billed monthly. 4. MISCELLANEOUS. 4.1 EFFECTIVE DATE. Subject to any necessary regulatory approval, the effective date of this Agreement shall be July 1, 1996. 4.2 TERM. The term of this Agreement shall be for a period of ten (10) years, which may be extended for additional ten (10) year terms by written agreement of the parties. 3 4.3 TERMINATION. 4.3.1 This Agreement may be terminated by either party upon one hundred eighty (180) days' prior written notice to the other party. 4.3.2 Either party may terminate this Agreement at any time upon delivery of written notice (i) if the other party applies for or consents to the appointment of a receiver, trustee or liquidator of all or a substantial part of its assets, files a voluntary petition in bankruptcy, admits in writing its inability to pay its debts as they become due, makes a general assignment for the benefit of creditors, files a petition or an answer seeking reorganization or arrangement with creditors or taking advantage of any insolvency law; or (ii) if an order, judgment or decree is entered by a court of competent jurisdiction adjudicating the other party bankrupt or insolvent, approving a petition seeking reorganization, or appointing a receiver, trustee or liquidator of all or a substantial part of its assets. 4.3.3 In the event of termination by either party for any reasons, FBL shall proceed to transfer all of its responsibilities under this Agreement to Management Corp., or any management company designated by Management Corp., in an orderly fashion subject to full and complete accounting. 4.3.4 Upon termination of this Agreement at the expiration of the stated term, or upon earlier termination as provided above, Management Corp. shall pay FBL a termination fee. The termination fee will be equal to the amount necessary to fund all employee related expenses accrued as of the date of termination, assuming for the purpose of this calculation that the employment of each employee of FBL ends on the date the Agreement terminates. 4.4 ASSIGNMENT AND DELEGATION. 4.4.1 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Either party may assign its rights and responsibilities under this Agreement to any entity which controls or is controlled by such party. For the purpose of this paragraph, "control" means the ability to direct or cause the direction of another. 4.4.2 Except as provided in subsection 4.4.1 above, neither party shall in any manner inconsistent with this Agreement assign, subcontract or otherwise delegate its duties under this Agreement unless the other party approves by prior written consent. 4.5 INTERPRETATION. The validity, enforceability and interpretation of any of the clauses of this Agreement shall be determined and governed by the laws of Iowa. The invalidity or unenforceability of any term or provision of this Agreement shall not, unless otherwise specified herein, affect the validity or enforceability of any other term or provisions. 4.6 INDEPENDENT CONTRACTORS. Nothing in this Agreement shall affect the separate identities of Management Corp. and FBL. The parties to this Agreement do not intend to create a partnership or agency relationship other than as provided in this Agreement. Except as specifically agreed herein, neither party to this Agreement intends to be the partner or agent of the other. Neither party intends to limit the other party in any manner 4 in the conduct of its businesses, ventures or activities not specifically provided for in this Agreement. 4.7 COMPLETE AGREEMENT. This Agreement, including its attachments, includes all the terms and conditions agreed upon by the parties, and supersedes all other agreements, oral or written between the parties. 4.8 AMENDMENTS. This Agreement may be amended at any time by mutual agreement of the parties, provided that any amendment shall be in writing and signed by both parties before it becomes effective. 4.9 NOTICES. Any notice required to be given by this Agreement shall be in writing and shall be sent by certified mail, return receipt requested, postage prepaid, to FBL at: 5400 University Avenue West Des Moines, Iowa 50266 or to Management Corp. at: 5400 University Avenue West Des Moines, Iowa 50266 4.10 HEADINGS. The headings in this Agreement are for convenience of reference only and are not intended to define, limit or describe the scope or intent of any provision of this Agreement. 4.11 WAIVER. The waiver by either party of any of the terms or provisions of this Agreement shall not constitute a waiver of any of its other terms or provisions. No waiver of any provision of this Agreement shall constitute a continuing waiver, unless otherwise expressly mutually agreed between the parties as provided in Section 4.8. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the 21 day of June, 1996. ATTEST FBL FINANCIAL GROUP, INC. /s/ Eugena R. Marks By: /s/ Edward M. Weiderstein - ------------------- -------------------------- Secretary Title: Chairman ----------------------- Date: June 21, 1996 -------------- ATTEST FARM BUREAU MANAGEMENT CORPORATION /s/ Eugena R. Marks By: /s/ Stephen M. Morain - ------------------- --------------------------- Secretary Title: Secretary ------------------------ Date: June 21, 1996 -------------- 5 EX-21 6 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF FBL FINANCIAL GROUP, INC.
STATE OF NAME INCORPORATION - ---------------------------------------------------------------------------------------------- --------------- Farm Bureau Life Insurance Company............................................................ Iowa Western Farm Bureau Life Insurance Company.................................................... Colorado Utah Farm Bureau Insurance Company............................................................ Utah FBL Financial Services, Inc................................................................... Iowa FBL Ventures of South Dakota, Inc............................................................. South Dakota RIK, Inc...................................................................................... Wisconsin FBL Marketing Services, Inc................................................................... Delaware FBL Investment Advisory Services, Inc......................................................... Delaware FBL Leasing Services, Inc..................................................................... Iowa
EX-23.(B) 7 EXH. 23(B) Exhibit 23(b) [LETTERHEAD] Consent of Independent Auditors We consent to the reference to our firm under the captions "Summary Consolidated Financial Data", "Selected Consolidated Financial Data" and "Experts" and to the use of our reports dated March 12, 1996, in the Registration Statement (Form S-1, No. 333-4332) and related Prospectus of FBL Financial Group, Inc. for the registration of Class A Common Stock without par value. /s/ Ernst & Young LLP Des Moines, Iowa June 17, 1996 -----END PRIVACY-ENHANCED MESSAGE-----