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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-11917
FBL Financial Group, Inc.
(Exact name of registrant as specified in its charter)
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Iowa |
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42-1411715 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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5400 University Avenue, West Des Moines, Iowa |
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50266 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code (515) 225-5400
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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| Class A common stock, without par value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer o
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Accelerated filer
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes x No
As of June 30, 2007, the aggregate market value of the registrant’s Class A and B Common Stock held
by non-affiliates of the registrant was $517,795,093 based on the closing sale price as reported on
the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date:
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| Title of each class
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Outstanding at February 19, 2008 |
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| Class A Common Stock, without par value
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28,961,071 |
| Class B Common Stock, without par value
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1,192,990 |
DOCUMENTS INCORPORATED BY REFERENCE
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Parts Into Which Incorporated |
Proxy statement for annual shareholders meeting on May 14, 2008
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Part III |
FBL FINANCIAL GROUP, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
Cautionary Statement Regarding Forward Looking Information
This Form 10-K includes statements relating to anticipated financial performance, business
prospects, new products, and similar matters. These statements and others, which include words
such as “expect”, “anticipate”, “believe”, “intend”, and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of 1995. A variety of
factors could cause our actual results and experiences to differ materially from the anticipated
results or other expectations expressed in our forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and results of our business
include but are not limited to the following:
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If we are unable to attract and retain agents and develop new distribution sources,
sales of our products and services may be reduced. |
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Attracting and retaining employees who are key to our business is critical to our growth
and success. |
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Changing interest rates and market volatility, and general economic conditions, affect
the risks and the returns on both our products and our investment portfolio. |
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Our investment portfolio is subject to credit quality risks which may diminish the value
of our invested assets and affect our profitability and reported book value per share. |
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As a holding company, we depend on our subsidiaries for funds to meet our obligations,
but our subsidiaries’ ability to make distributions to us is limited by law, and could be
affected by risk based capital computations. |
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A significant ratings downgrade may have a material adverse effect on our business. |
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Our earnings are influenced by our claims experience, which is difficult to estimate. If
our future claims experience does not match our pricing assumptions or past results, our
earnings could be materially adversely affected. |
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Our ability to grow depends upon the continued availability of capital, which may not be
available when we need it, or may only be available on unfavorable terms. |
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Our ability to maintain competitive costs is dependent upon the level of new sales and
persistency of existing business. |
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Inaccuracies in assumptions regarding future persistency, mortality and interest rates
used in calculating reserve, deferred policy acquisition expense and deferred sales
inducement amounts and pricing our products could have a material adverse impact on our net
income. |
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Changes in federal tax laws may affect sales of our products and profitability. |
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All segments of our business are highly regulated and these regulations or changes in
them could affect our profitability. |
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We face competition from companies having greater financial resources, more advanced
technology systems, broader arrays of products, higher ratings and stronger financial
performance, which may impair our ability to retain existing customers, attract new
customers and maintain our profitability and financial strength. |
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Success of our business depends in part on effective information technology systems and
on continuing to develop and implement improvements. |
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Our business is highly dependent on our relationships with Farm Bureau organizations and
would be adversely affected if those relationships became impaired. |
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We assumed a significant amount of closed block business through coinsurance agreements
and have only a limited ability to manage this business. |
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Our reinsurance program involves risks because we remain liable with respect to the
liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by
them. |
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We experience volatility in net income due to accounting standards for derivatives. |
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We face risks relating to litigation, including the costs of such litigation, management
distraction and the potential for damage awards, which may adversely impact our business. |
See Part 1A, Risk Factors, for additional information.
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PART I
ITEM 1. BUSINESS
General
FBL Financial Group, Inc. (we or the Company) sells individual life and annuity products
principally under the consumer brand names Farm Bureau Financial Services and EquiTrust Financial
Services. These brand identities are represented by the distribution channels of our subsidiaries,
Farm Bureau Life Insurance Company (Farm Bureau Life) and EquiTrust Life Insurance Company
(EquiTrust Life). As of December 31, 2007, our Farm Bureau Life distribution channel consisted of
1,967 exclusive agents and agency managers. These agents and agency managers sell our products in
the Midwestern and Western sections of the United States. As of December 31, 2007, our EquiTrust
Life independent distribution channel consisted of 19,781 independent agents. These agents sell
our products in all states and the District of Columbia, except New York. In addition to our Farm
Bureau Life and EquiTrust Life distribution channels, we have two closed blocks of coinsurance
business and our variable products are marketed by four variable alliance partner companies.
FBL Financial Group, Inc. was incorporated in Iowa in October 1993. Farm Bureau Life commenced
operations in 1945 and EquiTrust Life commenced operations in 1998. Several of our subsidiaries
support various functional areas of the Company and affiliates by providing investment advisory,
marketing and distribution, and leasing services. In addition, we manage all aspects of two Farm
Bureau affiliated property-casualty insurance companies (Farm Bureau Mutual Insurance Company and
Western Agricultural Insurance Company) which operate predominately in eight states in the Midwest
and West.
Investor related information, including electronic versions of periodic reports filed on Forms
10-K, 10-Q and 8-K, and proxy material, may be found on our Internet website at
www.fblfinancial.com. These documents are posted to our website immediately after they are filed.
Also available on our website are many corporate governance documents including a code of ethics
for the Chief Executive Officer and Senior Financial officers, committee charters, corporate
governance guidelines, director profiles and more. Product related information may be found on our
consumer websites, www.fbfs.com and www.equitrust.com.
Business Strategy
Our growth strategies are focused on our two life insurance subsidiaries, Farm Bureau Life and
EquiTrust Life.
Farm Bureau Life Insurance Company
Our Farm Bureau Life distribution system consists of 1,967 exclusive agents in 15 Midwestern and
Western states. These agents are multi-line agents who sell both property-casualty insurance
products and life insurance and investment products under the Farm Bureau name. Having multi-line
agents enhances our ability to develop a more comprehensive relationship with our customers and
increases our ability to cross sell our life insurance and investment products to the pool of Farm
Bureau property-casualty customers.
The Farm Bureau franchise and distribution channel is our foundation and we are defined by our
service to this niche marketplace. Growth in this channel is important to our success and we are
focused on delivering consistent, predictable and sustainable growth from this marketplace.
We focus on needs-based selling and have a broad portfolio of life insurance and annuity products
so that we have attractive products available to satisfy the needs of our agents and customers.
Sales within our Farm Bureau Life target marketplace are not as dependent upon new, unique product
features as much as good value, excellent customer service, and a trusted relationship with a Farm
Bureau agent.
Because of their multi-line nature, our Farm Bureau Life agents also focus on cross selling life
insurance products to Farm Bureau members who already own a property-casualty policy issued by Farm
Bureau affiliated property-casualty companies. For example, in the eight-state region where we
manage the affiliated property-casualty insurance companies and related field force (Arizona, Iowa,
Kansas, Minnesota, Nebraska, New Mexico,
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South Dakota and Utah), 17% of our policyholders own both
a Farm Bureau property-casualty and a life product. This percentage is and has historically been
higher than the industry average for multi-line exclusive agents, which is 10.9% according to the
most recent research by Life Insurance and Market Research Association (LIMRA). We believe there
is further opportunity for growth from cross-selling as 67% of the Farm
Bureau members in the eight-state region have a Farm Bureau property-casualty insurance product,
while only 20% have a life insurance product with us.
We provide our agents with sales materials, the necessary training and a high level of sales
support. In addition, throughout our Farm Bureau marketing territory, certain agents are life and
investment specialists who work as a resource to help their fellow agents with cross selling
techniques and client needs analysis. We also provide a variety of sales support to our agents
through the following sources:
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Just-In-Time Team – Comprised of product and sales experts available to agents through a
toll-free call, this team can answer nearly any question related to products, sales
approaches, suitability and more. |
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Advanced Markets Team – This group is an extension of the Just-In-Time team and includes
high-end experts such as attorneys and others who specialize in financial matters. |
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Life Sales Advisors – These field representatives are located strategically across our
15-state territory. They provide direct, hands-on training and support to agents on our broad
portfolio of products. |
Due to increased demand for ethanol and other renewable fuels, there is growing wealth in
agriculture as a result of strong commodity prices and increased farmland values. To meet the
needs of our customer base, we actively work with the state Farm Bureau organizations to build
awareness and provide education on important financial issues faced by Farm Bureau members. In
particular, our business succession programs have been well received and well attended by Farm
Bureau members across our 15 states. These programs and specialists have been instrumental in
developing life and annuity sales from our multi-line agents.
Farm Bureau Life’s growth has been augmented by our long and successful history of being a
consolidator among Farm Bureau affiliated insurance companies. We have grown over the years from a
single state Farm Bureau company to an operation covering 15 states in the Midwest and West. Our
most recent transaction was the 2001 acquisition of Kansas Farm Bureau Life Insurance Company
(Kansas Farm Bureau Life). We also acquired Utah Farm Bureau Life Insurance Company in 1984, Rural
Security Life Insurance Company in 1993 and Western Farm Bureau Life Insurance Company in 1994. In
addition, in 2003, Farm Bureau Mutual, one of our managed property-casualty companies, merged with
its property-casualty counterparts in Nebraska and Kansas.
We believe further consolidation in the Farm Bureau network of companies is appropriate due to the
similarity of businesses and cultures. While we believe further consolidation makes sense, this is
a long term strategy and we focus on maintaining solid relationships with the leaders of these
companies and the Farm Bureau organizations and are prepared when opportunities arise.
EquiTrust Life Insurance Company
EquiTrust Life was established to capitalize on opportunities to grow outside our traditional Farm
Bureau niche marketplace and provide diversification to the overall FBL organization. Today
EquiTrust Life has three business dimensions: our growing EquiTrust Life independent channel,
alliances with other companies to distribute our variable products and two closed blocks of
coinsured business.
Our EquiTrust Life independent channel, which began in late 2003, has been fast growing and
successful, reflecting its focus on growing its agent count, offering a portfolio of clean and
simple fixed annuity products and providing a high level of service. As of December 31, 2007, the
EquiTrust Life independent channel had 25,087 appointed independent agents and distributors, which
includes individual agents totaling 19,781. This is an increase from 15,326 individual agents at
December 31, 2006 and 8,482 individual agents at December 31, 2005. These independent agents are
affiliated with independent marketing organizations, broker/dealers and banks. The EquiTrust Life
independent market was developed to serve a growing market of baby boomers and seniors who are
approaching or are in retirement. We currently offer a variety of traditional fixed rate and index
annuities. Our multi-year guarantee annuity product allows our customers to lock in competitive
rates for the duration of their
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choice and our index annuities respond to consumers’ desire for
products which allow interest credits that reflect movement in broad market indices while limiting
the downside risk with certain principal guarantees.
Through our variable product alliances we provide our partner companies with competitive variable
products, brand-labeled for them if they choose. With this strategy, we obtain access to
additional distribution systems and our alliance partners benefit because they are able to provide
their sales force with variable products. We currently have four variable alliance partners, three
with other Farm Bureau affiliated insurance companies doing business outside of our 15-state
territory, which have 2,170 registered representatives as of December 31, 2007.
Variable sales by our alliance partners are generally underwritten by EquiTrust Life, but may be
underwritten by our partner. Depending on the agreement with each company, we receive 30%, 50% or
100% of the risks, costs and profits of the variable business they sell. For all of our partners,
we perform various administrative processing and other services with respect to their variable
business. These alliances are important, but are a small part of our overall business.
Our two closed block coinsurance agreements have provided us with significant assets and earnings.
Prior to August 1, 2004, we assumed, through a coinsurance agreement, a percentage of certain
annuity business written by American Equity Investment Life Insurance Company (American Equity).
Our other closed block coinsurance agreement is with EMC National Life Company (EMCNL), under which
we assumed in force business through December 31, 2002.
Marketing and Distribution
Farm Bureau Life Market Area
Sales through our Farm Bureau Life distribution channel are conducted in 15 states which we
characterize as follows: multi-line states (we own the Farm Bureau affiliated life company and
manage the Farm Bureau affiliated property-casualty companies) — Arizona, Iowa, Kansas, Minnesota,
Nebraska, New Mexico, South Dakota and Utah; and life only states (we own the Farm Bureau
affiliated life company and non-owned/non-managed Farm Bureau affiliated property-casualty
companies manage the exclusive multi-line agents) — Colorado, Idaho, Montana, North Dakota,
Oklahoma, Wisconsin and Wyoming.
Our target market for Farm Bureau branded products is Farm Bureau members and “Middle America” in
our 15-state territory. We traditionally have been very strong in rural and small town markets
and, over the last few years, have focused growth of our agency force in some of the medium-sized
cities and suburbs within our 15 states where we believe there are significant life and annuity
opportunities. This target market represents a relatively financially conservative and stable
customer base. The financial needs of our target market tend to focus on security, insurance needs
and retirement savings.
Affiliation with Farm Bureau
Many of our customers are members of Farm Bureau organizations affiliated with the American Farm
Bureau Federation (American Farm Bureau), the nation’s largest grass roots farm and ranch
organization with more than 6.2 million member families. In order to market insurance products in
a given state using the “Farm Bureau” and “FB” designations, related trademarks and service marks,
a company must have an agreement with the state’s Farm Bureau organization. Generally, these
marketing rights have only been granted to companies owned by or closely affiliated with Farm
Bureau federations. For each of the states in our Farm Bureau marketing territory, we have the
exclusive right to use the “Farm Bureau” name and “FB” logo for marketing life insurance and
investment products.
All of the state Farm Bureau federations in our 15-state Farm Bureau Life marketing area are
associated with the American Farm Bureau. The primary goal of the American Farm Bureau is to
improve the financial well being and quality of life of farmers and ranchers through education and
representation with respect to public policy issues. There are currently Farm Bureau federations
in all 50 states and Puerto Rico, each with their own distinctive mission and goals. Within each
state, Farm Bureau is organized at the county level. Farm Bureau programs generally include policy
development, government relations activities, leadership development and
training, communications,
market education classes, commodity conferences and young farmer activities. Member services
provided by Farm Bureau vary by state but often include programs such as risk management,
alternative energy development and
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guidance on enhancing profitability. Other benefits of
membership include newspaper and magazine subscriptions, as well as savings in areas such as health
care, entertainment and automobile rebates. In addition, members have access to theft and arson
rewards, accidental death insurance, banking services, credit card programs, computerized farm
accounting services, electronic information networks, feeder cattle procurement services, health
care insurance, property-casualty insurance and financial services.
The American Farm Bureau may terminate our right to use the “Farm Bureau” and “FB” designations in
all of our states (i) in the event of a material breach of the trademark license that we do not
cure within 60 days, (ii) immediately in the event of termination by the American Farm Bureau of
the state Farm Bureau’s membership in the American Farm Bureau or (iii) in the event of a material
breach of the state Farm Bureau federation’s membership agreement with the American Farm Bureau,
including by reason of the failure of the state Farm Bureau to cause us to adhere to the American
Farm Bureau’s policies.
We have royalty agreements with each state Farm Bureau organization in our Farm Bureau marketing
territory giving us the right to use the “Farm Bureau” and “FB” designations in that particular
state. Each state Farm Bureau organization in our Farm Bureau territory could terminate our right
to use the Farm Bureau designations in that particular state without cause at the
conclusion of the royalty agreements. The royalty agreements vary in term and have expiration
dates ranging from December 31, 2011 to December 31, 2032, depending on the state. The royalties
paid to a particular state Farm Bureau organization are based on the sale of our products in the
respective state. For 2007, royalty expense totaled approximately $1.7 million.
Our relationship with Farm Bureau provides a number of advantages. Farm Bureau organizations in
our current territory tend to be well known and long established, have active memberships and
provide a number of member benefits other than financial services. The strength of these
organizations provides enhanced prestige and brand awareness for our products and increased access
to Farm Bureau members, which results in a competitive advantage for us.
Our life insurance and investment products are available for sale to both members and non-members.
Property-casualty products sold by the property-casualty insurance companies affiliated with Farm
Bureau are generally only available for sale to Farm Bureau members. Annual Farm Bureau
memberships in our Farm Bureau marketing territory generally cost $35 to $220 and are available to
individuals, families, partnerships or corporations.
We have marketing agreements with all of the Farm Bureau-affiliated property-casualty companies in
our Farm Bureau Life marketing area, pursuant to which the property-casualty companies provide
certain services, which include recruiting and training the shared agency force that sells both
property-casualty products for that company and life products for us. The marketing agreements
have expiration dates through December 31, 2015, and upon expiration these agreements are renewed
annually. For 2007, we incurred fees totaling $7.6 million for the services provided under these
agreements.
Our Advisory Committee, which consists of executives of the Farm Bureau property-casualty insurance
companies in our marketing territory, assists us in our relationships with the property-casualty
organizations and the Farm Bureau federation leaders in their respective states. The Advisory
Committee meets on a regular basis to coordinate efforts and issues involving the agency force and
other matters. The Advisory Committee is an important contributor to our success in marketing
products through our Farm Bureau distribution system.
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Farm Bureau Life Agency Force
Our life insurance, annuities and sponsored mutual funds are currently marketed throughout our
15-state marketing territory by an exclusive Farm Bureau agency force. We have a written contract
with each member of our agency force. The contracts do the following:
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specify and limit the authority of the agents to solicit insurance applications on our
behalf; |
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describe the nature of the independent contractor relationship between us and the agent; |
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define the agent as an exclusive agent limited to selling insurance of the types sold on
our behalf, or for certain products, on the behalf of other insurance companies approved by
us; |
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allow either party to immediately terminate the contract; |
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specify the compensation payable to the agents; |
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reserve our ownership of customer lists; and |
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set forth all other terms and conditions of the relationship. |
Sales activities of our agents focus on personal contact and on cross selling the multiple lines of
products available through Farm Bureau affiliated companies. The Farm Bureau name recognition and
access to Farm Bureau membership leads to additional customers and cross selling of additional
insurance products.
Our Farm Bureau Life agents are independent contractors and exclusive agents. In the multi-line
states where we manage the
Farm Bureau affiliated property-casualty companies, our agents are led by agency managers employed
by the property-casualty companies which are under our direction. There are 1,188 agents and
managers in our multi-line states, all of whom market a full range of our life insurance and
annuity products. These agents and managers also market products for the property-casualty
companies that we manage.
In our life only states, our life insurance and annuity products are marketed by agents of the
property-casualty company affiliated with the Farm Bureau federation of that state. These agents
and managers, of which there are 779, market our life and annuity products on an exclusive basis
and market the property-casualty products of that state’s affiliated property-casualty companies.
Agents as well as agency managers are independent contractors or employees of the affiliated
property-casualty companies.
In addition, all Farm Bureau Life agents market mutual funds sponsored by us, as well as other
mutual funds, which we allow them to sell.
As of December 31, 2007, 98% of the agents in our multi-line states were licensed with the
Financial Industry Regulatory Authority (FINRA) to sell our variable life and annuity products and
sponsored mutual funds. We emphasize and encourage the training of agents for FINRA licensing
throughout our Farm Bureau Life territory.
We are responsible for product and sales training for all lines of business in our multi-line
states, and for training the agency force in life insurance products and sales methods in our life
only states. We are working to transform our agents to act more as small business owners with an
entrepreneurial mindset. Many of our agents are hiring sales associates, which has allowed them to
be more productive selling our products.
We structure our agents’ life products compensation system to encourage production and persistency.
Agents receive commissions for new life insurance and annuity sales and service fees on premium
payments in subsequent years. Production bonuses are paid based on the premium level of new life
business written in the prior 12 months and the persistency of the business written by the agent.
Persistency is a common measure of the quality of life insurance business and is included in
calculating the bonus to either increase or decrease (or even eliminate) the agent’s production
bonus, because we are willing to pay added incentives for higher volumes of business only as long
as the business is profitable. Production bonuses allow agents to increase their compensation
significantly. In 2007, approximately 32% of agent compensation in our multi-line states was
derived from the sale of life and annuity products.
The focus of agency managers is to recruit and train agents to achieve high production levels of
profitable business. Managers receive overwrite commissions on each agent’s life insurance
commissions which vary according to that agent’s productivity level and persistency of business.
During the first three years of an agent’s relationship with us,
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the agent’s manager receives
additional overwrite commissions to encourage early agent development. Early agent development is
also encouraged through financing arrangements and the annualization of commissions paid when a
life policy is sold.
We have a variety of incentives and recognitions to focus agents on production of quality life
insurance business. Some recognitions are jointly conducted with the property-casualty companies.
These programs provide significant incentives for the most productive agents. Approximately 12% of
our agents and agency managers qualify for our annual incentive trip. Agent recruiting, training
and financing programs are designed to develop a productive agent for the long term. The four-year
agency force retention rate for 2007 in our 15 states was approximately 43%. Retention of our
agents is enhanced because of their ability to sell life and property-casualty insurance products,
as well as mutual funds.
EquiTrust Life Market Area
EquiTrust Life is national in scope and is currently licensed to sell products in the District of
Columbia and all states except New York. Our typical customer is an individual purchaser of
annuities who buys through independent agents and representatives. This includes the aging baby
boomer population and seniors who are in or approaching retirement.
EquiTrust Life Independent Channel
An important part of our success at EquiTrust Life has been our ability to grow our agent count.
Working through independent marketing organizations, broker/dealers and banks, we have grown this
distribution channel by 29% in 2007 to 19,781 individual independent agents. We believe there is
still significant distribution available to sustain growth for our company.
Our target market consists of independent marketing organizations (IMOs) that recruit and motivate
agents and add value to these agents through service, training and sales support. These
organizations are not exclusive to EquiTrust Life and may
operate in any state where they are licensed. Most are organized for the principal purpose of
insurance product sales. Some IMOs are organized for other purposes, such as a bank or
broker/dealer. Recruiting expenses are primarily borne by the IMO and their compensation from
EquiTrust Life consists of commissions paid on net premiums received from sales by their agents.
We believe IMOs are attracted to EquiTrust Life because we are selective about the IMOs contracted
with us and we do not hire carrier-owned organizations. We also believe IMOs and agents are
attracted to EquiTrust Life because of our product portfolio, our commitment to maintaining high
ethical standards and the high level of support we offer. We keep our product design simple and
straightforward, and in the case of index annuities have only one moving part – the participation
rate or index cap. We are committed to being fair, honest and open in the way we advertise, sell
and service our products, as indicated by being an Insurance Marketplace Standards Association
(IMSA) qualified company. We believe in helping consumers understand what an annuity is and how it
can be used to support an individual’s retirement or accumulation needs.
Agents appointed by us are compensated by their assigned IMO or paid directly by EquiTrust Life
pursuant to an agent contract. The typical agent is an independent contractor with substantial
experience selling the types of products offered by EquiTrust Life.
We require all agents to be contracted with an IMO which is responsible for any uncollectible
commission-related debts. Credit, criminal and state license background checks are performed on
all applicants and evidence of current errors and omissions insurance coverage is required.
In addition to sales support offered by the IMO, an agent can receive direct assistance from
EquiTrust Life through either a toll-free telephone call or through our website www.equitrust.com.
We have a staff of specialists trained in the marketing of our products available to answer agents’
product questions, help with policy administrative issues and share best sales practices.
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Alliance Partners — Distribution
Our variable alliance partners have 2,170 registered representatives who are licensed to sell
variable products under our agreements with them. Our partners continue working with their sales
forces, which are comprised of exclusive agents, to license them to become registered
representatives. The percentage of our partners’ agents licensed to sell variable products has
grown to 55% at December 31, 2007. These alliance partners have incentive programs, like ours, to
promote the sale of life insurance and annuity products. The agents earn credit for these
incentives by selling our variable products. Our variable product alliance partners are
responsible for managing and training their own agency force. We provide each partner with
assistance on how to train their agents in the sale of variable products. These agents also have
access to our Just-In-Time sales support center.
Segmentation of Our Business
We analyze operations by reviewing financial information regarding products that are aggregated
into four product segments. The product segments are (1) Traditional Annuity – Exclusive
Distribution (“Exclusive Annuity”), (2) Traditional Annuity – Independent Distribution
(“Independent Annuity”), (3) Traditional and Universal Life Insurance and (4) Variable. We also
have various support operations and corporate capital that are aggregated into a Corporate and
Other segment.
See Note 14 of the notes to consolidated financial statements and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Segment Information” for additional
information regarding our financial results by operating segment. Included in the following
discussion of our segments are details regarding premiums collected by product type and
distribution source. Premiums collected is not a measure used in financial statements prepared
according to U.S. generally accepted accounting principles (GAAP). There is no comparable GAAP
financial measure. We use premiums collected to measure the productivity of our exclusive and
independent agents.
Traditional Annuity – Exclusive Distribution Segment
We sell a variety of traditional annuity products through our exclusive agency force. The
Exclusive Annuity segment primarily consists of fixed rate annuities and supplementary contracts
(some of which involve life contingencies). Traditional annuities provide for tax-deferred savings
and supplementary contracts provide for the systematic repayment of funds that accumulate interest.
The following table sets forth our annuity premiums collected for the years indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Traditional Annuity – Exclusive Distribution: |
|
|
|
|
|
|
|
|
|
|
|
|
First year
– individual |
|
$ |
73,266 |
|
|
$ |
79,546 |
|
|
$ |
95,980 |
|
Renewal – individual |
|
|
44,543 |
|
|
|
55,106 |
|
|
|
73,583 |
|
Group |
|
|
9,040 |
|
|
|
5,627 |
|
|
|
7,845 |
|
|
|
|
|
|
|
|
|
|
|
Total Traditional Annuity – Exclusive Distribution |
|
$ |
126,849 |
|
|
$ |
140,279 |
|
|
$ |
177,408 |
|
|
|
|
|
|
|
|
|
|
|
The amount of traditional annuity premiums collected is highly dependent upon the relationship
between the current crediting rates on our products and the crediting rates available on competing
products, including bank-offered certificates of deposit. We believe the decrease in annuity
premiums in 2007 and 2006 is due to a rise in short-term market interest rates, making certificates
of deposit and other short-term investments more attractive in relation to these traditional
annuities. In addition, we believe the decrease in traditional annuity premiums collected in 2007
is correlated to our increase in variable annuity premiums collected. Average crediting rates on
our individual deferred annuity contracts were 4.33% in 2007, 4.27% in 2006 and 4.24% in 2005,
while the average three-month U.S. Treasury rate was 4.39% in 2007, 4.66% in 2006 and 3.07% in
2005. Premiums collected in our Farm Bureau market territory in 2007 are concentrated in the
following states: Iowa (35%), Kansas (24%) and Oklahoma (7%).
9
Fixed Rate Annuities
We offer annuities that are generally marketed to individuals in anticipation of retirement. We
offer traditional annuities principally in the form of flexible premium deferred annuities (FPDA)
that allow policyholders to make contributions over a number of periods. For traditional annuity
products, policyholder account balances are credited interest at rates that we determine.
Approximately 41% of our existing individual direct traditional annuity business based on account
balances is held in qualified retirement plans. To further encourage persistency, a surrender
charge against the policyholders’ account balance is imposed for early termination of the annuity
contract within a specified period after its effective date. The surrender charge rate varies by
product, but typically starts at 10% and decreases 1% per year for the first ten years the contract
is in force. The annuitant may elect to take the proceeds of the annuity either in a single
payment or in a series of payments for life, for a fixed number of years, or a combination of these
options.
In addition to FPDAs, we also market single premium deferred annuity (SPDA) and single premium
immediate annuity (SPIA) products which feature a single premium paid when the contract is issued.
Benefit payments and the surrender charge structure on SPDA contracts are similar to other fixed
rate annuities. Benefit payments on SPIAs begin immediately after the issuance of the contract.
After the payment of acquisition costs, we invest the premiums we receive from fixed rate annuities
and the investments reside in our general account. The difference between the yield we earn on our
investment portfolio and the interest we credit on our fixed rate annuities is known as the
investment spread. The investment spread is a major driver of the profitability for all of our
traditional annuity products.
Withdrawal Rates
Withdrawal rates (excluding death benefits) for our individual deferred annuities were 5.2% for
2007, 5.1% for 2006 and 3.1% for 2005. We believe the competitive environment, due to changes in
market interest rates discussed above, resulted in increased surrenders, therefore increasing
withdrawal rates in 2007 and 2006.
Interest Crediting Policy
We have an asset/liability management committee that meets monthly, or more frequently if required,
to review and establish current period interest rates based upon existing and anticipated
investment opportunities. This applies to new sales and to annuity products after an initial
guaranteed period, if applicable. We examine earnings on assets by portfolio. We then establish
rates based on each product’s required interest spread and competitive market conditions at the
time. Most of our annuity contracts have guaranteed minimum crediting rates. These rates range
from 1.50% to 5.50%, with a weighted average guaranteed crediting rate of 3.21% at December 31,
2007 and 3.22% at December 31, 2006. This range excludes certain contracts with an account value
totaling $2.5 million with guarantees ranging up to 9.70%. The following table sets forth account
values of individual deferred fixed rate annuities for the Exclusive Annuity segment broken out by
the excess of current interest crediting rates over guaranteed rates:
| |
|
|
|
|
|
|
|
|
| |
|
Account Value at December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Dollars in thousands) |
|
At guaranteed rate |
|
$ |
96,885 |
|
|
$ |
103,274 |
|
Between guaranteed rate and 50 basis points |
|
|
225,882 |
|
|
|
243,921 |
|
Between 50 basis points and 100 basis points |
|
|
22,817 |
|
|
|
22,789 |
|
Greater than 100 basis points |
|
|
1,082,060 |
|
|
|
1,052,933 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,427,644 |
|
|
$ |
1,422,917 |
|
|
|
|
|
|
|
|
10
In Force
The following table sets forth in force information for our Exclusive Annuity segment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Number of direct contracts |
|
|
51,311 |
|
|
|
53,321 |
|
|
|
54,222 |
|
Interest sensitive reserves |
|
$ |
1,810,452 |
|
|
$ |
1,816,811 |
|
|
$ |
1,818,345 |
|
Other insurance reserves |
|
|
407,199 |
|
|
|
412,801 |
|
|
|
394,674 |
|
Traditional Annuity – Independent Distribution Segment
The Independent Annuity segment consists of fixed rate annuities, supplementary contracts (some of
which involve life contingencies) and index annuities sold by our independent agents or assumed
through our coinsurance agreements. The following table sets forth our annuity premiums collected
for the years indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Direct: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate annuities |
|
$ |
690,646 |
|
|
$ |
807,103 |
|
|
$ |
100,298 |
|
Index annuities |
|
|
878,482 |
|
|
|
1,001,379 |
|
|
|
802,007 |
|
|
|
|
|
|
|
|
|
|
|
Total direct |
|
|
1,569,128 |
|
|
|
1,808,482 |
|
|
|
902,305 |
|
Reinsurance assumed |
|
|
3,187 |
|
|
|
4,725 |
|
|
|
6,149 |
|
|
|
|
|
|
|
|
|
|
|
Total Traditional Annuity -
Independent Distribution, net of
reinsurance |
|
$ |
1,572,315 |
|
|
$ |
1,813,207 |
|
|
$ |
908,454 |
|
|
|
|
|
|
|
|
|
|
|
Direct traditional annuity premiums collected decreased in 2007 primarily due to a more favorable
market environment during 2006 for the sale of our multi-year guaranteed annuity product combined
with a competitive environment for index annuity sales in 2007. Our direct annuity sales in 2007
are widely disbursed throughout the United States with the largest concentration in the states of
Pennsylvania (10%), Florida (9%) and Texas (7%). In 2007, 94 IMOs produced at least $3.0 million
of premiums collected with the largest providing approximately $146.3 million. The five largest
IMOs combined for a total of $410.1 million of premium from agents appointed directly with them.
No one IMO, bank or broker/dealer accounted for more than 10% of our direct premiums collected in
2007.
Our EquiTrust Life independent channel currently offers a variety of fixed rate and index
annuities. These products are available to individuals who are seeking to accumulate tax-deferred
savings for retirement or other purposes. In 2007, 45% of premiums were placed in annuities that
were part of some tax-qualified benefit plan (primarily IRA) and 55% in non-qualified plans. Most
of the annuity plans can be sold to customers up to age 80. The weighted average issue age of
business in force at December 31, 2007 was 66. Surrender charge rates on our direct index business
range from 0% to 20% and surrender charge periods range from 7 years to 14 years depending upon the
terms of the product. Surrender charge rates on our direct fixed rate products range from 4.5% to
10% with the surrender charge periods consistent with the guarantee periods.
Index Annuities
Based on account balance, approximately 67.9% of the annuities in the Independent Annuity segment
are index annuities. The underlying indices available under the contracts vary by product, but may
include the S&P 500®, the Dow Jones Industrial AverageSM, the NASDAQ 100®, the Lehman
Aggregate Bond Index and the Lehman U.S. Treasury Bond Index. The products require periodic
crediting of interest and a reset of the applicable index at intervals specified in the contracts.
Approximately 75.7% of the direct index annuities have an annual reset period ending on each
contract anniversary date and the balance of the direct index annuities have a two-year reset
period. The computation of the index credit is based upon either a point-to-point calculation
(i.e., the gain in the applicable index from the beginning of the applicable contract year to the
next reset date) or a daily or monthly averaging of the
11
index during the reset period. These
products allow contract holders to transfer funds among the various index accounts and a
traditional fixed rate strategy at the end of each reset period.
The index annuity contract value is equal to the premiums paid plus (1) interest credited to the
fixed portion of the contract, plus (2) index credits on the indexed portion of the contract, plus
(3) premium bonus, if applicable, less (4) partial withdrawals taken from the contract. Index
credits are based upon the change in a recognized index or benchmark during the indexing period,
subject to a cap, margin or participation rate.
The participation rate varies among the products generally from 35% to 100%. Some of the products
we coinsure also have an index margin, which is deducted from the growth in the index, and for the
one-year accounts range from 0% to 3.5%. The index margins may be adjusted annually, subject to
stated limits. In addition, some index accounts within the products are uncapped, while others
apply a cap on the amount of index credits the contract holder may earn in any one indexing period,
and, for certain products, the applicable cap also may be adjusted annually subject to stated
minimums. The caps range from 4.5% to 13% for the one-year accounts. The minimum guaranteed
contract values are equal to 80% to 100% of the premium collected plus interest credited at an
annual rate ranging from 1.5% to 3.5% on a cumulative basis.
Certain index annuities sold through the EquiTrust Life independent distribution are “bonus”
products. These products are credited with a premium bonus ranging from 5% to 10% of the annuity
deposit upon issuance of the contract and for subsequent deposits made for a defined number of
years.
For our direct business, we purchase one-year or two-year call options on the applicable market
indices to fund the index credits due to the index annuity contract holders. On the respective
anniversary dates of the index annuity contracts, the market index used to compute the index
credits is reset and new call options are purchased to fund the next index credit. The cost of the
options can be managed through the terms of the index annuities, which permit changes to
participation rates, index margins and/or caps, subject to minimum guarantees.
After the purchase of the call options and payment of acquisition costs, we invest the balance of
the index premiums and the investments reside in our general account. With respect to that portion
of the index account value allocated to an index crediting strategy, our spread is measured as the
difference between the aggregate yield on the relevant portion of our invested assets, less the
aggregate option costs and the costs associated with minimum guarantees. If the minimum guaranteed
value of an index product exceeds the index value (computed on a cumulative basis over the life of
the contract), the general account earnings are available to satisfy the minimum guarantees. If
there were little or no gains in the entire series of options purchased over the expected life of
an index annuity (typically 15 to 20 years), we would incur expenses for credited interest over and
above our option costs. This would cause our spreads to tighten and reduce our profits.
Fixed Rate Annuities
Approximately 32.1% of the annuities in the Independent Annuity segment are fixed rate annuities.
We coinsure FPDA and SPDA products with characteristics which are generally similar to the products
offered directly through the Exclusive Annuity segment. We also sell multi-year guaranteed
annuities (MYGAs) that include guarantees of the annual crediting rate for three-year, five-year,
six-year, eight-year or ten-year periods. In addition, we began offering a SPIA product in the
fourth quarter of 2006.
Certain fixed rate annuities sold through our EquiTrust Life independent distribution offer an
additional first year interest rate. The initial crediting rate on these annuities is typically 0%
to 6% higher in the first contract year only.
Withdrawal Rates
Withdrawal rates (excluding death benefits) for our individual deferred annuities (including both
direct and assumed business) were 5.5% for 2007 and 5.1% for 2006 and 2005.
12
Interest Crediting Policy
We have an asset/liability management committee that meets monthly, or more frequently if required,
to review and establish current period interest and index terms for products sold through our
EquiTrust Life independent distribution. The interest and index terms are based upon current
investment opportunities. This applies to new sales and to annuity products after an initial
guaranteed period, if applicable. We then establish rates based on each product’s required
interest spread and competitive market conditions at the time. The average interest credited rate
on our MYGA contracts, including bonus interest, was 5.10% in 2007, 5.66% in 2006 and 4.41% in
2005. The average rate for these contracts, excluding bonus interest, was 4.66% in 2007, 4.56% in
2006 and 3.78% in 2005. The guaranteed minimum crediting rates for these contracts range from
1.50% to 3.00%, with a weighted average guaranteed crediting rate of 1.60% at December 31, 2007 and
1.64% at December 31, 2006.
The following table sets forth account values of MYGAs sold through our EquiTrust Life independent
distribution, broken out by the excess of current interest crediting rates over rates guaranteed
beyond the current guarantee period:
| |
|
|
|
|
|
|
|
|
| |
|
Account Value at December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Dollars in thousands) |
|
At guaranteed rate |
|
$ |
3,157 |
|
|
$ |
4,061 |
|
Between guaranteed rate and 50 basis points |
|
|
4,894 |
|
|
|
5,862 |
|
Between 50 basis points and 100 basis points |
|
|
192,215 |
|
|
|
122,622 |
|
Greater than 100 basis points |
|
|
1,421,029 |
|
|
|
842,446 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,621,295 |
|
|
$ |
974,991 |
|
|
|
|
|
|
|
|
The average crediting rate for the traditional fixed rate strategy for our index annuities sold
through our EquiTrust Life independent distribution was 3.01% in 2007, 2.98% in 2006 and 2.88% in
2005. The guaranteed minimum crediting rates for the fixed rate strategy of our index annuities
range from 1.50% to 2.30%, with a weighted average guaranteed crediting rate of 1.92% at December
31, 2007 and 1.89% at December 31, 2006.
We do not have the ability to adjust interest crediting rates or other non-guaranteed elements of
the underlying business assumed through coinsurance agreements, as this authority remains with the
direct writer. Average credited rates on fixed rate annuities assumed, including bonus interest,
were 3.44% in 2007, 3.42% in 2006 and 3.45% in 2005. Average credited rates on fixed rate
annuities assumed, excluding bonus interest, were 3.44% in 2007 and 3.42% in 2006 and 2005.
Most of the fixed rate annuity contracts and the fixed rate strategy on index annuities assumed
through coinsurance agreements have guaranteed minimum crediting rates. These rates range from
2.20% to 4.00%. The following table sets forth account values broken out by the excess of current
interest crediting rates over guaranteed rates for fixed rate annuity business assumed:
| |
|
|
|
|
|
|
|
|
| |
|
Account Value at December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Dollars in thousands) |
|
At guaranteed rate |
|
$ |
60,294 |
|
|
$ |
67,278 |
|
Between guaranteed rate and 50 basis points |
|
|
399,098 |
|
|
|
444,369 |
|
Between 50 basis points and 100 basis points |
|
|
34,009 |
|
|
|
36,195 |
|
Greater than 100 basis points |
|
|
54,391 |
|
|
|
62,930 |
|
|
|
|
|
|
|
|
Total |
|
$ |
547,792 |
|
|
$ |
610,772 |
|
|
|
|
|
|
|
|
13
In Force
The following table sets forth in force information for our Independent Annuity segment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
| |
|
2007 |
|
2006 |
|
2005 |
| |
|
(Dollars in thousands) |
Number of direct contracts |
|
|
73,980 |
|
|
|
51,007 |
|
|
|
22,607 |
|
Direct interest sensitive reserves |
|
$ |
1,607,009 |
|
|
$ |
962,662 |
|
|
$ |
156,937 |
|
Direct index annuity reserves |
|
|
3,387,727 |
|
|
|
2,463,086 |
|
|
|
1,344,460 |
|
Assumed annuity reserves |
|
|
1,766,735 |
|
|
|
1,928,218 |
|
|
|
2,064,291 |
|
Direct other insurance reserves |
|
|
64,242 |
|
|
|
13,983 |
|
|
|
5,677 |
|
Traditional and Universal Life Insurance Segment
We sell a variety of traditional and universal life insurance products through our exclusive agency
force. In addition, we have assumed a closed block of in force traditional and universal life
insurance. The Traditional and Universal Life Insurance segment consists of whole life, term life
and universal life policies. These policies provide benefits upon the death of the insured and may
also allow the customer to build cash value on a tax-deferred basis.
The following table sets forth our traditional and universal life insurance premiums collected for
the years indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Universal life: |
|
|
|
|
|
|
|
|
|
|
|
|
First year |
|
$ |
5,448 |
|
|
$ |
3,208 |
|
|
$ |
2,744 |
|
Renewal |
|
|
39,027 |
|
|
|
38,429 |
|
|
|
38,666 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
44,475 |
|
|
|
41,637 |
|
|
|
41,410 |
|
Participating whole life: |
|
|
|
|
|
|
|
|
|
|
|
|
First year |
|
|
14,680 |
|
|
|
14,286 |
|
|
|
16,453 |
|
Renewal |
|
|
91,249 |
|
|
|
87,753 |
|
|
|
83,668 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
105,929 |
|
|
|
102,039 |
|
|
|
100,121 |
|
Term life and other: |
|
|
|
|
|
|
|
|
|
|
|
|
First year |
|
|
9,291 |
|
|
|
7,312 |
|
|
|
6,652 |
|
Renewal |
|
|
44,518 |
|
|
|
40,837 |
|
|
|
38,265 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
53,809 |
|
|
|
48,149 |
|
|
|
44,917 |
|
|
|
|
|
|
|
|
|
|
|
Total Traditional and Universal Life Insurance |
|
|
204,213 |
|
|
|
191,825 |
|
|
|
186,448 |
|
Reinsurance assumed |
|
|
11,695 |
|
|
|
12,464 |
|
|
|
13,572 |
|
Reinsurance ceded |
|
|
(18,309 |
) |
|
|
(16,640 |
) |
|
|
(15,712 |
) |
|
|
|
|
|
|
|
|
|
|
Total Traditional and Universal Life Insurance, net of reinsurance |
|
$ |
197,599 |
|
|
$ |
187,649 |
|
|
$ |
184,308 |
|
|
|
|
|
|
|
|
|
|
|
For our direct traditional and universal life insurance premiums collected in our Farm Bureau
market territory, premiums collected in 2007 are concentrated in the following states: Iowa (24%),
Kansas (17%) and Oklahoma (12%).
Traditional Life Insurance
We offer traditional participating whole life insurance products. Participating whole life
insurance provides benefits for the life of the insured. It provides level premiums and a level
death benefit and requires payments in excess of mortality charges in early years to offset
increasing mortality costs in later years. Under the terms of these policies, policyholders have a
right to participate in our surplus to the extent determined by the Board of Directors, generally
through annual dividends. Participating business accounted for 42% of direct life receipts from
policyholders during 2007 and represented 13% of life insurance in force at December 31, 2007.
We also market non-participating term insurance policies that provide life insurance protection for
a specified period. Term insurance is mortality based and generally has no accumulation values.
However, beginning in 2007,
14
we introduced the return of premium rider, which returns a percentage
of premiums after a set number of years. For a portion of our business, we may change the premium
scales at any time but may not increase rates above guaranteed levels.
Universal Life Insurance
Our universal life policies provide permanent life insurance protection with a flexible or fixed
premium structure which allows the customer to pre-fund future insurance costs and accumulate
savings on a tax-deferred basis. Premiums received, less policy assessments for administration
expenses and mortality costs, are credited to the policyholder’s account balance. Interest is
credited to the cash value at rates that we periodically set.
Underwriting
We follow formal underwriting standards and procedures designed to properly assess and quantify
life insurance risks before issuing policies to individuals. To implement these procedures, we
employ a professional underwriting staff of 12 underwriters who have an average of 22 years of
experience in the insurance industry. Our underwriters review each applicant’s written
application, which is prepared under the supervision of our agents, and any required medical
records. We generally employ blood and urine testing (including HIV antibody testing) to provide
additional information whenever the applicant is age 16 or older and the face amount is $100,000 or
greater. Based on the results of these tests, we may adjust the mortality charge or decline
coverage completely. Generally, tobacco use by a life insurance applicant within the preceding
one-year results in a substantially higher mortality charge. In accordance with industry practice,
material misrepresentation on a policy application can result in the cancellation of the policy
upon the return of any premiums paid.
Interest Crediting and Participating Dividend Policy
The interest crediting policy for our direct traditional and universal life insurance products is
the same as for our traditional annuity products in the Exclusive Annuity segment. See “Interest
Crediting Policy” under the Exclusive Annuity Segment discussion. We pay dividends, credit
interest and determine other nonguaranteed elements on the individual insurance policies depending
on the type of product. Some elements, such as dividends, are generally declared for a year at a
time. Interest rates and other nonguaranteed elements are determined based on experience as it
emerges and with regard to competitive factors. Average contractual credited rates on our direct
universal life contracts were 4.43% in 2007, 4.45% in 2006 and 4.49% in 2005. Our universal life
contracts have guaranteed minimum crediting rates that range from 3.00% to 4.50%, with a weighted
average guaranteed crediting rate of 3.84% at December 31, 2007 and 3.85% at December 31, 2006.
The following table sets forth account values of our direct interest sensitive life products broken
out by the excess of current interest crediting rates over guaranteed rates:
| |
|
|
|
|
|
|
|
|
| |
|
Account Value at December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Dollars in thousands) |
|
At guaranteed rate |
|
$ |
334,475 |
|
|
$ |
36,797 |
|
Between guaranteed rate and 50 basis points |
|
|
40,882 |
|
|
|
343,099 |
|
Between 50 basis points and 100 basis points |
|
|
22,613 |
|
|
|
22,987 |
|
Greater than 100 basis points |
|
|
230,490 |
|
|
|
223,904 |
|
|
|
|
|
|
|
|
Total |
|
$ |
628,460 |
|
|
$ |
626,787 |
|
|
|
|
|
|
|
|
15
All of the assumed universal life contracts have a guaranteed minimum crediting rate of 4.00% at
December 31, 2007 and December 31, 2006. The following table sets forth account values broken out
by the excess of current interest crediting rates over guaranteed rates for assumed interest
sensitive life business:
| |
|
|
|
|
|
|
|
|
| |
|
Account Value at December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Dollars in thousands) |
|
At guaranteed rate |
|
$ |
106,199 |
|
|
$ |
112,045 |
|
Between
guaranteed rate and 50 basis points |
|
|
9,460 |
|
|
|
9,145 |
|
Between 50 basis points and 100 basis points |
|
|
18,786 |
|
|
|
18,225 |
|
Greater than 100 basis points |
|
|
5,058 |
|
|
|
5,983 |
|
|
|
|
|
|
|
|
Total |
|
$ |
139,503 |
|
|
$ |
145,398 |
|
|
|
|
|
|
|
|
Policyholder dividends are currently being paid and will continue to be paid as declared on
participating policies. Policyholder dividend scales are generally established annually and are
based on the performance of assets supporting these policies, the mortality experience of the
policies and expense levels. Other factors, such as changes in tax law, may be considered as well.
Our participating business does not have minimum guaranteed dividend rates.
In Force
The following table sets forth in force information for our Traditional and Universal Life
Insurance segment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands, except face amounts in millions) |
|
Number of
direct policies – traditional
life |
|
|
332,497 |
|
|
|
328,152 |
|
|
|
325,039 |
|
Number of
direct policies – universal life |
|
|
55,218 |
|
|
|
56,673 |
|
|
|
57,725 |
|
Direct face
amounts – traditional life |
|
$ |
28,552 |
|
|
$ |
25,993 |
|
|
$ |
23,717 |
|
Direct face
amounts – universal life |
|
|
4,695 |
|
|
|
4,675 |
|
|
|
4,699 |
|
Direct interest sensitive reserves |
|
|
628,563 |
|
|
|
625,541 |
|
|
|
621,481 |
|
Assumed insurance reserves |
|
|
190,741 |
|
|
|
199,020 |
|
|
|
203,731 |
|
Direct other insurance reserves |
|
|
1,349,141 |
|
|
|
1,306,987 |
|
|
|
1,273,566 |
|
16
Variable Segment
We sell several variable products through our exclusive agency force. In addition, we receive
variable business through our unique EquiTrust Life variable product alliances. The Variable
segment consists of variable universal life insurance and variable annuity contracts. These
products are similar to universal life insurance and traditional annuity contracts, except the
contract holder has the option to direct the cash value of the contract to a wide range of
investment sub-accounts, thereby passing the investment risk to the contract holder. The following
table sets forth our variable premiums collected for the years indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Variable annuities: |
|
|
|
|
|
|
|
|
|
|
|
|
Exclusive distribution: |
|
|
|
|
|
|
|
|
|
|
|
|
First year |
|
$ |
65,840 |
|
|
$ |
50,911 |
|
|
$ |
55,626 |
|
Renewal |
|
|
26,377 |
|
|
|
23,956 |
|
|
|
22,161 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
92,217 |
|
|
|
74,867 |
|
|
|
77,787 |
|
Alliance channel: |
|
|
|
|
|
|
|
|
|
|
|
|
First year (1) |
|
|
30,430 |
|
|
|
22,382 |
|
|
|
27,372 |
|
Renewal (1) |
|
|
5,028 |
|
|
|
3,724 |
|
|
|
5,007 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
35,458 |
|
|
|
26,106 |
|
|
|
32,379 |
|
|
|
|
|
|
|
|
|
|
|
Total variable annuities |
|
|
127,675 |
|
|
|
100,973 |
|
|
|
110,166 |
|
Variable universal life: |
|
|
|
|
|
|
|
|
|
|
|
|
Exclusive distribution: |
|
|
|
|
|
|
|
|
|
|
|
|
First year |
|
|
5,557 |
|
|
|
6,451 |
|
|
|
5,549 |
|
Renewal |
|
|
46,052 |
|
|
|
44,954 |
|
|
|
44,127 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
51,609 |
|
|
|
51,405 |
|
|
|
49,676 |
|
Alliance channel: |
|
|
|
|
|
|
|
|
|
|
|
|
First year (1) |
|
|
779 |
|
|
|
998 |
|
|
|
1,220 |
|
Renewal (1) |
|
|
2,102 |
|
|
|
1,830 |
|
|
|
1,480 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,881 |
|
|
|
2,828 |
|
|
|
2,700 |
|
|
|
|
|
|
|
|
|
|
|
Total variable universal life |
|
|
54,490 |
|
|
|
54,233 |
|
|
|
52,376 |
|
|
|
|
|
|
|
|
|
|
|
Total Variable |
|
|
182,165 |
|
|
|
155,206 |
|
|
|
162,542 |
|
Reinsurance ceded |
|
|
(856 |
) |
|
|
(555 |
) |
|
|
(417 |
) |
|
|
|
|
|
|
|
|
|
|
Total Variable, net of reinsurance |
|
$ |
181,309 |
|
|
$ |
154,651 |
|
|
$ |
162,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Amounts are net of portion ceded to and include amounts assumed from alliance partners. |
Variable sales tend to vary with the volatility, performance of and confidence level in the equity
markets as well as crediting and interest rates on competing products, including fixed rate
annuities and bank-offered certificates of deposit. Variable annuity premiums increased in 2007
reflecting increased sales from both our Farm Bureau Life distribution as well as our variable
alliance partners. Variable annuity premiums decreased in 2006 due primarily to a former variable
alliance partner recapturing, effective September 30, 2005, a block of variable annuity contracts
previously assumed by us. Premiums assumed from this alliance partner totaled $9.3 million in
2005. The S&P 500 Index increased 3.5% in 2007, 13.6% in 2006 and 3.0% in 2005. Variable premiums
collected in our Farm Bureau market territory are concentrated in the following states for 2007:
Iowa (35%), Kansas (13%) and Minnesota (11%).
Variable Universal Life Insurance
We offer variable universal life policies that are similar in design to universal life policies,
but the policyholder has the ability to direct the cash value of the policy to an assortment of
variable sub-accounts and, in turn, assumes the investment risk passed through by those funds.
Policyholders can select from variable sub-accounts managed by us as well as sub-accounts that are
managed by outside investment advisors. Variable universal life policyholders can also elect a
declared interest option under which the cash values are credited with interest as declared. See
“Variable Sub-Accounts and Mutual Funds.”
17
Variable Annuities
For variable annuities, policyholders have the right to direct the cash value of the policy into an
assortment of sub-accounts, thereby assuming the investment risk passed through by those
sub-accounts. The sub-account options for variable annuity contracts are the same as those
available for variable universal life policies. In addition, variable annuity contract holders can
also elect a declared interest option under which the cash values are credited with interest as
declared.
Our variable annuity products have a guaranteed minimum death benefit (GMDB) rider. For our
variable annuity contracts issued by Farm Bureau Life prior to September 1, 2002, which make up the
majority of our variable annuity account balance, the GMDB is equal to the amount by which premiums
less partial withdrawals exceeds the account value on the date of death. The variable annuity
products issued by Farm Bureau Life after September 1, 2002 and issued or assumed by EquiTrust Life
generally have a high water mark feature that pays the contract holder the greatest value attained
on any anniversary date. In addition, certain of our variable annuity products have an incremental
death benefit (IDB) rider that pays a percentage of the gain on the contract upon the death of the
contract holder. Our exposure to GMDBs and IDBs, the amount considered in the money, is $49.3
million at December 31, 2007. The reserve for these benefits is determined using scenario-based
modeling techniques and industry mortality assumptions. The related reserve recorded at December
31, 2007 totaled $1.2 million. We do not issue variable annuity contracts with guaranteed living
benefit riders that guarantee items such as a minimum withdrawal benefit, a minimum account balance
or a minimum income benefit.
Underwriting
Our underwriting standards for direct variable life products are the same as our standards for our
traditional and universal life insurance products. See “Underwriting” under the Traditional and
Universal Life Insurance segment discussion.
In Force
The following table sets forth in force information for our Variable segment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands, except face amounts in millions) |
|
Number of direct contracts – variable annuity |
|
|
21,041 |
|
|
|
20,763 |
|
|
|
20,137 |
|
Number of direct policies – variable
universal life |
|
|
63,378 |
|
|
|
64,502 |
|
|
|
65,596 |
|
Direct face amounts – variable universal life |
|
$ |
7,846 |
|
|
$ |
7,704 |
|
|
$ |
7,501 |
|
Separate account assets |
|
|
862,738 |
|
|
|
764,377 |
|
|
|
639,895 |
|
Interest sensitive reserves |
|
|
202,211 |
|
|
|
206,445 |
|
|
|
213,906 |
|
Other insurance reserves |
|
|
27,074 |
|
|
|
30,898 |
|
|
|
29,715 |
|
Corporate and Other Segment
The Corporate and Other segment includes (i) advisory services for the management of investments
and companies; (ii) marketing and distribution services for the sale of mutual funds and insurance
products not issued by us; (iii) leasing services, primarily with affiliates; (iv) a small block of
closed accident and health business; (v) interest expense and; (vi) investments and related
investment income not specifically allocated to our product segments.
Reinsurance
We reinsure a portion of our life insurance exposure with unaffiliated insurance companies under
traditional indemnity reinsurance agreements. New sales of participating whole life and universal
life products are reinsured above prescribed limits and do not require the reinsurer’s prior
approval within certain guidelines. New sales of certain term life products are reinsured on a
first dollar quota share basis and do not require the reinsurer’s prior approval within various
guidelines. We do not use financial or surplus relief reinsurance. Generally, we enter into
indemnity reinsurance arrangements to assist in diversifying our risks and to limit our maximum
loss on risks that
18
exceed our policy retention limits. Our maximum retention limit on an insured
life ranges up to $1.1 million depending on when the policy was issued.
In addition, we have reinsurance agreements with variable alliance partners to cede a specified
percentage of risks associated with variable universal life and variable annuity contracts. Under
these agreements, we pay the alliance partners their reinsurance percentage of charges and
deductions collected on the reinsured policies. The alliance partners in return pay us their
reinsurance percentage of benefits in excess of related account balances. In addition, the
alliance partners pay us an expense allowance for new business and development and maintenance
costs on the reinsured contracts.
Reinsurance contracts do not fully discharge our obligation to pay claims on the reinsured
business. As the ceding insurer, we remain responsible for policy claims to the extent the
reinsurer fails to pay claims. No reinsurer of business ceded by us has failed to pay any material
policy claims (either individually or in the aggregate) with respect to our ceded business. We
continually evaluate the financial strength of our reinsurers and monitor concentrations of credit
risk. If for any reason reinsurance coverages would need to be replaced, we believe that
replacement coverages from financially responsible reinsurers would be available. A summary of our
primary reinsurers as of December 31, 2007 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
A.M. Best |
|
|
Amount of |
|
Reinsurer |
|
Rating |
|
|
In Force Ceded |
|
| |
|
|
|
|
|
(Dollars in
millions) |
|
RGA Reinsurance Company |
|
|
A+ |
|
|
$ |
2,430.9 |
|
Generali USA Life Reassurance Company |
|
|
A |
|
|
|
2,075.5 |
|
Swiss Re Life & Health America Inc. |
|
|
A+ |
|
|
|
1,924.6 |
|
All other (13 reinsurers) |
|
|
|
|
|
|
1,832.1 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
8,263.1 |
|
|
|
|
|
|
|
|
|
We participate in a reinsurance pool with various unaffiliated life insurance companies to mitigate
the impact of a catastrophic event on our financial position and results of operations. Members of
the pool share in the eligible catastrophic losses based on their size and contribution to the
pool. Under the pool arrangement, we will be able to cede approximately 65% of catastrophic losses
after other reinsurance and a deductible of $0.8 million. Pool losses are capped at $12.8 million
per event and the maximum loss we could incur as a result of losses assumed from other pool members
is $4.5 million per event.
In addition, effective January 1, 2008, Farm Bureau Life entered into an annual accidental death
quota share reinsurance agreement. This coverage is a 100% quota share agreement covering
accidental death exposure of Farm Bureau Life’s portfolio of ordinary life insurance including
accidental death benefit riders. Coverage includes all acts of terrorism including those of a
nuclear, chemical or biological origin. Coverage is subject to an annual aggregate retention of
$10.0 million and a maximum occurrence limit of $50.0 million applies to policies written on agents
of the company who are participating in company-sponsored incentive trips. All other occurrence
catastrophes are unlimited in amount.
Variable Sub-Accounts and Mutual Funds
We sponsor the EquiTrust Series Fund, Inc. (the Series Fund) and EquiTrust Variable Insurance
Series Fund (the Insurance Series Fund) (collectively, the EquiTrust Funds) which are open-end,
diversified series management investment companies. The Series Fund is available to the general
public. The Insurance Series Fund offers its shares, without a sales charge, only to our separate
accounts and to our alliance partners’ separate accounts as an investment medium for variable
annuity contracts or variable life insurance policies.
The EquiTrust Funds each currently issue shares in six investment series (a Portfolio or
collectively the Portfolios) with the following distinct investment objectives: (1) long-term
capital appreciation by investing in equity securities which have a potential to earn a high return
on capital and/or are undervalued by the marketplace; (2) as high a level of current income as is
consistent with investment in a diversified portfolio of high-grade income-bearing debt securities;
(3) as high a level of current income as is consistent with investment in a diversified portfolio
of lower-rated, higher yielding income-bearing securities; (4) high level of total investment
return through income and capital
19
appreciation by investing in common stocks and other equity
securities, high grade debt securities and high quality short-term money market instruments; (5)
maximum current income consistent with liquidity and stability of principal; and (6) growth of
capital and income by investing primarily in common stocks of well-capitalized, established
companies. The net assets of the EquiTrust Funds at December 31, 2007 totaled $581.3 million.
EquiTrust Investment Management Services, Inc. (the Advisor), a subsidiary, receives an annual
management fee based on the average daily net assets of each EquiTrust Portfolio that ranges from
0.25% to 0.60% for the Series Fund and from 0.20% to 0.45% for the Variable Insurance Series Fund.
In addition, the Advisor receives a 0.05% accounting fee not to exceed $30,000 per Portfolio.
EquiTrust Marketing Services, LLC (EquiTrust Marketing), a subsidiary, serves as distributor and
principal underwriter for the EquiTrust Funds. EquiTrust Marketing receives from the Series Fund a
front-end load fee ranging from 0% to 5.75% for Class A share sales, an annual distribution
services fee of 0.25% for Class A shares and 0.50% for Class B shares, a 0.25% annual
administration services fee for Class A and B shares and a contingent deferred sales charge paid on
the early redemption of Class B shares. EquiTrust Marketing also serves as the principal dealer for
the Series Fund and receives
commissions and fees.
Our variable products include sub-accounts that invest in funds managed by outside investment
advisors in addition to the Insurance Series Fund. We receive an administrative service fee
ranging from 0.05% to 0.25% (annualized) of the sub-account values, generally once the sub-accounts
meet a predetermined asset threshold. The outside investment advisors and related sub-accounts
available to our variable contract holders include Fidelity Management & Research Company (7
sub-accounts), Dreyfus Corporation (5 sub-accounts), T. Rowe Price Associates, Inc. (5
sub-accounts), Franklin Advisers, Inc. (6 sub-accounts), Summit Investment Partners, Inc. (3
sub-accounts), American Century Investment Management Services, Inc. (5 sub-accounts), and JP
Morgan Investment Management Inc. (2 sub-accounts).
We also sponsor a money market fund, EquiTrust Money Market Fund, Inc. (Money Market Fund), which
is a no-load open-end diversified management investment company with an investment objective of
maximum current income consistent with liquidity and stability of principal. The Advisor acts as
the investment advisor and manager of the Money Market Fund and receives an annual management fee,
accrued daily and payable monthly at 0.25%, and certain other fees. The net assets of the Money
Market Fund were $18.3 million at December 31, 2007.
EquiTrust Series Fund, Inc. and EquiTrust Money Market Fund, Inc. are offered through registered
representatives of EquiTrust Marketing, the principal underwriter. For more complete information
including fees, charges and other expenses, obtain a prospectus from EquiTrust Marketing Services,
LLC, 5400 University Avenue, West Des Moines, Iowa 50266. Please read the prospectus before you
invest.
Ratings and Competition
Financial strength ratings are an important factor in establishing the competitive position of
insurance companies. Farm Bureau Life and EquiTrust Life are rated “A”(Excellent) by A.M. Best
Company, Inc. (“A.M. Best”), A.M. Best’s third highest rating of 13 ratings assigned to solvent
insurance companies, which currently range from “A++”(Superior) to “D”(Poor). In addition, both
Farm Bureau Life and EquiTrust Life are rated “A”(Strong) by Standard & Poor’s, which is the third
highest rating of eight financial strength ratings assigned to solvent insurance companies, ranging
from “AAA”(Extremely Strong) to “CC”(Extremely Weak). A.M. Best and Standard & Poor’s financial
strength ratings consider claims paying ability and are not a rating of investment worthiness. All
of our financial strength ratings have been issued with a stable outlook.
We operate in a highly competitive industry. Insurers compete based primarily upon price, service
level and the financial strength of the company. The operating results of companies in the
insurance industry historically have been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of insurance ratings from
rating agencies and other factors. We believe our ability to compete with other insurance
companies is dependent upon, among other things, our ability to attract and retain agents to market
our insurance products, our ability to develop competitive and profitable products and our ability
to maintain high ratings from A.M. Best and Standard & Poor’s. In connection with the development
and sale of our products, we encounter significant competition from other insurance companies, and
other financial institutions, such as banks and broker/dealers, many of which have financial
resources substantially greater than ours.
20
Regulation
Our insurance subsidiaries are subject to government regulation in each of the states in which they
conduct business. This regulatory authority is vested in state agencies having broad
administrative power dealing with all aspects of the insurance business, including rates, policy
forms and capital adequacy, and is concerned primarily with the protection of policyholders rather
than stockholders. Our variable insurance products, mutual funds, investment advisor,
broker/dealer and certain licensed agents are also subject to regulation by the Securities and
Exchange Commission, FINRA and state agencies. Furthermore, FINRA is attempting to regulate the
sale of index annuities and limit sales of these products to registered representatives.
Scrutiny has been placed upon the insurance regulatory framework, and certain state legislatures
have considered or enacted laws that alter, and in many cases increase, state authority to regulate
insurance companies and insurance holding company systems. In light of ongoing legislative
developments, the National Association of Insurance Commissioners (NAIC) and state insurance
regulators continue to reexamine existing laws and regulations, accounting policies and procedures,
specifically focusing on insurance company investments and solvency issues, market conduct,
risk-adjusted capital guidelines, interpretations of existing laws, the development of new laws,
the implementation of non-statutory guidelines and the circumstances under which dividends may be
paid. We do not believe the adoption of any of the current NAIC initiatives will have a material
adverse impact on us; however, we cannot predict the form of any future proposals or regulation.
Employees
At December 31, 2007, we had 1,818 employees. A majority of our employees and the executive
officers also provide services to Farm Bureau Mutual and other affiliates pursuant to management
agreements. None of our employees are members of a collective bargaining unit. We believe that we
have good employee relations.
ITEM 1A. RISK FACTORS
The performance of our company is subject to a variety of risks. If any of the following risks
develop into actual events, our business, financial condition or results of operations could be
negatively affected.
If we are unable to attract and retain agents and develop new distribution sources, sales of our
products and services may be reduced.
We compete to attract and retain exclusive agents for Farm Bureau Life and independent agents for
EquiTrust Life. Intense competition exists for persons and independent distributors with
demonstrated ability. We compete primarily on the basis of our products, compensation, support
services and financial position. Sales and our results of operations and financial condition could
be materially adversely affected if we are unsuccessful in attracting and retaining agents and
additional distribution sources for our products.
Attracting and retaining employees who are key to our business is critical to our growth and
success.
The success of our business is dependent to a large extent on our ability to attract and retain key
employees. Competition is generally intense in the job market for certain positions, such as
actuaries and other insurance professionals with demonstrated ability, particularly in our
headquarters city where we compete with other insurance and financial institutions.
Although we have change in control agreements with members of our management team, we do not have
employment contracts with any of them. In general, our employees are not subject to employment
contracts. Although none of our executive management team has indicated that they intend to
terminate their employment, there can be no certainty regarding the length of time they will remain
with us. Our inability to retain our key employees, or attract and retain additional qualified
employees, could materially adversely affect our sales, results of operations and financial
condition.
21
Changing interest rates and market volatility, and general economic conditions, affect the risks
and the returns on both our products and our investment portfolio.
The market value of our investments and our investment performance, including yields and
realization of gains or losses, may vary depending on economic and market conditions. Such
conditions include the shape of the yield curve, the level of interest rates and recognized equity
and bond indices, including, without limitation, the S&P 500 Index, the Dow Jones Index, the NASDAQ
100 Index, the Lehman Aggregate Bond Index and the Lehman U.S. Treasury Bond Index (the “Indices”).
Interest rate risk is our primary market risk exposure. Substantial and sustained increases and
decreases in market interest rates can materially and adversely affect the profitability of our
products, the market value of our investments and the reported value of stockholders’ equity.
From time to time, for business or regulatory reasons, we may be required to sell certain of our
investments at a time when their market value is less than the carrying value of these investments.
Rising interest rates may cause declines in the value of our fixed maturity securities. With
respect to our available-for-sale fixed maturity securities, such declines (net of income taxes and
certain adjustments for assumed changes in amortization of deferred policy acquisition costs,
deferred sales inducements, value of insurance in force acquired and unearned revenue reserve)
reduce our reported stockholders’ equity and book value per share.
At times we may have difficulty selling some of our investments due to a lack of liquidity in the
marketplace. If we require significant amounts of cash on short notice, we may have difficulty
selling investments at attractive prices, in a timely manner or both.
A key component of our net income is the investment spread. A narrowing of investment spreads may
adversely affect operating results. Although we have the right to adjust interest crediting rates
on a substantial portion of our direct business in force, changes to crediting rates may not be
sufficient to maintain targeted investment spreads in all economic and market environments. In
general, our ability to lower crediting rates is subject to a minimum crediting rate filed with and
approved by state regulators. In addition, competition and other factors, including the potential
for increases in surrenders and withdrawals, may limit our ability to adjust or maintain crediting
rates at levels necessary to avoid the narrowing of spreads under certain market conditions.
The profitability of our index annuities that are tied to market indices is significantly affected
by the interest earned on investments, by the cost of underlying call options purchased to fund the
credits owed to contract holders and by the minimum interest guarantees owed to the contract
holder, if any. If there were little or no gains on the call options purchased over the expected
life of an index annuity, we would incur expenses for credited interest over and above our option
costs. In addition, if we are not successful in matching the terms of call options purchased with
the terms of the index annuities, index credits could exceed call option proceeds. These items
would cause our spreads to tighten and reduce our profits.
See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Market
Risks of Financial Instruments” for further discussion of our interest rate risk exposure and
information regarding our asset-liability and hedging programs to help mitigate our exposure to
interest rate risk.
Our investment portfolio is subject to credit quality risks which may diminish the value of our
invested assets and affect our profitability and reported book value per share.
We are subject to the risk that the issuers of our fixed maturity securities and other debt
securities (other than our U.S. agency securities), and borrowers on our commercial mortgages, will
default on principal and interest payments, particularly if a major downturn in economic activity
occurs. As of December 31, 2007, we held $9,522.6 million of fixed income securities, $365.6
million of which represented below-investment grade holdings. Of these $365.6 million of
below-investment grade holdings, 84.2% were acquired as investment grade holdings but, as of
December 31, 2007, had been downgraded to below investment grade. An increase in defaults on our
fixed maturity securities and commercial mortgage loan portfolios could harm our financial strength
and reduce our profitability.
We use derivative instruments to fund the credits on our index annuities. We purchase derivative
instruments from a number of counterparties directly and through American Equity. If our
counterparties fail to honor their obligations under the derivative instruments, we will have
failed to provide for crediting to policyholders related to the
22
appreciation in the applicable
indices. Any such failure could harm our financial strength and reduce our profitability.
We have entered into six interest rate swaps with a total notional amount of $300.0 million to
manage interest rate risk on a portion of our flexible premium deferred annuity contracts. We also
have one interest rate swap with a $46.0 million notional amount to hedge the variable component of
the interest rate on our line of credit borrowings. We purchased these instruments from four
different counterparties. If these counterparties fail to honor their obligations, we will have
additional exposure to an increase in interest rates, which could harm our financial strength and
reduce our profitability.
As a holding company, we depend on our subsidiaries for funds to meet our obligations, but our
subsidiaries’ ability to make distributions to us is limited by law, and could be affected by
risk-based capital computations.
As a holding company, we rely on dividends from subsidiaries to assist in meeting our obligations.
The ability of our subsidiaries to pay dividends or to make other cash payments in the future may
materially affect our ability to pay our parent company payment obligations, including debt service
and dividends on our common stock.
The ability of our subsidiaries, Farm Bureau Life and EquiTrust Life, to pay dividends to the
parent company is limited by law to earned profits (statutory unassigned surplus) as of the date
the dividend is paid, as determined in accordance with accounting practices prescribed by insurance
regulatory authorities of the State of Iowa. In addition, under the Iowa Insurance Holding Company
Act, the Life Companies may not pay an “extraordinary” dividend without prior notice to and
approval by the Iowa Insurance Commissioner. An “extraordinary” dividend is defined under the Iowa
Insurance Holding Company Act as any dividend or distribution of cash or other property whose fair
market value, together with that of other dividends or distributions made within the preceding 12
months, exceeds the greater of (i) 10% of policyholders’ surplus (total statutory capital stock and
statutory surplus) as of December 31 of the preceding year, or (ii) the statutory net gain from
operations of the insurer for the 12-month period ending December 31 of the preceding year. During
2008, the maximum amount legally available for distribution to FBL Financial Group without further
regulatory approval is $51.7 million from Farm Bureau Life and $39.2 million from EquiTrust Life.
In addition, the Life Companies are subject to the risk-based capital, or RBC, requirement of the
NAIC set forth in the Risk-Based Capital for Insurers Model Act. The main purpose of the Model Act
is to provide a tool for insurance regulators to evaluate the capital of insurers relative to the
risks assumed by them and determine whether there is a need for possible corrective action. U.S.
insurers and reinsurers are required to report the results of their RBC calculations as part of the
statutory annual statements filed with state insurance regulatory authorities.
The Model Act provides for four different levels of regulatory actions based on annual statements,
each of which may be triggered if an insurer’s total adjusted capital, as defined in the Model Act,
is less than a corresponding RBC.
| |
• |
|
The company action level is triggered if an insurer’s total adjusted capital is less
than 200% of its authorized control level RBC, as defined in the Model Act. At the company
action level, the insurer must submit a plan to the regulatory authority that discusses
proposed corrective actions to improve its capital position. |
| |
| |
• |
|
The regulatory action level is triggered if an insurer’s total adjusted capital is less
than 150% of its authorized control level RBC. At the regulatory action level, the
regulatory authority will perform a special examination of the insurer and issue an order
specifying corrective actions that must be followed. |
| |
| |
• |
|
If an insurer’s total adjusted capital is less than its authorized control level RBC,
the regulatory authority is authorized (although not mandated) to take regulatory control
of the insurer. |
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• |
|
The mandatory control level is triggered if an insurer’s total adjusted capital is less
than 70% of its authorized control level RBC, and at that level the regulatory authority
must take regulatory control of the insurer. Regulatory control may lead to rehabilitation
or liquidation of an insurer. |
23
Although we believe our current sources of funds provide adequate cash flow to us to meet our
current and reasonably foreseeable future obligations, there can be no assurance that we will
continue to have access to these sources in the future.
A significant ratings downgrade may have a material adverse effect on our business.
Ratings are an important factor in establishing the competitive position of insurance companies.
If our ratings were lowered significantly, our ability to market products to new customers could be
harmed and existing policyholders might cancel their policies or withdraw the cash values of their
policies. These events, in turn, could have a material adverse effect on our net income and
liquidity. Our ratings reflect the agencies’ opinions as to the financial strength, operating
performance and ability to meet obligations to policyholders of our insurance company subsidiaries.
There is no assurance that a credit rating will remain in effect for any given period of time or
that a rating will not be reduced, suspended or withdrawn entirely by the applicable rating agency,
if in the rating agency’s judgment, circumstances so warrant. See “Item 1. Business — Ratings and
Competition” for a summary of our current ratings.
Our earnings are influenced by our claims experience, which is difficult to estimate. If our future
claims experience does not match our pricing assumptions or past results, our earnings could be
materially adversely affected.
Our earnings are significantly influenced by the claims paid under our insurance contracts and will
vary from period to period depending upon the amount of claims incurred. There is only limited
predictability of claims experience within any given quarter or year. The liability that we have
established for future insurance and annuity policy benefits is based on assumptions concerning a
number of factors, including interest rates, expected claims, persistency and expenses. In the
event our future experience does not match our pricing assumptions or our past results, our
operating results could be materially adversely affected.
Our ability to grow depends upon the continued availability of capital, which may not be available
when we need it, or may only be available on unfavorable terms.
Although we currently believe we have sufficient capital needed to fund our immediate growth and
capital needs, the capital available can significantly vary from period to period. This variation
is due to certain circumstances, some of which are neither predictable, foreseeable or within our
control. A lack of sufficient capital could impair our ability to grow.
Capital requirements depend on factors including accumulated statutory earnings of our life
insurance subsidiaries, statutory capital and surplus of our life insurance subsidiaries, the rate
of sales growth of our products, aggregate reserve levels and the levels of credit risk and/or
interest rate risk in our invested assets. In order to support these capital requirements, we may
need to increase or maintain the statutory capital and surplus of our life insurance subsidiaries
through additional financings, which could include debt, equity or other transactions. These
financings, if available, may be available only on terms that are not favorable to us. If we
cannot maintain adequate capital, we may be required to limit our sales growth, which could
adversely affect our business, financial condition and results of operations.
Our ability to maintain competitive costs is dependent upon the level of new sales and persistency
of existing business.
Maintaining competitive costs depends upon numerous factors, including the level of new sales,
persistency of existing business and expense management. A decrease in sales or persistency
without a corresponding reduction in expenses could result in higher unit costs.
Inaccuracies in assumptions regarding future persistency, mortality and interest rates used in
calculating reserve, deferred policy acquisition expense and deferred sales inducement amounts and
pricing our products could have a material adverse impact on our net income.
The process of calculating reserve, deferred policy acquisition expense and deferred sales
inducement amounts and pricing products for an insurance organization involves the use of a number
of assumptions including those related to persistency (how long a contract stays with the company),
mortality (the relative incidence of death in a given
24
time or place) and interest rates (the rates expected to be paid or received on financial
instruments, including insurance or investment contracts). Actual results could differ
significantly from those assumed. Inaccuracies in one or more of these assumptions could have a
material adverse impact on our net income.
Changes in federal tax laws may affect sales of our products and profitability.
The annuity and life insurance products that we market generally offer tax advantages to the
policyholders, as compared to other savings instruments such as certificates of deposit and taxable
bonds. Tax preferences include the deferral of income tax on the earnings during the accumulation
period of the annuity or insurance policy as opposed to the current taxation of other savings
instruments and the tax-free status of death benefit proceeds. In addition, life insurance
companies receive a tax deduction for dividends received for separate accounts.
Legislation eliminating this tax deferral and dividends received deduction would have a material
adverse effect on our ability to sell life insurance and annuities. Congress has from time to time
considered legislation which would reduce or eliminate the benefits to policyholders of the
deferral of taxation on the growth of value within certain insurance products or might otherwise
affect the taxation of insurance products and insurance companies relative to other investments.
To the extent that the Internal Revenue Code of 1986, as amended, is revised to reduce the
tax-deferred status of insurance products, or to reduce the taxation of competing products, all
life insurance companies, including us, could be adversely affected.
All segments of our business are highly regulated and these regulations or changes in them could
affect our profitability.
We are subject to regulation under applicable insurance statutes, including insurance holding
company statutes, in the various states in which our life subsidiaries write insurance. Insurance
regulation is intended to provide safeguards for policyholders rather than to protect shareholders
of insurance companies or their holding companies. Regulators oversee matters relating to sales
practices, policy forms, claims practices, guaranty funds, types and amounts of investments,
reserve adequacy, insurer solvency, minimum amounts of capital and surplus, transactions with
related parties, changes in control and payment of dividends.
State insurance regulators and the NAIC continually reexamine existing laws and regulations, and
may impose changes in the future.
As noted above, our life subsidiaries are subject to the NAIC’s risk-based capital requirements
which are used by insurance regulators as an early warning tool to identify deteriorating or weakly
capitalized insurance companies for the purpose of initiating regulatory action. Our life
subsidiaries also may be required, under solvency or guaranty laws of most states in which they do
business, to pay assessments up to certain prescribed limits to fund policyholder losses or
liabilities of other insolvent insurance companies.
Although the federal government does not directly regulate the insurance business, federal
legislation and administrative policies in several areas, including pension regulation, age and sex
discrimination, financial services regulation, securities regulation and federal taxation, can
significantly affect the insurance business. As increased scrutiny has been placed upon the
insurance regulatory framework, a number of state legislatures have considered or enacted
legislative proposals that alter, and in many cases increase, state authority to regulate insurance
companies and holding company systems. Legislation has been introduced in Congress in the past
which could result in the federal government assuming some role in the regulation of the insurance
industry. Furthermore, FINRA is attempting to regulate the sale of index annuities and limit sales
of these products to registered representatives. The regulatory framework at the state and federal
level applicable to our insurance products is evolving. The changing regulatory framework could
affect the design of such products and our ability to sell certain products. Any changes in these
laws and regulations could materially and adversely affect our business, financial condition or
results of operations.
In addition, our investment management subsidiary is registered with the SEC as an investment
adviser, and certain of its employees may be subject to state regulation. This subsidiary also
manages investment companies (mutual funds) that are registered under the Investment Company Act,
which places additional restrictions on its managers. Moreover, certain of our separate accounts
are registered as investment companies under the Investment Company Act. The investment companies
we advise and our registered separate accounts are themselves highly regulated
25
under the Investment Company Act. In addition, our broker/dealer subsidiary that distributes the
shares of our managed investment companies’ separate accounts is a broker/dealer registered with
the SEC and is subject to regulation under the Exchange Act and various state laws, and is a member
of, and subject to regulation by, FINRA. The registered representatives of our broker/dealer
subsidiary and of other broker/dealers who distribute our securities products are regulated by the
SEC and FINRA and are further subject to applicable state laws. We cannot predict the effect that
any proposed or future legislation or rule making by the SEC, FINRA or the states will have on our
financial condition or operational flexibility.
We face competition from companies having greater financial resources, more advanced technology
systems, broader arrays of products, higher ratings and stronger financial performance, which may
impair our ability to retain existing customers, attract new customers and maintain our
profitability and financial strength.
See “Item 1. Business — Ratings and Competition” for information regarding risks relating to
competition.
Success of our business depends in part on effective information technology systems and on
continuing to develop and implement improvements.
Our business is dependent upon the ability to keep up to date with effective, secure and advanced
technology systems for interacting with employees, agents, policyholders, vendors, agents, third
parties and investors. It is crucial to our business to reach a large number of people, provide
sizeable amounts of information, and secure and store information through our technology systems.
If we do not maintain adequate systems to reflect technological advancements, we could experience
adverse consequences, including inadequate information on which to base pricing, underwriting and
reserving decisions, regulatory problems, litigation exposure or increases in administrative
expenses. This could adversely affect our relationships and ability to do business with our
clients and provide difficulty attracting new customers.
Some of our information technology systems and software are older legacy-type systems and require
an ongoing commitment of resources to maintain current standards. Our business strategy involves
providing customers with easy-to-use products and systems to meet their needs. We are continuously
enhancing and updating our systems to keep pace with changes in information processing technology,
evolving industry and regulatory standards and customer demands. Our success is in large part
dependent on maintaining and enhancing the effectiveness of existing systems, as well as continuing
to develop and enhance information systems that support our business processes in a cost-effective
manner.
Our business is highly dependent on our relationships with Farm Bureau organizations and would be
adversely affected if those relationships became impaired.
Farm Bureau Life’s business relies significantly upon the maintenance of our right to use the “Farm
Bureau” and “FB” trade names and related trademarks and service marks which are controlled by the
American Farm Bureau Federation. See discussion under “Business – Marketing and Distribution –
Affiliation with Farm Bureau” for information regarding this relationship and circumstances under
which our access to the Farm Bureau membership base and use of the “Farm Bureau” and “FB”
designations could be terminated. We believe our relationship with the Farm Bureau provides a
number of advantages. Farm Bureau organizations in our current territory tend to be well known and
long established, have active memberships and provide a number of member benefits other than
financial services. The strength of these organizations provides enhanced prestige and brand
awareness for our products and increased access to Farm Bureau members. The loss of the right to
use these designations in a key state or states could have a material adverse effect upon operating
results.
Our business and operations are interrelated to a degree with that of the American Farm Bureau
Federation, its affiliates, and state Farm Bureaus. The overlap of the business, including service
of certain common executive officers and directors of the Company and the state Farm Bureau
organizations, may give rise to conflicts of interest among these parties. Conflicts could arise,
for example, with respect to business dealings among the parties, the use of a common agency force,
the sharing of employees, space and other services and facilities under intercompany agreements,
and the allocation of business opportunities between them. Additional conflicts of interest could
arise due to the fact that the presidents of several of the state Farm Bureau organizations, who
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
our products. Conflicts of interest could also arise
26
between the Company and the various state Farm Bureau organizations in our life-only states, some
of whose presidents serve as directors of the Company, and which control their state affiliated
property-casualty insurance company, with respect to the use of the common agency force. We have
adopted a conflict of interest policy which requires a director to disclose to the Board of
Directors and any appropriate committee of the Board, the existence of any transaction or proposed
transaction in which the Director has a direct or indirect interest, and the material facts
relating thereto. In addition, a majority of our directors are independent.
We assumed a significant amount of closed block business through coinsurance agreements and have
only a limited ability to manage this business.
We have assumed through coinsurance agreements a substantial block of annuity business written by
American Equity and certain traditional life, universal life and annuity business written by EMCNL.
Our ability to manage the products covered by the coinsurance arrangements is limited and we can
make no assurances that our coinsurance counterparties will make decisions regarding the operations
of the business covered by the coinsurance agreements in the same manner that we would or in a
manner that would have a positive impact on the business covered by the coinsurance arrangements.
In addition, we rely on American Equity and EMCNL to supply us with accurate financial and
accounting data relating to the business coinsured.
Our reinsurance program involves risks because we remain liable with respect to the liabilities
ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them.
We reinsure a portion of our life insurance exposure with unaffiliated insurance companies under
traditional indemnity reinsurance agreements. New sales of participating whole life and universal
life products are reinsured above prescribed limits and do not require the reinsurer’s prior
approval within certain guidelines. New sales of certain term life products are reinsured on a
first dollar quota share basis and do not require the reinsurer’s prior approval within various
guidelines. Generally, we enter into indemnity reinsurance arrangements to assist in diversifying
our risks and to limit our maximum loss on risks that exceed our policy retention limits. Our
maximum retention limit on an insured life ranges up to $1.1 million depending upon when the policy
was issued.
Indemnity reinsurance does not fully discharge our obligation to pay claims on the reinsured
business. As the ceding insurer, we remain responsible for policy claims to the extent the
reinsurer fails to pay claims. Should any reinsurer fail to meet the obligations assumed under
such reinsurance, we remain liable for these liabilities, and payment of these obligations could
result in losses. To limit the possibility of such losses, we evaluate the financial condition of
our reinsurers and monitor concentrations of credit risk.
We experience volatility in net income due to accounting standards for derivatives.
Under Statement of Financial Accounting Standards (Statement) No. 133, as amended, derivative
instruments (including certain derivative instruments embedded in other contracts) not designated
as hedges are recognized in the balance sheet at their fair values and changes in fair value are
recognized immediately in earnings. This impacts the items of revenue and expense we report in
five ways.
| |
• |
|
We must mark to market the purchased call options we use to fund the index credits on
our index annuities based upon quoted market prices from related counterparties. We record
the change in fair value of these options as a component of our revenues. Included within
the change in fair value of the options is an element reflecting the time value of the
options, which initially is their purchase cost declining to zero at the end of their
lives. The change in the difference between fair value and remaining option cost at
beginning and end of year totaled ($51.1) million in 2007, $75.7 million in 2006 and $0.5
million in 2005. |
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• |
|
Under Statement No. 133, the future annual index credits on our index annuities are
treated as a “series of embedded derivatives” over the expected life of the applicable
contracts. We are required to estimate the fair value of these embedded derivatives. Our
estimates of the fair value of these embedded derivatives are based on assumptions related
to underlying policy terms (including annual cap rates, participation rates, asset fees and
minimum guarantees), index values, notional amounts, strike prices and expected lives of
the contracts. The change in fair value of embedded derivatives increases with increases
in volatility in the indices and changes in interest rates. We record the change in fair
value of embedded derivatives as a component of our benefits and expenses. However, it will
not correspond to the change in fair value of the |
27
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|
|
purchased call options because the purchased options are one or two-year assets while the
embedded derivative in the index contracts represents the rights of the contract holder to
receive index credits over the entire period the index annuities are expected to be in
force, which typically exceed 10 years. Changes in the value of the embedded derivatives
included in the index annuity contracts totaled ($5.9) million in 2007, $70.3 million in
2006 and $4.9 million in 2005. |
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Beginning in April 2007, we discontinued the use of hedge accounting for interest rate
swaps backing our annuity liabilities. This accounting change, which is required with the
adoption of Statement 133 Implementation Issue No. G26, “Cash Flow Hedges: Hedging Interest
Cash Flows on Variable-Rate Assets and Liabilities That Are Not Based on a Benchmark
Interest Rate,” requires us to record changes in the fair value of these swaps in net
income. Prior to April 2007, changes in the fair value of these swaps were recorded as a
component of the change in accumulated other comprehensive income (loss). The change in
net unrealized gains/losses on these swaps included in the change in accumulated other
comprehensive income (loss) totaled ($5.9) million in 2007, ($0.8) million in 2006 and $2.3
million in 2005. The change in fair value of the swaps after March 31, 2007, is recorded
in derivative income (loss) and totaled ($4.8) million in 2007. |
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We adjust the amortization of deferred policy acquisition costs and deferred sales
inducements to reflect the impact of the three items discussed above. |
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Our earnings are also affected by the changes in the value of the embedded derivatives
in convertible fixed maturity securities and modified coinsurance contracts. Changes in
the value of these embedded derivatives totaled less than ($0.1) million in 2007, ($0.2)
million in 2006 and ($0.5) million in 2005. |
The application of Statement No. 133 to our derivatives and embedded derivatives may cause
volatility in our reported net income in future periods.
We face risks relating to litigation, including the costs of such litigation, management
distraction and the potential for damage awards, which may adversely impact our business.
We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition,
state regulatory bodies, such as state insurance departments, the SEC, FINRA, the Department of
Labor and other regulatory bodies regularly make inquiries and conduct examinations or
investigations concerning our compliance with, among other things, insurance laws, securities laws,
the Employee Retirement Income Security Act of 1974 and laws governing the activities of
broker-dealers. Companies in the life insurance and annuity business have faced litigation,
including class action lawsuits, alleging improper product design, improper sales practices and
similar claims. While we are not a party to any lawsuit that we believe will have a material
adverse effect on our business, financial condition or results of operations, there can be no
assurance that such litigation, or any future litigation, will not have such an effect, whether
financially, through distraction of our management or otherwise.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal operations are conducted from property leased from a subsidiary of the Iowa Farm
Bureau Federation under a 15 year operating lease that expires in 2013. The property leased
currently consists primarily of approximately 168,000 square feet of a 400,000 square foot office
building in West Des Moines, Iowa. Operations related to our EquiTrust Life independent
distribution are conducted from approximately 26,000 square feet of another office building in West
Des Moines, Iowa. We consider the current facilities to be adequate for the foreseeable future.
28
ITEM 3. LEGAL PROCEEDINGS
We are a party to lawsuits arising in the normal course of business. We believe the resolution of
these lawsuits will not have a material adverse effect on our financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
29
PART II
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| ITEM 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Stock Market and Dividend Information
The Class A common stock of FBL Financial Group, Inc. is traded on the New York Stock Exchange
under the symbol FFG. The following table sets forth the cash dividends per common share and the
high and low prices of FBL Financial Group Class A common stock as reported in the consolidated
transaction reporting system for each quarter of 2007 and 2006.
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| Class A Common Stock Data (per share) |
|
1st Qtr. |
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2nd Qtr. |
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3rd Qtr. |
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4th Qtr. |
|
2007 |
|
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High |
|
$ |
41.53 |
|
|
$ |
40.61 |
|
|
$ |
40.50 |
|
|
$ |
42.50 |
|
Low |
|
|
36.58 |
|
|
|
36.89 |
|
|
|
30.33 |
|
|
|
33.98 |
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|
Dividends declared and paid |
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
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2006 |
|
|
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|
|
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High |
|
$ |
34.55 |
|
|
$ |
36.48 |
|
|
$ |
35.36 |
|
|
$ |
40.66 |
|
Low |
|
|
31.57 |
|
|
|
29.80 |
|
|
|
30.48 |
|
|
|
32.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared and paid |
|
$ |
0.115 |
|
|
$ |
0.115 |
|
|
$ |
0.115 |
|
|
$ |
0.115 |
|
There is no established public trading market for our Class B common stock. As of February 7,
2008, there were approximately 6,400 holders of Class A common stock, including participants
holding securities under the name of a broker (i.e., in “street name”), and 24 holders of Class B
common stock.
Class B common stockholders receive dividends at the same rate as that declared on Class A common
stock. We intend to declare regular quarterly cash dividends in the future, subject to the
discretion of the Board of Directors, which depends in part upon general business conditions, legal
restrictions and other factors the Board of Directors deems relevant. It is anticipated the
quarterly dividend rate during 2008 will be $0.125 per common share.
For restrictions on dividends, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operation — Liquidity and Capital Resources” and Notes 1 and 13 to the consolidated
financial statements.
Issuer Purchases of Equity Securities
| The following table sets forth issuer purchases of equity securities for the quarter ended
December 31, 2007. |
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|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum |
|
| |
|
|
|
|
|
|
|
|
|
(c) Total |
|
|
Number (or |
|
| |
|
|
|
|
|
|
|
|
|
Number of |
|
|
Approximate |
|
| |
|
|
|
|
|
|
|
|
|
Shares (or |
|
|
Dollar Value) |
|
| |
|
|
|
|
|
|
|
|
|
Units) |
|
|
of Shares (or |
|
| |
|
|
|
|
|
|
|
|
|
Purchased as |
|
|
Units) that |
|
| |
|
|
|
|
|
|
|
|
|
Part of |
|
|
May Yet Be |
|
| |
|
(a) Total |
|
|
(b) Average |
|
|
Publicly |
|
|
Purchased |
|
| |
|
Number of |
|
|
Price Paid per |
|
|
Announced |
|
|
Under the |
|
| |
|
Shares (or Units) |
|
|
Share (or |
|
|
Plans or |
|
|
Plans or |
|
| Period |
|
Purchased (1) |
|
|
Unit) (1) |
|
|
Programs |
|
|
Programs |
|
October 1, 2007
through October 31,
2007 |
|
|
– |
|
|
$ |
– |
|
|
Not applicable |
|
Not applicable |
November 1, 2007
through November
30, 2007 |
|
|
1,194 |
|
|
|
38.41 |
|
|
Not applicable |
|
Not applicable |
December 1, 2007
through December
31, 2007 |
|
|
2,614 |
|
|
|
35.43 |
|
|
Not applicable |
|
Not applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,808 |
|
|
$ |
36.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
| |
(1) |
|
Our Amended and Restated 1996 and 2006 Class A Common Stock Compensation Plans (the
Plans) provide for the grant of incentive stock options, nonqualified stock options, bonus
stock, restricted stock units and stock appreciation rights to directors, officers and
employees. Under the Plans, 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 by
transferring shares of Class A common stock to the Company. Activity in this table
represents Class A common shares returned to the Company in connection with the exercise of
employee stock options. |
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding securities authorized for issuance under equity compensation plans is hereby
incorporated by reference from our definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after December 31, 2007.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of or for the year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
(Dollars in thousands, except per share data) |
|
|
|
|
|
Consolidated Statement of Income Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive and index product charges |
|
$ |
114,529 |
|
|
$ |
105,033 |
|
|
$ |
96,258 |
|
|
$ |
89,925 |
|
|
$ |
83,944 |
|
Traditional life insurance premiums |
|
|
144,682 |
|
|
|
138,401 |
|
|
|
134,618 |
|
|
|
131,865 |
|
|
|
129,190 |
|
Net investment income |
|
|
628,031 |
|
|
|
535,836 |
|
|
|
475,443 |
|
|
|
416,081 |
|
|
|
395,881 |
|
Derivative income (loss) |
|
|
(4,951 |
) |
|
|
70,340 |
|
|
|
(2,800 |
) |
|
|
15,607 |
|
|
|
17,078 |
|
Realized/unrealized gains (losses) on
investments |
|
|
5,769 |
|
|
|
13,971 |
|
|
|
2,961 |
|
|
|
8,175 |
|
|
|
(2,008 |
) |
Total revenues |
|
|
914,599 |
|
|
|
887,353 |
|
|
|
728,148 |
|
|
|
682,602 |
|
|
|
641,545 |
|
| |
Net income (1) (2) |
|
|
86,339 |
|
|
|
90,129 |
|
|
|
72,842 |
|
|
|
66,076 |
|
|
|
65,945 |
|
Net income applicable to common stock (1) |
|
|
86,189 |
|
|
|
89,979 |
|
|
|
72,692 |
|
|
|
65,926 |
|
|
|
63,648 |
|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
2.90 |
|
|
|
3.06 |
|
|
|
2.51 |
|
|
|
2.31 |
|
|
|
2.27 |
|
Earnings
– assuming dilution |
|
|
2.84 |
|
|
|
3.01 |
|
|
|
2.47 |
|
|
|
2.26 |
|
|
|
2.23 |
|
Cash dividends |
|
|
0.48 |
|
|
|
0.46 |
|
|
|
0.42 |
|
|
|
0.40 |
|
|
|
0.40 |
|
Weighted average common shares
outstanding — assuming dilution |
|
|
30,321,617 |
|
|
|
29,904,624 |
|
|
|
29,414,988 |
|
|
|
29,140,890 |
|
|
|
28,548,882 |
|
Consolidated Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
11,137,923 |
|
|
$ |
9,782,626 |
|
|
$ |
8,299,208 |
|
|
$ |
7,501,680 |
|
|
$ |
6,341,701 |
|
Assets held in separate accounts |
|
|
862,738 |
|
|
|
764,377 |
|
|
|
639,895 |
|
|
|
552,029 |
|
|
|
463,772 |
|
Total assets |
|
|
14,002,976 |
|
|
|
12,154,012 |
|
|
|
10,153,933 |
|
|
|
9,100,736 |
|
|
|
7,949,070 |
|
Long-term debt |
|
|
316,930 |
|
|
|
218,399 |
|
|
|
218,446 |
|
|
|
217,183 |
|
|
|
140,200 |
|
Total liabilities |
|
|
13,099,994 |
|
|
|
11,273,154 |
|
|
|
9,309,538 |
|
|
|
8,267,934 |
|
|
|
7,201,082 |
|
Total stockholders’ equity (3) |
|
|
902,891 |
|
|
|
880,720 |
|
|
|
844,231 |
|
|
|
832,611 |
|
|
|
747,827 |
|
Book value per common share (3) |
|
|
29.98 |
|
|
|
29.59 |
|
|
|
28.88 |
|
|
|
28.87 |
|
|
|
26.42 |
|
Notes to Selected Consolidated Financial Data
| (1) |
|
Amounts are impacted by equity income from an equity investee totaling $4.4 million in 2003.
Beginning in 2004, we discontinued applying the equity method of accounting for this
investment as our share of percentage ownership decreased due to the equity investee’s initial
public offering of common stock in December 2003. |
| |
| (2) |
|
Effective July 1, 2003, we adopted Statement No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.” Statement No. 150 required
the classification of preferred dividends as interest expense on a prospective basis from the
date of adoption. Net income for 2003 would have been $2.2 million lower if Statement No. 150
had been effective January 1, 2003. Net income applicable to common stock was not impacted by
Statement No. 150. |
| |
| (3) |
|
Amounts are impacted by accumulated other comprehensive income (loss) totaling ($36.3)
million in 2007, $28.2 million in 2006, $82.3 million in 2005, $141.2 million in 2004 and
$121.6 million in 2003. These amounts are net of deferred income taxes and other adjustments
for assumed changes in the amortization of deferred policy acquisition costs, deferred sales
inducements, unearned revenue reserve and value of insurance in force acquired. |
31
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This section includes a summary of FBL Financial Group, Inc.’s consolidated results of operations,
financial condition and where appropriate, factors that management believes may affect future
performance. Please read this discussion in conjunction with the accompanying consolidated
financial statements and related notes. Unless noted otherwise, all references to FBL Financial
Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its
primary life insurance subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and
EquiTrust Life Insurance Company (EquiTrust Life) (collectively, the Life Companies).
Overview and Profitability
We sell individual life insurance and annuity products through an exclusive distribution channel
and individual annuity products through independent agents and brokers. Our exclusive agency force
consists of 1,967 Farm Bureau agents and managers operating in the Midwestern and Western sections
of the United States. Our fast growing independent channel, which we began in 2003, consists of
19,781 agents and brokers operating throughout the United States. In addition to writing direct
insurance, we assume business through various coinsurance agreements. Several subsidiaries support
various functional areas of the Life Companies and other affiliates, by providing investment
advisory, marketing and distribution, and leasing services. In addition, we manage two Farm Bureau
affiliated property-casualty companies.
Our profitability is primarily a factor of the following:
| • |
|
The volume of our life insurance and annuity business in force, which is driven by the
level of our sales and the persistency of the business written. |
| |
| • |
|
The amount of spread (excess of net investment income earned over interest credited/option
costs) we earn on contract holders’ general account balances. |
| |
| • |
|
The amount of fees we earn on contract holders’ separate account balances. |
| |
| • |
|
Our ability to price our life insurance products to earn acceptable margins over the cost
of providing benefits and the expenses of acquiring and administering the products.
Competitive conditions, mortality experience, persistency, investment results and our ability
to maintain expenses in accordance with pricing assumptions drive our margins on the life
products. On many products, we have the ability to mitigate adverse experience through
adjustments to credited interest rates, policyholder dividends or cost of insurance charges. |
| |
| • |
|
Our ability to manage our investment portfolio to maximize investment returns while
providing adequate liquidity for obligations to policyholders and minimizing the risk of
defaults or impairments of invested assets. |
| |
| • |
|
Our ability to manage the level of our operating expenses. |
| |
| • |
|
Changes in fair values of derivatives and embedded derivatives relating to our index
annuity business. |
Significant Accounting Policies and Estimates
The following is a brief summary of our significant accounting policies and a review of our most
critical accounting estimates. For a complete description of our significant accounting polices,
see Note 1 to our consolidated financial statements.
In accordance with U.S. generally accepted accounting principles (GAAP), premiums and
considerations received for interest sensitive and index products, such as ordinary annuities and
universal life insurance, are reflected as increases in liabilities for policyholder account
balances and not as revenues. Revenues reported for these products consist of policy charges for
the cost of insurance, administration charges, amortization of policy initiation fees and surrender
charges assessed against policyholder account balances. Surrender benefits paid relating to these
products are reflected as decreases in liabilities for policyholder account balances and not as
expenses. The Life Companies receive investment income earned from the funds deposited into
account balances, a portion of which is passed through to the policyholders in the form of interest
credited. For index annuities, proceeds from call options are earned from a portion of the funds
deposited, which are passed through to the contract holders in the form of index credits. Index
credits and interest credited to policyholder account balances and benefit claims in excess of
policyholder account balances are reported as expenses in the consolidated financial statements.
32
Premium revenues reported for traditional life insurance products are recognized as revenues when
due. Future policy benefits are recognized as expenses over the life of the policy by means of the
provision for future policy benefits.
For variable universal life and variable annuities, premiums received are not reported as revenues.
Similar to universal life and ordinary annuities, revenues reported consist of fee income and
product charges collected from the policyholders. Expenses related to these products include
benefit claims incurred in excess of policyholder account balances.
The costs related to acquiring new business, including certain costs of issuing policies and other
variable selling expenses (principally commissions), defined as deferred policy acquisition costs
and deferred sales inducements, are capitalized and amortized into expense. We also record an
asset, value of insurance in force acquired, for the cost assigned to insurance contracts when an
insurance company is acquired. For nonparticipating traditional life products, these costs are
amortized over the premium paying period of the related policies, in proportion to the ratio of
annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues
are estimated using the same assumptions used for computing liabilities for future policy benefits
and are generally “locked in” at the date the policies are issued. For participating traditional
life insurance, interest sensitive and index products, these costs are amortized generally in
proportion to expected gross profits from surrender charges and investment, mortality and expense
margins. This amortization is adjusted (also known as “unlocked”) when the Life Companies revise
their estimate of current or future gross profits or margins. For example, deferred policy
acquisition costs and deferred sales inducements are amortized earlier than originally estimated
when policy terminations are higher than originally estimated or when investments backing the
related policyholder liabilities are sold at a gain prior to their anticipated maturity.
Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to
year based on the level of claims incurred under insurance retention limits.
As described in more detail in Note 1 to our consolidated financial statements and in the “Net
income applicable to common stock” section that follows, in 2007 we changed our accounting policies
for modifications or exchanges of insurance contracts, income tax contingencies and cash flow
hedges on certain fixed annuity contracts. In 2006, we changed our method of computing share-based
compensation expense and changed our presentation of the related excess tax deductions in the
consolidated statement of cash flows.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities. 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. A summary of our significant accounting
estimates and the hypothetical effects of changes in the material assumptions used to develop each
estimate, are included in the following table. We have discussed the identification, selection and
disclosure of these critical accounting estimates with the Audit Committee of the Board of
Directors.
33
| |
|
|
|
|
|
|
|
|
|
|
|
| |
| |
Balance Sheet |
|
|
Description of |
|
|
Assumptions / |
|
|
Effect if Different |
|
| |
Caption |
|
|
Critical Estimate |
|
|
Approach Used |
|
|
Assumptions / Approach Used |
|
| |
Fixed maturities –
available for sale
|
|
|
Excluding U.S.
government treasury
securities, very
few of our fixed
maturity securities
trade on the
balance sheet date.
For those
securities without
a trade on the
balance sheet date,
market values are
determined using
valuation processes
that require
judgment.
|
|
|
Market values are
obtained primarily
from a variety of
independent pricing
sources, whose
results undergo
evaluation by our
internal investment
professionals.
Details regarding
valuation
techniques and
processes are
summarized in Note
1, “Significant
Accounting Policies
– Investments –
Market Values,” to
the consolidated
financial
statements.
|
|
|
At December 31, 2007, our
fixed maturity securities
classified as available
for sale had a market
value of $9,522.6 million,
with gross unrealized
gains totaling $146.7
million and gross
unrealized losses totaling
$287.1 million. Due to
the large number of fixed
maturity securities held,
the unique attributes of
each security and the
complexity of valuation
methods, it is not
practical to estimate a
potential range of market
values for different
assumptions and methods
that could be used in the
valuation process. |
|
| |
Fixed maturities –
available for sale
and equity
securities
|
|
|
We are required to
exercise judgment
to determine when a
decline in the
value of a security
is other than
temporary. When
the value of a
security declines
and the decline is
determined to be
other than
temporary, the
carrying value of
the investment is
reduced to its fair
value and a
realized loss is
recorded to the
extent of the
decline.
|
|
|
We evaluate the
operating results
of the underlying
issuer, near-term
prospects of the
issuer, general
market conditions,
causes for the
decline in value,
the length of time
there has been a
decline in value,
other key economic
measures and our
intent and ability
to hold a security
to recovery of fair
value.
|
|
|
At December 31, 2007, we
had 864 fixed maturity and
equity securities with
gross unrealized losses
totaling $287.1 million.
Included in the gross
unrealized losses are
losses attributable to
both movements in market
interest rates as well as
temporary credit issues.
Details regarding these
securities are included in
the “Financial Condition –
Investments” section that
follows. Net income would
have been reduced by
approximately $160.2
million if all these
securities were deemed to
be other-than-temporarily
impaired on December 31,
2007. |
|
| |
34
| |
|
|
|
|
|
|
|
|
|
|
|
| |
| |
Balance Sheet |
|
|
Description of |
|
|
Assumptions / |
|
|
Effect if Different |
|
| |
Caption |
|
|
Critical Estimate |
|
|
Approach Used |
|
|
Assumptions / Approach Used |
|
| |
Deferred policy
acquisition costs
and deferred sales
inducements
|
|
|
Amortization of
deferred policy
acquisition costs
and deferred sales
inducements for
participating life
insurance and
interest sensitive
and index products
is dependent upon
estimates of future
gross profits or
margins on this
business. Key
assumptions used
include the
following:
• yield on
investments
supporting the
liabilities,
• amount of interest or
dividends credited
to the policies,
•amount of
policy fees and
charges,
• amount of
expenses necessary
to maintain the
policies, and
• amount of
death and surrender
benefits and the
length of time the
policies will stay
in force.
|
|
|
These estimates,
which are revised
at least annually,
are based on
historical results
and our best
estimate of future
experience.
|
|
|
Amortization of deferred
policy acquisition costs
and deferred sales
inducements for
participating life
insurance and interest
sensitive and index
products is expected to
total $101.6 million for
2008, excluding the impact
of new production in 2008.
A 10% increase in
estimated gross profits
for 2008 would result in
$8.7 million of additional
amortization expense.
Correspondingly, a 10%
decrease in estimated
gross profits would result
in an $8.8 million
reduction of amortization
expense. |
|
| |
Future policy
benefits
|
|
|
Reserving for
future policy
benefits for
traditional life
insurance products
requires the use of
many assumptions,
including the
duration of the
policies, mortality
experience, lapse
rates, surrender
rates and dividend
crediting rates.
The development of
reserves for future
policy benefits for
index annuities
requires the
valuation of the
embedded
derivatives
relating to the
contract holder’s
right to
participate in one
or more market
indices. This
valuation requires
assumptions as to
future option costs
that are dependent
upon the volatility
of the market
indices, risk free
interest rates,
market returns and
the expected lives
of the contracts.
|
|
|
These assumptions
are made based upon
historical
experience,
industry standards
and a best estimate
of future results
and, for
traditional life
products, include a
provision for
adverse deviation.
For traditional
life insurance,
once established
for a particular
series of products,
these assumptions
are generally held
constant. For
index annuities,
these assumptions
are revised at each
balance sheet date.
|
|
|
Due to the number of
independent variables
inherent in the
calculation of traditional
life insurance reserves
and reserves for the
embedded derivatives in
index annuities, it is not
practical to perform a
sensitivity analysis on
the impact of reasonable
changes in the underlying
assumptions. The cost of
performing detailed
calculations using
different assumption
scenarios outweighs the
benefit that would be
derived. We believe our
assumptions are realistic
and produce reserves that
are fairly stated in
accordance with GAAP. |
|
| |
35
| |
|
|
|
|
|
|
|
|
|
|
|
| |
| |
Balance Sheet |
|
|
Description of |
|
|
Assumptions / |
|
|
Effect if Different |
|
| |
Caption |
|
|
Critical Estimate |
|
|
Approach Used |
|
|
Assumptions / Approach Used |
|
| |
Other
assets/liabilities
|
|
|
The determination
of net periodic
pension expense and
related
accrued/prepaid
pension cost
requires the use of
estimates as to the
expected return on
plan assets,
discount rate on
plan liabilities
and other actuarial
assumptions.
Pension expense for
2007 totaled $5.9
million.
|
|
|
We assume an
expected long-term
rate of return on
plan assets of
7.00% and discount
rate of 5.60%.
Details regarding
the method used to
determine the
discount rate are
summarized in Note
9, “Retirement and
Compensation
Plans,” to the
consolidated
financial
statements.
|
|
|
A 100 basis point decrease
in the expected return on
assets would result in a
$0.6 million increase in
pension expense and a 100
basis point increase would
result in a $0.6 million
decrease to pension
expense. A 100 basis
point decrease in the
assumed discount rate
would result in a $0.2
million increase in
pension expense while a
100 basis point increase
would result in a $0.2
million decrease to
pension expense. |
|
| |
Results of Operations for the Three Years Ended December 31, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands, except per share data) |
Revenues |
|
$ |
914,599 |
|
|
$ |
887,353 |
|
|
$ |
728,148 |
|
Benefits and expenses |
|
|
788,793 |
|
|
|
753,865 |
|
|
|
619,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,806 |
|
|
|
133,488 |
|
|
|
108,563 |
|
Income taxes |
|
|
(41,051 |
) |
|
|
(44,368 |
) |
|
|
(36,780 |
) |
Minority interest and equity income |
|
|
1,584 |
|
|
|
1,009 |
|
|
|
1,059 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
86,339 |
|
|
|
90,129 |
|
|
|
72,842 |
|
Less dividends on Series B preferred stock |
|
|
(150 |
) |
|
|
(150 |
) |
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
86,189 |
|
|
$ |
89,979 |
|
|
$ |
72,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
$ |
2.90 |
|
|
$ |
3.06 |
|
|
$ |
2.51 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per
common share – assuming dilution |
|
$ |
2.84 |
|
|
$ |
3.01 |
|
|
$ |
2.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data |
|
|
|
|
|
|
|
|
|
|
|
|
Direct premiums collected, net of reinsurance ceded: |
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
Annuity – Exclusive Distribution |
|
$ |
126,849 |
|
|
$ |
140,279 |
|
|
$ |
177,408 |
|
Traditional
Annuity – Independent Distribution |
|
|
1,569,128 |
|
|
|
1,808,482 |
|
|
|
902,305 |
|
Traditional and Universal Life Insurance |
|
|
185,904 |
|
|
|
175,185 |
|
|
|
170,736 |
|
Variable Annuity and Variable Universal Life (1) |
|
|
181,309 |
|
|
|
154,651 |
|
|
|
162,125 |
|
Reinsurance assumed and other |
|
|
15,238 |
|
|
|
17,604 |
|
|
|
20,159 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,078,428 |
|
|
$ |
2,296,201 |
|
|
$ |
1,432,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct life insurance in force, end of year (in millions) |
|
$ |
41,092 |
|
|
$ |
38,372 |
|
|
$ |
35,917 |
|
Life insurance lapse rates |
|
|
6.1 |
% |
|
|
6.5 |
% |
|
|
7.0 |
% |
Withdrawal
rates – individual traditional annuity: |
|
|
|
|
|
|
|
|
|
|
|
|
Exclusive Distribution |
|
|
5.2 |
% |
|
|
5.1 |
% |
|
|
3.1 |
% |
Independent Distribution |
|
|
5.5 |
% |
|
|
5.1 |
% |
|
|
5.1 |
% |
(1) Amounts are net of portion ceded to and include amounts assumed from alliance partners.
Premiums collected is a non-GAAP financial measure for which there is no comparable GAAP financial
measure. We use premiums collected to measure the productivity of our exclusive and independent
agents. Direct Traditional Annuity — Independent Distribution premiums collected decreased in 2007
primarily due to a more favorable market environment during 2006 for the sale of our multi-year
guaranteed annuity product combined with a competitive environment for index annuity sales in 2007.
In addition, during 2007 we took actions to further increase the profitability of our products.
36
Net income applicable to common stock decreased 4.2% in 2007 to $86.2 million and increased 23.8%
in 2006 to $90.0 million. As discussed in detail below, net income applicable to common stock
decreased in 2007 due to the impact of changes in unrealized gains and losses on derivatives and a
decrease in realized gains on investments, partially offset by the impact of growth in the volume
of business in force and decreases in death benefits. Net income applicable to common stock
increased in 2006 due to the growth in the volume of business in force and an increase in realized
gains on investments, partially offset by increases in death benefits.
The increase in volume of business in force is quantified in the detailed discussion that follows
by summarizing the face amount of insurance in force for life products or account values of
contracts in force for interest sensitive products. The face amount of life insurance in force
represents the gross death benefit payable to policyholders and account value represents the value
of the contract to the contract holder before application of surrender charges or reduction for any
policy loans outstanding.
The spreads earned on our universal life and individual traditional annuity products are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Weighted average yield on cash and invested assets |
|
|
5.97 |
% |
|
|
6.02 |
% |
|
|
6.18 |
% |
Weighted average interest crediting rate/index cost |
|
|
3.67 |
% |
|
|
3.57 |
% |
|
|
3.68 |
% |
|
|
|
|
|
|
|
|
|
|
Spread |
|
|
2.30 |
% |
|
|
2.45 |
% |
|
|
2.50 |
% |
|
|
|
|
|
|
|
|
|
|
The weighted average yield on cash and invested assets represents the yield on cash and investments
backing the universal life and individual traditional annuity products, net of investment expenses.
With respect to our index annuities, index costs represent the expenses we incur to fund the
annual index credits through the purchase of options and minimum guaranteed interest credited on
the index business. The weighted average crediting rate/index cost and spread are computed
excluding the impact of the amortization of deferred sales inducements. The decline in spread in
2007 and 2006 is primarily due to a shift in business to our multi-year guaranteed annuity which
has a lower spread target, but similar priced return, than other products in our portfolio. See
the “Segment Information” section that follows for a discussion of our spreads.
37
As noted in the “Segment Information” section that follows, we use both net income and operating
income to measure our operating results. Operating income for the years covered by this report
equals net income, excluding the impact of: (1) realized gains and losses on investments, (2) the
change in net unrealized gains and losses on derivatives, (3) the cumulative effect of change in
accounting principles and (4) a lawsuit settlement. The rationale for excluding these items from
operating income is explained in the “Segment Information” section that follows and Note 14 to the
consolidated financial statements. The impact of these adjustments on net income is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Realized/unrealized gains on investments |
|
$ |
5,769 |
|
|
$ |
13,971 |
|
|
$ |
2,961 |
|
Change in net unrealized gains/losses on derivatives |
|
|
(49,361 |
) |
|
|
4,574 |
|
|
|
(6,061 |
) |
Change in amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs |
|
|
16,856 |
|
|
|
(1,561 |
) |
|
|
1,456 |
|
Deferred sales inducements |
|
|
12,895 |
|
|
|
(1,409 |
) |
|
|
570 |
|
Value of insurance in force acquired |
|
|
12 |
|
|
|
54 |
|
|
|
6 |
|
Unearned revenue reserve |
|
|
(16 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Cumulative effect of change in accounting principle |
|
|
(283 |
) |
|
|
— |
|
|
|
— |
|
Lawsuit settlement |
|
|
— |
|
|
|
(4,880 |
) |
|
|
— |
|
Income tax offset |
|
|
4,846 |
|
|
|
(3,762 |
) |
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
Net impact of operating income adjustments |
|
$ |
(9,282 |
) |
|
$ |
6,986 |
|
|
$ |
(695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of adjustments noted above after offsets and
income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized/unrealized gains on investments |
|
$ |
4,501 |
|
|
$ |
9,222 |
|
|
$ |
1,633 |
|
Change in net unrealized gains/losses on derivatives |
|
|
(13,500 |
) |
|
|
936 |
|
|
|
(2,328 |
) |
Cumulative effect of change in accounting principle |
|
|
(283 |
) |
|
|
— |
|
|
|
— |
|
Lawsuit settlement |
|
|
— |
|
|
|
(3,172 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net impact of operating income adjustments |
|
$ |
(9,282 |
) |
|
$ |
6,986 |
|
|
$ |
(695 |
) |
|
|
|
|
|
|
|
|
|
|
Net impact
per common share – basic |
|
$ |
(0.31 |
) |
|
$ |
0.24 |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
Net impact
per common share – assuming dilution |
|
$ |
(0.31 |
) |
|
$ |
0.23 |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
We periodically revise the key assumptions used in the calculation of the amortization of deferred
policy acquisition costs, deferred sales inducements, value of insurance in force acquired and
unearned revenues for participating life insurance, variable and interest sensitive and index
products, as applicable, through an unlocking process. Revisions are made based on historical
results and our best estimate of future experience. The impact of unlocking on our results is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands except per share data) |
Amortization of deferred policy acquisition costs |
|
$ |
942 |
|
|
$ |
1,570 |
|
|
$ |
1,732 |
|
Amortization of deferred sales inducements |
|
|
1,134 |
|
|
|
146 |
|
|
|
108 |
|
Amortization of value of insurance in force acquired |
|
|
(1,276 |
) |
|
|
(405 |
) |
|
|
584 |
|
Amortization of unearned revenues |
|
|
405 |
|
|
|
332 |
|
|
|
(397 |
) |
|
|
|
|
|
|
|
|
|
|
Increase to pre-tax income |
|
$ |
1,205 |
|
|
$ |
1,643 |
|
|
$ |
2,027 |
|
|
|
|
|
|
|
|
|
|
|
Impact per common share (basic and diluted), net of tax |
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
The amounts of the unlocking adjustments and whether they increase or decrease income depend upon
the nature of the underlying assumption changes made in the amortization models. See the “Segment
Information” section that follows for additional discussion of our unlocking adjustments.
Effective April 1, 2007, we adopted Statement of Financial Accounting Standards (Statement) 133
Implementation Issue No. G26, “Cash Flow Hedges: Hedging Interest Cash Flows on Variable-Rate
Assets and Liabilities That Are Not Based on a Benchmark Interest Rate,” (DIG G26) which required
us to discontinue the use of hedge accounting for interest rate swaps backing our annuity
contracts. As a result of adopting DIG G26, net income for 2007 was
38
$2.2 million ($0.07 per basic and diluted common share) lower than if we continued to use hedge
accounting for the interest rate swaps. The adoption of DIG G26 did not have any impact on
comprehensive income.
Effective January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” which requires a more-likely-than-not recognition
threshold for evaluating our tax positions. The impact of adopting Interpretation No. 48 was not
material to our consolidated financial statements; therefore the cumulative effective of change in
this accounting principle, totaling $0.3 million, was reflected as an increase to income tax
expense in our 2007 consolidated income statement. Net income for the full year 2007 was $0.3
million lower ($0.01 per basic and diluted common share) as a result of adopting this
Interpretation.
Effective January 1, 2007, we adopted Statement of Position (SOP) 05-1, “Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of
Insurance Contracts” issued by the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants. The impact of adopting SOP 05-1 was not material to our
consolidated financial statements for 2007 (estimated to be a $0.1 million decrease to net income -
less than $0.01 per basic and diluted common share) as our previous accounting policy for internal
replacements substantially conformed to current interpretations of the guidance in the SOP.
Effective January 1, 2006, we adopted Statement No. 123(R), “Share-Based Payment,” using the
modified-prospective-transition method. Statement No. 123(R) is a revision of Statement No. 123,
“Accounting for Stock-Based Compensation.” As a result of adopting Statement No. 123(R), net
income for the full year 2006 was $0.2 million lower (less than $0.01 per basic and diluted common
share), than if we had continued to account for share-based compensation under Statement No. 123.
Premiums and product charges are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Premiums and product charges: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive and index product charges |
|
$ |
114,529 |
|
|
$ |
105,033 |
|
|
$ |
96,258 |
|
Traditional life insurance premiums |
|
|
144,682 |
|
|
|
138,401 |
|
|
|
134,618 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
259,211 |
|
|
$ |
243,434 |
|
|
$ |
230,876 |
|
|
|
|
|
|
|
|
|
|
|
Premiums and product charges increased 6.5% in 2007 to $259.2 million and 5.4% in 2006 to $243.4
million. The increases in interest sensitive and index product charges in 2007 and 2006 are driven
principally by surrender charges on annuity and universal life products, mortality and expense fees
on variable products and cost of insurance charges on variable universal life and universal life
products.
Surrender charges totaled $23.4 million in 2007, $18.3 million in 2006 and $13.5 million in 2005.
Surrender charges increased primarily due to an increase in surrenders relating to growth in the
volume and aging of business in force. The average aggregate account value for annuity and
universal life insurance in force, which increased due to increases in premiums collected as
summarized in the “Other data” table above, totaled $8,428.8 million for 2007, $6,861.7 million for
2006 and $5,523.8 million for 2005. We believe aging of the business in force is driving a portion
of the increase in surrender charges relating to the annuity business assumed under coinsurance
agreements and business written directly through the EquiTrust Life independent agents as the
surrender charge rate decreases with the passage of time (at a rate generally equal to 1.0% per
year). This makes a surrender later in the contract period more economical for the contract
holder, which results in higher lapse rates as the business ages. We started assuming business
under coinsurance agreements in 2001 and started selling annuities directly through EquiTrust Life
independent agents in the fourth quarter of 2003. In total, surrender charges on this coinsurance
and direct business totaled $20.5 million for 2007, $15.6 million for 2006 and $10.9 million for
2005.
Mortality and expense fees totaled $10.0 million in 2007, $8.1 million in 2006 and $6.9 million in
2005. Mortality and expense fees increased due to increases in the separate account balances on
which fees are based. The average separate account balance increased to $823.2 million for 2007,
from $697.6 million for 2006 and $588.0 million for 2005 due to the impact of new sales and
favorable investment results. Transfers of premiums to the separate accounts totaled $138.6
million for 2007, $93.6 million for 2006 and $118.2 million for 2005. Net investment income and
net realized and unrealized gains on separate account assets totaled $60.6 million for 2007, $39.8
million for 2006 and $37.7 million for 2005.
39
Cost of insurance charges totaled $65.3 million in 2007, $63.8 million in 2006 and $61.9 million in
2005. Cost of insurance charges increased primarily due to aging of the business in force as the
cost of insurance charge rate per each $1,000 in force increases with the age of the insured. The
average age of our universal life and variable universal life policyholders was 45.4 years in 2007,
45.0 years in 2006 and 44.6 years in 2005.
Traditional premiums increased in 2007 and 2006 due to an increase in the volume of business in
force. The increase in the business in force is primarily attributable to sales of traditional
life products by our Farm Bureau Life agency force exceeding the loss of in force amounts through
deaths, lapses and surrenders. Our average aggregate traditional life insurance in force, net of
reinsurance ceded, totaled $20,090 million for 2007, $18,295 million for 2006 and $17,344 million
for 2005. The change in life insurance in force is not proportional to the change in premium
income due to a shift in the composition of our traditional life block of business from whole life
policies to term policies. The premium for a term policy per $1,000 face amount is less than that
for a whole life policy.
Net investment income, which excludes investment income on separate account assets relating to
variable products, increased 17.2% in 2007 to $628.0 million and increased 12.7% in 2006 to $535.8
million. These increases are primarily due to an increase in average invested assets. Average
invested assets increased 18.2% to $10,430.4 million (based on securities at amortized cost) in
2007 and 15.4% to $8,822.7 million (based on securities at amortized cost) in 2006. Average
invested assets totaled $7,645.4 million in 2005. The increase in average invested assets in 2007
and 2006 is principally due to net premium inflows from the Life Companies and, for 2007, proceeds
totaling $98.5 million from issuance of our Senior Notes in March 2007 (2017 Senior Notes). The
annualized yield earned on average invested assets decreased to 6.02% in 2007 from 6.07% in 2006
and 6.22% in 2005. Market conditions in 2007, 2006 and 2005 impacted our investment portfolio
yield as market investment rates were, in general, lower than our portfolio yield or yield on
investments maturing or being paid down. The average yields on fixed maturity securities purchased
were 6.11% for 2007, 6.04% for 2006 and 5.44% for 2005. The average yields on fixed maturity
securities maturing or being paid down were 6.59% for 2007, 6.62% for 2006 and 6.10% for 2005. For
2007, the impact of these market conditions on our portfolio yield was partially offset by
increased fee income. Fee income from bond calls, tender offers and mortgage loan prepayments
totaled $10.1 million in 2007, $8.9 million in 2006 and $8.4 million in 2005. Net investment
income also includes ($1.3) million in 2007, $0.1 million in 2006 and ($0.6) million in 2005
representing the acceleration (reversal) of net discount accretion on mortgage and asset-backed
securities resulting from changing prepayment speed assumptions at the end of each respective
period. See “Financial Condition — Investments” section that follows for a description of how
changes in prepayment speeds impact net investment income.
Derivative income (loss) is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Derivative income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Components of derivative income (loss) from call options: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains received at expiration |
|
$ |
156,378 |
|
|
$ |
67,919 |
|
|
$ |
41,569 |
|
Change in the difference between fair value and remaining option
cost at beginning and end of year |
|
|
(51,087 |
) |
|
|
75,655 |
|
|
|
467 |
|
Cost of money for call options |
|
|
(108,379 |
) |
|
|
(73,070 |
) |
|
|
(44,335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,088 |
) |
|
|
70,504 |
|
|
|
(2,299 |
) |
Other |
|
|
(1,863 |
) |
|
|
(164 |
) |
|
|
(501 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(4,951 |
) |
|
$ |
70,340 |
|
|
$ |
(2,800 |
) |
|
|
|
|
|
|
|
|
|
|
40
Gains received at expiration are attributable to growth in the volume of index annuities in force
and appreciation in the market indices on which our options are based. The average aggregate
account value of index annuities in force, which has increased due to new sales, totaled $4,106.8
million for 2007, $3,200.1 million for 2006 and $2,299.1 million for 2005. The changes in the
difference between the fair value of the call options and the remaining option costs are caused
primarily by the timing of index settlements and the change in the S&P 500 Index® (upon which the
majority of our options are based). The range of index appreciation for S&P 500 Index options
during 2007, 2006 and 2005 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Annual point-to-point strategy |
|
|
1.9%-24.4% |
|
|
|
1.1%-16.0% |
|
|
|
1.6%-7.9% |
|
Monthly point-to-point strategy |
|
|
0.0%-16.1% |
|
|
|
0.0%-12.7% |
|
|
|
0.1%-12.0% |
|
Monthly
average strategy – one-year options |
|
|
1.2%-14.1% |
|
|
|
0.9%-9.1% |
|
|
|
0.0%-9.9% |
|
Monthly
average strategy – two-year options |
|
|
8.1%-16.4% |
|
|
|
– |
|
|
|
– |
|
Daily average strategy |
|
|
2.1%-11.1% |
|
|
|
0.7%-8.7% |
|
|
|
0.0%-9.2% |
|
The change in fair value is also reduced by participation rates and caps, as applicable, on the
underlying options. Furthermore, the change in fair value is impacted by options based on other
underlying indices and the timing of option settlements. The cost of money for call options
increased primarily due to the impact of growth in the volume of index annuities in force. In
addition, the price of call options increased during 2007 due to an increase in the volatility of
the equity markets during the year. Other derivative loss is comprised of changes in the value of
the conversion feature embedded in convertible fixed maturity securities and the embedded
derivative included in our modified coinsurance contracts. In addition, beginning in the second
quarter of 2007, other derivative loss includes cash flows and the change in fair value of the
interest rate swaps relating to our flexible premium deferred annuity contracts due to the adoption
of Statement 133 Implementation Issue No. G26, “Cash Flow Hedges: Hedging Interest Cash Flows on
Variable Rate Assets and Liabilities That Are Not Based on a Benchmark Interest Rate.” See Note 1
to our consolidated financial statements for additional details on this change in accounting.
Derivative income (loss) will fluctuate based on market conditions.
Realized/unrealized gains (losses) on investments are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Realized/unrealized gains (losses) on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains on sales |
|
$ |
10,398 |
|
|
$ |
16,861 |
|
|
$ |
8,200 |
|
Realized losses on sales |
|
|
(200 |
) |
|
|
(633 |
) |
|
|
(2,833 |
) |
Realized losses due to impairments |
|
|
(4,502 |
) |
|
|
(2,340 |
) |
|
|
(2,250 |
) |
Unrealized gains (losses) on trading securities |
|
|
73 |
|
|
|
83 |
|
|
|
(156 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,769 |
|
|
$ |
13,971 |
|
|
$ |
2,961 |
|
|
|
|
|
|
|
|
|
|
|
The level of realized/unrealized gains (losses) 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. Gains on sales include $6.1 million in 2007 and $13.5 million in 2006 related to
sales of a portion of our investment in American Equity Investment Life Holding Company (AEL)
common stock. Gains on sales in 2006 also included a $1.9 million gain related to the sale of our
equity investment in an affiliate, Western Agricultural Insurance Company, to another affiliate,
Farm Bureau Mutual Insurance Company. See “Financial Condition
– Investments” for details
regarding our unrealized gains and losses on available-for-sale securities at December 31, 2007 and
2006.
41
We monitor the financial condition and operations of the issuers of securities rated below
investment grade and of the issuers of certain investment grade securities on which we have
concerns regarding credit quality. In determining whether or not an unrealized loss is other than
temporary, we review factors such as:
| |
• |
|
historical operating trends; |
| |
• |
|
business prospects; |
| |
• |
|
status of the industry in which the company operates; |
| |
• |
|
analyst ratings on the issuer and sector; |
| |
• |
|
quality of management; |
| |
• |
|
size of the unrealized loss; |
| |
• |
|
length of time the security has been in an unrealized loss position; and |
| |
• |
|
our intent and ability to hold the security. |
If we determine that an unrealized loss is other than temporary, the security is written down to
its fair value with the difference between amortized cost and fair value recognized as a realized
loss. Details regarding investment impairments individually exceeding $0.5 million for 2007, 2006
and 2005, including the circumstances requiring the write downs, are summarized in the following
table:
| |
|
|
|
|
|
|
| General Description |
|
Loss |
|
Circumstances |
| |
|
(Dollars in |
|
|
| |
|
thousands) |
|
|
Year ended December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Major printing and
publishing company
|
|
$ |
3,285 |
|
|
During the second
quarter, the
company announced
that it would take
the company private
in a series of
transactions
tendering
outstanding shares.
In addition,
rating declines and
other adverse
details regarding
the financial
status of the
company became
available during
the second and
fourth quarters.
(A) |
|
|
|
|
|
|
|
United States military base housing
revenue bond
|
|
$ |
812 |
|
|
During the second
quarter, the United
States closed one
military base
leading to a
restructuring and
tender offer for
the bonds. (A) |
|
|
|
|
|
|
|
Year ended December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Major United States credit
company
|
|
$ |
986 |
|
|
Valuation of this
security is tied to
the strength of its
parent. During the
first quarter,
continued rating
declines and other
adverse details
regarding the
financial status of
the parent company
became available. (A) |
|
|
|
|
|
|
|
Major United States automaker
|
|
$ |
648 |
|
|
During the first
quarter, continued
rating declines and
other adverse details
regarding the
financial status of
the company became
available. In
addition, the company
faced labor strikes
and restated its
financial statements
during the quarter. (A) |
|
|
|
|
|
|
|
Major United States automaker
|
|
$ |
643 |
|
|
During the first
quarter, continued
rating declines and
other adverse details
regarding the
financial status of
the company became
available. (A) |
|
|
|
|
|
|
|
Year ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Major United States automaker
|
|
$ |
1,295 |
|
|
During the second
quarter, adverse details
regarding the financial
status of the company
became available. (A) |
| (A) |
|
Negative trends in this segment of the industry were considered in our analysis, which is
done on an issue-by-issue basis. We concluded that there is no impact on other material
investments in addition to amounts already written down. |
42
Other income and other expenses include revenues and expenses, respectively, relating primarily to
our non-insurance operations. Our non-insurance operations include management, advisory, marketing
and distribution services and leasing activities. Fluctuations in these financial statement line
items are generally attributable to fluctuations in the level of these services provided during the
years.
Interest sensitive and index product benefits are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Interest sensitive and index product benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
$ |
240,943 |
|
|
$ |
204,693 |
|
|
$ |
191,475 |
|
Index credits |
|
|
154,449 |
|
|
|
71,299 |
|
|
|
44,549 |
|
Change in value of embedded derivative |
|
|
(5,907 |
) |
|
|
70,295 |
|
|
|
4,891 |
|
Amortization of deferred sales inducements |
|
|
9,352 |
|
|
|
18,680 |
|
|
|
10,263 |
|
Interest sensitive death benefits |
|
|
37,800 |
|
|
|
44,160 |
|
|
|
37,840 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
436,637 |
|
|
$ |
409,127 |
|
|
$ |
289,018 |
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive and index product benefits increased 6.7% in 2007 to $436.6 million and 41.6% in
2006 to $409.1 million. The increase in interest sensitive and index product benefits for 2007 is
primarily due to an increase in volume of annuity business in force, partially offset by market
depreciation on the indices backing the index annuities and a decrease in interest sensitive death
benefits. In 2006, the increase in interest sensitive and index product benefits was primarily due
to an increase in volume of annuity business in force, an increase in interest sensitive death
benefits and an increase in market appreciation on the indices backing the index annuities.
Interest sensitive and index product benefits tend to fluctuate from period to period primarily as
a result of changes in mortality experience and the impact of changes in the equity markets on
index credits, the value of the embedded derivatives in our index annuities and amortization of
deferred sales inducements.
The average aggregate account value of annuity contracts in force, which increased due to
additional premiums collected as summarized in the “Other data” table above, totaled $7,536.9
million for 2007, $5,970.0 million for 2006 and $4,637.6 million for 2005. These account values
include values relating to index contracts totaling $4,106.8 million for 2007, $3,200.1 million for
2006 and $2,299.1 million for 2005.
The weighted average interest crediting rate/index cost for universal life and individual
traditional annuity products, excluding the impact of the amortization of deferred sales
inducements, was 3.67% for 2007, 3.57% for 2006 and 3.68% for 2005. See the “Segment Information”
section that follows for additional details on our spreads.
The change in the amount of index credits is impacted by growth in the volume of index annuities in
force and the amount of appreciation/depreciation in the underlying equity market indices on which
our options are based as discussed above under “Derivative income (loss).” The change in the value
of the embedded derivative is impacted by the change in expected index credits on the next policy
anniversary dates, which is related to the change in the fair value of the options acquired to fund
these index credits as discussed above under “Derivative income (loss).” The value of the embedded
derivative is also impacted by the timing of the posting of index credits and changes in reserve
discount rates and assumptions used in estimating future call option costs. In addition, during
2006, we reduced our reserves for the embedded derivative in our coinsured index annuities $7.1
million. This adjustment, which is the correction of an overstatement that started in 2001,
increased net income $2.6 million ($0.09 per basic and diluted common share) after offsets for
taxes and the amortization of deferred policy acquisition costs and deferred sales inducements.
This adjustment does not impact our segment results as the segment results are based on operating
income which, as explained in the “Segment Information” section, excludes the impact of changes in
the valuation of derivatives.
The decrease in amortization of deferred sales inducements in 2007 is primarily due to the impact
of changes in unrealized gains and losses on derivatives, partially offset by the impact of
capitalization of costs incurred with new sales and profitability on the underlying business.
Deferred sales inducements on interest sensitive and index products totaled $319.2 million at
December 31, 2007, $225.1 million at December 31, 2006 and $147.0 million at December 31, 2005.
The impact of realized/unrealized gains and losses on investments and the change in unrealized
gains/losses on derivatives is detailed and in the “Net income applicable to common stock” section
above.
43
Traditional life insurance policy benefits are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Traditional life insurance policy benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
Traditional life insurance benefits |
|
$ |
90,808 |
|
|
$ |
90,837 |
|
|
$ |
85,255 |
|
Increase in traditional life future policy benefits |
|
|
37,682 |
|
|
|
33,500 |
|
|
|
36,436 |
|
Distributions to participating policyholders |
|
|
21,420 |
|
|
|
22,504 |
|
|
|
22,861 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
149,910 |
|
|
$ |
146,841 |
|
|
$ |
144,552 |
|
|
|
|
|
|
|
|
|
|
|
Traditional life insurance policy benefits increased 2.1% in 2007 to $149.9 million and 1.6% in
2006 to $146.8 million. These increases are attributable to an increase in the volume of
traditional life business in force, partially offset, in 2007, by decreases in traditional life
insurance death benefits. Traditional life insurance death benefits decreased 5.0% to $51.1
million in 2007 and increased 4.5% to $53.8 million in 2006. Surrender benefits increased 7.5% to
$35.4 million in 2007 and 9.8% to $32.9 million in 2006. The change in traditional life and future
policy benefits may not be proportional to the change in traditional premiums and benefits as
reserves on term policies are generally less than reserves on whole life policies. Distributions
to participating policyholders decreased in 2007 and 2006 due to reductions in our dividend
crediting rates in response to the impact of declining market interest rates on our investment
portfolio yield as discussed in the “Net investment income” section above. Traditional life
insurance benefits can fluctuate from period to period primarily as a result of changes in
mortality experience.
Underwriting, acquisition and insurance expenses are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Underwriting, acquisition and insurance expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Commission expense, net of deferrals |
|
$ |
13,906 |
|
|
$ |
13,497 |
|
|
$ |
13,904 |
|
Amortization of deferred policy acquisition costs |
|
|
68,394 |
|
|
|
68,541 |
|
|
|
57,207 |
|
Amortization of value of insurance in force acquired |
|
|
5,069 |
|
|
|
3,458 |
|
|
|
2,861 |
|
Other underwriting, acquisition and insurance
expenses, net of deferrals |
|
|
74,451 |
|
|
|
79,022 |
|
|
|
78,556 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
161,820 |
|
|
$ |
164,518 |
|
|
$ |
152,528 |
|
|
|
|
|
|
|
|
|
|
|
Underwriting, acquisition and insurance expenses decreased 1.7% in 2007 to $161.8 million and
increased 7.9% in 2006 to $164.5 million. Amortization of deferred policy acquisition costs
decreased in 2007 primarily due to the impact of the change in unrealized gains/losses on
derivatives, partially offset by the impact of an increase in profitability and volume of business
in force resulting from direct sales from our EquiTrust Life distribution channel. Amortization of
deferred policy acquisition costs on this business, excluding the impact of changes in unrealized
gains/losses on derivatives, totaled $24.1 million in 2007, $14.9 million in 2006 and $6.5 million
in 2005. The impact of realized/unrealized gains and losses on investments and the change in
unrealized gains/losses on derivatives is detailed and in the “Net income applicable to common
stock” section above. In addition, amortization of deferred policy acquisition costs in 2005
included $0.9 million in connection with the recapture by a former variable alliance partner of a
previously coinsured block of variable annuity contracts. Amortization of value of insurance in
force acquired increased in 2007 primarily due to the impact of unlocking and more favorable
mortality experience.
The decrease in other underwriting, acquisition and insurance expenses in 2007 is primarily due to
a $4.9 million lawsuit settlement in 2006 ($0.11 per basic and diluted common share, after taxes).
In 2006, the increase from the lawsuit settlement was partially offset by expense savings
initiatives, mostly relating to the closure of a life processing unit in Manhattan, Kansas during
the third quarter of 2005. This closure and other unrelated terminations also contributed to a
$2.3 million charge for severance, early retirement benefits and other closing costs in 2005. See
Note 1 of our notes to the consolidated financial statements for further details regarding the
lawsuit settlement and a related unrecorded gain contingency.
44
Interest expense totaled $16.7 million in 2007 compared to $11.7 million in 2006 and $13.6 million
in 2005. The increase in 2007 is due to an increase in our long-term debt due to issuance of the
2017 Senior Notes in March 2007. Our average debt outstanding was $296.6 million in 2007 compared
to $218.4 million in 2006 and $254.6 million in 2005. Interest expense in 2006 decreased $2.3
million due to dividends on the Series C redeemable preferred stock, which was redeemed in December
2005, partially offset by an increase in the effective interest rate on our $46.0 million line of
credit to 5.50% in 2007 and 2006 from 4.55% in 2005.
Income taxes decreased 7.5% in 2007 to $41.1 million and increased 20.6% in 2006 to $44.4 million.
The effective tax rate was 32.6% for 2007, 33.2% for 2006 and 33.9% for 2005. The effective tax
rates were lower than the federal statutory rate of 35% primarily due to deductions for tax-exempt
interest and dividend income, partially offset by state income taxes. The decrease in the 2007
effective rate is primarily attributable to higher tax-exempt interest and dividend income and
lower state income taxes. The decrease in the 2006 effective rate is primarily attributable to
less nondeductible interest due to the redemption of the Series C preferred stock in December 2005.
The 2006 and 2005 effective tax rates were also impacted by tax accrual reversals totaling $0.5
million in 2006 and 2005, as we determined they were no longer necessary based on events and
analysis performed during each of those periods. The effective rates, excluding the impact of the
accrual reversals, were 33.6% in 2006 and 34.4% in 2005.
In its Revenue Ruling 2007-61, issued on September 25, 2007, the Internal Revenue Service (IRS)
announced its intention to issue regulations which would limit our ability to receive a
dividends-received deduction (DRD) on separate account assets held in connection with variable
annuity and variable universal life insurance contracts. Revenue Ruling 2007-61 suspended Revenue
Ruling 2007-54 issued in August 2007 that purported to change accepted industry and IRS
interpretations of the statutes governing these computation questions. Any regulations that the
IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at
which time insurance companies and other members of the public will have the opportunity to raise
legal and practical questions about the content, scope and application of such regulations. As a
result, the ultimate timing, substance, and effective date of any such regulations are unknown, but
they could result in the elimination of some or all of the separate account DRD tax benefit we
receive. We recorded separate account DRD tax benefits totaling $2.4 million in 2007, $1.6 million
in 2006 and $1.2 million in 2005.
Equity income, net of related income taxes, totaled $1.5 million in 2007, $1.1 million in 2006 and
$1.2 million in 2005. Equity income includes our proportionate share of gains and losses
attributable to our ownership interest in partnerships, joint ventures and certain companies where
we exhibit some control but have a minority ownership interest. Given the timing of availability
of financial information from our equity investees, we will consistently use information that is as
much as three months in arrears for certain of these entities. Several of these entities are
investment companies whose operating results are derived primarily from unrealized and realized
gains and losses generated by their investment portfolios. As is normal with these types of
entities, the level of these gains and losses is subject to fluctuation from period to period
depending on the prevailing economic environment, changes in prices of equity securities held by
the investment partnerships, timing and success of initial public offerings and other exit
strategies, and the timing of the sale of investments held by the partnerships and joint ventures.
Segment Information
We analyze operations by reviewing financial information regarding products that are aggregated
into four product segments. The product segments are:
(1) Traditional Annuity – Exclusive
Distribution (“Exclusive Annuity”), (2) Traditional Annuity – Independent Distribution
(“Independent Annuity”), (3) Traditional and Universal Life Insurance and (4) Variable. We also
have various support operations and corporate capital that are aggregated into a Corporate and
Other segment.
We analyze our segment results based on pre-tax operating income (loss). Accordingly, income taxes
are not allocated to the segments. In addition, operating results are generally reported net of
any transactions between the segments. Operating income (loss) represents net income excluding, as
applicable, the after tax impact of:
| |
• |
|
realized and unrealized gains and losses on investments; |
| |
• |
|
changes in net unrealized gains and losses on derivatives; |
| |
• |
|
the cumulative effect of changes in accounting principles; |
| |
• |
|
a nonrecurring lawsuit settlement; and |
| |
• |
|
discontinued operations. |
45
The impact of realized and unrealized gains and losses on investments and unrealized gains and
losses on derivatives also includes adjustments for that portion of amortization of deferred policy
acquisition costs, deferred sales inducements, unearned revenue reserve and value of insurance in
force acquired attributable to such gains or losses. Our rationale for using operating income, in
addition to net income to measure our performance is summarized in Note 14, “Segment Information,”
to the consolidated financial statements.
A reconciliation of net income to pre-tax operating income and a summary of pre-tax operating
income (loss) by segment follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Net income |
|
$ |
86,339 |
|
|
$ |
90,129 |
|
|
$ |
72,842 |
|
Net impact of operating income adjustments* |
|
|
9,282 |
|
|
|
(6,986 |
) |
|
|
695 |
|
Income taxes on operating income |
|
|
46,444 |
|
|
|
41,218 |
|
|
|
37,811 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax operating income |
|
$ |
142,065 |
|
|
$ |
124,361 |
|
|
$ |
111,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax operating income (loss) by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
Annuity – Exclusive Distribution |
|
$ |
33,011 |
|
|
$ |
35,555 |
|
|
$ |
34,426 |
|
Traditional
Annuity – Independent Distribution |
|
|
39,875 |
|
|
|
30,439 |
|
|
|
22,174 |
|
Traditional and Universal Life Insurance |
|
|
58,685 |
|
|
|
58,706 |
|
|
|
54,814 |
|
Variable |
|
|
12,514 |
|
|
|
3,596 |
|
|
|
2,609 |
|
Corporate and Other |
|
|
(2,020 |
) |
|
|
(3,935 |
) |
|
|
(2,675 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
142,065 |
|
|
$ |
124,361 |
|
|
$ |
111,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
See “Net income applicable to common stock” above for additional details on operating income
adjustments. |
A discussion of our operating results, by segment, follows:
Traditional
Annuity – Exclusive Distribution Segment
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Pre-tax operating income |
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive and index product charges |
|
$ |
1,111 |
|
|
$ |
1,091 |
|
|
$ |
824 |
|
Net investment income |
|
|
146,267 |
|
|
|
146,433 |
|
|
|
146,620 |
|
Derivative income (loss) |
|
|
3,025 |
|
|
|
(159 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
150,403 |
|
|
|
147,365 |
|
|
|
147,436 |
|
Benefits and expenses |
|
|
117,392 |
|
|
|
111,810 |
|
|
|
113,010 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax operating income |
|
$ |
33,011 |
|
|
$ |
35,555 |
|
|
$ |
34,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data |
|
|
|
|
|
|
|
|
|
|
|
|
Annuity premiums collected, direct |
|
$ |
126,849 |
|
|
$ |
140,279 |
|
|
$ |
177,408 |
|
Policy liabilities and accruals,
end of year |
|
|
2,233,013 |
|
|
|
2,229,612 |
|
|
|
2,213,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual deferred annuity spread: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield on cash and invested assets |
|
|
6.23 |
% |
|
|
6.28 |
% |
|
|
6.42 |
% |
Weighted average interest crediting rate/index cost |
|
|
4.08 |
% |
|
|
4.03 |
% |
|
|
4.16 |
% |
|
|
|
|
|
|
|
|
|
|
Spread |
|
|
2.15 |
% |
|
|
2.25 |
% |
|
|
2.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual traditional annuity withdrawal rate |
|
|
5.2 |
% |
|
|
5.1 |
% |
|
|
3.1 |
% |
Pre-tax operating income for the Exclusive Annuity segment decreased 7.2% in 2007 to $33.0 million
and increased 3.3% in 2006 to $35.6 million. The decrease in 2007 and increase in 2006 was
primarily due to the impact of unlocking on deferred policy acquisition costs as discussed under
“Net income applicable to common stock.”
46
Amortization of deferred policy acquisition costs increased $1.2 million in 2007, decreased $1.7
million in 2006 and increased $2.4 million in 2005 from unlocking.
The average aggregate account value for annuity contracts in force in the Exclusive Annuity segment
totaled $1,488.9 million for 2007, $1,479.5 million for 2006 and $1,428.8 million for 2005.
Net investment income includes $4.6 million in 2007, $3.5 million in 2006 and $4.2 million in 2005
in fee income from bond calls, tender offers and mortgage loan prepayments and the change in net
discount accretion on mortgage and asset-backed securities as noted in the “Net investment income”
section above. This additional income was offset by the impact of market investment rates being
lower than our portfolio yield or yield on investments maturing or being paid down.
In addition to the impact of unlocking on deferred policy acquisition costs described above,
benefits and expenses were also impacted by unlocking value of insurance in force acquired, which
increased amortization less than $0.1 million in 2007 and reduced amortization $0.2 million in 2006
and $0.7 million in 2005. In addition, other underwriting expenses decreased 8.4% in 2006 to $8.9
million primarily due to expense savings initiatives. Other underwriting expenses totaled $8.7
million in 2007.
Premiums collected decreased 9.6% to $126.8 million in 2007 and 20.9% to $140.3 million in 2006.
The amount of traditional annuity premiums collected is highly dependent upon the relationship
between the current crediting rates on our products and the crediting rates available on competing
products, including bank-offered certificates of deposit. We believe the decreases in annuity
premiums in 2007 and 2006 are due to a rise in short-term market interest rates, making
certificates of deposit and other short-term investments more attractive in relation to traditional
annuities. We also believe the competitive environment resulted in increased surrenders, therefore
increasing the withdrawal rate in 2007 and 2006. For the company in total, the decrease in annuity
premiums in 2007 is offset by increases in variable annuity premiums as discussed in the “Variable
Segment” section that follows.
The changes in the weighted average yield on cash and invested assets are primarily attributable to
the items affecting net investment income noted above. In 2006, we increased the crediting rate on
our primary fixed premium deferred annuity product ten basis points in response to increased income
generated from interest rate swaps we utilize to hedge a portion of our annuity portfolio. Income
from these swaps totaled $3.9 million in 2007, $3.7 million in 2006 and $1.0 million in 2005.
Income from these swaps is netted against interest credited through March 31, 2007, but included in
derivative income (loss) starting in the second quarter of 2007. See “Market Risks of Financial
Instruments” following and Note 1 and Note 3 to the consolidated financial statements for
additional information regarding these hedges.
47
Traditional Annuity – Independent Distribution Segment
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
| Pre-tax operating income |
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive and index product charges |
|
$ |
20,466 |
|
|
$ |
15,612 |
|
|
$ |
10,895 |
|
Net investment income |
|
|
309,131 |
|
|
|
225,206 |
|
|
|
161,566 |
|
Derivative income (loss) |
|
|
47,290 |
|
|
|
(4,371 |
) |
|
|
(2,473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
376,887 |
|
|
|
236,447 |
|
|
|
169,988 |
|
Benefits and expenses |
|
|
337,012 |
|
|
|
206,008 |
|
|
|
147,814 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax operating income |
|
$ |
39,875 |
|
|
$ |
30,439 |
|
|
$ |
22,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data |
|
|
|
|
|
|
|
|
|
|
|
|
Annuity premiums collected, independent channel |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate annuities |
|
$ |
690,646 |
|
|
$ |
807,103 |
|
|
$ |
100,298 |
|
Index annuities |
|
|
878,482 |
|
|
|
1,001,379 |
|
|
|
802,007 |
|
|
|
|
|
|
|
|
|
|
|
Total annuity premiums collected, independent channel |
|
|
1,569,128 |
|
|
|
1,808,482 |
|
|
|
902,305 |
|
Annuity premiums collected, assumed |
|
|
3,187 |
|
|
|
4,725 |
|
|
|
6,149 |
|
Policy liabilities and accruals, end of year |
|
|
6,825,713 |
|
|
|
5,367,949 |
|
|
|
3,571,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual deferred annuity spread: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield on cash and invested assets |
|
|
5.78 |
% |
|
|
5.77 |
% |
|
|
5.86 |
% |
Weighted average interest crediting rate/index cost |
|
|
3.48 |
% |
|
|
3.26 |
% |
|
|
3.26 |
% |
|
|
|
|
|
|
|
|
|
|
Spread |
|
|
2.30 |
% |
|
|
2.51 |
% |
|
|
2.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual traditional annuity withdrawal rate |
|
|
5.5 |
% |
|
|
5.1 |
% |
|
|
5.1 |
% |
Pre-tax operating income for the Independent Annuity segment increased 31.0% in 2007 to $39.9
million and 37.3% in 2006 to $30.4 million. These increases are principally due to growth in the
volume of business in force, partially offset by a decrease in spreads earned on individual
deferred annuities. Revenues, benefits, expenses and the volume of business in force increased in
2007 and 2006 due to growth of our EquiTrust Life distribution channel. The number of individual
agents increased to 19,781 at December 31, 2007 from 15,326 at December 31, 2006 and 8,482 at
December 31, 2005. The average aggregate account value for annuity contracts in force in the
Independent Annuity segment totaled $5,966.7 million for 2007, $4,401.2 million for 2006 and
$3,114.7 million for 2005.
The increases in interest sensitive and index product charges in 2007 and 2006 are due to an
increase in surrender charges. Surrender charges increased due to increases in surrenders relating
to growth in the volume and aging of business in force. The increases in net investment income in
2007 and 2006 are attributable to growth in invested assets due principally to net premium inflows.
In addition, net investment income includes income from bond calls, tender offers and mortgage
loan prepayments and the change in net discount accretion on mortgage and asset-backed securities
totaling $0.7 million in 2007, $2.1 million in 2006 and $0.5 million in 2005. In 2006, these
increases were partially offset by the impact of a decline in our investment yield.
The changes in derivative income (loss) are primarily due to increases in proceeds from call option
settlements, partially offset by increases in the cost of money for call options as discussed under
“Derivative income (loss)” above. Call option settlements increased to $155.3 million in 2007,
from $68.5 million in 2006 and $41.9 million in 2005. The cost of money for call options totaled
$108.0 million in 2007, $72.8 million in 2006 and $44.3 million in 2005.
Benefits and expenses increased in 2007 and 2006 due to growth in the volume of business in force.
The timing of policy anniversary dates and the amount of appreciation in the underlying indices
also contributed to increases in index credits totaling $154.0 million in 2007, compared to $71.2
million in 2006 and $44.5 million in 2005. In addition, operating expenses include $6.8 million
in 2007, $5.9 million in 2006 and $4.1 million in 2005 relating to the expansion of our EquiTrust
Life distribution. These increases were partially offset by the impact of unlocking adjustments,
which decreased amortization of deferred policy acquisition costs and deferred sales inducements
$1.9 million in 2007, less than $0.1 million in 2006 and $0.5 million in 2005.
48
Premiums collected from the independent channel decreased in 2007 primarily due to a more favorable
market environment during 2006 for the sale of our multi-year guaranteed annuity product combined
with a competitive environment for index annuity sales in 2007. In addition, during 2007 we took
actions to further increase the profitability of our products.
In 2007, the weighted average yield on cash and invested assets increased primarily due to an
increase in market investment rates and the acquisition of investments at yields greater than the
existing portfolio yield, partially offset by a decrease in fee income discussed above. In 2006,
market investment rates were generally lower than our portfolio yield. The weighted average
crediting rate increased in 2007 due to increasing crediting rates and option costs. The decreases
in spread are primarily due to a shift in business to our multi-year guaranteed annuity which has a
lower spread target than other products in our portfolio. Spreads earned in 2005 were primarily a
result of spreads on index annuities assumed under a coinsurance agreement, which is driven by
option costs, the extent to which the business was over hedged and fluctuations in the minimum
guarantees credited to the contracts.
Traditional and Universal Life Insurance Segment
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
| Pre-tax operating income |
|
|
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive product charges |
|
$ |
46,180 |
|
|
$ |
44,997 |
|
|
$ |
43,972 |
|
Traditional life insurance premiums and other income. |
|
|
144,682 |
|
|
|
138,401 |
|
|
|
134,618 |
|
Net investment income |
|
|
144,231 |
|
|
|
142,620 |
|
|
|
141,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335,093 |
|
|
|
326,018 |
|
|
|
320,523 |
|
Benefits and expenses |
|
|
276,408 |
|
|
|
267,312 |
|
|
|
265,709 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax operating income |
|
$ |
58,685 |
|
|
$ |
58,706 |
|
|
$ |
54,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data |
|
|
|
|
|
|
|
|
|
|
|
|
Life premiums collected, net of reinsurance |
|
$ |
197,599 |
|
|
$ |
187,649 |
|
|
$ |
184,308 |
|
Policy liabilities and accruals, end of year |
|
|
2,168,445 |
|
|
|
2,131,548 |
|
|
|
2,098,778 |
|
Direct life insurance in force, end of year (in millions) |
|
|
33,246 |
|
|
|
30,668 |
|
|
|
28,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive life insurance spread: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield on cash and invested assets |
|
|
6.59 |
% |
|
|
6.61 |
% |
|
|
6.70 |
% |
Weighted average interest crediting rate |
|
|
4.42 |
% |
|
|
4.49 |
% |
|
|
4.52 |
% |
|
|
|
|
|
|
|
|
|
|
Spread |
|
|
2.17 |
% |
|
|
2.12 |
% |
|
|
2.18 |
% |
|
|
|
|
|
|
|
|
|
|
Pre-tax operating income for the Traditional and Universal Life Insurance segment decreased less
than 0.1% in 2007 to $58.7 million and increased 7.1% in 2006 to $58.7 million. The impact of the
increase in the volume of business in force contributed to pre-tax operating income in 2007 and
2006. In 2007, this increase, combined with increased spreads on our interest sensitive life
business and lower death benefits, was offset by the impact of unlocking on deferred policy
acquisition costs and the value of insurance in force acquired. The increase in 2006 was also due
to a decrease in other underwriting expenses, partially offset by an increase in death benefits and
reduction in spreads.
Traditional life insurance premiums increased in 2007 and 2006 due primarily to sales of life
products by our Farm Bureau Life agency force. The increase in net investment income is primarily
due to an increase in invested assets, principally due to net premium inflows, partially offset by
the impact of market investment rates being lower than our investment portfolio yield or yield on
investments maturing or being paid down. In addition, net investment income includes $2.9 million
in 2007, $2.8 million in 2006 and $1.7 million in 2005 in fee income from bond calls, tender offers
and mortgage loan prepayments and the change of net discount accretion on mortgage and asset-backed
securities.
Death benefits totaled $77.3 million in 2007, $81.2 million in 2006 and $75.4 million in 2005.
Surrender benefits totaled $39.7 million in 2007, $37.0 million in 2006 and $33.8 million in 2005.
Amortization of deferred policy acquisition costs increased primarily due to higher gross margins
resulting from the increase in traditional life premiums. In addition, amortization of deferred
policy acquisition costs increased $1.2 million in 2007 and decreased $1.8 million in 2006 and $3.2
million in 2005 due to the impact of unlocking. Other underwriting
49
expenses decreased 4.3% to $29.7 million in 2007 primarily due to lower employee benefit expenses.
In 2006, other underwriting expenses decreased 12.4% to $31.1 million due to a reduction in
software costs and expense saving initiatives, primarily relating to the closure of a life
insurance processing unit during 2005. Other underwriting expenses in 2005 include approximately
$0.8 million of severance benefits as a result of closing the life processing unit and other
unrelated terminations.
The changes in the weighted average yield on cash and invested assets are attributable to the items
affecting net investment income noted above. The decrease in weighted average interest crediting
rate is due to a decrease in credited rates on both direct and assumed business.
Variable Segment
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
| Pre-tax operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive product charges |
|
$ |
46,790 |
|
|
$ |
43,334 |
|
|
$ |
40,569 |
|
Net investment income |
|
|
13,658 |
|
|
|
14,437 |
|
|
|
14,653 |
|
Other income |
|
|
2,932 |
|
|
|
1,239 |
|
|
|
973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,380 |
|
|
|
59,010 |
|
|
|
56,195 |
|
Benefits and expenses |
|
|
50,866 |
|
|
|
55,414 |
|
|
|
53,586 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax operating income |
|
$ |
12,514 |
|
|
$ |
3,596 |
|
|
$ |
2,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data |
|
|
|
|
|
|
|
|
|
|
|
|
Variable premiums collected, net of reinsurance |
|
$ |
181,309 |
|
|
$ |
154,651 |
|
|
$ |
162,125 |
|
Policy liabilities and accruals, end of year |
|
|
229,196 |
|
|
|
237,343 |
|
|
|
243,621 |
|
Separate account assets, end of year |
|
|
862,738 |
|
|
|
764,377 |
|
|
|
639,895 |
|
Direct life insurance in force, end of year (in millions) |
|
|
7,846 |
|
|
|
7,704 |
|
|
|
7,501 |
|
Pre-tax operating income for the Variable segment totaled $12.5 million in 2007, $3.6 million in
2006 and $2.6 million in 2005. These increases are primarily due to an increase in the volume of
business in force and, for 2007, a decrease in death benefits.
Interest sensitive product charges increased in 2007 and 2006 due to increases in mortality and
expense fee income and cost of insurance charges. Mortality and expense fee income increased
23.6% to $10.0 million in 2007 and 18.2% to $8.1 million in 2006 due to growth in separate account
assets. Cost of insurance charges increased 5.4% to $28.2 million in 2007 and 5.3% to $26.7
million in 2006 primarily due to aging of business in force. Death benefits in excess of related
account values on variable universal life policies decreased 28.3% to $10.5 million in 2007 and
increased 18.3% to $14.7 million in 2006.
During the third quarter of 2005, a former variable alliance partner recaptured a block of variable
annuity contracts previously assumed by us with an account value totaling $45.5 million. The block
was assumed through a modified coinsurance agreement. Accordingly, the related insurance reserves
and supporting investments were not recorded on our financial statements. A pre-tax loss of $0.9
million, representing the excess of the related deferred policy acquisition costs ($3.9 million)
over the consideration received ($3.0 million), was recorded as a component of amortization of
deferred policy acquisition costs.
50
Corporate and Other Segment
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
| Pre-tax operating loss |
|
|
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
14,744 |
|
|
$ |
7,140 |
|
|
$ |
10,671 |
|
Other income |
|
|
23,607 |
|
|
|
22,533 |
|
|
|
20,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,351 |
|
|
|
29,673 |
|
|
|
31,366 |
|
Interest expense |
|
|
16,666 |
|
|
|
11,744 |
|
|
|
13,590 |
|
Benefits and other expenses |
|
|
26,116 |
|
|
|
23,485 |
|
|
|
22,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,431 |
) |
|
|
(5,556 |
) |
|
|
(4,390 |
) |
Minority interest |
|
|
49 |
|
|
|
(126 |
) |
|
|
(159 |
) |
Equity income, before tax |
|
|
2,362 |
|
|
|
1,747 |
|
|
|
1,874 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax operating loss |
|
$ |
(2,020 |
) |
|
$ |
(3,935 |
) |
|
$ |
(2,675 |
) |
|
|
|
|
|
|
|
|
|
|
Pre-tax operating loss totaled $2.0 million in 2007 compared to $3.9 million in 2006 and $2.7
million in 2005. Net investment income increased in 2007 due to an increase in invested assets,
primarily from the proceeds of our 2017 Senior Notes offering as discussed in the “Net investment
income” section above. Net investment income decreased in 2006 primarily due to a decrease in
investments resulting from the redemption of the Series C preferred stock in December 2005 and an
increase in investments allocated to the product segments. Net investment income also includes fee
income from bond calls, mortgage loan prepayments and the reversal of net discount accretion on
mortgage and asset-backed securities totaling $0.1 million in 2007, $0.5 million in 2006 and $1.2
million in 2005. In addition, we recorded $0.9 million in net investment income during 2005,
representing past due interest that had not been accrued, relating to the redemption of a fixed
maturity security that had been impaired in a prior period.
Other income includes revenues relating primarily to our non-insurance operations. These
operations include management, advisory, marketing and distribution services and leasing
activities. Fluctuations in other income are generally attributable to fluctuations in the level
of these services provided during the years.
Interest expense increased in 2007 due to our 2017 Senior Notes offering. Interest expense
decreased in 2006 due to the redemption of our Series C preferred stock, partially offset by an
increase in the effective interest rate on our line of credit as discussed in the “Interest
expense” section above.
Benefits and other expenses includes activities relating to our non-insurance operations, which
increased in 2007, primarily due to an increase in salary expense and a $0.5 million loss on the
sale of a fixed asset.
Pending Accounting Changes
As described in more detail in Note 1 to the consolidated financial statements, we will be subject
to certain pending accounting changes. During 2008, we plan to adopt the following:
| • |
|
Staff Position FIN 39-1, which amends certain aspects of FASB Interpretation No. 39,
“Offsetting of Amounts Related to Certain Contracts – an interpretation of APB Opinion No.
10 and FASB Statement No. 105, “ allows a reporting entity to offset fair value amounts
recognized for the right to reclaim or obligation to return cash collateral against fair
value amounts recognized for derivative instruments executed with the same counterparty
under the same master netting arrangement. At December 31, 2007, we had master netting
agreements with counterparties covering cash collateral payable totaling $73.2 million and
cash collateral receivable totaling $7.5 million. These amounts are included in collateral
payable for securities lending and other transactions and collateral held for securities
lending and other transactions lines on our consolidated balance sheet at December 31,
2007, but will be netted against the fair value of the call options included in derivative
instruments and swaps included in other liabilities in 2008. |
| • |
|
Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R),” which
requires measurement of a plan’s assets and benefit obligations as of the end of the
employer’s fiscal year. The impact of this adoption will result in a decrease to the
beginning balance of retained earnings totaling $0.7 million. |
51
| • |
|
Statement No. 157, “Fair Value Measurements,” which defines fair value, establishes a
framework for measuring fair value and expands the required disclosures about fair value
measurements. We are currently evaluating the requirements of this Statement and have not
yet determined the impact of adoption on our consolidated financial statements as guidance
regarding the proper methodology for determining the fair value of liabilities is still
emerging as of the filing of this Form 10-K. |
In addition, in 2009 we plan to adopt Statement No. 160, “Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51,” which
establishes accounting and reporting standards for the minority interest in a subsidiary. The
impact of this adoption on our consolidated financial statements is expected to be immaterial and
will primarily result in a reclassification of minority interest. We will also adopt Statement
No. 141(R), “Business Combinations,” relating to acquisitions or consolidations occurring after
December 31, 2008. The impact of this new statement will depend on the size and nature of any
business combinations we do in the future.
Financial Condition
Investments
Our total investment portfolio increased 13.9% to $11,137.9 million at December 31, 2007 compared
to $9,782.6 million at December 31, 2006. This increase is primarily the result of net cash
received from interest sensitive and index products and proceeds from issuance of the 2017 Senior
Notes, partially offset by the impact of a decrease in net unrealized appreciation on fixed
maturity securities classified as available for sale. Net unrealized appreciation of fixed
maturity securities decreased $161.6 million during 2007 to a net unrealized loss of $140.4 million
at December 31, 2007, principally due to the impact of a general widening of credit spreads
(difference between bond yields and risk-free interest rates), partially offset by a decrease in
risk-free interest rates.
Internal investment professionals manage our investment portfolio. The investment strategy is
designed to achieve superior risk-adjusted returns consistent with the investment philosophy of
maintaining a largely investment grade portfolio and providing adequate liquidity for obligations
to policyholders and other requirements. We continually review the returns on invested assets and
change the mix of invested assets as deemed prudent under the current market environment to help
maximize current income.
Our investment portfolio is summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
|
December 31, 2006 |
|
| |
|
Carrying Value |
|
|
Percent |
|
|
Carrying Value |
|
|
Percent |
|
| |
|
(Dollars in thousands) |
|
Fixed
maturities – available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public |
|
$ |
7,866,990 |
|
|
|
70.6 |
% |
|
$ |
6,859,169 |
|
|
|
70.1 |
% |
144A private placement |
|
|
1,318,181 |
|
|
|
11.9 |
|
|
|
1,215,215 |
|
|
|
12.4 |
|
Private placement |
|
|
337,421 |
|
|
|
3.0 |
|
|
|
301,412 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed
maturities – available
for sale |
|
|
9,522,592 |
|
|
|
85.5 |
|
|
|
8,375,796 |
|
|
|
85.6 |
|
Fixed
maturities – trading |
|
|
— |
|
|
|
— |
|
|
|
14,927 |
|
|
|
0.2 |
|
Equity securities |
|
|
23,633 |
|
|
|
0.2 |
|
|
|
50,278 |
|
|
|
0.5 |
|
Mortgage loans on real estate |
|
|
1,221,573 |
|
|
|
11.0 |
|
|
|
979,883 |
|
|
|
10.0 |
|
Derivative instruments |
|
|
114,771 |
|
|
|
1.1 |
|
|
|
127,478 |
|
|
|
1.3 |
|
Investment real estate |
|
|
2,559 |
|
|
|
— |
|
|
|
8,711 |
|
|
|
0.1 |
|
Policy loans |
|
|
179,490 |
|
|
|
1.6 |
|
|
|
179,899 |
|
|
|
1.8 |
|
Other long-term investments |
|
|
1,300 |
|
|
|
— |
|
|
|
1,300 |
|
|
|
— |
|
Short-term investments |
|
|
72,005 |
|
|
|
0.6 |
|
|
|
44,354 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
11,137,923 |
|
|
|
100.0 |
% |
|
$ |
9,782,626 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, 96.2% (based on carrying value) of the available-for-sale fixed maturity
securities were investment grade debt securities, defined as being in the highest two National
Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities
generally provide higher yields and involve greater risks than investment grade debt securities
because their issuers typically are more highly leveraged
52
and more vulnerable to adverse economic conditions than investment grade
issuers. In addition, the trading market for these securities is usually more limited than for
investment grade debt securities. We regularly review the percentage of our portfolio that is
invested in non-investment grade debt securities (NAIC designations 3 through 6). As of December
31, 2007, the investment in non-investment grade debt was 3.8% of available-for-sale fixed maturity
securities. At that time, no single non-investment grade holding exceeded 0.2% of total
investments. The following table sets forth the credit quality, by NAIC designation and Standard &
Poor’s (S&P) rating equivalents, of available-for-sale fixed maturity securities:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
December 31, 2007 |
|
|
December 31, 2006 |
|
NAIC
Designation |
|
|
Equivalent S&P Ratings (1) |
|
|
Carrying Value |
|
|
Percent |
|
|
Carrying Value |
|
|
Percent |
|
| |
|
|
|
|
(Dollars in thousands) |
|
| |
1 |
|
|
AAA, AA, A |
|
$ |
6,056,231 |
|
|
|
63.6 |
% |
|
$ |
5,352,040 |
|
|
|
63.9 |
% |
| |
2 |
|
|
BBB |
|
|
3,100,795 |
|
|
|
32.6 |
|
|
|
2,668,572 |
|
|
|
31.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Total investment grade |
|
|
9,157,026 |
|
|
|
96.2 |
|
|
|
8,020,612 |
|
|
|
95.8 |
|
| |
3 |
|
|
BB |
|
|
264,070 |
|
|
|
2.7 |
|
|
|
264,071 |
|
|
|
3.2 |
|
| |
4 |
|
|
B |
|
|
64,700 |
|
|
|
0.7 |
|
|
|
78,345 |
|
|
|
0.9 |
|
| |
5 |
|
|
CCC, CC, C |
|
|
36,314 |
|
|
|
0.4 |
|
|
|
11,932 |
|
|
|
0.1 |
|
| |
6 |
|
|
In or near default |
|
|
482 |
|
|
|
— |
|
|
|
836 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Total below investment grade |
|
|
365,566 |
|
|
|
3.8 |
|
|
|
355,184 |
|
|
|
4.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Total fixed
maturities – available for sale |
|
$ |
9,522,592 |
|
|
|
100.0 |
% |
|
$ |
8,375,796 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
The Securities Valuation Office of the NAIC generally rates private placement
securities. Comparisons between NAIC designations and S&P ratings are published by the
NAIC. S&P has not rated some of the fixed maturity securities in our portfolio. |
A summary of the gross unrealized gains and gross unrealized losses on our available-for-sale fixed
maturity securities, by internal industry classification, as of December 31, 2007 and 2006, is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
| |
|
|
|
|
|
Carrying Value |
|
|
|
|
|
|
Carrying Value |
|
|
|
|
| |
|
|
|
|
|
of Securities |
|
|
|
|
|
|
of Securities |
|
|
|
|
| |
|
Total |
|
|
with Gross |
|
|
Gross |
|
|
with Gross |
|
|
Gross |
|
| |
|
Carrying |
|
|
Unrealized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Unrealized |
|
| |
|
Value |
|
|
Gains |
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
| |
|
(Dollars in thousands) |
Corporate securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
1,826,956 |
|
|
$ |
720,244 |
|
|
$ |
25,480 |
|
|
$ |
1,106,712 |
|
|
$ |
(91,717 |
) |
Manufacturing |
|
|
1,089,836 |
|
|
|
582,073 |
|
|
|
23,726 |
|
|
|
507,763 |
|
|
|
(31,703 |
) |
Mining |
|
|
434,459 |
|
|
|
265,921 |
|
|
|
10,149 |
|
|
|
168,538 |
|
|
|
(7,738 |
) |
Retail trade |
|
|
115,178 |
|
|
|
71,302 |
|
|
|
4,391 |
|
|
|
43,876 |
|
|
|
(3,336 |
) |
Services |
|
|
171,913 |
|
|
|
108,239 |
|
|
|
4,818 |
|
|
|
63,674 |
|
|
|
(3,550 |
) |
Transportation |
|
|
187,513 |
|
|
|
93,600 |
|
|
|
6,266 |
|
|
|
93,913 |
|
|
|
(5,460 |
) |
Private utilities and related sectors |
|
|
483,613 |
|
|
|
307,077 |
|
|
|
15,989 |
|
|
|
176,536 |
|
|
|
(6,412 |
) |
Other |
|
|
88,206 |
|
|
|
50,289 |
|
|
|
1,265 |
|
|
|
37,917 |
|
|
|
(1,711 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities |
|
|
4,397,674 |
|
|
|
2,198,745 |
|
|
|
92,084 |
|
|
|
2,198,929 |
|
|
|
(151,627 |
) |
Mortgage and asset-backed securities |
|
|
2,685,973 |
|
|
|
955,176 |
|
|
|
16,052 |
|
|
|
1,730,797 |
|
|
|
(102,631 |
) |
United States Government and agencies |
|
|
554,340 |
|
|
|
405,936 |
|
|
|
8,454 |
|
|
|
148,404 |
|
|
|
(4,524 |
) |
State, municipal and other governments |
|
|
1,252,899 |
|
|
|
723,326 |
|
|
|
19,118 |
|
|
|
529,573 |
|
|
|
(15,106 |
) |
Public utilities |
|
|
631,706 |
|
|
|
333,750 |
|
|
|
10,973 |
|
|
|
297,956 |
|
|
|
(13,187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,522,592 |
|
|
$ |
4,616,933 |
|
|
$ |
146,681 |
|
|
$ |
4,905,659 |
|
|
$ |
(287,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2006 |
|
| |
|
|
|
|
|
Carrying Value |
|
|
|
|
|
|
Carrying Value |
|
|
|
|
| |
|
|
|
|
|
of Securities |
|
|
|
|
|
|
of Securities |
|
|
|
|
| |
|
Total |
|
|
with Gross |
|
|
Gross |
|
|
with Gross |
|
|
Gross |
|
| |
|
Carrying |
|
|
Unrealized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Unrealized |
|
| |
|
Value |
|
|
Gains |
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
| |
|
(Dollars in thousands) |
|
Corporate securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
1,708,538 |
|
|
$ |
920,465 |
|
|
$ |
41,021 |
|
|
$ |
788,073 |
|
|
$ |
(18,774 |
) |
Manufacturing |
|
|
941,985 |
|
|
|
474,324 |
|
|
|
21,544 |
|
|
|
467,661 |
|
|
|
(21,829 |
) |
Mining |
|
|
403,234 |
|
|
|
207,522 |
|
|
|
8,280 |
|
|
|
195,712 |
|
|
|
(7,357 |
) |
Retail trade |
|
|
107,442 |
|
|
|
55,528 |
|
|
|
3,640 |
|
|
|
51,914 |
|
|
|
(1,776 |
) |
Services |
|
|
145,073 |
|
|
|
85,009 |
|
|
|
3,163 |
|
|
|
60,064 |
|
|
|
(2,770 |
) |
Transportation |
|
|
181,233 |
|
|
|
131,136 |
|
|
|
7,399 |
|
|
|
50,097 |
|
|
|
(1,173 |
) |
Private utilities and related sectors |
|
|
440,361 |
|
|
|
275,912 |
|
|
|
15,611 |
|
|
|
164,449 |
|
|
|
(4,911 |
) |
Other |
|
|
82,617 |
|
|
|
40,818 |
|
|
|
1,620 |
|
|
|
41,799 |
|
|
|
(827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities |
|
|
4,010,483 |
|
|
|
2,190,714 |
|
|
|
102,278 |
|
|
|
1,819,769 |
|
|
|
(59,417 |
) |
Mortgage and asset-backed securities |
|
|
2,344,986 |
|
|
|
924,029 |
|
|
|
14,324 |
|
|
|
1,420,957 |
|
|
|
(27,601 |
) |
United States Government and agencies |
|
|
603,246 |
|
|
|
96,013 |
|
|
|
3,702 |
|
|
|
507,233 |
|
|
|
(13,436 |
) |
State, municipal and other governments |
|
|
929,378 |
|
|
|
428,158 |
|
|
|
14,855 |
|
|
|
501,220 |
|
|
|
(13,950 |
) |
Public utilities |
|
|
487,703 |
|
|
|
230,629 |
|
|
|
8,473 |
|
|
|
257,074 |
|
|
|
(7,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,375,796 |
|
|
$ |
3,869,543 |
|
|
$ |
143,632 |
|
|
$ |
4,506,253 |
|
|
$ |
(122,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth the composition by credit quality of the available-for-sale fixed
maturity securities with gross unrealized losses:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, 2007 |
|
| |
|
|
|
Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
of Securities with |
|
|
|
|
|
|
Gross |
|
|
|
|
| NAIC |
|
|
|
Gross Unrealized |
|
|
Percent of |
|
|
Unrealized |
|
|
Percent of |
|
| Designation |
|
Equivalent S&P Ratings |
|
Losses |
|
|
Total |
|
|
Losses |
|
|
Total |
|
| |
|
|
|
(Dollars in thousands) |
|
| 1 |
|
AAA, AA, A |
|
$ |
3,113,384 |
|
|
|
63.5 |
% |
|
$ |
(172,016 |
) |
|
|
59.9 |
% |
| 2 |
|
BBB |
|
|
1,605,652 |
|
|
|
32.7 |
|
|
|
(89,572 |
) |
|
|
31.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total investment grade |
|
|
4,719,036 |
|
|
|
96.2 |
|
|
|
(261,588 |
) |
|
|
91.1 |
|
| 3 |
|
BB |
|
|
130,043 |
|
|
|
2.7 |
|
|
|
(13,533 |
) |
|
|
4.7 |
|
| 4 |
|
B |
|
|
26,633 |
|
|
|
0.5 |
|
|
|
(5,335 |
) |
|
|
1.9 |
|
| 5 |
|
CCC, CC, C |
|
|
29,947 |
|
|
|
0.6 |
|
|
|
(6,619 |
) |
|
|
2.3 |
|
| 6 |
|
In or near default |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total below investment grade |
|
|
186,623 |
|
|
|
3.8 |
|
|
|
(25,487 |
) |
|
|
8.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total |
|
$ |
4,905,659 |
|
|
|
100.0 |
% |
|
$ |
(287,075 |
) |
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, 2006 |
|
| |
|
|
|
Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
of Securities with |
|
|
|
|
|
|
Gross |
|
|
|
|
| NAIC |
|
|
|
Gross Unrealized |
|
|
Percent of |
|
|
Unrealized |
|
|
Percent of |
|
| Designation |
|
Equivalent S&P Ratings |
|
Losses |
|
|
Total |
|
|
Losses |
|
|
Total |
|
| |
|
|
|
(Dollars in thousands) |
|
| 1 |
|
AAA, AA, A |
|
$ |
3,030,985 |
|
|
|
67.3 |
% |
|
$ |
(71,362 |
) |
|
|
58.3 |
% |
| 2 |
|
BBB |
|
|
1,344,332 |
|
|
|
29.8 |
|
|
|
(40,978 |
) |
|
|
33.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total investment grade |
|
|
4,375,317 |
|
|
|
97.1 |
|
|
|
(112,340 |
) |
|
|
91.8 |
|
| 3 |
|
BB |
|
|
99,430 |
|
|
|
2.2 |
|
|
|
(7,335 |
) |
|
|
6.0 |
|
| 4 |
|
B |
|
|
25,667 |
|
|
|
0.6 |
|
|
|
(2,143 |
) |
|
|
1.7 |
|
| 5 |
|
CCC, CC, C |
|
|
5,839 |
|
|
|
0.1 |
|
|
|
(582 |
) |
|
|
0.5 |
|
| 6 |
|
In or near default |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total below investment grade |
|
|
130,936 |
|
|
|
2.9 |
|
|
|
(10,060 |
) |
|
|
8.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total |
|
$ |
4,506,253 |
|
|
|
100.0 |
% |
|
$ |
(122,400 |
) |
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
The following tables set forth the number of issuers, amortized cost, unrealized losses and market
value of available-for-sale fixed maturity securities in an unrealized loss position listed by the
length of time the securities have been in an unrealized loss position:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
| |
|
Number of |
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Estimated |
|
| |
|
Issuers |
|
|
Cost |
|
|
Losses |
|
|
Market Value |
|
| |
|
(Dollars in thousands) |
|
Three months or less |
|
|
82 |
|
|
$ |
571,263 |
|
|
$ |
(14,014 |
) |
|
$ |
557,249 |
|
Greater than three months to six months |
|
|
33 |
|
|
|
207,506 |
|
|
|
(12,992 |
) |
|
|
194,514 |
|
Greater than six months to nine months |
|
|
143 |
|
|
|
1,012,268 |
|
|
|
(62,549 |
) |
|
|
949,719 |
|
Greater than nine months to twelve months |
|
|
58 |
|
|
|
300,857 |
|
|
|
(14,218 |
) |
|
|
286,639 |
|
Greater than twelve months |
|
|
375 |
|
|
|
3,100,840 |
|
|
|
(183,302 |
) |
|
|
2,917,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
5,192,734 |
|
|
$ |
(287,075 |
) |
|
$ |
4,905,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
December 31, 2006 |
|
| |
|
Number of |
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Estimated |
|
| |
|
Issuers |
|
|
Cost |
|
|
Losses |
|
|
Market Value |
|
| |
|
(Dollars in thousands) |
|
Three months or less |
|
|
105 |
|
|
$ |
564,118 |
|
|
$ |
(5,078 |
) |
|
$ |
559,040 |
|
Greater than three months to six months |
|
|
18 |
|
|
|
80,862 |
|
|
|
(528 |
) |
|
|
80,334 |
|
Greater than six months to nine months |
|
|
13 |
|
|
|
63,674 |
|
|
|
(456 |
) |
|
|
63,218 |
|
Greater than nine months to twelve months |
|
|
179 |
|
|
|
1,013,254 |
|
|
|
(17,449 |
) |
|
|
995,805 |
|
Greater than twelve months |
|
|
304 |
|
|
|
2,906,745 |
|
|
|
(98,889 |
) |
|
|
2,807,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
4,628,653 |
|
|
$ |
(122,400 |
) |
|
$ |
4,506,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| The scheduled maturity dates for available-for-sale fixed maturity securities in an unrealized loss
position, are as follows: |
| |
| |
|
December 31, 2007 |
|
|
December 31, 2006 |
|
| |
|
Carrying Value |
|
|
|
|
|
|
Carrying Value |
|
|
|
|
| |
|
of Securities with |
|
|
Gross |
|
|
of Securities with |
|
|
Gross |
|
| |
|
Gross Unrealized |
|
|
Unrealized |
|
|
Gross Unrealized |
|
|
Unrealized |
|
| |
|
Losses |
|
|
Losses |
|
|
Losses |
|
|
Losses |
|
| |
|
(Dollars in thousands) |
|
Due in one year or less |
|
$ |
4,697 |
|
|
$ |
(2 |
) |
|
$ |
12,512 |
|
|
$ |
(31 |
) |
Due after one year through five years |
|
|
206,405 |
|
|
|
(10,436 |
) |
|
|
282,055 |
|
|
|
(4,868 |
) |
Due after five years through ten years |
|
|
1,205,663 |
|
|
|
(66,342 |
) |
|
|
1,123,357 |
|
|
|
(32,487 |
) |
Due after ten years |
|
|
1,747,686 |
|
|
|
(106,075 |
) |
|
|
1,652,648 |
|
|
|
(57,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,164,451 |
|
|
|
(182,855 |
) |
|
|
3,070,572 |
|
|
|
(94,477 |
) |
Mortgage and asset-backed securities |
|
|
1,730,797 |
|
|
|
(102,631 |
) |
|
|
1,420,957 |
|
|
|
(27,601 |
) |
Redeemable preferred stocks |
|
|
10,411 |
|
|
|
(1,589 |
) |
|
|
14,724 |
|
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,905,659 |
|
|
$ |
(287,075 |
) |
|
$ |
4,506,253 |
|
|
$ |
(122,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the above table are 863 securities from 538 issuers at December 31, 2007 and 780
securities from 513 issuers at December 31, 2006. These increases are primarily due to an increase
in spreads between the risk-free interest rates and corporate and other bond yields. The following
summarizes the details describing the more significant unrealized losses by investment category as
of December 31, 2007.
Corporate securities: The unrealized losses on corporate securities, which include redeemable
preferred stocks, totaled $151.6 million, or 52.8% of our total unrealized losses. The largest
losses were in the financial services sector ($1,106.7 million carrying value and $91.7 million
unrealized loss) and in the manufacturing sector ($507.8 million carrying value and $31.7 million
unrealized loss). The largest unrealized losses in the financial services sector were in the
depository institutions sector ($345.3 million carrying value and $32.9 million unrealized loss)
and the holding and other investment offices sector ($480.7 million carrying value and $30.8
million unrealized loss). The unrealized losses in the depository institutions sector are
primarily due to a decrease in market liquidity and concerns regarding the underlying credit
quality of subprime and other assets these institutions hold. The majority of securities in the
holding and other investment offices sector are real estate investment trust bonds. The unrealized
losses in this sector are primarily due to an increase in credit spreads due to the sector’s
exposure to
55
commercial real estate and market concerns about the ability to access the capital
markets. The largest unrealized losses in the manufacturing sector were in the paper and allied
products sector ($90.7 million carrying value and $10.0 million unrealized loss) and the printing
and publishing sector ($31.9 million carrying value and $4.1 million unrealized loss). The
unrealized losses in the paper and allied products sector and the printing and publishing sector
are due to spread widening that is the result of weaker operating results. The unrealized losses
in the remaining corporate sectors are also primarily attributable to spread widening due to a
decrease in market liquidity, an increase in market volatility and concerns about the general
health of the economy. Because we have the ability and intent to hold these investments until a
recovery of fair value, which may be maturity, we do not consider these investments to be
other-than-temporarily impaired at December 31, 2007.
Mortgage and asset-backed securities: The unrealized losses on mortgage and asset-backed
securities totaled $102.6 million, or 35.8% of our total unrealized losses, and were caused
primarily by concerns regarding mortgage defaults on subprime and other risky mortgages. There
were also concerns regarding potential downgrades or defaults of bond insurers providing credit
protection for underlying securities. These concerns resulted in spread widening in the sector as
liquidity decreased in the market. We purchased most of these investments at a discount to their
face amount and the contractual cash flows of these investments are based on mortgages and other
assets backing the securities. Details regarding the composition of our mortgage and asset-backed
securities, including our limited exposure to subprime loans, are provided later in this section.
Because we have the ability and intent to hold these investments until a recovery of fair value,
which may be maturity, we do not consider these investments to be other-than-temporarily impaired
at December 31, 2007.
United States Government and agencies: The unrealized losses on U.S. Governments and agencies
totaled $4.5 million, or 1.6% of our total unrealized losses, and were caused by spread widening.
We purchased most of these investments at a discount to their face amount and the contractual cash
flows of these investments are based on direct guarantees from the U.S. Government and by agencies
of the U.S. Government. Because the decline in market value is attributable to changes in market
interest rates and not credit quality, and because we have the ability and intent to hold these
investments until a recovery of fair value, which may be maturity, we do not consider these
investments to be other-than-temporarily impaired at December 31, 2007.
State, municipal and other governments: The unrealized losses on state, municipal and other
governments totaled $15.1 million, or 5.2% of our total unrealized losses, and were primarily
caused by general spread widening. We purchased most of these investments at a discount to their
face amount and the contractual cash flows of these investments are based on the taxing authority
of a municipality or the revenues of a municipal project. Additional details regarding the
composition of our municipal bond portfolio are provided later in this section. Because the
decline in market value is primarily attributable to increased spreads and not credit quality, and
because we have the ability and intent to hold these investments until a recovery of fair value,
which may be maturity, we do not consider these investments to be other-than-temporarily impaired
at December 31, 2007.
Public utilities: The unrealized losses on public utilities totaled $13.2 million, or 4.65% of our
total unrealized losses, and were caused primarily by spread widening. Because the decline in
market value is attributable to changes in market interest rates and not credit quality, and
because we have the ability and intent to hold these investments until recovery of fair value,
which may be maturity, we do not consider these investments to be other-than-temporarily impaired
at December 31, 2007.
At December 31, 2007, we had one security with an unrealized loss of $8.5 million. This security,
which is included in the financial services sector of the corporate securities industry above, has
subprime collateral exposure and been impacted by the loss of market liquidity and spread widening.
At December 31, 2007, this security is rated investment grade by two major rating agencies,
remains adequately collateralized and is expected to continue its principal and interest payments.
We believe the decline in market value is temporary, and we have the ability and intent to hold the
security until recovery of fair value. Excluding mortgage and asset-backed securities and this one
security, no securities from the same issuer had an aggregate unrealized loss in excess of $4.5
million at December 31, 2007. With respect to mortgage and asset-backed securities not backed by
the United States Government, no securities from the same issuer had an aggregate unrealized loss
in excess of $17.9 million at December 31, 2007. The $17.9 million unrealized loss from one issuer
relates to fourteen different securities that are backed by different pools of residential mortgage
loans. All fourteen securities are rated investment grade and the largest unrealized loss on any
one security totaled $5.9 million at December 31, 2007.
56
Excluding mortgage and asset-backed securities, no securities from the same issuer had an aggregate
unrealized loss in excess of $1.2 million at December 31, 2006. With respect to mortgage and
asset-backed securities not backed by the United States Government, no securities from the same
issuer had an aggregate unrealized loss in excess of $4.5 million at December 31, 2006. The $4.5
million unrealized loss from one issuer relates to five different securities that are backed by
different pools of residential mortgage loans. All five securities are rated investment grade and
the largest unrealized loss on any one security totaled $2.3 million at December 31, 2006.
The carrying value and estimated market value of our portfolio of available-for-sale fixed maturity
securities, 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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
|
December 31, 2006 |
|
| |
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
| |
|
Amortized Cost |
|
|
Market Value |
|
|
Amortized Cost |
|
|
Market Value |
|
| |
|
(Dollars in thousands) |
|
Due in one year or less |
|
$ |
63,476 |
|
|
$ |
63,980 |
|
|
$ |
71,066 |
|
|
$ |
71,927 |
|
Due after one year through five years |
|
|
881,754 |
|
|
|
895,729 |
|
|
|
628,258 |
|
|
|
634,720 |
|
Due after five years through ten years |
|
|
2,441,018 |
|
|
|
2,411,240 |
|
|
|
2,074,127 |
|
|
|
2,074,513 |
|
Due after ten years |
|
|
3,470,968 |
|
|
|
3,432,672 |
|
|
|
3,140,461 |
|
|
|
3,162,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,857,216 |
|
|
|
6,803,621 |
|
|
|
5,913,912 |
|
|
|
5,943,161 |
|
Mortgage and asset-backed securities |
|
|
2,772,552 |
|
|
|
2,685,973 |
|
|
|
2,358,263 |
|
|
|
2,344,986 |
|
Redeemable preferred stocks |
|
|
33,218 |
|
|
|
32,998 |
|
|
|
82,389 |
|
|
|
87,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,662,986 |
|
|
$ |
9,522,592 |
|
|
$ |
8,354,564 |
|
|
$ |
8,375,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other asset-backed securities comprised 28.2% at December 31, 2007 and 28.0% at
December 31, 2006 of our total available-for-sale fixed maturity securities. These securities are
purchased when we believe these types of investments provide superior risk-adjusted returns
compared to returns of more conventional investments such as corporate bonds and mortgage loans.
These securities are diversified as to collateral types, cash flow characteristics and maturity.
The repayment pattern on mortgage and other asset-backed securities is more variable than that of
more traditional fixed maturity securities because the repayment terms are tied to underlying debt
obligations that are subject to prepayments. The prepayment speeds (e.g., the rate of individuals
refinancing their home mortgages) can vary based on a number of economic factors that cannot be
predicted with certainty. These factors include the prevailing interest rate environment and
general status of the economy.
At each balance sheet date, we review and update our expectation of future prepayment speeds and
the book value of the mortgage and other asset-backed securities purchased at a premium or discount
is reset, if needed, to result in a constant effective yield over the life of the security. This
effective yield is computed using historical principal payments and expected future principal
payment patterns. Any adjustments to book value to derive the constant effective yield, which may
include the reversal of premium or discount amounts previously amortized or accrued, are recorded
in the current period as a component of net investment income. Accordingly, deviations in actual
prepayment speeds from that originally expected or changes in expected prepayment speeds can cause
a change in the yield earned on mortgage and asset-backed securities purchased at a premium or
discount and may result in adjustments that have a material positive or negative impact on reported
results. Increases in prepayment speeds, which typically occur in a decreasing interest rate
environment, generally increase the rate at which discount is accrued and premium is amortized into
income. Decreases in prepayment speeds, which typically occur in an increasing interest rate
environment, generally slow down the rate at which these amounts are recorded into income.
The mortgage-backed portfolio includes pass-through and collateralized mortgage obligation (CMO)
securities. With a pass-through security, we receive a pro rata share of principal payments as
payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided
into sections or “tranches” which provide sequential retirement of the bonds. We invest in
sequential tranches which provide cash flow stability in that principal payments do not occur until
the previous tranches are paid off. In addition, to provide call protection and more stable
average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization
class (TAC) securities. CMOs of these types provide more predictable cash flows within a range of
prepayment speeds by shifting the prepayment risks to support tranches. We generally do not
purchase certain types of CMOs that we believe would
57
subject the investment portfolio to greater
than average risk. These include, but are not limited to, principal only, floater, inverse
floater, PAC II and support tranches.
The following table sets forth the amortized cost, par value and carrying value of our mortgage and
asset-backed securities summarized by type of security:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Fixed |
|
| |
|
Amortized Cost |
|
|
Par Value |
|
|
Carrying Value |
|
|
Maturities |
|
| |
|
(Dollars in thousands) |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sequential |
|
$ |
1,277,207 |
|
|
$ |
1,303,336 |
|
|
$ |
1,244,758 |
|
|
|
13.1 |
% |
Pass-through |
|
|
199,854 |
|
|
|
200,024 |
|
|
|
200,900 |
|
|
|
2.1 |
|
Planned and targeted amortization class |
|
|
327,667 |
|
|
|
331,133 |
|
|
|
321,764 |
|
|
|
3.4 |
|
Other |
|
|
101,040 |
|
|
|
102,019 |
|
|
|
96,648 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed
securities |
|
|
1,905,768 |
|
|
|
1,936,512 |
|
|
|
1,864,070 |
|
|
|
19.6 |
|
Commercial mortgage-backed securities |
|
|
578,510 |
|
|
|
578,416 |
|
|
|
570,057 |
|
|
|
6.0 |
|
Other asset-backed securities |
|
|
288,274 |
|
|
|
289,173 |
|
|
|
251,846 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage and asset-backed
securities |
|
$ |
2,772,552 |
|
|
$ |
2,804,101 |
|
|
$ |
2,685,973 |
|
|
|
28.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
December 31, 2006 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Fixed |
|
| |
|
Amortized Cost |
|
|
Par Value |
|
|
Carrying Value |
|
|
Maturities |
|
| |
|
(Dollars in thousands) |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sequential |
|
$ |
1,179,339 |
|
|
$ |
1,203,495 |
|
|
$ |
1,172,544 |
|
|
|
14.0 |
% |
Pass-through |
|
|
115,281 |
|
|
|
114,933 |
|
|
|
114,337 |
|
|
|
1.3 |
|
Planned and targeted amortization
class |
|
|
304,861 |
|
|
|
308,391 |
|
|
|
301,209 |
|
|
|
3.6 |
|
Other |
|
|
101,904 |
|
|
|
102,900 |
|
|
|
99,154 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed
securities |
|
|
1,701,385 |
|
|
|
1,729,719 |
|
|
|
1,687,244 |
|
|
|
20.1 |
|
Commercial mortgage-backed securities |
|
|
400,946 |
|
|
|
399,438 |
|
|
|
402,271 |
|
|
|
4.8 |
|
Other asset-backed securities |
|
|
255,932 |
|
|
|
256,453 |
|
|
|
255,471 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage and
asset-backed securities |
|
$ |
2,358,263 |
|
|
$ |
2,385,610 |
|
|
$ |
2,344,986 |
|
|
|
28.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The commercial and other asset-backed securities are primarily sequential securities. Commercial
mortgage-backed securities typically have cash flows that are less sensitive to interest rate
changes than residential securities of similar types due principally to prepayment restrictions on
many of the underlying commercial mortgage loans. The other asset-backed securities, whose
collateral is primarily home-equity loans, generally exhibit more stable cash flows relative to
mortgage-backed issues.
The mortgage and asset-backed portfolios include securities with exposure to the Alt-A and subprime
home equity loan sectors. Securities with Alt-A and subprime exposure are backed by loans to
borrowers with credit scores below those of A-grade borrowers. Alt-A securities generally include
borrowers with credit scores ranging from 725 to 641, and subprime securities include borrowers
with credit scores of 640 or less. The slowing U.S. housing market, increased interest rates,
greater use of affordable mortgage products and relaxed underwriting standards for some originators
of below-prime loans have recently led to higher delinquency and loss rates, especially for
subprime loans originated in 2006. These factors have caused market illiquidity and repricing of
risk, which has led to an increase in unrealized losses in 2007. We expect delinquency rates and
loss rates will increase in the future, however, we continue to expect to receive payments in
accordance with contractual terms of our securities, largely due to the seniority of our claims on
the collateral, represented by AAA rated securities.
Our exposure to the Alt-A and subprime home equity loan sectors is limited to investments in
structured securities collateralized by senior tranches of commercial or residential mortgage loans
with this exposure. We do not own any direct investments in subprime lenders or adjustable rate
mortgages. At December 31, 2007, all mortgage and asset-backed securities with subprime or Alt-A
exposure, except for one, are AAA rated. We held one asset-backed
58
security with an amortized cost
of $12.0 million and an estimated market value of $8.9 million, that had a “BBB+” rating at
December 31, 2007.
A summary of our mortgage and asset-backed portfolios by collateral type is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
|
December 31, 2006 |
|
| |
|
|
|
|
|
Estimated |
|
|
Percent |
|
|
|
|
|
|
Estimated |
|
|
Percent |
|
| |
|
Amortized |
|
|
Market |
|
|
of Fixed |
|
|
Amortized |
|
|
Market |
|
|
of Fixed |
|
| |
|
Cost |
|
|
Value |
|
|
Maturities |
|
|
Cost |
|
|
Value |
|
|
Maturities |
|
| |
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Government agency |
|
$ |
423,831 |
|
|
$ |
427,097 |
|
|
|
4.5 |
% |
|
$ |
310,508 |
|
|
$ |
310,155 |
|
|
|
3.7 |
% |
Prime |
|
|
925,225 |
|
|
|
901,041 |
|
|
|
9.4 |
|
|
|
860,542 |
|
|
|
849,196 |
|
|
|
10.1 |
|
Alt-A exposure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities |
|
|
580,322 |
|
|
|
558,678 |
|
|
|
5.9 |
|
|
|
544,975 |
|
|
|
542,740 |
|
|
|
6.5 |
|
Asset-backed securities |
|
|
204,336 |
|
|
|
170,184 |
|
|
|
1.8 |
|
|
|
179,276 |
|
|
|
179,330 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A exposure |
|
|
784,658 |
|
|
|
728,862 |
|
|
|
7.7 |
|
|
|
724,251 |
|
|
|
722,070 |
|
|
|
8.6 |
|
Subprime asset-backed
securities |
|
|
30,146 |
|
|
|
29,259 |
|
|
|
0.3 |
|
|
|
30,159 |
|
|
|
29,395 |
|
|
|
0.4 |
|
Commercial mortgage |
|
|
578,510 |
|
|
|
570,057 |
|
|
|
6.0 |
|
|
|
400,946 |
|
|
|
402,271 |
|
|
|
4.8 |
|
Non-mortgage |
|
|
30,182 |
|
|
|
29,657 |
|
|
|
0.3 |
|
|
|
31,857 |
|
|
|
31,899 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,772,552 |
|
|
$ |
2,685,973 |
|
|
|
28.2 |
% |
|
$ |
2,358,263 |
|
|
$ |
2,344,986 |
|
|
|
28.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our exposure to the Alt-A and subprime mortgage and asset-backed sectors summarized by origination
year is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
| |
|
Alt-A |
|
|
Subprime |
|
|
Total |
|
| |
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
| |
|
Amortized |
|
|
Market |
|
|
Amortized |
|
|
Market |
|
|
Amortized |
|
|
Market |
|
| |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
| |
|
(Dollars in thousands) |
|
Origination year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
91,214 |
|
|
$ |
85,814 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
91,214 |
|
|
$ |
85,814 |
|
2006 |
|
|
162,408 |
|
|
|
130,322 |
|
|
|
– |
|
|
|
– |
|
|
|
162,408 |
|
|
|
130,322 |
|
2005 |
|
|
25,961 |
|
|
|
24,749 |
|
|
|
30,146 |
|
|
|
29,259 |
|
|
|
56,107 |
|
|
|
54,008 |
|
2004 and prior |
|
|
505,075 |
|
|
|
487,977 |
|
|
|
– |
|
|
|
– |
|
|
|
505,075 |
|
|
|
487,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
784,658 |
|
|
$ |
728,862 |
|
|
$ |
30,146 |
|
|
$ |
29,259 |
|
|
$ |
814,804 |
|
|
$ |
758,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan-to-value Ratio* |
|
77.6% |
|
76.6% |
|
77.6% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2006 |
|
| |
|
Alt-A |
|
|
Subprime |
|
|
Total |
|
| |
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
| |
|
Amortized |
|
|
Market |
|
|
Amortized |
|
|
Market |
|
|
Amortized |
|
|
Market |
|
| |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
| |
|
(Dollars in thousands) |
|
Origination year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
$ |
163,383 |
|
|
|
163,913 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
163,383 |
|
|
$ |
163,913 |
|
2005 |
|
|
25,974 |
|
|
|
25,364 |
|
|
|
30,159 |
|
|
|
29,395 |
|
|
|
56,133 |
|
|
|
54,759 |
|
2004 and prior |
|
|
534,894 |
|
|
|
532,793 |
|
|
|
– |
|
|
|
– |
|
|
|
534,894 |
|
|
|
532,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
724,251 |
|
|
$ |
722,070 |
|
|
$ |
30,159 |
|
|
$ |
29,395 |
|
|
$ |
754,410 |
|
|
$ |
751,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan-to-value Ratio* |
|
77.9% |
|
76.6% |
|
77.9% |
|
|
|
| * |
|
Represents average loan-to-value ratio at issue. |
The corporate securities portfolio also includes one collateralized debt obligation partially
backed by subprime mortgages with an amortized cost of $10.0 million and fair value of $1.5 million
at December 31, 2007, and an amortized cost of $10.0 million and fair value of $9.9 million at
December 31, 2006, which is not included in the tables above. Additional details on this security
are included in the discussion of significant unrealized losses
59
above. Our other investments in
collateralized debt obligations are backed by investment grade credit default swaps with no home
equity exposure. These are all actively managed investments rated AA or above with a carrying
value totaling $45.2 million and unrealized loss of $10.1 million at December 31, 2007 and a
carrying value of $25.5 million and unrealized loss of $0.8 million at December 31, 2006.
The mortgage and asset-backed portfolios also include securities wrapped by bond insurers providing
additional credit enhancement for the investment. At December 31, 2007, our insured asset-backed
holdings totaled $209.3 million, or 7.8% of our mortgage and asset-backed portfolios and 2.2% of
our total fixed income portfolio. We believe these securities were underwritten at investment
grade levels excluding any credit enhancing protection. The insolvency of one or more of the
insurance providers could have a short-term liquidity impact and expose these securities to a
higher probability of experiencing a cash flow shortfall, but would not dramatically increase our
investment portfolio’s risk profile.
Our state, municipal and other government securities include investments in general obligation,
revenue, military housing and municipal housing bonds. Our investment strategy is to utilize
municipal bonds in addition to corporate bonds, as we believe they provide additional
diversification and historically low default rates compared with similarly rated corporate bonds.
We evaluate the credit strength of the underlying issues on both a quantitative and qualitative
basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are
investment grade credits without consideration of insurance. The insolvency of one or more of the
credit enhancing entities would be a meaningful short-term market liquidity event, but would not
dramatically increase our investment portfolio’s risk profile.
A summary of our insured and uninsured municipal holdings by rating of the insurer and underlying
issue is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured Bonds |
|
|
|
|
|
|
|
|
|
|
Total Bonds by |
|
| |
|
|
|
|
|
|
|
|
|
Insured Bonds by |
|
|
By Underlying |
|
|
Total Bonds by |
|
|
By Underlying |
|
| |
|
Uninsured Bonds |
|
|
Insurer Rating |
|
|
Issue Rating |
|
|
Insurer Rating |
|
|
Issue Rating |
|
| |
|
Carrying |
|
|
% of |
|
|
Carrying |
|
|
% of |
|
|
Carrying |
|
|
% of |
|
|
Carrying |
|
|
% of |
|
|
Carrying |
|
|
% of |
|
| Rating |
|
Value |
|
|
Total |
|
|
Value |
|
|
Total |
|
|
Value |
|
|
Total |
|
|
Value |
|
|
Total |
|
|
Value |
|
|
Total |
|
| |
|
(Dollars in thousands) |
|
AAA |
|
$ |
99,332 |
|
|
|
38.9 |
% |
|
$ |
994,467 |
|
|
|
99.7 |
% |
|
$ |
47,151 |
|
|
|
4.7 |
% |
|
$ |
1,093,799 |
|
|
|
87.3 |
% |
|
$ |
146,483 |
|
|
|
11.7 |
% |
AA |
|
|
112,912 |
|
|
|
44.2 |
|
|
|
3,075 |
|
|
|
0.3 |
|
|
|
316,797 |
|
|
|
31.8 |
|
|
|
115,987 |
|
|
|
9.3 |
|
|
|
429,709 |
|
|
|
34.3 |
|
A |
|
|
9,987 |
|
|
|
3.9 |
|
|
|
– |
|
|
|
– |
|
|
|
302,980 |
|
|
|
30.4 |
|
|
|
9,987 |
|
|
|
0.8 |
|
|
|
312.967 |
|
|
|
25.0 |
|
BBB |
|
|
31,367 |
|
|
|
12.3 |
|
|
|
– |
|
|
|
– |
|
|
|
57,983 |
|
|
|
5.8 |
|
|
|
31,367 |
|
|
|
2.5 |
|
|
|
89,350 |
|
|
|
7.1 |
|
BB |
|
|
1,759 |
|
|
|
0.7 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,759 |
|
|
|
0.1 |
|
|
|
1,759 |
|
|
|
0.1 |
|
NR (1) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
272,631 |
|
|
|
27.3 |
|
|
|
– |
|
|
|
– |
|
|
|
272,631 |
|
|
|
21.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
255,357 |
|
|
|
100.0 |
% |
|
$ |
997,542 |
|
|
|
100.0 |
% |
|
$ |
997,542 |
|
|
|
100.0 |
% |
|
$ |
1,252,899 |
|
|
|
100.0 |
% |
|
$ |
1,252,899 |
|
|
|
100.0 |
% |
| |
|
|
|
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2006 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured Bonds |
|
|
|
|
|
|
|
|
|
|
Total Bonds by |
|
| |
|
|
|
|
|
|
|
|
|
Insured Bonds by |
|
|
By Underlying |
|
|
Total Bonds by |
|
|
By Underlying |
|
| |
|
Uninsured Bonds |
|
|
Insurer Rating |
|
|
Issue Rating |
|
|
Insurer Rating |
|
|
Issue Rating |
|
| |
|
Carrying |
|
|
% of |
|
|
Carrying |
|
|
% of |
|
|
Carrying |
|
|
% of |
|
|
Carrying |
|
|
% of |
|
|
Carrying |
|
|
% of |
|
| Rating |
|
Value |
|
|
Total |
|
|
Value |
|
|
Total |
|
|
Value |
|
|
Total |
|
|
Value |
|
|
Total |
|
|
Value |
|
|
Total |
|
| |
|
(Dollars in thousands) |
|
AAA |
|
$ |
25,813 |
|
|
|
16.2 |
% |
|
$ |
766,611 |
|
|
|
99.6 |
% |
|
$ |
23,380 |
|
|
|
3.0 |
% |
|
$ |
792,424 |
|
|
|
85.3 |
% |
|
$ |
49,193 |
|
|
|
5.3 |
% |
AA |
|
|
94,274 |
|
|
|
59.0 |
|
|
|
3,044 |
|
|
|
0.4 |
|
|
|
222,400 |
|
|
|
28.9 |
|
|
|
97,318 |
|
|
|
10.5 |
|
|
|
316,674 |
|
|
|
34.1 |
|
A |
|
|
11,954 |
|
|
|
7.5 |
|
|
|
– |
|
|
|
– |
|
|
|
270,291 |
|
|
|
35.1 |
|
|
|
11,954 |
|
|
|
1.3 |
|
|
|
282,245 |
|
|
|
30.4 |
|
BBB |
|
|
27,682 |
|
|
|
17.3 |
|
|
|
– |
|
|
|
– |
|
|
|
51,583 |
|
|
|
6.7 |
|
|
|
27,682 |
|
|
|
2.9 |
|
|
|
79,265 |
|
|
|
8.5 |
|
BB |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
NR (1) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
202,001 |
|
|
|
26.3 |
|
|
|
– |
|
|
|
– |
|
|
|
202,001 |
|
|
|
21.7 |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
$ |
159,723 |
|
|
|
100.0 |
% |
|
$ |
769,655 |
|
|
|
100.0 |
% |
|
$ |
769,655 |
|
|
|
100.0 |
% |
|
$ |
929,378 |
|
|
|
100.0 |
% |
|
$ |
929,378 |
|
|
|
100.0 |
% |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| (1) |
|
No formal public rating issued. Approximately 53% of the non-rated securities relate to military housing bonds, which we believe have an
“A-” shadow rating; approximately 31% are revenue obligation bonds; and approximately 16% are general obligation bonds. Insurance on these bonds is provided by AMBAC
Assurance Corporation (64%), Financial Security Assurance, Inc. (18%), MBIA Insurance Corporation (11%); Financial Guaranty Insurance Co. (6%) and other (1%). |
60
We do not directly own any fixed income or equity investments in bond insurers. A summary of the
primary insurers of the municipal bonds we hold follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Equivalent |
|
|
December 31, |
|
| Bond Insurer |
|
S&P Rating |
|
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
(Dollars in thousands) |
|
AMBAC Assurance Corporation |
|
AAA |
|
$ |
347,471 |
|
|
$ |
237,304 |
|
MBIA Insurance Corporation |
|
AAA |
|
|
201,409 |
|
|
|
186,260 |
|
Financial Security Assurance , Inc. |
|
AAA |
|
|
146,297 |
|
|
|
90,828 |
|
Financial Guaranty Insurance Co. (1) |
|
AAA |
|
|
143,275 |
|
|
|
134.910 |
|
All others (4 insurers in 2007 and 2006) (2) |
|
|
|
|
|
|
159,090 |
|
|
|
120,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
997,542 |
|
|
$ |
769,655 |
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Rating changed to AA on January 31, 2008. |
| |
| (2) |
|
Includes 98.1% in AAA rated insurers and 1.9% non-rated insurers at December 31, 2007. |
Fixed maturity securities held for trading at December 31, 2006 included U.S. Treasury securities
totaling $14.9 million with an unrealized loss of $0.1 million.
Equity securities totaled $23.6 million at December 31, 2007 and $50.3 million at December 31,
2006. Gross unrealized gains totaled $1.3 million and gross unrealized losses totaled $0.1 million
at December 31, 2007. At December 31, 2006, gross unrealized gains totaled $14.9 million and gross
unrealized losses totaled $0.2 million on these securities. Included in equity securities is our
investment in AEL which totaled $12.6 million at December 31, 2007 and $39.4 million at December
31, 2006.
Mortgage loans totaled $1,221.6 million at December 31, 2007 and $979.9 million at December 31,
2006. These mortgage loans are diversified as to property type, location and loan size, and are
collateralized by the related properties. There were no mortgages more than 60 days delinquent at
December 31, 2007. At December 31, 2006, mortgages more than 60 days delinquent accounted for less
than 0.1% of the carrying value of the mortgage portfolio. Our mortgage lending policies establish
limits on the amount that can be loaned to one borrower and require diversification by geographic
location and collateral type. Information regarding the collateral type and related geographic
location within the United States follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
|
December 31, 2006 |
|
| |
|
Mortgage Loan |
|
|
Percent of |
|
|
Mortgage Loan |
|
|
Percent of |
|
| Collateral Type |
|
Carrying Value |
|
|
Total |
|
|
Carrying Value |
|
|
Total |
|
| |
|
(Dollars in thousands) |
|
Office |
|
$ |
426,005 |
|
|
|
34.9 |
% |
|
$ |
342,164 |
|
|
|
34.9 |
% |
Retail |
|
|
386,506 |
|
|
|
31.6 |
|
|
|
344,749 |
|
|
|
35.2 |
|
Industrial |
|
|
373,449 |
|
|
|
30.6 |
|
|
|
266,902 |
|
|
|
27.2 |
|
Other |
|
|
35,613 |
|
|
|
2.9 |
|
|
|
26,068 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,221,573 |
|
|
|
100.0 |
% |
|
$ |
979,883 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
|
December 31, 2006 |
|
| |
|
Mortgage Loan |
|
|
Percent of |
|
|
Mortgage Loan |
|
|
Percent of |
|
| Region of the United States |
|
Carrying Value |
|
|
Total |
|
|
Carrying Value |
|
|
Total |
|
| |
|
(Dollars in thousands) |
|
South Atlantic |
|
$ |
284,872 |
|
|
|
23.3 |
% |
|
$ |
200,309 |
|
|
|
20.4 |
% |
East North Central |
|
|
242,899 |
|
|
|
19.9 |
|
|
|
203,543 |
|
|
|
20.8 |
|
Pacific |
|
|
228,366 |
|
|
|
18.7 |
|
|
|
165,614 |
|
|
|
16.9 |
|
West North Central |
|
|
158,538 |
|
|
|
13.0 |
|
|
|
154,441 |
|
|
|
15.8 |
|
Mountain |
|
|
127,055 |
|
|
|
10.4 |
|
|
|
92,954 |
|
|
|
9.5 |
|
West South Central |
|
|
69,739 |
|
|
|
5.7 |
|
|
|
75,442 |
|
|
|
7.7 |
|
Other |
|
|
110,104 |
|
|
|
9.0 |
|
|
|
87,580 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,221,573 |
|
|
|
100.0 |
% |
|
$ |
979,883 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Derivative Instruments
Derivative instruments consist primarily of call options totaling $114.8 million at December 31,
2007 and $121.9 million at December 31, 2006, supporting our index annuity business. See “Market
Risks of Financial Instruments” for details regarding how we manage counterparty credit risk.
Collateral Related to Securities Lending and Other Transactions
In 2007, we began participating in a securities lending program administered by a lending agent,
whereby certain fixed maturity securities from our investment portfolio are loaned to other
institutions for a short period of time. We require collateral equal to or greater than 100
percent of the market value of the loaned securities. The collateral is invested by the lending
agent, in accordance with our guidelines, generating fee income that is recognized as net
investment income over the period the security is on loan. Securities recorded on our consolidated
balance sheet with a market value of $179.5 million were on loan under the program and we were
liable for cash collateral under our control totaling $185.3 million at December 31, 2007.
We also obtain or are required to provide collateral relating to certain derivative transactions.
Cash collateral that we received, invested and owe to counterparties for these transactions totaled
$73.2 million at December 31, 2007 and $70.5 million at December 31, 2006.
Other Assets
Deferred policy acquisition costs increased 19.7% to $991.2 million and deferred sales inducements
increased 41.7% to $321.3 million at December 31, 2007, primarily due to the capitalization of
costs incurred with new sales. In addition, deferred policy acquisition costs increased $58.1
million and deferred sales inducements increased $20.5 million due to the impact of the change in
unrealized appreciation/depreciation on fixed maturity securities and interest rate swaps. Other
assets decreased 38.8% to $32.4 million due primarily to a $21.3 million decrease for receivables
for securities sold. Assets held in separate accounts increased 12.9% to $862.7 million at
December 31, 2007 primarily due to the transfer of net premiums to the separate accounts and
positive investment returns.
Liabilities
Policy liabilities and accruals and other policyholders’ funds increased 15.1% to $10,900.7 million
at December 31, 2007 primarily due to increases in the volume of business in force. Long-term debt
increased 45.1% to $316.9 million due to the issuance of $100.0 million of 2017 Senior Notes as
described in Note 7, “Credit Arrangements,” to the consolidated financial statements. The deferred
income tax liability decreased 54.8% to $28.2 million at December 31, 2007 primarily due to the
impact of the change in net unrealized investment gains/losses.
Stockholders’ Equity
Stockholders’ equity increased 2.5% to $902.9 million at December 31, 2007, compared to $880.7
million at December 31, 2006. This increase is attributable to net income for the year and
proceeds from stock option exercises, partially offset by the change in unrealized
appreciation/depreciation on investments and dividends paid.
At December 31, 2007, common stockholders’ equity was $899.9 million, or $29.98 per share, compared
to $877.7 million, or $29.59 per share at December 31, 2006. Included in stockholders’ equity per
common share is ($1.21) at December 31, 2007 and $0.95 at December 31, 2006 attributable to
accumulated other comprehensive income (loss).
Market Risks of Financial Instruments
Interest rate risk is our primary market risk exposure. Substantial and sustained increases and
decreases in market interest rates can affect the profitability of insurance products and market
value of investments. The yield realized on new investments generally increases or decreases in
direct relationship with interest rate changes. The market value of our fixed maturity and
mortgage loan portfolios generally increases when interest rates decrease, and decreases when
interest rates increase.
A majority of our insurance liabilities are backed by fixed maturity securities and mortgage loans.
The weighted average life of the fixed maturity and mortgage loan portfolio, based on market
values and excluding convertible
62
bonds, was approximately 9.3 years at December 31, 2007 and 9.6
years at December 31, 2006. Accordingly, the earned rate on the portfolio lags behind changes in
market yields. The extent that the portfolio yield lags behind changes in market yields generally
depends upon the following factors:
| • |
|
The average life of the portfolio. |
| • |
|
The amount and speed at which market interest rates rise or fall. |
| • |
|
The amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and
asset-backed securities accelerate during periods of declining interest rates. |
| • |
|
The amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and
asset-backed securities decelerate during periods of increasing interest rates. |
For a majority of our traditional products, profitability is significantly affected by the spreads
between interest yields on investments and interest crediting rates/call option costs relating to
our insurance liabilities. For variable annuities and variable universal life policies,
profitability on the portion of the policyholder’s account balance invested in the fixed general
account option, if any, is also affected by the spreads earned. For the variable products, the
policyholder assumes essentially all the investment earnings risk for the portion of the account
balance invested in the separate accounts.
For a substantial portion of our direct business in force, we have the ability to adjust interest
or dividend crediting rates in reaction to changes in portfolio yield. We had the ability to
adjust rates on 96% of our policyholder liabilities at December 31, 2007 and December 31, 2006.
However, the ability to adjust these rates is limited by competitive factors. Surrender rates
could increase and new sales could be negatively impacted if the crediting rates are not
competitive with the rates on similar products offered by other insurance companies and financial
services institutions. In addition, if market rates were to decrease substantially and stay at a
low level for an extended period of time, our spread could be lowered due to interest rate
guarantees on many of our interest sensitive products. At December 31, 2007, interest rate
guarantees on our direct interest sensitive products ranged from 1.50% to 5.50%, with a weighted
average guarantee of 2.30%. This range excludes certain contracts with an account value totaling
$2.5 million at December 31, 2007 with guarantees ranging up to 9.70%. The following table sets
forth account values of direct individual deferred annuities (excluding index annuities) and
interest sensitive life products, including the general account portion of variable contracts,
broken out by the excess of current interest crediting rates over guaranteed rates at December 31,
2007.
| |
|
|
|
|
| |
|
Account Value at |
|
| |
|
December 31, 2007 |
|
| |
|
(Dollars in thousands) |
|
At guaranteed rate |
|
$ |
608,788 |
|
Between guaranteed rate and 50 basis points |
|
|
293,011 |
|
Between 50 basis points and 100 basis points |
|
|
243,027 |
|
Greater than 100 basis points |
|
|
2,733,579 |
|
|
|
|
|
Total |
|
$ |
3,878,405 |
|
|
|
|
|
For a substantial portion of business assumed through coinsurance agreements, the ceding companies
have the ability to adjust interest and dividend crediting rates in reaction to portfolio yield.
Most of the traditional annuity and universal life insurance contracts assumed through the
coinsurance agreements have guaranteed minimum crediting rates. These rates range from 2.25% to
4.00%, with a weighted average guaranteed crediting rate of approximately 3.10% at December 31,
2007. The following table sets forth account values broken out by the excess of current interest
crediting rates over guaranteed rates for fixed rate annuities and universal life business assumed
through the coinsurance agreements at December 31, 2007.
| |
|
|
|
|
| |
|
Account Value at |
|
| |
|
December 31, 2007 |
|
| |
|
(Dollars in thousands) |
|
At guaranteed rate |
|
$ |
166,493 |
|
Between guaranteed rate and 50 basis points |
|
|
408,558 |
|
Between 50 basis points and 100 basis points |
|
|
52,795 |
|
Greater than 100 basis points |
|
|
59,449 |
|
|
|
|
|
Total |
|
$ |
687,295 |
|
|
|
|
|
63
For index annuities, call options are purchased to fund the index credits owed to contract holders
who elect to participate in one or more market indices. Except for certain contracts for which
minimum guaranteed interest rates apply, the options are purchased to fund the full amount of the
annual index credits. For contracts for which minimum guaranteed interest rates apply, the options
are generally purchased to fund the amount of the annual index credits in excess of minimum
guaranteed interest accrued on the contracts. In 2007, proceeds from the maturity of call options
totaled $156.4 million while related index amounts credited to contract holders’ account balances
totaled $154.4 million. The difference between index credits and option proceeds is primarily
attributable to call options being purchased for contracts that had a full or partial surrender
during the year.
Profitability on the portion of the index annuities tied to market indices is significantly
impacted by the spread on interest earned on investments and the sum of (1) cost of underlying call
options purchased to fund the credits owed to contract holders and (2) minimum interest guarantees
owed to the contract holder, if any. The cost of the call options is managed through the terms of
the index annuities, which permit adjustments to annual participation rates, asset fees, and/or
caps, subject to guaranteed minimums. The minimum guaranteed contract values for the majority of
annuities marketed by our EquiTrust Life distribution channel are equal to 87.5% of the premium
collected plus interest credited at 3.00%. In addition, two of the products introduced in 2007
offer a minimum guarantee of 100% of premium accumulated at 3.00%. The minimum guaranteed contract
values for index annuities assumed are equal to 80% to 100% of the premium collected plus interest
credited at rates ranging between 2.25% to 3.50%. If there were little or no gains in the entire
series of options purchased over the expected life of an index annuity (typically 15 to 20 years),
we would incur expenses for credited interest over and above our option costs. This would cause
our spreads to tighten and reduce our profits.
Profitability on the index annuities in any given year is also impacted by changes in the fair
value of the embedded option which provides the contract holder the right to participate in market
index returns after the next index reset date of the contract. This impacts profitability because
only one or two-year call options are purchased to fund the index credits owed to the contract
holders at the inception of each reset period. This practice matches well with the contract
holders’ rights to switch to different indices on each reset date. The value of the forward
starting options embedded in the index annuities can fluctuate with changes in assumptions as to
the expected cost of the options, which is driven by expectations as to the future volatility of
the market indices, risk free interest rates, market returns, contractual features such as
participation rates, asset fees, and/or caps and the lives of the contracts.
We design our products and manage our investment portfolio in a manner to encourage persistency and
to help ensure targeted spreads are earned. In addition to the ability to change interest
crediting rates on our direct products, certain interest sensitive and index contracts have
surrender and withdrawal penalty provisions. The following is a summary of the surrender and
discretionary withdrawal characteristics of our interest sensitive and index products and
supplementary contracts without life contingencies at December 31, 2007.
| |
|
|
|
|
| |
|
Reserve Balance at |
|
| |
|
December 31, 2007 |
|
| |
|
(Dollars in thousands) |
|
Direct business: |
|
|
|
|
Surrender charge rate: |
|
|
|
|
Greater than or equal to 5% |
|
$ |
5,495,218 |
|
Less than 5%, but still subject to surrender charge |
|
|
595,225 |
|
Not subject to surrender charge |
|
|
1,707,471 |
|
Not subject to surrender or discretionary withdrawal |
|
|
236,202 |
|
|
|
|
|
|
Business assumed through coinsurance agreements: |
|
|
|
|
Surrender charge rate: |
|
|
|
|
Greater than or equal to 5% |
|
|
1,532,428 |
|
Less than 5%, but still subject to surrender charge |
|
|
213,736 |
|
Not subject to surrender charge |
|
|
210,862 |
|
Not subject to surrender or discretionary withdrawal |
|
|
5,372 |
|
|
|
|
|
Total |
|
$ |
9,996,514 |
|
|
|
|
|
As of December 31, 2007, we have entered into six interest rate swaps to manage interest rate risk
associated with a portion of our flexible premium deferred annuity contracts. Under the interest
rate swaps, we pay a fixed rate of
64
interest and receive a floating rate of interest on a notional
amount totaling $300.0 million. These interest rate swaps effectively fix the interest crediting
rate on a portion of our flexible premium deferred annuity contract liabilities thereby hedging our
exposure to increases in market interest rates. We also have one interest rate swap to hedge the
variable component of the interest rate on our line of credit borrowings. The terms of this swap
provide that we pay a fixed rate of interest and receive a floating rate of interest on a notional
amount of $46.0 million. Any gain or loss on the interest rate swap settlements offset any
increase or decrease in the interest paid on the line of credit, effectively fixing our interest
expense related to the outstanding debt on this line of credit. As discussed in Note 1 to the
consolidated financial statements, we discontinued the use of hedge accounting during 2007 for the
interest rate swaps backing our annuity liabilities in connection with the adoption of new
accounting pronouncement DIG G26. This change does not impact the economic benefit the swaps
provide to us. See Note 3 to the consolidated financial statements for additional discussion of
these interest rate swaps.
A major component of our asset-liability management program is structuring the investment portfolio
with cash flow characteristics consistent with the cash flow characteristics of our insurance
liabilities. We use models to perform simulations of the cash flows generated from existing
insurance policies under various interest rate scenarios. Information from these models is used in
the determination of investment strategies. Effective duration is a common measure for price
sensitivity to changes in interest rates. It measures the approximate percentage change in the
market value of a portfolio when interest rates change by 100 basis points. This measure includes
the impact of estimated changes in portfolio cash flows from features such as bond calls and
prepayments. When the estimated durations of assets and liabilities are similar, exposure to
interest rate risk is reduced because a change in the value of assets should be largely offset by a
change in the value of liabilities. The effective duration of our fixed maturity and mortgage loan
portfolios was 6.3 at December 31, 2007 and 6.1 at December 31, 2006. The effective duration of
the interest sensitive products was approximately 6.9 at December 31, 2007 and 2006.
If interest rates were to increase 10% from levels at December 31, 2007 and 2006, the market value
of our fixed maturity securities and short-term investments would decrease approximately $254.2
million at December 31, 2007 and $260.8 million at December 31, 2006, while the value of our
interest rate swaps would increase approximately $4.9 million at December 31, 2007 and $6.4 million
at December 31, 2006. These hypothetical changes in value do not take into account any offsetting
change in the value of insurance liabilities for investment contracts since we estimate such value
to be the cash surrender value for a majority of the underlying contracts. If interest rates were
to decrease 10% from levels at December 31, 2007 and 2006, the fair value of our debt would
increase $6.5 million at December 31, 2007 and $4.9 million at December 31, 2006, while the value
of our interest rate swap on our line of credit would decrease $0.5 million at December 31, 2007
and $0.4 million at December 31, 2006.
The models used to estimate the impact of a 10% change in market interest rates use many
assumptions and estimates that materially impact the fair value calculations. Key assumptions used
by the models include an immediate and parallel shift in the yield curve and an acceleration of
bond calls and principal prepayments on mortgage and other asset-backed securities. The above
estimates do not attempt to measure the financial statement impact on the resulting change in
deferred policy acquisition costs, deferred sales inducements, value of insurance in force
acquired, unearned revenue reserves and income taxes. Due to the subjectivity of these
assumptions, the actual impact of a 10% change in rates on the fair market values would likely be
different from that estimated.
Equity price risk is not material to us due to the relatively small equity portfolio held at
December 31, 2007. However, we do earn investment management fees (on those investments managed by
us) and mortality and expense fee income based on the value of our separate accounts. On an
annualized basis, the investment management fee rates range from 0.20% to 0.45% for 2007, 2006 and
2005. The mortality and expense fee rates range from 0.90% to 1.40% for 2007, 2006 and 2005. As a
result, revenues from these sources do fluctuate with changes in the market value of the equity,
fixed maturity and other securities held by the separate accounts. In addition, we have equity
price risk to the extent we may owe amounts under the guaranteed minimum death benefit and
incremental death benefit provisions of our variable annuity contracts. See Note 5 to the
consolidated financial statements for additional discussion of these provisions. Furthermore, as
discussed above, our profitability would be impacted if there were little or no gains in the entire
series of options purchased over the expected life of an index annuity contract.
We also have exposure to credit risk associated from the uncertainty associated with the continued
ability of a given obligator to make timely payments of principal and interest. See “Financial
Condition – Investments” for additional information about credit risk in our investment portfolio.
65
In connection with our use of interest rate swaps and call options, we are exposed to counterparty
credit risk (the risk that a counterparty fails to perform under the terms of the derivative
contract). We do not anticipate nonperformance by any of our counterparties. We purchase our
derivative instruments from multiple counterparties and evaluate the creditworthiness of all
counterparties prior to purchase of the contracts. Purchasing such agreements from financial
institutions with superior performance reduces the credit risk associated with these agreements.
Our policy allows us to purchase derivative instruments from nationally recognized investment
banking institutions with an S&P rating of BBB+ or higher. As of December 31, 2007, all derivative
instruments have been purchased from counterparties with an S&P rating of A or higher. Collateral
support documents are negotiated to further reduce the exposure when deemed necessary. See Note 2
to the consolidated financial statements for details regarding collateral we held as of December
31, 2007. Counterparty credit ratings are monitored on a regular basis (at least quarterly).
Credit exposure is monitored monthly and reviewed quarterly by our credit and investment
committees. Our credit exposure is the fair value of derivative instruments with a positive value,
which totaled $114.8 million at December 31, 2007.
Liquidity and Capital Resources
FBL Financial Group, Inc.
Parent company cash inflows from operations consists primarily of (i) dividends from subsidiaries,
if declared and paid, (ii) fees that it charges the various subsidiaries and affiliates for
management of their operations, (iii) expense reimbursements from subsidiaries and affiliates, (iv)
proceeds from the exercise of employee stock options, (v) proceeds from borrowings and (vi) tax
settlements between the parent company and its subsidiaries. Cash outflows are principally for
salaries, taxes and other expenses related to providing these management services, dividends on
outstanding stock, interest on our parent company debt and capital contributions to subsidiaries.
On March 12, 2007, we issued $100.0 million of 5.875% Senior Notes due March 15, 2017. Interest on
the 2017 Senior Notes is payable semi-annually on March 15 and September 15 each year. The 2017
Senior Notes are redeemable in whole or in part at any time at our option at a “make-whole”
redemption price equal to the greater of 100% of their principal amount or the sum of the present
values of the remaining scheduled payments of principal and interest on the 2017 Senior Notes,
discounted to the redemption date on a semiannual basis at the treasury rate plus 20 basis points.
We received net proceeds of approximately $98.5 million from the issuance of the 2017 Senior Notes
after underwriting fees, offering expenses and an original issue discount. We intend to use the
net proceeds to fund the continued growth of EquiTrust Life.
We have a $60.0 million revolving line of credit agreement with LaSalle Bank National Association
and Bankers Trust Company, N.A. due October 2010. Debt outstanding on this line of credit totaled
$46.0 million at December 31, 2007 and December 31, 2006. Interest on any borrowings accrues at a
variable rate (5.99% at December 31, 2007 and 6.12% at December 31, 2006). In 2006, we entered
into a $46.0 million interest rate swap to hedge the variable component of the interest rate on the
line of credit borrowings. See “Market Risks of Financial Instruments” and Note 3 to the
consolidated financial statements for additional details on this interest rate swap.
We paid cash dividends on our common and preferred stock totaling $14.4 million in 2007, $13.7
million in 2006 and $12.3 million in 2005. Interest payments on our debt totaled $15.1 million in
2007, $11.7 million in 2006 and $11.8 million in 2005. It is anticipated that quarterly cash
dividend requirements for 2008 will be $0.125 per common share and $0.0075 per Series B redeemable
preferred share, or approximately $15.1 million. In addition, interest payments on our debt
outstanding at December 31, 2007 are estimated to be $17.7 million for 2008.
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 by insurance regulatory authorities of the State
of Iowa. The annual dividend limitation is defined under the Iowa Insurance Holding Company Act as
any dividend or distribution of cash or other property whose fair market value, together with that
of other dividends or distributions made within the preceding 12 months, exceeds the greater of (i)
10% of policyholders’ surplus (total statutory capital stock and statutory surplus) as of December
31 of the preceding year, or (ii) the statutory net gain from operations of the insurer for the
12-month period ending December 31 of the preceding year. During 2008, the maximum amount legally
available for distribution to FBL Financial Group, Inc., without further regulatory approval, from
Farm Bureau Life is $51.7 million and from EquiTrust Life is $39.2 million.
66
FBL Financial Group, Inc. expects to rely on available cash resources and dividends from Farm
Bureau Life to make dividend payments to its stockholders and interest payments on its debt.
We may from time to time review potential acquisition opportunities. It is anticipated that
funding for any such acquisition would be provided from available cash resources, debt or equity
financing. As of December 31, 2007, we had no material commitments for capital expenditures. The
parent company had available cash and investments totaling $51.7 million at December 31, 2007.
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, repayments
of investment principal and proceeds from call option exercises. In addition, EquiTrust Life
receives capital contributions from FBL Financial Group to help fund its growth. The Life
Companies’ cash outflows are primarily related to withdrawals of policyholder account balances,
investment purchases, payment of policy acquisition costs, policyholder benefits, income taxes,
dividends and current operating expenses. Life insurance companies generally produce a positive
cash flow which may be measured by the degree to which cash inflows are adequate to meet benefit
obligations to policyholders and normal operating expenses as they are incurred. The remaining
cash flow is generally used to increase the asset base to provide funds to meet the need for future
policy benefit payments and for writing new business. The Life Companies’ liquidity positions
continued to be favorable in 2007, with cash inflows at levels sufficient to provide the funds
necessary to meet their obligations.
For the life insurance operations, cash outflow requirements for operations are typically met from
normal premium and deposit cash inflows. This has been the case for all reported periods as the
Life Companies’ continuing operations and financing activities relating to interest sensitive and
index products provided funds totaling $1,418.4 million in 2007, $1,599.1 million in 2006 and
$892.2 million in 2005. Positive cash flow from operations is generally used to increase the Life
Companies’ fixed maturity securities and other investment portfolios. In developing their
investment strategy, the Life Companies establish a level of cash and securities which, combined
with expected net cash inflows from operations, maturities of fixed maturity investments and
principal payments on mortgage and asset-backed securities and mortgage loans, are believed
adequate to meet anticipated short-term and long-term benefit and expense payment obligations.
We anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends
to stockholders and operating cash needs will come from existing capital and internally generated
funds. We believe that current levels of cash, available-for-sale and short-term securities,
combined with expected net cash inflows from operations, maturities of fixed maturity investments,
principal payments on mortgage and asset-backed securities and mortgage loans and premiums and
deposits on our insurance products, will be adequate to meet our anticipated cash obligations for
the foreseeable future. Our investment portfolio at December 31, 2007, included $72.0 million of
short-term investments, $84.0 million of cash and $1,194.2 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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of December 31, 2007 or 2006, except for
collateral held at December 31, 2006 for derivative transactions as discussed in Note 2 of our
notes to the consolidated financial statements.
67
Contractual Obligations
In the normal course of business, we enter into insurance contracts, financing transactions, lease
agreements or other commitments which are necessary or beneficial to our operations. These
commitments may obligate us to certain cash flows during future periods. The following table
summarizes such obligations as of December 31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
|
| |
|
|
|
|
|
Less than |
|
|
1 – 3 |
|
|
4 – 5 |
|
|
After |
|
| |
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
| |
|
(Dollars in thousands) |
|
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance liabilities (1) |
|
$ |
20,328,421 |
|
|
$ |
1,044,445 |
|
|
$ |
2,155,312 |
|
|
$ |
2,474,491 |
|
|
$ |
14,654,173 |
|
Subordinated note payable to
Capital Trust, including
interest payments (2) |
|
|
288,575 |
|
|
|
4,850 |
|
|
|
9,700 |
|
|
|
9,700 |
|
|
|
264,325 |
|
La Salle Bank revolving line
of credit, including interest
payments (3) |
|
|
53,869 |
|
|
|
2,777 |
|
|
|
51,092 |
|
|
|
- |
|
|
|
- |
|
2017 Senior Notes, including
interest payments |
|
|
152,875 |
|
|
|
5,875 |
|
|
|
11,750 |
|
|
|
11,750 |
|
|
|
123,500 |
|
2014 Senior Notes, including
interest payments |
|
|
103,519 |
|
|
|
4,388 |
|
|
|
8,775 |
|
|
|
8,775 |
|
|
|
81,581 |
|
Collateral payable for
securities lending and other
transactions |
|
|
273,447 |
|
|
|
273,447 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Home office operating leases |
|
|
13,958 |
|
|
|
2,604 |
|
|
|
5,343 |
|
|
|
5,343 |
|
|
|
668 |
|
Purchase obligations |
|
|
8,999 |
|
|
|
7,802 |
|
|
|
1,184 |
|
|
|
13 |
|
|
|
- |
|
Mortgage loan funding |
|
|
29,400 |
|
|
|
29,400 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other long-term liabilities (4) |
|
|
30,028 |
|
|
|
10,140 |
|
|
|
6,877 |
|
|
|
4,818 |
|
|
|
8,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,283,091 |
|
|
$ |
1,385,728 |
|
|
$ |
2,250,033 |
|
|
$ |
2,514,890 |
|
|
$ |
15,132,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Amounts shown in this table are projected payments through the year 2057 which we are
contractually obligated to pay to our life insurance and annuity contract holders. The
payments are derived from actuarial models which assume a level interest rate scenario and
incorporate assumptions regarding mortality and persistency when applicable. These
assumptions are based on our historical experience. The total of the contractual obligations
relating to insurance contracts noted above differs from the liability balance on our
consolidated balance sheet as follows: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Contractual |
|
|
Balance Sheet |
|
|
|
|
| |
|
Obligations |
|
|
Carrying Value |
|
|
Difference |
|
| |
|
(Dollars in thousands) |
|
(a) Reserves based on account values, including separate
accounts |
|
$ |
14,983,517 |
|
|
$ |
10,283,680 |
|
|
$ |
4,699,837 |
|
(c) Supplementary contracts involving life contingencies |
|
|
281,328 |
|
|
|
136,132 |
|
|
|
145,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,264,845 |
|
|
|
10,419,812 |
|
|
|
4,845,033 |
|
(b) Traditional life insurance and accident and health products |
|
|
4,117,591 |
|
|
|
1,284,068 |
|
|
|
2,833,523 |
|
(c) Supplementary contracts without life contingencies |
|
|
612,651 |
|
|
|
439,441 |
|
|
|
173,210 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,995,087 |
|
|
$ |
12,143,321 |
|
|
$ |
7,851,766 |
|
|
|
|
|
|
|
|
|
|
|
The more significant factors causing this difference include:
| |
(a) |
|
reserves for products such as annuities and universal life products are generally based
on the account values of the contracts without taking into account surrender charges, while
the contractual obligations table includes projected cash payments. The following are the
reconciling items between these balances (dollars in thousands): |
| |
|
|
|
|
Reserves based on account values, including separate accounts, per table above |
|
$ |
10,283,680 |
|
Projected amounts pertaining to: |
|
|
|
|
Accumulation of interest/index credits |
|
|
3,750,524 |
|
Surrender charges |
|
|
(60,505 |
) |
Death benefits on universal life business in excess of projected account values |
|
|
1,524,752 |
|
Net cost of insurance charges on variable and universal life business |
|
|
(477,973 |
) |
Other, net |
|
|
(36,961 |
) |
|
|
|
|
Contractual obligations per table above |
|
$ |
14,983,517 |
|
|
|
|
|
68
| |
(b) |
|
traditional life reserves are computed as the present value of future benefits less the
present value of future premiums while the contractual obligations table includes gross
benefit payments and |
| |
| |
(c) |
|
reserves for supplementary contracts and similar instruments are computed as the
present value of future cash payments while the table above includes cash payments without
the impact of discounting. |
In addition, contractual obligations totaling $333.3 million relating to dividend accumulations
and other policy claims are included in the “Other policy claims and benefits” and “Advance
premiums and other deposits” lines on the consolidated balance sheets.
| (2) |
|
Amount shown is net of $3.0 million equity investment in the Capital Trust due to the
contractual right of setoff upon repayment of the note. |
| (3) |
|
Interest on the revolving line of credit is assumed to be 5.99% until maturity. |
| (4) |
|
Includes our estimated future contributions to multiemployer defined benefit plans.
Contributions related to the qualified pension plan are included through 2008. No amounts
related to the qualified pension plan are included beyond 2008 as the contribution amounts
will be re-evaluated based on actual results. |
We are also a party to other operating leases with total payments of approximately $0.2 million per
year. Generally, these leases are renewable annually with similar terms. Although our current
intention is to renew these leases, we are not obligated to do so.
Effects of Inflation
We do not believe that inflation has had a material effect on our consolidated results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Market Risks of Financial Instruments,” for our quantitative and qualitative
disclosures about market risk.
69
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a – 15(f). Under the
supervision and the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control – Integrated Framework, our management concluded
that our internal control over financial reporting was effective as of December 31, 2007.
We engage Ernst & Young LLP as independent auditors to audit our financial statements and internal
control over financial reporting and express their opinion thereon. A copy of Ernst & Young LLP’s
audit opinions follow this letter.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
FBL Financial Group, Inc.
We have audited FBL Financial Group, Inc.’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). FBL
Financial Group, Inc.’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
70
In our opinion, FBL Financial Group, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of December 31, 2007 and 2006, and the
related statements of income, changes in stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007 of FBL Financial Group, Inc. and our report dated
February 14, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 14, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON CONSOLIDATED FINANCIAL STATEMENTS
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, 2007 and 2006, 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,
2007. 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 the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of FBL Financial Group, Inc. at December 31,
2007 and 2006, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 2007 the Company changed its
methods of accounting for the treatment of modifications or exchanges of insurance contracts,
income tax contingencies and cash flow hedges on certain fixed annuity contracts.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), FBL Financial Group, Inc.’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 14, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 14, 2008
71
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Assets |
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
Fixed maturities – available for sale, at market (amortized
cost: 2007 - $9,662,986; 2006 - $8,354,564) |
|
$ |
9,522,592 |
|
|
$ |
8,375,796 |
|
Fixed maturities – trading, at market (cost: 2006 - $15,000) |
|
|
– |
|
|
|
14,927 |
|
Equity securities – available for sale, at market
(cost: 2007 - $22,410; 2006 - $35,604) |
|
|
23,633 |
|
|
|
50,278 |
|
Mortgage loans on real estate |
|
|
1,221,573 |
|
|
|
979,883 |
|
Derivative instruments |
|
|
114,771 |
|
|
|
127,478 |
|
Investment real estate, less allowances for depreciation of
$0 in 2007 and $2,452 in 2006 |
|
|
2,559 |
|
|
|
8,711 |
|
Policy loans |
|
|
179,490 |
|
|
|
179,899 |
|
Other long-term investments |
|
|
1,300 |
|
|
|
1,300 |
|
Short-term investments |
|
|
72,005 |
|
|
|
44,354 |
|
|
|
|
|
|
|
|
Total investments |
|
|
11,137,923 |
|
|
|
9,782,626 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
84,015 |
|
|
|
112,292 |
|
Securities and indebtedness of related parties |
|
|
19,957 |
|
|
|
17,839 |
|
Accrued investment income |
|
|
117,189 |
|
|
|
103,027 |
|
Amounts receivable from affiliates |
|
|
10,831 |
|
|
|
17,608 |
|
Reinsurance recoverable |
|
|
123,659 |
|
|
|
146,789 |
|
Deferred policy acquisition costs |
|
|
991,155 |
|
|
|
827,720 |
|
Deferred sales inducements |
|
|
321,263 |
|
|
|
226,647 |
|
Value of insurance in force acquired |
|
|
41,215 |
|
|
|
42,841 |
|
Property and equipment, less allowances for depreciation of
$75,365 in 2007 and $73,433 in 2006 |
|
|
49,164 |
|
|
|
46,030 |
|
Current income taxes recoverable |
|
|
7,412 |
|
|
|
– |
|
Goodwill |
|
|
11,170 |
|
|
|
11,170 |
|
Collateral held for securities lending and other transactions |
|
|
192,827 |
|
|
|
2,009 |
|
Other assets |
|
|
32,458 |
|
|
|
53,037 |
|
Assets held in separate accounts |
|
|
862,738 |
|
|
|
764,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,002,976 |
|
|
$ |
12,154,012 |
|
|
|
|
|
|
|
|
72
FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Policy liabilities and accruals: |
|
|
|
|
|
|
|
|
Future policy benefits: |
|
|
|
|
|
|
|
|
Interest sensitive and index products |
|
$ |
9,557,073 |
|
|
$ |
8,163,318 |
|
Traditional life insurance and accident and health products |
|
|
1,284,068 |
|
|
|
1,244,712 |
|
Unearned revenue reserve |
|
|
28,448 |
|
|
|
28,436 |
|
Other policy claims and benefits |
|
|
31,069 |
|
|
|
38,133 |
|
|
|
|
|
|
|
|
|
|
|
10,900,658 |
|
|
|
9,474,599 |
|
|
|
|
|
|
|
|
|
|
Other policyholders’ funds: |
|
|
|
|
|
|
|
|
Supplementary contracts without life contingencies |
|
|
439,441 |
|
|
|
391,113 |
|
Advance premiums and other deposits |
|
|
158,245 |
|
|
|
159,965 |
|
Accrued dividends |
|
|
11,208 |
|
|
|
11,766 |
|
|
|
|
|
|
|
|
|
|
|
608,894 |
|
|
|
562,844 |
|
|
|
|
|
|
|
|
|
|
Amounts payable to affiliates |
|
|
35 |
|
|
|
7,319 |
|
Long-term debt |
|
|
316,930 |
|
|
|
218,399 |
|
Current income taxes |
|
|
– |
|
|
|
8,740 |
|
Deferred income taxes |
|
|
28,188 |
|
|
|
62,380 |
|
Collateral payable for securities lending and other transactions |
|
|
273,447 |
|
|
|
72,851 |
|
Other liabilities |
|
|
109,104 |
|
|
|
101,645 |
|
Liabilities related to separate accounts |
|
|
862,738 |
|
|
|
764,377 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
13,099,994 |
|
|
|
11,273,154 |
|
|
|
|
|
|
|
|
|
|
Minority interest in subsidiaries |
|
|
91 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, without par value, at liquidation value –
authorized 10,000,000 shares, issued and outstanding 5,000,000
Series B shares |
|
|
3,000 |
|
|
|
3,000 |
|
Class A common stock, without par value – authorized 88,500,000
shares, issued and outstanding 28,826,738 shares in 2007 and
28,468,662 shares in 2006 |
|
|
101,221 |
|
|
|
86,462 |
|
Class B common stock, without par value – authorized 1,500,000
shares, issued and outstanding 1,192,990 shares |
|
|
7,525 |
|
|
|
7,519 |
|
Accumulated other comprehensive income (loss) |
|
|
(36,345 |
) |
|
|
28,195 |
|
Retained earnings |
|
|
827,490 |
|
|
|
755,544 |
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
902,891 |
|
|
|
880,720 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
14,002,976 |
|
|
$ |
12,154,012 |
|
|
|
|
|
|
|
|
See accompanying notes.
73
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive and index product charges |
|
$ |
114,529 |
|
|
$ |
105,033 |
|
|
$ |
96,258 |
|
Traditional life insurance premiums |
|
|
144,682 |
|
|
|
138,401 |
|
|
|
134,618 |
|
Net investment income |
|
|
628,031 |
|
|
|
535,836 |
|
|
|
475,443 |
|
Derivative income (loss) |
|
|
(4,951 |
) |
|
|
70,340 |
|
|
|
(2,800 |
) |
Realized/unrealized gains on investments |
|
|
5,769 |
|
|
|
13,971 |
|
|
|
2,961 |
|
Other income |
|
|
26,539 |
|
|
|
23,772 |
|
|
|
21,668 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
914,599 |
|
|
|
887,353 |
|
|
|
728,148 |
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive and index product benefits |
|
|
436,637 |
|
|
|
409,127 |
|
|
|
289,018 |
|
Traditional life insurance benefits |
|
|
90,808 |
|
|
|
90,837 |
|
|
|
85,255 |
|
Increase in traditional life future policy benefits |
|
|
37,682 |
|
|
|
33,500 |
|
|
|
36,436 |
|
Distributions to participating policyholders |
|
|
21,420 |
|
|
|
22,504 |
|
|
|
22,861 |
|
Underwriting, acquisition and insurance expenses |
|
|
161,820 |
|
|
|
164,518 |
|
|
|
152,528 |
|
Interest expense |
|
|
16,666 |
|
|
|
11,744 |
|
|
|
13,590 |
|
Other expenses |
|
|
23,760 |
|
|
|
21,635 |
|
|
|
19,897 |
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
788,793 |
|
|
|
753,865 |
|
|
|
619,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,806 |
|
|
|
133,488 |
|
|
|
108,563 |
|
Income taxes |
|
|
(41,051 |
) |
|
|
(44,368 |
) |
|
|
(36,780 |
) |
Minority interest in loss (earnings) of subsidiaries |
|
|
49 |
|
|
|
(126 |
) |
|
|
(159 |
) |
Equity income, net of related income taxes |
|
|
1,535 |
|
|
|
1,135 |
|
|
|
1,218 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
86,339 |
|
|
|
90,129 |
|
|
|
72,842 |
|
Dividends on Series B preferred stock |
|
|
(150 |
) |
|
|
(150 |
) |
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
86,189 |
|
|
$ |
89,979 |
|
|
$ |
72,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
$ |
2.90 |
|
|
$ |
3.06 |
|
|
$ |
2.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – assuming dilution |
|
$ |
2.84 |
|
|
$ |
3.01 |
|
|
$ |
2.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
0.48 |
|
|
$ |
0.46 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
74
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
| |
|
Series B |
|
|
Class A |
|
|
Class B |
|
|
Other |
|
|
|
|
|
|
Total |
|
| |
|
Preferred |
|
|
Common |
|
|
Common |
|
|
Comprehensive |
|
|
Retained |
|
|
Stockholders’ |
|
| |
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Equity |
|
Balance at January 1, 2005 |
|
$ |
3,000 |
|
|
$ |
62,234 |
|
|
$ |
7,524 |
|
|
$ |
141,240 |
|
|
$ |
618,613 |
|
|
$ |
832,611 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2005 |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
72,842 |
|
|
|
72,842 |
|
Change in net unrealized
investment gains/losses |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(58,939 |
) |
|
|
– |
|
|
|
(58,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,903 |
|
Stock-based compensation,
including the issuance of 398,474
common shares under compensation
plans |
|
|
– |
|
|
|
10,026 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
10,026 |
|
Dividends on preferred stock |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(150 |
) |
|
|
(150 |
) |
Dividends on common stock |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(12,159 |
) |
|
|
(12,159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
3,000 |
|
|
|
72,260 |
|
|
|
7,524 |
|
|
|
82,301 |
|
|
|
679,146 |
|
|
|
844,231 |
|
Record underfunded status of other
postretirement benefit plans |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(209 |
) |
|
|
– |
|
|
|
(209 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2006 |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
90,129 |
|
|
|
90,129 |
|
Change in net unrealized
investment gains/losses |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(53,897 |
) |
|
|
– |
|
|
|
(53,897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,232 |
|
Adjustment resulting from capital
transactions of equity investee |
|
|
– |
|
|
|
(52 |
) |
|
|
(5 |
) |
|
|
– |
|
|
|
– |
|
|
|
(57 |
) |
Stock-based compensation,
including the issuance of 528,321
common shares under compensation
plans |
|
|
– |
|
|
|
14,254 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
14,254 |
|
Dividends on preferred stock |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(150 |
) |
|
|
(150 |
) |
Dividends on common stock |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(13,581 |
) |
|
|
(13,581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
3,000 |
|
|
|
86,462 |
|
|
|
7,519 |
|
|
|
28,195 |
|
|
|
755,544 |
|
|
|
880,720 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2007 |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
86,339 |
|
|
|
86,339 |
|
Change in net unrealized
investment gains/losses |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(64,520 |
) |
|
|
– |
|
|
|
(64,520 |
) |
Change in underfunded status of
other postretirement benefit
plans |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(20 |
) |
|
|
– |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,799 |
|
Adjustment resulting from capital
transactions of equity investee |
|
|
– |
|
|
|
67 |
|
|
|
6 |
|
|
|
– |
|
|
|
– |
|
|
|
73 |
|
Stock-based compensation,
including the issuance of 358,076
common shares under compensation
plans |
|
|
– |
|
|
|
14,692 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
14,692 |
|
Dividends on preferred stock |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(150 |
) |
|
|
(150 |
) |
Dividends on common stock |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(14,243 |
) |
|
|
(14,243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
3,000 |
|
|
$ |
101,221 |
|
|
$ |
7,525 |
|
|
$ |
(36,345 |
) |
|
$ |
827,490 |
|
|
$ |
902,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
75
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
86,339 |
|
|
$ |
90,129 |
|
|
$ |
72,842 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments related to interest sensitive and index
products: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited/index credits to account
balances, excluding deferred sales inducements |
|
|
395,952 |
|
|
|
279,257 |
|
|
|
236,561 |
|
Change in fair value of embedded derivatives |
|
|
(5,907 |
) |
|
|
70,295 |
|
|
|
4,891 |
|
Charges for mortality and administration |
|
|
(104,989 |
) |
|
|
(96,940 |
) |
|
|
(89,758 |
) |
Deferral of unearned revenues |
|
|
1,429 |
|
|
|
1,035 |
|
|
|
1,046 |
|
Amortization of unearned revenue reserve |
|
|
(2,292 |
) |
|
|
(1,666 |
) |
|
|
(1,274 |
) |
Provision for depreciation and amortization of
property and equipment |
|
|
14,324 |
|
|
|
14,298 |
|
|
|
13,497 |
|
Provision for accretion and amortization of investments |
|
|
(10,228 |
) |
|
|
(8,181 |
) |
|
|
(5,998 |
) |
Realized/unrealized gains on investments |
|
|
(5,769 |
) |
|
|
(13,971 |
) |
|
|
(2,961 |
) |
Change in fair value of derivatives |
|
|
3,398 |
|
|
|
(51,853 |
) |
|
|
(4,200 |
) |
Increase in traditional life and accident and health
benefit accruals |
|
|
39,356 |
|
|
|
38,114 |
|
|
|
39,166 |
|
Policy acquisition costs deferred |
|
|
(173,723 |
) |
|
|
(190,955 |
) |
|
|
(142,611 |
) |
Amortization of deferred policy acquisition costs |
|
|
68,394 |
|
|
|
68,541 |
|
|
|
57,207 |
|
Amortization of deferred sales inducements |
|
|
9,555 |
|
|
|
18,745 |
|
|
|
10,418 |
|
Amortization of value of insurance in force |
|
|
5,069 |
|
|
|
3,458 |
|
|
|
2,861 |
|
Net sale (acquisition) of fixed maturities – trading |
|
|
15,000 |
|
|
|
– |
|
|
|
(15,006 |
) |
Change in accrued investment income |
|
|
(14,162 |
) |
|
|
(21,536 |
) |
|
|
(13,177 |
) |
Change in amounts receivable from/payable to affiliates |
|
|
(507 |
) |
|
|
(10,866 |
) |
|
|
772 |
|
Change in reinsurance recoverable |
|
|
23,130 |
|
|
|
(30,757 |
) |
|
|
3,599 |
|
Change in current income taxes |
|
|
(16,152 |
) |
|
|
6,422 |
|
|
|
(1,485 |
) |
Provision for deferred income taxes |
|
|
521 |
|
|
|
3,397 |
|
|
|
918 |
|
Other |
|
|
28,914 |
|
|
|
(63,792 |
) |
|
|
49,785 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
357,652 |
|
|
|
103,174 |
|
|
|
217,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Sale, maturity or repayment of investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities – available for sale |
|
|
554,217 |
|
|
|
453,942 |
|
|
|
875,577 |
|
Equity securities – available for sale |
|
|
19,980 |
|
|
|
32,725 |
|
|
|
1,759 |
|
Mortgage loans on real estate |
|
|
56,804 |
|
|
|
79,332 |
|
|
|
58,649 |
|
Derivative instruments |
|
|
104,950 |
|
|
|
104,106 |
|
|
|
12,842 |
|
Investment real estate |
|
|
9,741 |
|
|
|
554 |
|
|
|
– |
|
Policy loans |
|
|
39,522 |
|
|
|
28,777 |
|
|
|
36,140 |
|
Short-term investments – net |
|
|
– |
|
|
|
134,979 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
785,214 |
|
|
|
834,415 |
|
|
|
984,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities – available for sale |
|
|
(1,852,613 |
) |
|
|
(1,963,560 |
) |
|
|
(1,509,254 |
) |
Equity securities – available for sale |
|
|
(205 |
) |
|
|
(273 |
) |
|
|
(434 |
) |
Mortgage loans on real estate |
|
|
(298,453 |
) |
|
|
(218,658 |
) |
|
|
(158,681 |
) |
Derivative instruments |
|
|
(104,694 |
) |
|
|
(72,142 |
) |
|
|
(34,542 |
) |
Investment real estate |
|
|
(536 |
) |
|
|
– |
|
|
|
(40 |
) |
Policy loans |
|
|
(39,113 |
) |
|
|
(31,804 |
) |
|
|
(36,399 |
) |
Short-term investments – net |
|
|
(27,651 |
) |
|
|
– |
|
|
|
(151,788 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,323,265 |
) |
|
|
(2,286,437 |
) |
|
|
(1,891,138 |
) |
76
FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Investing
activities - continued |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal, repayments of advances and other
distributions of capital from equity investees |
|
$ |
127 |
|
|
$ |
9,931 |
|
|
$ |
2,206 |
|
Investments in and advances to equity investees |
|
|
(850 |
) |
|
|
(1,550 |
) |
|
|
– |
|
Purchases of property and equipment |
|
|
(20,463 |
) |
|
|
(19,630 |
) |
|
|
(20,110 |
) |
Disposal of property and equipment |
|
|
4,475 |
|
|
|
6,100 |
|
|
|
3,223 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,554,762 |
) |
|
|
(1,457,171 |
) |
|
|
(920,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Receipts from interest sensitive and index products
credited to policyholder account balances |
|
|
2,010,769 |
|
|
|
2,211,283 |
|
|
|
1,363,314 |
|
Return of policyholder account balances on interest
sensitive and index products |
|
|
(935,385 |
) |
|
|
(746,824 |
) |
|
|
(632,263 |
) |
Proceeds from long-term debt |
|
|
98,460 |
|
|
|
– |
|
|
|
– |
|
Repayments of short-term debt |
|
|
– |
|
|
|
– |
|
|
|
(46,273 |
) |
Receipts (distributions) related to minority interests – net |
|
|
2 |
|
|
|
(152 |
) |
|
|
(186 |
) |
Excess tax deductions on stock-based compensation |
|
|
1,376 |
|
|
|
1,591 |
|
|
|
– |
|
Issuance of common stock |
|
|
8,004 |
|
|
|
9,002 |
|
|
|
8,639 |
|
Dividends paid |
|
|
(14,393 |
) |
|
|
(13,731 |
) |
|
|
(12,309 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,168,833 |
|
|
|
1,461,169 |
|
|
|
680,922 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(28,277 |
) |
|
|
107,172 |
|
|
|
(22,837 |
) |
Cash and cash equivalents at beginning of year |
|
|
112,292 |
|
|
|
5,120 |
|
|
|
27,957 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
84,015 |
|
|
$ |
112,292 |
|
|
$ |
5,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
15,095 |
|
|
$ |
11,744 |
|
|
$ |
11,779 |
|
Income taxes |
|
|
56,133 |
|
|
|
33,569 |
|
|
|
36,617 |
|
Non-cash operating activity: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferral of sales inducements |
|
|
83,713 |
|
|
|
90,454 |
|
|
|
72,872 |
|
Non-cash financing activity: |
|
|
|
|
|
|
|
|
|
|
|
|
Refinancing of short-term debt |
|
|
– |
|
|
|
– |
|
|
|
46,000 |
|
See accompanying notes.
77
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1) |
|
Significant Accounting Policies |
Nature of Business
FBL Financial Group, Inc. (we or the Company) operates predominantly in the life insurance industry
through its principal subsidiaries, Farm Bureau Life Insurance Company (Farm Bureau Life) and
EquiTrust Life Insurance Company (EquiTrust Life) (collectively, the Life Companies). Farm Bureau
Life markets individual life insurance policies and annuity contracts to Farm Bureau members and
other individuals and businesses in the Midwestern and Western sections of the United States
through an exclusive agency force. EquiTrust Life markets individual annuity products through
independent agents and brokers and variable products through alliances with other insurance
companies. These sales take place throughout the United States. In addition to writing direct
insurance business, EquiTrust Life has assumed closed blocks of life insurance and annuity business
through coinsurance agreements. Several subsidiaries support various functional areas of the Life
Companies and other affiliates, by providing investment advisory, marketing and distribution, and
leasing services. In addition, we manage two Farm Bureau affiliated property-casualty companies.
Consolidation
Our consolidated financial statements include the financial statements of FBL Financial Group, Inc.
and its direct and indirect subsidiaries. All significant intercompany transactions have been
eliminated.
Accounting Changes
Effective April 1, 2007, we adopted Statement of Financial Accounting Standards (Statement) 133
Implementation Issue No. G26, “Cash Flow Hedges: Hedging Interest Cash Flows on Variable-Rate
Assets and Liabilities That Are Not Based on a Benchmark Interest Rate,” (DIG G26) which clarifies
the accounting for a cash flow hedge of a variable-rate asset or liability, specifically addressing
when an entity is permitted to hedge benchmark interest rate risk. DIG G26 indicates that the risk
being hedged in a cash flow hedge of a variable-rate financial asset or liability cannot be
designated as interest rate risk unless the cash flows of the hedged transaction are explicitly
based on that same benchmark interest rate. In addition, DIG G26 clarifies that the only permitted
benchmarks are the risk-free rate and rates based on the LIBOR swap curve. Hedging relationships
that no longer qualify for cash flow hedge accounting based on this guidance must be undesignated
prospectively. Changes in fair value of derivatives not subsequently re-designated to a new
qualifying hedging relationship are recorded in earnings. Gains or losses previously included in
accumulated other comprehensive income (loss) remain in accumulated other comprehensive income
(loss) and are amortized to net income over the remaining term of the swaps as the hedged
anticipated cash flows occur. If it becomes probable that the anticipated cash flows will not
occur, the deferred gains or losses will be reclassified into earnings immediately. As a result of
adopting DIG G26, we undesignated the hedging relationship for the interest rate swaps related to
our flexible premium deferred annuity contracts as they are not explicitly based on one of the two
permitted benchmarks. Net unrealized gains on these swaps included in accumulated other
comprehensive income (loss) totaled $2.8 million at March 31, 2007 and are being amortized into
income over the life of the individual swaps. The adoption of DIG G26 decreased net income $2.2
million ($0.07 per basic and diluted common share) during 2007. This guidance does not impact the
interest rate swap on our line of credit, as both the derivative instrument and hedged item are
based on the three-month LIBOR rate.
Effective January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes.” Interpretation No. 48 creates a single model
to address uncertainty in tax positions and clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. Under the Interpretation, a tax position can be recognized
in the financial statements if it is more likely than not that the position will be sustained upon
examination by taxing authorities who have full knowledge of all relevant information. A tax
position that meets the more-likely-than-not recognition threshold is measured at the largest
amount of benefit that is greater than 50 percent likely of being realized upon settlement.
Interpretation No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
The impact of adopting Interpretation No. 48 was not material to our consolidated financial
statements; therefore the cumulative effect of change in this accounting principle, totaling $0.3
million, is reflected as an increase to income tax expense
78
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in our 2007 consolidated income statement. Net income for the full year 2007 was $0.3 million
lower ($0.01 per basic and diluted common share) as a result of adopting this Interpretation. We
recognize interest accrued related to unrecognized tax benefits in interest expense and penalties
in other expenses.
Effective January 1, 2007, we adopted Statement of Position (SOP) 05-1, “Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of
Insurance Contracts” issued by the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants. The SOP provides guidance on the accounting for
internal replacements of one insurance contract for another insurance contract. Under the SOP, an
internal replacement that is determined to result in a replacement contract that is substantially
changed from the replaced contract is accounted for as an extinguishment of the replaced contract.
As an extinguishment, the unamortized deferred policy acquisition costs, deferred sales
inducements, value of insurance in force acquired and unearned revenue reserve from the replaced
contract are written off at the time of the extinguishment. An internal replacement that is
determined to result in a replacement contract that is substantially unchanged from the replaced
contract is accounted for as a continuation of the replaced contract. The impact of adopting SOP
05-1 was not material to our consolidated financial statements for 2007 (estimated to be a $0.1
million decrease to net income – less than $0.01 per basic and diluted common share) as our
previous accounting policy for internal replacements substantially conformed to current
interpretations of the guidance in the SOP.
In September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and
132(R).” This Statement requires the recognition of an asset or liability in the consolidated
balance sheet based on the funded status of a defined benefit postretirement plan and changes in
the funded status of the plan are recorded as a component of comprehensive income in the year in
which the changes occur. These requirements were effective for fiscal years ending after December
15, 2006. The impact of adopting Statement No. 158 at December 31, 2006 was minimal on our
consolidated financial statements as we participate with several affiliates and an unaffiliated
organization in various multiemployer defined benefit and other postretirement plans, which are
exempt from this Statement. However, we did adopt Statement No. 158 for two small single employer
health and medical postretirement plans. The impact of this adoption in 2006 was to increase other
liabilities $0.3 million for the underfunded status of these plans, reduce accumulated other
comprehensive income (loss) $0.2 million and record a deferred tax asset of $0.1 million. This
adoption had no impact on our consolidated statements of income. Statement No. 158 also requires
measurement of a plan’s assets and benefit obligations as of the end of the employer’s fiscal year,
beginning with fiscal years ending after December 15, 2008. We plan to adopt the measurement date
portion of this Statement in 2008, using the single measurement date method, which will result in a
decrease to the beginning balance of retained earnings totaling $0.7 million.
In December 2007, the FASB issued Statement No. 160, “Accounting and Reporting of Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB No. 51.” This Statement
establishes accounting and reporting standards for the noncontrolling (minority) interest in a
subsidiary, which requires that the minority interest be reported in equity and the related net
income and comprehensive income be included in the respective lines of the consolidated financial
statements. This Statement is effective for the first annual reporting period beginning on or
after December 15, 2008 and early adoption is prohibited. The impact of this adoption on our
consolidated financial statements is expected to be immaterial and will primarily result in a
reclassification of minority interest as noted above.
In December 2007, the FASB issued Statement No. 141(R), “Business Combinations,” which changes the
accounting and reporting of business combination transactions effective for the first annual
reporting period beginning on or after December 15, 2008. Statement 141(R) has no immediate impact
on our consolidated financial statements, though it will impact our accounting of future
acquisitions or consolidations.
In April 2007, the FASB issued Staff Position FIN 39-1 (FSP FIN 39-1), which amends certain aspects
of FASB Interpretation No. 39, “Offsetting of Amounts
Related to Certain Contracts – an
interpretation of APB Opinion No. 10 and FASB Statement No. 105.” This FSP allows a reporting
entity to offset fair value amounts recognized for the right to reclaim cash collateral (a
receivable) or the obligation to return cash collateral (a payable) against fair value amounts
recognized for derivative instruments executed with the same counterparty under the same master
netting arrangement. The guidance in this FSP is effective for fiscal years beginning after
November 15, 2007, with
79
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
early application permitted. At December 31, 2007, we had master netting agreements with
counterparties covering cash collateral payable totaling $73.2 million and cash collateral
receivable totaling $7.5 million. These amounts are included in the collateral payable for
securities lending and other transactions and collateral held for securities lending and other
transactions lines on our consolidated balance sheet at December 31, 2007, but will be netted
against the fair value of the call options included in derivative instruments and swaps included in
other liabilities upon adoption of FSP FIN 39-1 in 2008. This FSP will have no impact on our
consolidated statements of income.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities,” which permits certain financial assets and liabilities to be measured
at fair value, with changes in fair value reported in earnings. This election is allowed on an
instrument-by-instrument basis and requires additional reporting disclosures. This Statement is
effective for fiscal years beginning after November 15, 2007. Early adoption is allowed provided
the provisions of Statement No. 157 are also adopted. At this time, we do not intend to elect the
fair value option for any financial instruments.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements,” which defines
fair value, establishes a framework for measuring fair value and expands the required disclosures
about fair value measurements. This Statement is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the requirements of this Statement and have not yet
determined the impact of adoption on our consolidated financial statements, as guidance regarding
the proper methodology for determining the fair value of liabilities is still emerging as of the
filing date of this Form 10-K.
Effective January 1, 2006, we adopted Statement No. 123(R), “Share-Based Payment,” using the
modified-prospective-transition method. Statement No. 123(R) is a revision of Statement No. 123,
“Accounting for Stock-Based Compensation.” Details regarding the impact of changes in accounting
for stock-based compensation and our application of the modified-prospective-transition method of
adoption are outlined in the “Stock-Based Compensation” section of this Note.
Investments
Fixed Maturities and Equity Securities
Fixed maturity securities, comprised of bonds and redeemable preferred stocks, 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, with the exception of unrealized gains and
losses relating to the conversion feature embedded in convertible fixed maturity securities, are
included directly in stockholders’ equity as a component of accumulated other comprehensive income
(loss). Unrealized gains and losses relating to the conversion feature embedded in convertible
fixed maturity securities are recorded as a component of derivative income (loss) in the
consolidated statements of income. The unrealized gains and losses are reduced by a provision for
deferred income taxes and adjustments to deferred policy acquisition costs, deferred sales
inducements, 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. Fixed maturity securities
that are purchased with the intent to sell within a short period of time are classified as
“trading.” These securities are carried at fair value and unrealized gains and losses are
reflected in the consolidated statements of income as a component of realized/unrealized gains on
investments. Premiums and discounts are amortized/accrued using methods which result in a constant
yield over the securities’ expected lives. Amortization/accrual of premiums and discounts on
mortgage and asset-backed securities incorporates prepayment assumptions to estimate the
securities’ expected lives.
Equity securities, comprised of common and non-redeemable preferred stocks are designated as
“available for sale” and are reported at market value. The change in unrealized appreciation and
depreciation of equity securities is included directly in stockholders’ equity, net of any related
deferred income taxes, as a component of accumulated other comprehensive income (loss).
80
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Mortgage Loans on Real Estate
Mortgage loans on real estate are reported at cost adjusted for amortization of premiums and
accrual of discounts. If we determine that the value of any mortgage loan is impaired (i.e., when
it is probable we will be unable to collect all amounts due according to the contractual terms of
the loan agreement), the carrying value of the mortgage loan is reduced to its fair value, which
may be based upon the present value of expected future cash flows from the loan, or the fair value
of the underlying collateral. The carrying value of impaired loans is reduced by the establishment
of a valuation allowance, changes to which are recognized as realized gains or losses on
investments. Interest income on impaired loans is recorded on a cash basis.
Derivative Instruments
Derivative instruments include interest rate swaps used to reduce our exposure to increases in
market interest rates and call options used to fund index credits on index annuities. In addition,
we have embedded derivatives associated with our index annuity business and certain modified
coinsurance contracts. All derivatives are recognized as either assets or liabilities in the
consolidated balance sheets and measured at fair value.
Interest rate swaps are carried on the consolidated balance sheets as either a derivative
instrument or other liability. The swap on our line of credit and, prior to April 1, 2007, the
swaps related to our flexible premium deferred annuity contracts are accounted for as cash flow
hedges. The effective portion of any unrealized gain or loss is recorded in accumulated other
comprehensive income (loss). If a portion of the hedges become ineffective, the ineffective
portion of any unrealized gain or loss on the swap will be recorded in earnings as a component of
derivative income (loss) as it occurs. Prior to April 1, 2007, the net periodic interest
settlement between the interest paid and the interest received under the swaps hedging our annuity
contracts was recorded as a component of interest sensitive and index product benefits.
For derivatives not designated as a hedging instrument, the change in fair value is recognized in
earnings in the period of change. See “Accounting Changes” above and Note 3, “Derivative
Instruments,” for more information regarding our derivative instruments and embedded derivatives.
Investment Real Estate
Investment real estate is reported at cost less allowances for depreciation, as applicable. The
carrying value of these assets is subject to regular review. For properties not held for sale, if
indicators of impairment are present and a property’s expected undiscounted cash flows are not
sufficient to recover the property’s carrying value, an impairment loss is recognized and the
property’s cost basis is reduced to fair value. If the fair value, less estimated sales costs, of
real estate held for sale decreases to an amount lower than its carrying value, the carrying value
of the real estate is reduced by the establishment of a valuation allowance, changes to which are
recognized as realized gains or losses on investments.
Other Investments
Policy loans are reported at unpaid principal balance. Short-term investments are reported at cost
adjusted for amortization of premiums and accrual of discounts. Other long-term investments
include an investment deposit which is reported at amortized cost.
Securities and indebtedness of related parties include investments in corporations and partnerships
over which we may exercise significant influence. These corporations and partnerships operate
predominately in the insurance, broker/dealer, investment company and real estate industries. Such
investments are generally accounted for using the equity method. In applying the equity method, we
record our share of income or loss reported by the equity investees. For partnerships operating in
the investment company industry, this income or loss includes changes in unrealized gains and
losses in the partnerships’ investment portfolios. Changes in the value of our investment in
equity investees attributable to capital transactions of the investee, such as an additional
offering of stock, are recorded directly to stockholders’ equity.
81
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Collateral Held/Payable for Securities Lending and Other Transactions
We participate in a securities lending program whereby certain fixed maturity securities from our
investment portfolio are loaned to other institutions for a short period of time. We require
collateral equal to or greater than 100 percent of the market value of the loaned securities. The
collateral is invested by the lending agent, in accordance with our guidelines, generating fee
income that is recognized as net investment income over the period the securities are on loan. The
collateral is accounted for as a secured borrowing and is recorded as an asset on the consolidated
balance sheets, with a corresponding liability reflecting our obligation to return this collateral
upon the return of the loaned securities. Securities recorded on our consolidated balance sheet
with a market value of $179.5 million were on loan under the program and we were liable for cash
collateral under our control totaling $185.3 million at December 31, 2007.
We also obtain or are required to provide collateral relating to certain derivative transactions.
We invest cash collateral received and record a liability for amounts owed to counterparties for
these transactions. See Note 2, “Investment Operations,” for more information regarding our
collateral.
Accrued Investment Income
We discontinue the accrual of investment income on invested assets when it is determined that
collection is uncertain.
Realized/Unrealized Gains and Losses on Investments
Realized gains and losses on sales of investments are determined on the basis of specific
identification. This line item also includes the change in unrealized gains and losses on trading
securities. The carrying values of all our investments are reviewed on an ongoing basis for credit
deterioration. If this review indicates a decline in market value that is other than temporary,
the carrying value of the investment is reduced to its fair value and a specific write down is
taken. Such reductions in carrying value are recognized as realized losses on investments. For
fixed maturity securities and equity securities, the fair value becomes the new cost basis for the
security and the cost basis is not adjusted for subsequent recoveries in fair value. However, for
fixed maturity securities for which we can reasonably estimate future cash flows after a write
down, the discount or reduced premium recorded, based on the new cost basis, is amortized over the
remaining life of the security. Amortization in this instance is computed using the prospective
method and the current estimate of the amount and timing of future cash flows. It is difficult to
estimate cash flows on securities that have been written down for an other-than-temporary
impairment due to the inherent variability of cash flows associated with distressed securities.
Net investment income for 2007 includes accretion totaling $0.5 million on two previously impaired
securities that mature in 2008. No such accretion was recorded in 2006 or 2005.
Market Values
Independent pricing sources are used to obtain market values for nearly all of our fixed maturity
securities. The pricing service providers utilize valuation models that vary by asset class and
incorporate available trade, bid and other market information. Many fixed income securities in the
portfolio do not trade on a daily basis, so available information such as benchmark curves,
benchmarking of like securities, reported trades, broker/dealer quotes, issuer spreads, bids,
offers, and matrix pricing are utilized in the valuation process. For each type of security,
information is gathered from market sources that integrate relevant credit information, perceived
market movements and sector news into the pricing process. In addition, models are utilized to
develop prepayment and interest rate scenarios. All prices obtained from pricing sources are
reviewed by our internal investment trading group for reasonableness based on the underlying
characteristics of the security, including relative yield, credit rating market activity and
valuations of similar securities. Price discrepancies between providers and any prices that look
unusual are investigated by our internal investment professionals for final price determination.
In addition, certain fixed maturity securities with a market value totaling $86.8 million at
December 31, 2007 and $296.8 at December 31, 2006 are valued by us using a matrix calculation
assuming a spread (based on interest rates and a risk assessment of
82
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the bonds) over U.S. Treasury bond yields. Regardless of the pricing source, we take full
responsibility for the reasonableness of all market value estimates.
Market values of the conversion features embedded in convertible fixed maturity securities are
estimated using an option-pricing model. Market values of redeemable preferred stocks, equity
securities, call options and interest rate swaps are based on the latest quoted market prices, or
for those stocks not readily marketable, generally at values which are representative of the market
values of comparable issues. Market values for the embedded derivatives in our modified
coinsurance contracts are based on the difference between the fair value and the cost basis of the
underlying investments. Market values for the embedded derivatives in our reinsurance recoverable
relating to call options are based on quoted market prices.
Cash and Cash Equivalents
For purposes of our consolidated statements of cash flows, we consider all highly liquid debt
instruments purchased with a maturity of three months or less to be cash equivalents. Cash
collateral received for derivative positions is invested in cash equivalents and reported with
derivative instruments as an investing activity in the consolidated statements of cash flows.
Reinsurance Recoverable
We use reinsurance to manage certain risks associated with our insurance operations. These
reinsurance arrangements provide for greater diversification of business, allow management to
control exposure to potential risks arising from large claims and provide additional capacity for
growth. For business ceded to other companies, reinsurance recoverable generally consists of the
reinsurers’ share of policyholder liabilities, claims and expenses, net of amounts due the
reinsurers for premiums. For business assumed from other companies, reinsurance recoverable
generally consists of premium receivable, net of our share of benefits and expenses we owe to the
ceding company.
We assume, under coinsurance agreements, certain fixed rate and index annuity contracts. Call
options used to fund index credits on the assumed index annuities are purchased by and maintained
on the books of the ceding company. We record our proportionate share of the option value
supporting the business we reinsure as reinsurance recoverable on the consolidated balance sheets.
See Note 3, “Derivative Instruments,” for more information regarding these call options and see
Note 5, “Reinsurance and Policy Provisions,” for additional information regarding these reinsurance
agreements.
Deferred Policy Acquisition Costs, Deferred Sales Inducements and Value of Insurance In Force
Acquired
Deferred policy acquisition costs include certain costs of acquiring new insurance business,
principally commissions and other expenses related to the production of new business, to the extent
recoverable from future policy revenues and gross profits. Deferred sales inducements include
premium bonuses and bonus interest credited to contracts during the first contract year only. The
value of insurance in force acquired represents the cost assigned to insurance contracts when an
insurance company is acquired. The initial value is determined by an actuarial study using
expected future gross profits as a measurement of the net present value of the insurance acquired.
Interest accrued on the unamortized balance at a weighted average rate of 4.96% in 2007, 4.95% in
2006 and 4.88% in 2005.
For participating traditional life insurance, interest sensitive and index 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 through an unlocking process when estimates of
current or future gross profits/margins (including the impact of investment gains and losses) to be
realized from a group of products are revised. For nonparticipating traditional life products,
these costs are amortized over the premium paying period of the related policies, in proportion to
the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated
premium revenues are estimated using the same assumptions used for computing liabilities for future
policy benefits.
83
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and Equipment
Property and equipment, comprised primarily of furniture, equipment and capitalized software costs,
are reported at cost less allowances for depreciation and amortization. Depreciation and
amortization expense is computed primarily using the straight-line method over the estimated useful
lives of the assets. Furniture and equipment had a carrying value of $33.4 million at December 31,
2007 and $35.2 million at December 31, 2006, and estimated useful lives that generally range from
two to twenty years. Capitalized software costs had a carrying value of $15.8 million at December
31, 2007 and $10.8 million at December 31, 2006, and estimated useful lives that range from two to
five years. Depreciation expense for furniture and equipment was $9.0 million in 2007, $9.4
million in 2006 and $8.7 million in 2005. Amortization expense for capitalized software was $5.3
million in 2007, $4.9 million in 2006 and $4.8 million in 2005.
Goodwill
Goodwill includes $9.9 million related to the excess of the amounts paid to acquire companies over
the fair value of its net assets acquired. Goodwill also includes $1.2 million of identifiable
intangible assets relating to insurance licenses obtained with the acquisition of EquiTrust Life
Insurance Company. Goodwill and identifiable intangible assets with indefinite lives are not
amortized but are subject to annual impairment testing. We have performed impairment testing using
cash flow and other analyses and determined none of our goodwill was impaired as of December 31,
2007 or December 31, 2006.
Future Policy Benefits
Future policy benefit reserves for interest sensitive products are computed under a retrospective
deposit method and represent policy account balances before applicable surrender charges. Future
policy benefit reserves for index annuities are equal to the sum of the fair value of the embedded
index options, accumulated index credits and the host contract reserve computed using a method
similar to that used for interest sensitive products. Policy benefits and claims that are charged
to expense include benefit claims incurred in the period in excess of related policy account
balances.
For our direct business, interest crediting rates for interest sensitive products ranged from 2.30%
to 5.50% in 2007 and 2006 and from 2.40% to 5.50% in 2005. These ranges exclude certain contracts
with an account value totaling $2.5 million with guarantees ranging up to 9.70%. For interest
sensitive products assumed through coinsurance agreements, interest crediting rates ranged from
3.00% to 6.00% in 2007 and 2006 and 3.00% to 11.50% in 2005. A portion of the interest credited on
our direct business ($9.6 million in 2007, $3.9 million in 2006 and $1.2 million in 2005)
represents an additional interest credit on first-year premiums, payable at policy issue or until
the first contract anniversary date (first-year bonus interest). These amounts are included as
deferred sales inducements.
The liability for future policy benefits for direct participating traditional life insurance is
based on net level premium reserves, including assumptions as to interest, mortality and other
factors underlying the guaranteed policy cash values. Reserve interest assumptions are level and
range from 2.00% to 6.00%. The average rate of assumed investment yields used in estimating gross
margins was 6.32% in 2007, 6.33% in 2006 and 6.28% in 2005. Accrued dividends for participating
business are established for anticipated amounts earned to date that have not been paid. The
declaration of future dividends for participating business is at the discretion of the Board of
Directors of Farm Bureau Life. Participating business accounted for 42% of direct receipts from
policyholders during 2007 (2006 – 42% and 2005 – 43%), and represented 13% of life insurance in
force at December 31, 2007 (2006 and 2005 – 14%). The liability for future policy benefits for
non-participating traditional life insurance is computed using a net level method, including
assumptions as to mortality, persistency and interest and includes provisions for possible
unfavorable deviations.
The liabilities for future policy benefits for accident and health insurance are computed using a
net level (or an equivalent) method, including assumptions as to morbidity, mortality and interest
and include provisions for possible unfavorable deviations. Policy benefit claims are charged to
expense in the period that the claims are incurred.
84
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The unearned revenue reserve reflects the unamortized balance of charges assessed to interest
sensitive contract holders to compensate us for services to be performed over future periods
(policy initiation fees). These charges have been deferred and are being recognized in income over
the period benefited using the same assumptions and factors used to amortize deferred policy
acquisition costs.
Guaranty Fund Assessments
From time to time, assessments are levied on our insurance subsidiaries by guaranty associations in
most states in which the subsidiaries are licensed. These assessments, which are accrued for, are
to cover losses of policyholders of insolvent or rehabilitated companies. In some states, these
assessments can be partially recovered through a reduction in future premium taxes.
We had undiscounted reserves of $0.1 million at December 31, 2007 and December 31, 2006 to cover
estimated future assessments on known insolvencies. We had assets totaling $0.5 million at
December 31, 2007 and $0.3 million at December 31, 2006 representing estimated premium tax offsets
on paid and future assessments. Expenses incurred for guaranty fund assessments, net of related
premium tax offsets, totaled less than $0.1 million in 2007, 2006 and 2005. It is anticipated that
estimated future guaranty fund assessments on known insolvencies will be paid during 2008 and
substantially all the related future premium tax offsets will be realized during the five-year
period ending December 31, 2012. We believe the reserve for guaranty fund assessments is
sufficient to provide for future assessments based upon known insolvencies and projected premium
levels.
Deferred Income Taxes
Deferred income tax assets or liabilities are computed based on the difference between the
financial statement and income tax bases of assets and liabilities using the enacted marginal tax
rate. Deferred income tax expenses or credits are based on the changes in the asset or liability
from period to period.
Separate Accounts
The separate account assets and liabilities reported in our accompanying consolidated balance
sheets represent funds that are separately administered for the benefit of certain policyholders
that bear the underlying investment risk. The separate account assets and liabilities are carried
at fair value. Revenues and expenses related to the separate account assets and liabilities, to
the extent of benefits paid or provided to the separate account policyholders, are excluded from
the amounts reported in the accompanying consolidated statements of income.
Recognition of Premium Revenues and Costs
Revenues for interest sensitive, index and variable products consist of policy charges for the cost
of insurance, asset charges, administration charges, amortization of policy initiation fees and
surrender charges assessed against policyholder account balances. The timing of revenue
recognition as it relates to these charges and fees is determined based on the nature of such
charges and fees. Policy charges for the cost of insurance, asset charges and policy
administration charges are assessed on a daily or monthly basis and are recognized as revenue when
assessed and earned. Certain policy initiation fees that represent compensation for services to be
provided in the future are reported as unearned revenue and recognized in income over the periods
benefited. Surrender charges are determined based upon contractual terms and are recognized upon
surrender of a contract. Policy benefits and claims charged to expense include interest or index
amounts credited to policyholder account balances (excluding sales inducements) and benefit claims
incurred in excess of policyholder account balances during the period. Changes in the reserves for
the embedded derivatives in the index annuities and amortization of deferred policy acquisition
costs and deferred sales inducements are recognized as expenses over the life of the policy.
During 2006, we reduced our reserves for the embedded derivative in our coinsured index annuities
$7.1 million. This adjustment, which is the correction of an overstatement that started in 2001,
increased 2006 net income $2.6 million ($0.09 per basic and diluted common share) after offsets for
taxes and the amortization of deferred policy acquisition costs and deferred sales inducements.
The impact to the financial statement line items and prior period financial statements affected by
this overstatement is not material. This adjustment does not impact our segment
85
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
results as the segment results are based on operating income which, as explained in Note 14,
excludes the impact of changes in the valuation of derivatives.
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 and deferred sales inducements.
All insurance-related revenues, benefits and expenses are reported net of reinsurance ceded. The
cost of reinsurance ceded is generally amortized over the contract periods of the reinsurance
agreements. Policies and contracts assumed are accounted for in a manner similar to that followed
for direct business.
Components of our underwriting, acquisition and insurance expenses are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Underwriting, acquisition and insurance expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Commission expense, net of deferrals |
|
$ |
13,906 |
|
|
$ |
13,497 |
|
|
$ |
13,904 |
|
Amortization of deferred policy acquisition costs |
|
|
68,394 |
|
|
|
68,541 |
|
|
|
57,207 |
|
Amortization of value of insurance in force acquired |
|
|
5,069 |
|
|
|
3,458 |
|
|
|
2,861 |
|
Other underwriting, acquisition and insurance
expenses, net of deferrals |
|
|
74,451 |
|
|
|
79,022 |
|
|
|
78,556 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
161,820 |
|
|
$ |
164,518 |
|
|
$ |
152,528 |
|
|
|
|
|
|
|
|
|
|
|
Underwriting, acquisition and insurance expenses include a pre-tax charge of $4.9 million ($0.11
per basic and diluted common share) for 2006 relating to the settlement of a lawsuit with a husband
and wife who had applied for life insurance policies. The settlement ended litigation regarding
the process we followed in denying insurance coverage for medical reasons. The settlement was
entered into after adverse judicial rulings were made against us in June 2006. Prior to the
issuance of the adverse judicial rulings, a material loss, net of insurance recoveries, was not
deemed to be reasonably possible.
Insurance claims have been filed under our professional liability and general liability insurance
policies for reimbursement of the settlement amount, but coverage has been denied, and we have made
a claim against an insurance broker for breach of contractual duties. We have filed lawsuits
against the insurer and the insurance broker to recover those damages. While we have received an
adverse ruling in the case against the insurer at the district court level, the adverse ruling has
been appealed and we continue to believe both claims are valid. Recoveries from third parties are
required to be accounted for as gain contingencies and not recorded in our financial statements
until the lawsuits are resolved. Accordingly, our financial statements for 2006 include the $4.9
million settlement expense, but any recoveries will be recorded in net income in the period the
recovery is received.
In July 2005, we announced the closing of our life insurance processing unit in Manhattan, Kansas.
As a result of the closure and some additional unrelated terminations, we incurred a pre-tax charge
of $2.3 million during 2005, relating primarily to severance and early retirement benefits. These
expenses are recorded in the underwriting, acquisition and insurance expense line of the
consolidated statements of income.
Other Income and Other Expenses
Other income and other expenses consist primarily of revenue and expenses generated by our various
non-insurance subsidiaries for investment advisory, marketing and distribution, and leasing
services. They also include revenues and expenses generated by our parent company for management
services. Certain of these activities are performed on behalf of our affiliates. In addition,
certain revenues generated by our insurance subsidiaries are classified as other income. Revenues
of the insurance subsidiaries included as other income totaled $3.2 million in 2007, $1.7 million
in 2006 and $1.1 million in 2005. Lease income from leases with affiliates totaled $12.2 million
in 2007, $12.0 million in 2006 and $11.0 million in 2005. Investment advisory fee income from
affiliates totaled $1.5 million in 2007 and 2006 and $2.5 million in 2005.
86
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation
We have two share-based payment arrangements under our Class A Common Stock Compensation Plan,
which are described in more detail in Note 9, “Retirement and Compensation Plans — Stock
Compensation Plans.” Effective January 1, 2006, we adopted Statement No. 123(R), “Share-Based
Payment,” using the modified-prospective-transition method. Beginning in 2006, compensation
expense includes expense for awards that were granted prior to the adoption date for which the
requisite service had not been provided as of the adoption date. In addition, we recognize
compensation expense for all share-based payments granted, modified or settled after the date of
adoption. The stock option expense is recognized over the shorter of our five-year vesting
schedule or the period ending when the employee becomes eligible for retirement using the
straight-line method. The impact of forfeitures is estimated and compensation expense is
recognized only for those options expected to vest. Beginning in 2006, we report stock
option-related tax deductions in excess of recognized compensation expense as a financing cash
flow, as required under Statement No. 123(R).
As a result of adopting Statement No. 123(R), net income for 2006 was $0.2 million lower (less than
$0.01 per basic and diluted common share) than if we had continued to account for share-based
compensation under Statement No. 123. This included a cumulative effect adjustment of $0.1 million
(less than $0.01 per basic and diluted common share) related to the change in accounting for
forfeitures which was recorded as a reduction to compensation expense in our 2006 consolidated
income statement. Also, for 2006, $1.6 million of excess tax deductions were classified as
financing cash inflows instead of operating cash inflows as they would have been under Statement
No. 123. Results for prior periods have not been restated.
Prior to January 1, 2006, we followed the prospective method under Statement No. 123. Under the
prospective method, expense was recognized for those options granted, modified or settled after the
date of adoption. The expense was generally recognized ratably over our five-year vesting period
without regard to when an employee became eligible for retirement and immediate vesting. In
addition, the impact of forfeitures was recognized when they occurred.
The following table illustrates the effect on net income and earnings per share if the fair value
based method under Statement No. 123 had been applied to all outstanding and unvested awards.
| |
|
|
|
|
| |
|
Year ended |
|
| |
|
December 31, 2005 |
|
| |
|
(Dollars in thousands,
except per share data) |
|
Net income, as reported: |
|
$ |
72,842 |
|
Add: Stock-based employee and director compensation
expense included in reported net income, net of
related tax effects |
|
|
1,805 |
|
Less: Total stock-based employee and director
compensation expense determined under fair value
based methods for all awards, net of related tax
effects |
|
|
(2,177 |
) |
|
|
|
|
Net income, pro forma |
|
$ |
72,470 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share, as reported |
|
$ |
2.51 |
|
|
|
|
|
Earnings per common share, pro forma |
|
$ |
2.50 |
|
|
|
|
|
|
|
|
|
|
Earnings per
common share – assuming dilution, as reported |
|
$ |
2.47 |
|
|
|
|
|
Earnings per
common share – assuming dilution, pro forma |
|
$ |
2.46 |
|
|
|
|
|
Comprehensive Income
Unrealized gains and losses on our available-for-sale securities and certain interest rate swaps
are included in accumulated other comprehensive income in stockholders’ equity. Other
comprehensive income (loss) excludes net
87
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
investment gains included in net income which represent transfers from unrealized to realized gains
and losses. These amounts totaled $2.7 million in 2007, $7.9 million in 2006 and $1.9 million in
2005. These amounts, which have been measured through the date of sale, are net of income taxes
and adjustments to deferred policy acquisition costs, deferred sales inducements, value of
insurance in force acquired and unearned revenue reserve totaling ($0.3) million in 2007, ($4.0)
million in 2006 and ($1.5) million in 2005. Beginning in 2006, other comprehensive income (loss)
also includes the initial recognition and subsequent changes in the underfunded status of our
single employer health and medical postretirement benefit plans totaling $0.2 million in 2007 and
2006.
Dividend Restriction
We have agreed that we will not pay dividends on the Class A or Class B Common Stock, nor on the
Series B Preferred Stock, if we are in default of our line of credit agreement with LaSalle Bank
National Association, or in default of the Subordinated Deferrable Interest Note Agreement Dated
May 30, 1997 with FBL Financial Group Capital Trust. See Note 7, “Credit Arrangements,” for
additional information regarding these agreements.
Reclassifications
Certain amounts in the 2006 and 2005 consolidated financial statements have been reclassified to
conform to the 2007 financial statement presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and
liabilities. For example, significant estimates and assumptions are utilized in the valuation of
investments, determination of other-than-temporary impairments of investments, amortization of
deferred policy acquisition costs and deferred sales inducements, calculation of policyholder
liabilities and accruals and determination of pension expense. It is reasonably possible that
actual experience could differ from the estimates and assumptions utilized which could have a
material impact on the consolidated financial statements.
Fixed Maturities and Equity Securities
The following tables contain amortized cost and estimated market value information on fixed
maturities and equity securities classified as available for sale:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
| |
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Market Value |
|
| |
|
(Dollars in thousands) |
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
4,423,999 |
|
|
$ |
90,715 |
|
|
$ |
(150,038 |
) |
|
$ |
4,364,676 |
|
Mortgage and asset-backed securities |
|
|
2,772,552 |
|
|
|
16,052 |
|
|
|
(102,631 |
) |
|
|
2,685,973 |
|
United States Government and
agencies |
|
|
550,410 |
|
|
|
8,454 |
|
|
|
(4,524 |
) |
|
|
554,340 |
|
State, municipal and other
governments |
|
|
1,248,887 |
|
|
|
19,118 |
|
|
|
(15,106 |
) |
|
|
1,252,899 |
|
Public utilities |
|
|
633,920 |
|
|
|
10,973 |
|
|
|
(13,187 |
) |
|
|
631,706 |
|
Redeemable preferred stocks |
|
|
33,218 |
|
|
|
1,369 |
|
|
|
(1,589 |
) |
|
|
32,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
9,662,986 |
|
|
$ |
146,681 |
|
|
$ |
(287,075 |
) |
|
$ |
9,522,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
22,410 |
|
|
$ |
1,290 |
|
|
$ |
(67 |
) |
|
$ |
23,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
| |
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Market Value |
|
| |
|
(Dollars in thousands) |
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
3,885,233 |
|
|
$ |
96,696 |
|
|
$ |
(59,095 |
) |
|
$ |
3,922,834 |
|
Mortgage and asset-backed securities |
|
|
2,358,263 |
|
|
|
14,324 |
|
|
|
(27,601 |
) |
|
|
2,344,986 |
|
United States Government and
agencies |
|
|
612,980 |
|
|
|
3,702 |
|
|
|
(13,436 |
) |
|
|
603,246 |
|
State, municipal and other
governments |
|
|
928,473 |
|
|
|
14,855 |
|
|
|
(13,950 |
) |
|
|
929,378 |
|
Public utilities |
|
|
487,226 |
|
|
|
8,473 |
|
|
|
(7,996 |
) |
|
|
487,703 |
|
Redeemable preferred stocks |
|
|
82,389 |
|
|
|
5,582 |
|
|
|
(322 |
) |
|
|
87,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
8,354,564 |
|
|
$ |
143,632 |
|
|
$ |
(122,400 |
) |
|
$ |
8,375,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
35,604 |
|
|
$ |
14,850 |
|
|
$ |
(176 |
) |
|
$ |
50,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 our portfolio of available-for-sale fixed maturity
securities at December 31, 2007, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Estimated |
|
| |
|
Amortized Cost |
|
|
Market Value |
|
| |
|
(Dollars in thousands) |
|
Due in one year or less |
|
$ |
63,476 |
|
|
$ |
63,980 |
|
Due after one year through five years. |
|
|
881,754 |
|
|
|
895,729 |
|
Due after five years through ten years |
|
|
2,441,018 |
|
|
|
2,411,240 |
|
Due after ten years |
|
|
3,470,968 |
|
|
|
3,432,672 |
|
|
|
|
|
|
|
|
|
|
|
6,857,216 |
|
|
|
6,803,621 |
|
Mortgage and asset-backed securities |
|
|
2,772,552 |
|
|
|
2,685,973 |
|
Redeemable preferred stocks |
|
|
33,218 |
|
|
|
32,998 |
|
|
|
|
|
|
|
|
|
|
$ |
9,662,986 |
|
|
$ |
9,522,592 |
|
|
|
|
|
|
|
|
89
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net unrealized investment gains (losses) on fixed maturity and equity securities classified as
available for sale and interest rate swaps, recorded directly to stockholders’ equity, were
comprised of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Dollars in thousands) |
|
Unrealized appreciation (depreciation) on: |
|
|
|
|
|
|
|
|
Fixed
maturities – available for sale |
|
$ |
(140,394 |
) |
|
$ |
21,232 |
|
Equity
securities – available for sale |
|
|
1,223 |
|
|
|
14,674 |
|
Interest rate swaps |
|
|
(591 |
) |
|
|
4,726 |
|
|
|
|
|
|
|
|
|
|
|
(139,762 |
) |
|
|
40,632 |
|
Adjustments for assumed changes in amortization pattern of: |
|
|
|
|
|
|
|
|
Deferred policy acquisition costs |
|
|
55,490 |
|
|
|
(2,616 |
) |
Deferred sales inducements |
|
|
28,237 |
|
|
|
7,779 |
|
Value of insurance in force acquired |
|
|
624 |
|
|
|
(2,819 |
) |
Unearned revenue reserve |
|
|
(191 |
) |
|
|
684 |
|
Provision for deferred income taxes |
|
|
19,461 |
|
|
|
(15,281 |
) |
|
|
|
|
|
|
|
|
|
|
(36,141 |
) |
|
|
28,379 |
|
Proportionate share of net unrealized investment gains of
equity investees |
|
|
25 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Net unrealized investment gains (losses) |
|
$ |
(36,116 |
) |
|
$ |
28,404 |
|
|
|
|
|
|
|
|
The changes in net unrealized investment gains and losses are recorded net of deferred income
taxes and other adjustments for assumed changes in the amortization pattern of deferred policy
acquisition costs, deferred sales inducements, value of insurance in force acquired and unearned
revenue reserve totaling ($115.9) million in 2007, ($48.1) million in 2006 and ($66.4) million in
2005.
The following tables set forth the estimated market value and unrealized losses of
available-for-sale fixed maturity securities in an unrealized loss position that are not deemed to
be other-than-temporarily impaired. These are listed by investment category and the length of time
the securities have been in an unrealized loss position:
December 31, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than one year |
|
|
One year or more |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
| |
|
Estimated |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
| Description of Securities |
|
Market Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
| |
|
(Dollars in thousands) |
|
Corporate securities |
|
$ |
1,039,886 |
|
|
$ |
(54,032 |
) |
|
$ |
1,148,632 |
|
|
$ |
(96,006 |
) |
|
$ |
2,188,518 |
|
|
$ |
(150,038 |
) |
Mortgage and
asset-backed
securities |
|
|
611,532 |
|
|
|
(40,452 |
) |
|
|
1,119,265 |
|
|
|
(62,179 |
) |
|
|
1,730,797 |
|
|
|
(102,631 |
) |
United States
Government and
agencies |
|
|
51,200 |
|
|
|
(372 |
) |
|
|
97,204 |
|
|
|
(4,152 |
) |
|
|
148,404 |
|
|
|
(4,524 |
) |
State, municipal and
other governments |
|
|
142,733 |
|
|
|
(3,343 |
) |
|
|
386,840 |
|
|
|
(11,763 |
) |
|
|
529,573 |
|
|
|
(15,106 |
) |
Public utilities |
|
|
137,345 |
|
|
|
(3,999 |
) |
|
|
160,611 |
|
|
|
(9,188 |
) |
|
|
297,956 |
|
|
|
(13,187 |
) |
Redeemable preferred
stocks |
|
|
5,425 |
|
|
|
(1,575 |
) |
|
|
4,986 |
|
|
|
(14 |
) |
|
|
10,411 |
|
|
|
(1,589 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
1,988,121 |
|
|
$ |
(103,773 |
) |
|
$ |
2,917,538 |
|
|
$ |
(183,302 |
) |
|
$ |
4,905,659 |
|
|
$ |
(287,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than one year |
|
|
One year or more |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
| |
|
Estimated |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
| Description of Securities |
|
Market Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
| |
|
(Dollars in thousands) |
|
Corporate securities |
|
$ |
669,716 |
|
|
$ |
(10,230 |
) |
|
$ |
1,135,329 |
|
|
$ |
(48,865 |
) |
|
$ |
1,805,045 |
|
|
$ |
(59,095 |
) |
Mortgage and asset-backed securities |
|
|
478,099 |
|
|
|
(3,599 |
) |
|
|
942,858 |
|
|
|
(24,002 |
) |
|
|
1,420,957 |
|
|
|
(27,601 |
) |
United States Government and agencies |
|
|
65,407 |
|
|
|
(1,248 |
) |
|
|
441,826 |
|
|
|
(12,188 |
) |
|
|
507,233 |
|
|
|
(13,436 |
) |
State, municipal and other
governments |
|
|
368,864 |
|
|
|
(7,368 |
) |
|
|
132,356 |
|
|
|
(6,582 |
) |
|
|
501,220 |
|
|
|
(13,950 |
) |
Public utilities |
|
|
111,348 |
|
|
|
(1,030 |
) |
|
|
145,726 |
|
|
|
(6,966 |
) |
|
|
257,074 |
|
|
|
(7,996 |
) |
Redeemable preferred stocks |
|
|
4,963 |
|
|
|
(36 |
) |
|
|
9,761 |
|
|
|
(286 |
) |
|
|
14,724 |
|
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
1,698,397 |
|
|
$ |
(23,511 |
) |
|
$ |
2,807,856 |
|
|
$ |
(98,889 |
) |
|
$ |
4,506,253 |
|
|
$ |
(122,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the above table are 863 securities from 538 issuers at December 31, 2007 and 780
securities from 513 issuers at December 31, 2006. These increases are primarily due to an increase
in spreads between the risk-free and corporate and other bond yields. The following summarizes the
details describing the more significant unrealized losses by investment category as of December 31,
2007.
Corporate securities: The unrealized losses on corporate securities, which include redeemable
preferred stocks, totaled $151.6 million, or 52.8% of our total unrealized losses. The largest
losses were in the financial services sector ($1,106.7 million carrying value and $91.7 million
unrealized loss) and in the manufacturing sector ($507.8 million carrying value and $31.7 million
unrealized loss). The largest unrealized losses in the financial services sector were in the
depository institutions sector ($345.3 million carrying value and $32.9 million unrealized loss)
and the holding and other investment offices sector ($480.7 million carrying value and $30.8
million unrealized loss). The unrealized losses in the depository institutions sector are
primarily due to a decrease in market liquidity and concerns regarding the underlying credit
quality of subprime and other assets these institutions hold. The majority of securities in the
holding and other investment offices sector are real estate investment trust bonds. The unrealized
losses in this sector are primarily due to an increase in credit spreads due to the sector’s
exposure to commercial real estate and market concerns about the ability to access the capital
markets. The largest unrealized losses in the manufacturing sector were in the paper and allied
products sector ($90.7 million carrying value and $10.0 million unrealized loss) and the printing
and publishing sector ($31.9 million carrying value and $4.1 million unrealized loss). The
unrealized losses in the paper and allied products sector and the printing and publishing sector
are due to spread widening that is the result of weaker operating results. The unrealized losses
in the remaining corporate sectors are also primarily attributable to spread widening due to a
decrease in market liquidity, an increase in market volatility and concerns about the general
health of the economy. Because we have the ability and intent to hold these investments until a
recovery of fair value, which may be maturity, we do not consider these investments to be
other-than-temporarily impaired at December 31, 2007.
Mortgage and asset-backed securities: The unrealized losses on mortgage and asset-backed
securities totaled $102.6 million, or 35.8% of our total unrealized losses, and were caused
primarily by concerns regarding mortgage defaults on subprime and other risky mortgages. There
were also concerns regarding potential downgrades or defaults of bond insurers providing credit
protection for underlying issuers. These concerns resulted in spread widening in the sector as
liquidity decreased in the market. We purchased most of these investments at a discount to their
face amount and the contractual cash flows of these investments are based on mortgages and other
assets backing the securities. At December 31, 2007, our investment in subprime mortgages totaled
$29.3 million, or 0.3% of our total fixed income portfolio. We also held investments with exposure
to the Alt-A home equity loan sector, ($728.9 million carrying value and $55.8 million unrealized
loss). All securities with subprime or Alt-A exposure, except for one are AAA rated. In addition,
at December 31, 2007, $209.3 million of our mortgage and asset-backed
securities were wrapped with credit enhancing insurance. We believe these securities were
underwritten at investment grade excluding any credit enhancing protection. Because we have the
ability and intent to hold these investments until a recovery of fair value, which may be maturity,
we do not consider these investments to be other-than-temporarily impaired at December 31, 2007.
91
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
United States Government and agencies: The unrealized losses on U.S. Governments and agencies
totaled $4.5 million, or 1.6% of our total unrealized losses, and were caused by spread widening.
We purchased most of these investments at a discount to their face amount and the contractual cash
flows of these investments are based on direct guarantees from the U.S. Government and by agencies
of the U.S. Government. Because the decline in market value is attributable to changes in market
interest rates and not credit quality, and because we have the ability and intent to hold these
investments until a recovery of fair value, which may be maturity, we do not consider these
investments to be other-than-temporarily impaired at December 31, 2007.
State, municipal and other governments: The unrealized losses on state, municipal and other
governments totaled $15.1 million, or 5.2% of our total unrealized losses, and were primarily
caused by general spread widening. We purchased most of these investments at a discount to their
face amount and the contractual cash flows of these investments are based on the taxing authority
of a municipality or the revenues of a municipal project. Because the decline in market value is
attributable to increased spreads and not credit quality, and because we have the ability and
intent to hold these investments until a recovery of fair value, which may be maturity, we do not
consider these investments to be other-than-temporarily impaired at December 31, 2007.
Public utilities: The unrealized losses on public utilities totaled $13.2 million, or 4.6% of our
total unrealized losses, and were caused primarily by spread widening. Because the decline in
market value is attributable to changes in market interest rates and not credit quality, and
because we have the ability and intent to hold these investments until recovery of fair value,
which may be maturity, we do not consider these investments to be other-than-temporarily impaired
at December 31, 2007.
Regarding our entire portfolio, we monitor the financial condition and operations of the issuers of
securities rated below investment grade and of the issuers of certain investment grade securities
on which we have concerns regarding credit quality. In determining whether or not an unrealized
loss is other than temporary, we review factors such as:
| |
• |
|
historical operating trends; |
| |
• |
|
business prospects; |
| |
• |
|
status of the industry in which the company operates; |
| |
• |
|
analyst ratings on the issuer and sector; |
| |
• |
|
quality of management; |
| |
• |
|
size of the unrealized loss; |
| |
• |
|
length of time the security has been in an unrealized loss position; and |
| |
• |
|
our intent and ability to hold the security. |
We held one collateralized debt obligation partially backed by subprime mortgages with an amortized
cost of $10.0 million at December 31, 2007 and 2006 and an estimated fair value of $1.5 million at
December 31, 2007 and $9.9 million at December 31, 2006. We believe the decline in market value on
this security is attributable to spread widening from market liquidity and credit quality concerns.
This security is rated investment grade by two major rating agencies, remains adequately
collateralized and is expected to continue its principal and interest payments. We also have the
intent and ability to hold this investment until a recovery of fair value, which may be maturity,
therefore we do not consider it to be other-than-temporarily impaired at December 31, 2007.
We also have $0.1 million of gross unrealized losses on equity securities with an estimated market
value of $0.7 million at December 31, 2007 and $0.2 million of gross unrealized losses on equity
securities with an estimated market value of $0.7 million at December 31, 2006. These equity
securities have been in an unrealized loss position for more than one year.
92
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Mortgage Loans on Real Estate
Our mortgage loan portfolio consists principally of commercial mortgage loans that we have
originated. Our lending policies require that the loans be collateralized by the value of the
related property, establish limits on the amount that can be loaned to one borrower and require
diversification by geographic location and collateral type.
We establish an allowance, consisting of specific reserves, for possible losses against our
mortgage loan portfolio. There were no impaired loans (those loans in which we do not believe we
will collect all amounts due according to the contractual terms of the respective loan agreements)
requiring a valuation allowance at December 31, 2007, 2006 and 2005. An analysis of the allowance
provided in 2005 is as follows:
| |
|
|
|
|
| |
|
Year ended |
|
| |
|
December 31, 2005 |
|
| |
|
(Dollars in thousands) |
|
Balance at beginning of year |
|
$ |
3,500 |
|
Realized losses |
|
|
479 |
|
Sales |
|
|
(3,979 |
) |
|
|
|
|
Balance at end of year |
|
$ |
– |
|
|
|
|
|
Investment Real Estate
We establish an allowance, consisting of specific reserves, for possible losses against our
investment real estate. There were no real estate investments requiring a valuation allowance at
December 31, 2007. An analysis of the allowance provided in 2006 and 2005 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Balance at beginning of year |
|
$ |
700 |
|
|
$ |
618 |
|
Realized losses |
|
|
51 |
|
|
|
82 |
|
Sales |
|
|
(751 |
) |
|
|
– |
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
– |
|
|
$ |
700 |
|
|
|
|
|
|
|
|
Net Investment Income
Components of net investment income are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Fixed
maturities – available for sale |
|
$ |
542,669 |
|
|
$ |
463,723 |
|
|
$ |
407,443 |
|
Fixed
maturities – trading |
|
|
195 |
|
|
|
546 |
|
|
|
277 |
|
Equity
securities – available for sale |
|
|
511 |
|
|
|
522 |
|
|
|
529 |
|
Mortgage loans on real estate |
|
|
68,201 |
|
|
|
58,042 |
|
|
|
52,233 |
|
Investment real estate |
|
|
461 |
|
|
|
435 |
|
|
|
1,212 |
|
Policy loans |
|
|
10,800 |
|
|
|
10,415 |
|
|
|
10,617 |
|
Short-term investments, cash and cash equivalents |
|
|
11,104 |
|
|
|
3,693 |
|
|
|
1,946 |
|
Prepayment fee income and other |
|
|
5,345 |
|
|
|
6,262 |
|
|
|
7,638 |
|
Interest paid on collateral held |
|
|
(4,526 |
) |
|
|
(1,243 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
634,760 |
|
|
|
542,395 |
|
|
|
481,892 |
|
Less investment expenses |
|
|
(6,729 |
) |
|
|
(6,559 |
) |
|
|
(6,449 |
) |
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
628,031 |
|
|
$ |
535,836 |
|
|
$ |
475,443 |
|
|
|
|
|
|
|
|
|
|
|
93
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Realized and Unrealized Gains and Losses
Realized/unrealized gains (losses), recorded as a component of income, and the change in unrealized
appreciation/depreciation on investments and interest rate swaps, recorded as a component of the
change in accumulated other comprehensive income (loss), are summarized below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Realized/unrealized – income |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities – available for sale |
|
$ |
(2,743 |
) |
|
$ |
(1,521 |
) |
|
$ |
2,924 |
|
Fixed
maturities – trading |
|
|
73 |
|
|
|
83 |
|
|
|
(156 |
) |
Equity
securities – available for sale |
|
|
5,794 |
|
|
|
13,492 |
|
|
|
432 |
|
Mortgage loans on real estate |
|
|
— |
|
|
|
— |
|
|
|
(479 |
) |
Investment real estate |
|
|
2,645 |
|
|
|
(19 |
) |
|
|
240 |
|
Securities and indebtedness of related parties |
|
|
— |
|
|
|
1,936 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Realized/unrealized gains on investments |
|
$ |
5,769 |
|
|
$ |
13,971 |
|
|
$ |
2,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized – accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities – available for sale |
|
$ |
(161,626 |
) |
|
$ |
(87,587 |
) |
|
$ |
(140,796 |
) |
Equity
securities – available for sale |
|
|
(13,451 |
) |
|
|
(13,258 |
) |
|
|
12,128 |
|
Interest rate swaps |
|
|
(5,317 |
) |
|
|
(798 |
) |
|
|
2,282 |
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized
appreciation/depreciation of investments |
|
$ |
(180,394 |
) |
|
$ |
(101,643 |
) |
|
$ |
(126,386 |
) |
|
|
|
|
|
|
|
|
|
|
The income on fixed maturity securities classified as trading represents unrealized gains (losses)
relating to securities held as of December 31, 2006 and December 31, 2005 that matured in 2007.
An analysis of sales, maturities and principal repayments of our available-for-sale fixed
maturities portfolio is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross Realized |
|
|
Gross Realized |
|
|
|
|
| |
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Proceeds |
|
| |
|
(Dollars in thousands) |
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled principal repayments and
calls – available for sale |
|
$ |
497,676 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
497,676 |
|
Sales – available for sale |
|
|
55,088 |
|
|
|
1,626 |
|
|
|
(173 |
) |
|
|
56,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
552,764 |
|
|
$ |
1,626 |
|
|
$ |
(173 |
) |
|
$ |
554,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled principal repayments and
calls – available for sale |
|
$ |
393,789 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
393,789 |
|
Sales – available for sale |
|
|
59,454 |
|
|
|
1,226 |
|
|
|
(527 |
) |
|
|
60,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
453,243 |
|
|
$ |
1,226 |
|
|
$ |
(527 |
) |
|
$ |
453,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled principal repayments and
calls – available for sale |
|
$ |
657,080 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
657,080 |
|
Sales – available for sale |
|
|
214,453 |
|
|
|
6,391 |
|
|
|
(2,347 |
) |
|
|
218,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
871,533 |
|
|
$ |
6,391 |
|
|
$ |
(2,347 |
) |
|
$ |
875,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses on fixed maturities totaling $4.3 million in 2007, $2.3 million in 2006 and $2.2
million in 2005 were incurred as a result of writedowns for other-than-temporary impairment of
fixed maturity securities.
94
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income taxes include a provision of $2.0 million in 2007, $4.9 million in 2006 and $1.0 million in
2005 for the tax effect of realized gains and losses.
Variable Interest Entities
We have investments in variable interest entities for which we are not considered the primary
beneficiary. These investments consist of a real estate limited partnership and certain mezzanine
commercial real estate loans on real estate properties. The real estate limited partnership had
revenues totaling $2.7 million for 2007, $3.2 million for 2006 and $2.8 million for 2005. There
were two real estate projects in 2007, one in 2006 and three in 2005. Each real estate project has
assets totaling less than $21.0 million at December 31, 2007, less than $5.0 million at December 31
2006 and less than $17.0 million at December 31, 2005. Our investments in these real estate
projects were made during the period from 2002 to 2007. Our maximum exposure to loss is the
carrying value of our investments which totaled $13.2 million at December 31, 2007 and $11.7
million at December 31, 2006 for the real estate limited partnership and $3.6 million at December
31, 2007 and $0.8 million at December 31, 2006 for the mezzanine commercial real estate loans.
Other
We have a common stock investment in American Equity Investment Life Holding Company (AEL), valued
at $12.6 million at December 31, 2007 and $39.4 million at December 31, 2006. American Equity
underwrites and markets life insurance and annuity products throughout the United States. We sold
a portion of our investment in AEL and realized gains totaling $6.1 million in 2007 and $13.5
million in 2006. We coinsure a closed block of annuity business from a subsidiary of AEL.
During 2006, we sold our equity investment in Western Agricultural Insurance Company, an affiliate,
at its fair market value of $7.9 million, to Farm Bureau Mutual Insurance Company (Farm Bureau
Mutual), another affiliate. A realized gain of $1.9 million was recognized on this transaction.
At December 31, 2007, affidavits of deposits covering investments with a carrying value totaling
$10,652.9 million were on deposit with state agencies to meet regulatory requirements. Also, fixed
maturity securities with a carrying value of $51.2 million were on deposit with the Federal Home
Loan Bank as collateral for a funding agreement.
At December 31, 2007, we had committed to provide additional funding for mortgage loans on real
estate aggregating $29.4 million. These commitments arose in the normal course of business at
terms that are comparable to similar investments.
We held cash collateral for derivative and other transactions totaling $87.9 million at December
31, 2007 and $70.5 million at December 31, 2006 that was invested and included in the consolidated
balance sheets with corresponding amounts recorded in collateral payable for securities lending and
other transactions. We also had securities we held as off-balance sheet collateral for derivative
transactions with a market value totaling $10.5 million at December 31, 2006. No such off-balance
sheet collateral was held at December 31, 2007.
The carrying value of investments which have been non-income producing for the twelve months
preceding
December 31, 2007 include real estate, fixed income, equity securities and other long-term
investments totaling $2.4 million.
No investment in any entity or its affiliates (other than bonds issued by agencies of the United
States Government) exceeded ten percent of stockholders’ equity at December 31, 2007.
| 3) |
|
Derivative Instruments |
We have entered into six interest rate swaps to manage interest rate risk associated with a portion
of our flexible premium deferred annuity contracts. Under the interest rate swaps, we pay a fixed
rate of interest and receive a floating rate of interest on a notional amount totaling $300.0
million. These interest rate swaps effectively fix the interest crediting rate on a portion of our
flexible premium deferred annuity contract liabilities thereby hedging our
exposure to increases in market interest rates. As described in Note 1, “Significant Accounting
Policies — Accounting Changes,” we were required to undesignated these hedging relationships in the
second quarter of 2007. As a result, the net interest rate settlements on the interest rate swaps
are recorded as a component of derivative income beginning April 1, 2007. The interest rate
settlements increased derivative income $2.9 million in 2007 and decreased interest sensitive
product benefits $1.0 million in 2007, $3.7 million in 2006 and $1.0 million in 2005.
95
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Beginning in 2006, we also entered into one interest rate swap to hedge the variable component of
the interest rate on our line of credit borrowings. The terms of this swap provide that we pay a
fixed rate of interest and receive a floating rate of interest on a notional amount of $46.0
million. Any gain or loss on the interest rate swap settlements offset any increase or decrease in
the interest paid on the line of credit, effectively fixing our interest expense related to the
outstanding debt on this line of credit. Interest expense decreased $0.3 million in 2007 and $0.2
million in 2006 as a result of the net interest settlements on this swap.
Details regarding the swaps are as follows (dollars in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Carrying and Fair Value at December 31, |
|
| Maturity |
|
Notional |
|
Receive |
|
Pay |
|
|
|
|
|
|
| Date |
|
Amount |
|
Rate |
|
Rate |
|
2007 |
|
|
2006 |
|
4/1/2008 |
|
$ |
50,000 |
|
3 month LIBOR* |
|
3.865 % |
|
$ |
120 |
|
|
$ |
860 |
|
7/1/2008 |
|
|
50,000 |
|
1 month LIBOR* |
|
2.579 |
|
|
440 |
|
|
|
1,900 |
|
7/1/2008 |
|
|
50,000 |
|
1 month LIBOR* |
|
2.465 |
|
|
451 |
|
|
|
1,978 |
|
1/1/2010 |
|
|
50,000 |
|
1 month LIBOR* |
|
4.858 |
|
|
(1,080 |
) |
|
|
343 |
|
10/7/2010 |
|
|
46,000 |
|
3 month LIBOR* |
|
4.760 |
|
|
(1,159 |
) |
|
|
368 |
|
12/1/2010 |
|
|
50,000 |
|
1 month LIBOR* |
|
5.040 |
|
|
(1,640 |
) |
|
|
97 |
|
6/1/2011 |
|
|
50,000 |
|
1 month LIBOR* |
|
5.519 |
|
|
(2,554 |
) |
|
|
(820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,422 |
) |
|
$ |
4,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* London Interbank Offered Rate
We formally documented hedging relationships, including identification of the interest rate swaps
as the hedging instruments and interest credited to the related flexible premium deferred annuity
contract liabilities or interest expense on the line of credit as the hedged transactions. We also
documented our risk management objectives and strategies for undertaking these transactions. There
was no ineffectiveness recorded in the consolidated statements of income during 2007, 2006, or 2005
for instruments designated as hedges.
We assume index annuity business under a coinsurance agreement and write index annuities directly.
Index annuities guarantee the return of principal to the contract holder and credit amounts based
on a percentage of the gain in a specified market index. Most of the premium received is invested
in investment grade fixed income securities and a portion of the premium received from the contract
holder is used to purchase derivatives consisting of one-year or two-year call options on the
applicable market indices to fund the index credits due to the index annuity contract holders. On
the respective anniversary dates of the index annuity contracts, the market index used to compute
the index credits is reset and new call options are purchased to fund the next index credit.
Although the call options are designed to be effective hedges from an economic standpoint, they do
not meet the requirements for hedge accounting treatment under Statement No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” Therefore, the change in fair value of the options
is recognized in earnings in the period of change. The cost of the options can be managed through
the terms of the index annuities, which permit changes to participation rates, asset fees and/or
caps, subject to guaranteed minimums.
We held call options relating to our direct business with a fair value of $114.8 million at
December 31, 2007 and $121.9 million at December 31, 2006. Our share of call options assumed,
which is recorded as embedded derivatives in reinsurance recoverable, totaled $22.4 million at
December 31, 2007 and $42.5 million at December 31, 2006. Derivative income (loss) includes ($3.0)
million for 2007, $70.5 million for 2006 and ($2.3) million for 2005 relating to call option
proceeds and changes in fair value.
The reserve for index annuity contracts includes a series of embedded derivatives that represent
the contract holder’s right to participate in index returns over the expected lives of the
applicable contracts. The reserve includes the value of the embedded forward options despite the
fact that call options are not purchased for a period longer than
the period of time to the next index reset date. The change in the value of this embedded
derivative is included in interest sensitive and index product benefits in the consolidated
statements of income and totaled $(5.9) million for 2007, $70.3 million for 2006 and $4.9 million
for 2005.
96
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We have modified coinsurance agreements where interest on funds withheld is determined by reference
to a pool of fixed maturity securities. These arrangements contain embedded derivatives requiring
bifurcation. Embedded derivatives in these contracts are recorded at fair value at each balance
sheet date and changes in the fair values of the derivatives are recorded as derivative income or
loss. The fair value of the embedded derivatives pertaining to funds withheld on variable business
assumed by us totaled $0.1 million at December 31, 2007 and 2006, and the fair value of the
embedded derivatives pertaining to funds withheld on business ceded by us was $0.2 million at
December 31, 2007 and less than $0.1 million at December 31, 2006 and 2005. Derivative income
(loss) from our modified coinsurance contracts totaled $0.1 million in 2007, less that $0.1 million
in 2006 and ($0.4) million in 2005.
| 4) |
|
Fair Values of Financial Instruments |
Statement No. 107, “Disclosures About Fair Value of Financial Instruments,” requires disclosure of
fair value information about financial instruments, whether or not recognized in the consolidated
balance sheets, for which it is practicable to estimate value. In cases where quoted market prices
are not available, fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. Statement No. 107 also excludes certain
financial instruments and all nonfinancial instruments from its disclosure requirements and allows
companies to forego the disclosures when those estimates can only be made at excessive cost.
Accordingly, the aggregate fair value amounts presented herein are limited by each of these factors
and do not purport to represent our underlying value.
We used the following methods and assumptions in estimating the fair value of our financial
instruments.
Fixed maturity securities: Fair values for fixed maturity securities are obtained primarily from a
variety of independent pricing sources, whose results undergo evaluation by our internal investment
professionals.
Equity securities: The fair values for equity securities are based on quoted market prices, where
available. For equity securities that are not actively traded, estimated fair values are based on
values of comparable issues.
Mortgage loans on real estate: Fair values are estimated by discounting expected cash flows of each
loan at an interest rate equal to a spread above the U.S. Treasury bond yield that corresponds to
the loan’s expected life. These spreads are based on overall market pricing of commercial mortgage
loans at the time of valuation.
Derivative instruments: Fair values for call options and interest rate swaps are based on quoted
market prices.
Policy loans: Fair values are estimated by discounting expected cash flows using a risk-free
interest rate based on the U.S. Treasury curve.
Cash, short-term investments, other long-term investments and collateral held and payable for
securities lending: The carrying amounts reported in the consolidated balance sheets for these
instruments approximate their fair values.
Securities and indebtedness of related parties: For equity securities that are not actively traded,
estimated fair values are based on values of comparable issues. As allowed by Statement No. 107,
fair values are not assigned to investments accounted for using the equity method.
Reinsurance recoverable: Reinsurance recoverable relating to our portion of the call options used
to fund index credits on the index annuities assumed from American Equity is reported at fair
value. Fair value is determined using quoted market prices for the call options. Reinsurance
recoverable also includes the embedded derivatives in
our modified coinsurance contracts under which we assume business. Market values for these
embedded derivatives are based on the difference between the fair value and the cost basis of the
underlying fixed maturity securities. We are not required to estimate fair value for the remainder
of the reinsurance recoverable balance.
97
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other assets and other liabilities: Fair values for the embedded derivatives in our modified
coinsurance contracts under which we cede business are based on the difference between the fair
value and the cost basis of the underlying fixed maturity securities. Other liabilities also
include interest rate swaps with fair values based on quoted market prices. We are not required to
estimate fair value for the remainder of the other assets or other liabilities balances.
Assets held in separate accounts: Separate account assets are reported at estimated fair value in
our consolidated balance sheets based on quoted net asset values of the underlying mutual funds.
Future policy benefits and other policyholders’ funds: Fair values of our liabilities under
contracts not involving significant mortality or morbidity risks (principally deferred annuities,
deposit administration funds, funding agreements and supplementary contracts) are estimated using
one of two methods. For contracts with known maturities, fair value is determined using discounted
cash flow analyses based on current interest rates being offered for similar contracts with
maturities consistent with those remaining for the contracts being valued. For contracts without
known maturities, fair value is cash surrender value, the cost we would incur to extinguish the
liability. We are not required to estimate the fair value of our liabilities under other insurance
contracts.
Long-term debt: The fair values for long-term debt are estimated using discounted cash flow
analysis based on our current incremental borrowing rate for similar types of borrowing
arrangements.
Liabilities related to separate accounts: Separate account liabilities are estimated at cash
surrender value, the cost we would incur to extinguish the liability.
The following sets forth a comparison of the fair values and carrying values of our financial
instruments subject to the provisions of Statement No. 107:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
| |
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities – available for sale |
|
$ |
9,522,592 |
|
|
$ |
9,522,592 |
|
|
$ |
8,375,796 |
|
|
$ |
8,375,796 |
|
Fixed maturities – trading |
|
|
– |
|
|
|
– |
|
|
|
14,927 |
|
|
|
14,927 |
|
Equity securities – available for sale |
|
|
23,633 |
|
|
|
23,633 |
|
|
|
50,278 |
|
|
|
50,278 |
|
Mortgage loans on real estate |
|
|
1,221,573 |
|
|
|
1,244,718 |
|
|
|
979,883 |
|
|
|
1,003,218 |
|
Derivative instruments |
|
|
114,771 |
|
|
|
114,771 |
|
|
|
127,478 |
|
|
|
127,478 |
|
Policy loans |
|
|
179,490 |
|
|
|
215,208 |
|
|
|
179,899 |
|
|
|
204,895 |
|
Other long-term investments |
|
|
1,300 |
|
|
|
1,300 |
|
|
|
1,300 |
|
|
|
1,300 |
|
Cash and short-term investments |
|
|
156,020 |
|
|
|
156,020 |
|
|
|
156,646 |
|
|
|
156,646 |
|
Reinsurance recoverable |
|
|
22,509 |
|
|
|
22,509 |
|
|
|
42,613 |
|
|
|
42,613 |
|
Collateral held for securities lending |
|
|
192,827 |
|
|
|
192,827 |
|
|
|
2,009 |
|
|
|
2,009 |
|
Other assets |
|
|
150 |
|
|
|
150 |
|
|
|
37 |
|
|
|
37 |
|
Assets held in separate accounts |
|
|
862,738 |
|
|
|
862,738 |
|
|
|
764,377 |
|
|
|
764,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits |
|
$ |
8,666,463 |
|
|
$ |
7,670,795 |
|
|
$ |
7,268,910 |
|
|
$ |
6,425,829 |
|
Other policyholders’ funds |
|
|
596,557 |
|
|
|
601,966 |
|
|
|
550,008 |
|
|
|
575,389 |
|
Long-term debt |
|
|
316,930 |
|
|
|
273,971 |
|
|
|
218,399 |
|
|
|
170,791 |
|
Collateral payable for securities lending |
|
|
273,447 |
|
|
|
273,447 |
|
|
|
72,851 |
|
|
|
72,851 |
|
Other liabilities |
|
|
6,433 |
|
|
|
6,433 |
|
|
|
820 |
|
|
|
820 |
|
Liabilities related to separate accounts |
|
|
862,738 |
|
|
|
837,591 |
|
|
|
764,377 |
|
|
|
741,790 |
|
98
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5) Reinsurance and Policy Provisions
Reinsurance
In the normal course of business, we seek to limit our exposure to loss on any single insured or
event and to recover a portion of benefits paid by ceding a portion of our exposure to other
insurance enterprises or reinsurers. Our reinsurance coverage for life insurance varies according
to the age and risk classification of the insured with retention limits ranging up to $1.1 million
of coverage per individual life. New sales of certain term life products are reinsured on a first
dollar quota share basis. We do not use financial or surplus relief reinsurance. Life insurance
in force ceded on a consolidated basis totaled $8,482.8 million (20.6% of direct life insurance in
force) at December 31, 2007 and $8,012.8 million (20.9% of direct life insurance in force) at
December 31, 2006.
In addition to the cession of risks described above, we also have reinsurance agreements with
variable alliance partners to cede a specified percentage of risks associated with variable
universal life and variable annuity contracts. Under these agreements, we pay the alliance
partners their reinsurance percentage of charges and deductions collected on the reinsured polices.
The alliance partners in return pay us their reinsurance percentage of benefits in excess of
related account balances. In addition, the alliance partners pay us an expense allowance for
certain new business, development and maintenance costs on the reinsured contracts.
We participate in a reinsurance pool with various unaffiliated life insurance companies to mitigate
the impact of a catastrophic event on our financial position and results of operations. Members of
the pool share in the eligible catastrophic losses based on their size and contribution to the
pool. Under the pool arrangement, we will be able to cede approximately 65% of catastrophic losses
after other reinsurance and a deductible of $0.8 million. Pool losses are capped at $12.8 million
per event and the maximum loss we could incur as a result of losses assumed from other pool members
is $4.5 million per event.
In total, insurance premiums and product charges have been reduced by $30.8 million in 2007, $30.7
million in 2006 and $30.4 million in 2005 and insurance benefits have been reduced by $13.7 million
in 2007, $21.2 million in 2006 and $15.7 million in 2005 as a result of cession agreements.
Reinsurance contracts do not relieve us of our obligations to policyholders. To the extent that
reinsuring companies are later unable to meet obligations under reinsurance agreements, our
insurance subsidiaries would be liable for these obligations, and payment of these obligations
could result in losses. To limit the possibility of such losses, we evaluate the financial
condition of our reinsurers and monitor concentrations of credit risk. No allowance for
uncollectible amounts has been established against our asset for reinsurance recoverable since none
of our receivables are deemed to be uncollectible.
We have assumed closed blocks of certain traditional life, universal life and annuity business
through coinsurance agreements. In addition, we assume variable annuity and variable life business
from alliance partners through modified coinsurance arrangements.
99
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Life insurance in force assumed on a consolidated basis totaled $1,573.7 million (4.6% of total
life insurance in force) at December 31, 2007 and $1,626.5 million (5.1% of total life insurance in
force) at December 31, 2006. Premiums and product charges assumed totaled $24.5 million in 2007,
$26.0 million in 2006 and $24.8 million in 2005. Insurance benefits assumed totaled $9.7 million
in 2007, $10.9 million in 2006 and $10.7 million in 2005.
Policy Provisions
An analysis of the value of insurance in force acquired is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Excluding impact of net unrealized investment gains
and losses: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
45,660 |
|
|
$ |
49,118 |
|
|
$ |
51,979 |
|
Accretion of interest during the year |
|
|
1,819 |
|
|
|
6,186 |
|
|
|
2,218 |
|
Amortization of asset |
|
|
(6,888 |
) |
|
|
(9,644 |
) |
|
|
(5,079 |
) |
|
|
|
|
|
|
|
|
|
|
Balance prior to impact of net unrealized
investment gains and losses |
|
|
40,591 |
|
|
|
45,660 |
|
|
|
49,118 |
|
Impact of net unrealized investment gains and losses |
|
|
624 |
|
|
|
(2,819 |
) |
|
|
(2,552 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
41,215 |
|
|
$ |
42,841 |
|
|
$ |
46,566 |
|
|
|
|
|
|
|
|
|
|
|
Net amortization of the value of insurance in force acquired, based on expected future gross
profits/margins, for the next five years and thereafter is expected to be as follows: 2008 — $2.6
million; 2009 — $2.6 million; 2010 — $2.7 million; 2011 — $2.5 million; 2012 — $2.3 million; and
thereafter, through 2030 — $27.9 million.
Certain variable annuity and variable universal life contracts in our separate accounts have
minimum interest guarantees on funds deposited in our general account and guaranteed minimum death
benefits (GMDBs) on our variable annuities. In addition, we have certain variable annuity
contracts that have an incremental death benefit (IDB) rider that pays a percentage of the gain on
the contract upon death of the contract holder. Information regarding our GMDBs and IDBs by type
of guarantee and related separate account balance and net amount at risk (amount by which GMDB or
IDB exceeds account value) is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
|
December 31, 2006 |
|
| |
|
Separate |
|
|
|
|
|
|
Separate |
|
|
|
|
| |
|
Account |
|
|
Net Amount at |
|
|
Account |
|
|
Net Amount at |
|
| Type of Guarantee |
|
Balance |
|
|
Risk |
|
|
Balance |
|
|
Risk |
|
| |
|
(Dollars in thousands) |
|
Guaranteed minimum death benefit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of net deposits |
|
$ |
241,716 |
|
|
$ |
365 |
|
|
$ |
254,001 |
|
|
$ |
1,903 |
|
Return the greater of highest
anniversary value or net deposits |
|
|
478,694 |
|
|
|
6,925 |
|
|
|
339,982 |
|
|
|
382 |
|
Incremental death benefit |
|
|
442,323 |
|
|
|
42,015 |
|
|
|
387,260 |
|
|
|
34,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
49,305 |
|
|
|
|
|
|
$ |
36,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The separate account assets are principally comprised of stock and bond mutual funds. The reserve
for GMDBs and IDBs, determined using scenario-based modeling techniques and industry mortality
assumptions, that is included in future policy benefits, totaled $1.2 million at December 31, 2007
and 2006. The weighted average age of the contract holders with a GMDB or IDB rider was 54 years
at December 31, 2007 and 59 years at December 31, 2006.
Incurred benefits for GMDBs and IDBs totaled $0.1 million for 2007, $0.3 million for 2006 and $0.6
million for 2005. Paid benefits for GMDBs and IDBs totaled $0.1 million for 2007, less than $0.1
million for 2006 and $0.1 million for 2005.
100
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6) Income Taxes
We file a consolidated federal income tax return with the Life Companies and FBL Financial
Services, Inc. and certain of their subsidiaries. The companies included in the consolidated
federal income tax return each report current income tax expense as allocated under a consolidated
tax allocation agreement. Generally, this allocation results in profitable companies recognizing a
tax provision as if the individual company filed a separate return and loss companies recognizing a
benefit to the extent their losses contribute to reduce consolidated taxes.
Deferred income taxes have been established based upon the temporary differences between the
financial statement and income tax bases of assets and liabilities. The reversal of the temporary
differences will result in taxable or deductible amounts in future years when the related asset or
liability is recovered or settled.
Income tax expenses (credits) are included in the consolidated financial statements as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Taxes provided in consolidated statements of income on: |
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest in earnings of
subsidiaries and equity income: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
40,530 |
|
|
$ |
40,993 |
|
|
$ |
35,862 |
|
Deferred |
|
|
521 |
|
|
|
3,375 |
|
|
|
918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,051 |
|
|
|
44,368 |
|
|
|
36,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income – current |
|
|
827 |
|
|
|
612 |
|
|
|
656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes provided in consolidated statements of changes in
stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized investment gains/losses –
deferred |
|
|
(34,742 |
) |
|
|
(29,022 |
) |
|
|
(31,735 |
) |
Adjustment resulting from capital transaction of
equity investee – deferred |
|
|
39 |
|
|
|
(31 |
) |
|
|
– |
|
Change in underfunded status of other post-retirement
benefit plans – deferred |
|
|
(10 |
) |
|
|
(112 |
) |
|
|
– |
|
Issuance of shares under stock option plan – current |
|
|
(1,376 |
) |
|
|
(1,614 |
) |
|
|
(1,387 |
) |
Issuance of shares under stock option plan – deferred |
|
|
– |
|
|
|
22 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,089 |
) |
|
|
(30,757 |
) |
|
|
(33,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,789 |
|
|
$ |
14,223 |
|
|
$ |
4,314 |
|
|
|
|
|
|
|
|
|
|
|
101
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effective tax rate on income before income taxes, minority interest in earnings of subsidiaries
and equity income is different from the prevailing federal income tax rate as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Income before income taxes, minority
interest in earnings of subsidiaries and
equity income |
|
$ |
125,806 |
|
|
$ |
133,488 |
|
|
$ |
108,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax at federal statutory rate (35%) |
|
$ |
44,032 |
|
|
$ |
46,721 |
|
|
$ |
37,997 |
|
Tax effect (decrease) of: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt dividend and interest income |
|
|
(2,700 |
) |
|
|
(1,963 |
) |
|
|
(1,495 |
) |
Reversal of tax accruals no longer
necessary based on events and analysis
performed during the year |
|
|
– |
|
|
|
(525 |
) |
|
|
(525 |
) |
Interest on Series C mandatorily
redeemable preferred stock |
|
|
– |
|
|
|
– |
|
|
|
805 |
|
Other items |
|
|
(281 |
) |
|
|
135 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
41,051 |
|
|
$ |
44,368 |
|
|
$ |
36,780 |
|
|
|
|
|
|
|
|
|
|
|
The tax effect of temporary differences giving rise to our deferred income tax assets and
liabilities is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Dollars in thousands) |
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Deferred policy acquisition costs |
|
$ |
298,703 |
|
|
$ |
246,830 |
|
Deferred sales inducements |
|
|
112,452 |
|
|
|
79,432 |
|
Value of insurance in force acquired |
|
|
14,425 |
|
|
|
14,994 |
|
Property and equipment |
|
|
9,162 |
|
|
|
8,718 |
|
Fixed maturity and equity securities |
|
|
– |
|
|
|
16,754 |
|
Other |
|
|
1,299 |
|
|
|
2,287 |
|
|
|
|
|
|
|
|
|
|
|
436,041 |
|
|
|
369,015 |
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Fixed maturity and equity securities |
|
|
46,481 |
|
|
|
– |
|
Future policy benefits |
|
|
342,244 |
|
|
|
289,806 |
|
Accrued dividends |
|
|
3,923 |
|
|
|
4,149 |
|
Accrued benefit and compensation costs |
|
|
12,469 |
|
|
|
10,851 |
|
Other |
|
|
2,736 |
|
|
|
1,829 |
|
|
|
|
|
|
|
|
|
|
|
407,853 |
|
|
|
306,635 |
|
|
|
|
|
|
|
|
Net deferred income tax liability |
|
$ |
28,188 |
|
|
$ |
62,380 |
|
|
|
|
|
|
|
|
As discussed in Note 1 above, the impact of adopting Interpretation No. 48 was not material to our
consolidated financial statements. We are no longer subject to U.S. federal, state and local
income tax examinations by tax authorities for years prior to 2001.
7) Credit Arrangements
We have a $60.0 million revolving line of credit agreement with LaSalle Bank National Association
and Bankers Trust Company, N.A. This agreement is effective through October 31, 2010 and interest
on any borrowings accrues at a variable rate (5.99% at December 31, 2007 and 6.12% at December 31,
2006). Under this agreement, we are required to meet certain financial covenants. In addition, we
are prohibited from incurring additional indebtedness in excess of $25.0 million without prior
approval from the banks while this line of credit is in effect. Debt outstanding on this line of
credit totaled $46.0 million at December 31, 2007 and 2006.
102
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On March 12, 2007, we issued $100.0 million of 5.875% Senior Notes due March 15, 2017 (2017 Senior
Notes). Interest on the 2017 Senior Notes is payable semi-annually on March 15 and September 15
each year. The 2017 Senior Notes are redeemable in whole or in part at any time at our option at a
“make-whole” redemption price equal to the greater of 100% of their principal amount or the sum of
the present values of the remaining scheduled payments of principal and interest, discounted to the
redemption date on a semiannual basis at the treasury rate plus 20 basis points. We received net
proceeds of approximately $98.5 million from the issuance of the 2017 Senior Notes after
underwriting fees, offering expenses and original issue discount, which are being amortized over
the term of the 2017 Senior Notes, using the effective interest method. The notes offering would
have caused us to violate the covenants of our revolving line of credit agreement with LaSalle Bank
National Association and Bankers Trust Company, N.A. Therefore, on March 12, 2007, the line of
credit agreement was amended to allow for the Senior Notes due 2017 without violating the financial
covenants of that agreement.
In April 2004, we issued $75.0 million of 5.85% Senior Notes due April 15, 2014 (2014 Senior
Notes). Interest on the Senior Notes due 2014 is payable semi-annually on April 15 and October 15
each year. The 2014 Senior Notes are redeemable in whole or in part at any time at our option at a
“make-whole” redemption price equal to the greater of 100% of their principal amount or the sum of
the present values of the remaining scheduled payments of principal and interest, discounted to the
redemption date on a semiannual basis at the treasury rate plus 25 basis points. We received net
proceeds of approximately $75.5 million from the issuance of the 2014 Senior Notes after
underwriting fees, offering expenses, original issue discount and the impact of a rate lock, which
are being amortized over the term of the 2014 Senior Notes, using the effective interest method.
We amended our line of credit agreement with LaSalle Bank National Association and Bankers Trust
Company, N.A in 2004 to allow for the 2014 Senior Notes without violating the financial covenants
of that agreement.
In connection with the 2001 acquisition of Kansas Farm Bureau Life Insurance Company, we issued
3,411,000 shares of Series C cumulative voting mandatorily redeemable preferred stock with an
estimated fair value of $80.0 million to the Kansas Farm Bureau. Each share of Series C preferred
stock had a par value of $26.8404 and voting rights identical to that of Class A common stock.
Dividends on the Series C preferred stock were payable quarterly at a rate equal to the regular
cash dividends per share of common stock, as defined, then payable. We redeemed 1,687,000 shares,
or $45.3 million, of the Series C preferred stock in January 2004 and 1,724,000 shares, or $46.3
million in December 2005. The Series C preferred stock was initially issued with conversion rights
based upon certain contingencies not involving market price triggers. Both parties signed an
agreement to waive these rights, so this instrument was not contingently convertible. The Series C
preferred stock was issued at an $11.6 million discount to par. This discount accreted to interest
expense during the life of the securities using the effective interest method.
Long-term debt includes $97.0 million of our subordinated debt obligation to FBL Financial Group
Capital Trust (the Trust). FBL Financial Group, Inc. (parent company) issued 5% Subordinated
Deferrable Interest Notes, due June 30, 2047 (the Notes) with a principal amount of $100.0 million
to support $97.0 million of 5% Preferred Securities issued by the Trust. FBL Financial Group, Inc.
also has a $3.0 million equity investment in the Trust, which is netted against the Notes on the
consolidated balance sheets due to a contractual right of setoff. The sole assets of the Trust are
and will be the Notes and any interest accrued thereon. The interest payment dates on the Notes
correspond to the distribution dates on the 5% Preferred Securities. The 5% Preferred Securities,
which have a liquidation value of $1,000.00 per share plus accrued and unpaid distributions, mature
simultaneously with the Notes and are owned by AEL. As of December 31, 2007 and 2006, 97,000
shares of 5% Preferred Securities were outstanding, all of which we unconditionally guarantee.
8) Stockholders’ Equity
The Iowa Farm Bureau Federation (IFBF), our majority stockholder, owns our Series B preferred
stock. Each share of Series B preferred stock has a liquidation preference of $0.60 and voting
rights identical to that of Class A common stock with the exception that each Series B share is
entitled to two votes while each Class A share is entitled to one vote. The Series B preferred
stock pays cumulative annual cash dividends of $0.03 per share, payable quarterly, and is
redeemable by us, at our option, at $0.60 per share plus unpaid dividends if the stock ceases to be
beneficially owned by a Farm Bureau organization.
103
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Holders of the Class A common stock and Series B preferred stock vote together as a group in the
election of Class A Directors (eight to ten). The Class B common stock votes as a separate class
to elect the Class B Directors (five to seven). Voting for the Directors is noncumulative. In
addition, various ownership aspects of our Class B common stock are governed by a Class B
Shareholder Agreement which results in the IFBF, which owns 64% of our voting stock as of December
31, 2007, maintaining control of the Company. Holders of Class A common stock and Class B common
stock receive equal per-share common stock dividends.
9) Retirement and Compensation Plans
Defined Benefit Plans
We participate with several affiliates and an unaffiliated organization in various multiemployer
defined benefit plans. These plans cover substantially all our employees and the employees of the
other participating companies who have attained age 21 and one year of service. Benefits are based
on years of service and the employee’s compensation. One of these plans provides supplemental
pension benefits to employees with salaries and/or pension benefits in excess of the qualified plan
limits imposed by federal tax law. Net periodic pension cost of the plans is allocated between
participants generally on a basis of time incurred by the respective employees for each employer.
Such allocations are reviewed annually.
As multiemployer plans, the assets we contribute to the plans are commingled with the assets
contributed by the other employers. Accordingly, unless noted otherwise, we do not separate the
disclosure information below between amounts attributable to us and amounts attributable to the
other employers. The measurement date for the plans is September 30. As mentioned in Note 1,
“Significant Accounting Policies — Accounting Changes” beginning in 2008, the measurement date for
the plans will be changed to December 31 as required by Statement No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87,
88, 106 and 132(R).”
The plans’ funded status for all employers combined, compared to amounts recognized in our
consolidated financial statements under rules for multiemployer plans follows:
| |
|
|
|
|
|
|
|
|
| |
|
As of or for the year ended |
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Dollars in thousands) |
|
Change in benefit obligation – all employers |
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of the year |
|
$ |
261,289 |
|
|
$ |
271,098 |
|
Service cost |
|
|
9,364 |
|
|
|
9,583 |
|
Interest cost |
|
|
13,903 |
|
|
|
13,711 |
|
Actuarial gain |
|
|
(3,446 |
) |
|
|
(9,713 |
) |
Benefits paid |
|
|
(20,564 |
) |
|
|
(23,390 |
) |
Other |
|
|
192 |
|
|
|
– |
|
|
|
|
|
|
|
|
Net benefit obligation at end of the year |
|
|
260,738 |
|
|
|
261,289 |
|
|
|
|
|
|
|
|
|
|
Change in plan assets – all employers |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of the year |
|
|
182,452 |
|
|
|
172,281 |
|
Actual return on plan assets |
|
|
13,515 |
|
|
|
8,444 |
|
Employer contributions |
|
|
32,053 |
|
|
|
25,117 |
|
Benefits paid |
|
|
(20,564 |
) |
|
|
(23,390 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of the year |
|
|
207,456 |
|
|
|
182,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of the year |
|
$ |
(53,282 |
) |
|
$ |
(78,837 |
) |
|
|
|
|
|
|
|
As also mentioned in Note 1, Statement No. 158 does not require the recognition of an asset or
liability in the consolidated balance sheets for the funded status of multiemployer plans. Under
Statement No. 158, a liability totaling $53.3 million at December 31, 2007 and $78.8 million at
December 31, 2006 would have been recorded for
all employers for the underfunded status of the plans. The following table illustrates the
incremental effect of applying Statement No. 158 at December 31, 2006 if the employers followed the
single-employer accounting model.
104
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, 2006 |
|
| |
|
|
|
|
|
|
|
|
|
After |
|
| |
|
|
|
|
|
|
|
|
|
Application of |
|
| |
|
Before Application of |
|
|
|
|
|
|
Statement No. |
|
| |
|
Statement No. 158 |
|
|
Adjustments |
|
|
158 |
|
| |
|
|
|
| |
|
(Dollars in thousands) |
|
Liability for pension benefits |
|
$ |
(47,922 |
) |
|
$ |
(30,915 |
) |
|
$ |
(78,837 |
) |
Intangible asset |
|
|
5,523 |
|
|
|
(5,523 |
) |
|
|
– |
|
Accumulated other comprehensive
income (loss) |
|
|
35,744 |
|
|
|
36,438 |
|
|
|
72,182 |
|
|
|
|
|
|
|
|
|
|
|
Net amount
recognized – all employers |
|
$ |
(6,655 |
) |
|
$ |
– |
|
|
$ |
(6,655 |
) |
|
|
|
|
|
|
|
|
|
|
Components of net periodic pension cost for all employers are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
| |
|
(Dollars in thousands) |
|
Service cost |
|
$ |
9,364 |
|
|
$ |
9,583 |
|
|
$ |
8,647 |
|
Interest cost |
|
|
13,903 |
|
|
|
13,711 |
|
|
|
13,635 |
|
Expected return on assets |
|
|
(12,347 |
) |
|
|
(10,984 |
) |
|
|
(10,848 |
) |
Amortization of prior service cost |
|
|
775 |
|
|
|
804 |
|
|
|
1,583 |
|
Amortization of actuarial loss |
|
|
4,479 |
|
|
|
5,593 |
|
|
|
4,185 |
|
Special termination benefits |
|
|
– |
|
|
|
– |
|
|
|
1,617 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost – all employers |
|
$ |
16,174 |
|
|
$ |
18,707 |
|
|
$ |
18,819 |
|
|
|
|
|
|
|
|
|
|
|
The plans’ prior service costs are amortized using a straight-line amortization method over the
average remaining service period of the employees. For actuarial gains and losses, we use a
corridor, as allowed under Statement No. 87, “Employers Accounting for Pensions,” to determine the
amounts to amortize. It is expected that net periodic pension cost for all employers in 2008 will
include $3.8 million for amortization of the actuarial loss and $0.8 million of prior service cost
amortization.
Expected benefits to be paid for all employers are as follows: 2008 — $27.0 million, 2009 — $22.0
million, 2010 — $23.1 million, 2011 — $23.7 million, 2012 — $23.1 million and 2013 through 2017 -
$114.6 million. We expect contributions to the plans for 2008 for all employers to be
approximately $17.6 million, of which $5.6 million is expected to be contributed by us.
We continue to follow Statement No. 87 for multiemployer plans. We record our proportionate share
of prepaid or accrued pension cost and net periodic pension cost as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
(Dollars in thousands) |
|
Amounts recognized in our consolidated financial statements |
|
|
|
|
|
|
|
|
Prepaid benefit cost |
|
$ |
14,342 |
|
|
$ |
9,680 |
|
Accrued benefit cost |
|
|
(10,666 |
) |
|
|
(10,285 |
) |
|
|
|
|
|
|
|
Net amount recognized in our consolidated financial statements |
|
$ |
3,676 |
|
|
$ |
(605 |
) |
|
|
|
|
|
|
|
Net periodic pension cost recorded in our consolidated income statements totaled $5.9 million in
2007, $6.4 million in 2006 and $7.8 million in 2005.
105
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information for pension plans with accumulated benefit obligations in excess of plan assets is as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
2007 |
|
2006 |
| |
|
(Dollars in thousands) |
Projected benefit obligation – all employers |
|
$ |
260,738 |
|
|
$ |
261,289 |
|
Accumulated benefit obligation – all employers |
|
|
228,574 |
|
|
|
230,375 |
|
Fair value of plan assets – all employers |
|
|
207,456 |
|
|
|
182,453 |
|
Weighted average assumptions used to determine benefit obligations disclosed above are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
2007 |
|
2006 |
Discount rate |
|
|
6.01 |
% |
|
|
5.60 |
% |
Annual salary increases |
|
|
4.00 |
% |
|
|
4.00 |
% |
We estimate the discount rate by projecting and discounting future benefit payments inherent in the
projected benefit obligation using a “spot’ yield curve known as the Citigroup Pension Discount
Liability Index yield curve. This curve is constructed from the Treasury curve by adding
option-adjusted spreads that are drawn from the double-A corporate sector of the Salomon Broad
Investment-Grade Bond Index. The bonds with “excessive” call exposure are excluded, as well as
securities with abnormal option-adjusted spreads. The final spreads are determined using this
“call-protected” sample of double-A corporate bonds.
Weighted average assumptions used to determine net periodic pension cost are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| |
|
2007 |
|
2006 |
|
2005 |
Discount rate |
|
|
5.60 |
% |
|
|
5.50 |
% |
|
|
5.75 |
% |
Expected long-term return on plan assets |
|
|
7.00 |
% |
|
|
7.00 |
% |
|
|
7.00 |
% |
Annual salary increases |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
4.00 |
% |
During 2005, we began executing our long-term investment strategy of diversifying the plans’ assets
into equity securities with the long-term target allocation being approximately 60% deposit
administration fund contracts and 40% equities. At December 31, 2007, the plans’ assets were
invested 67% in deposit administration fund contracts held by Farm Bureau Life and 33% in
diversified equities. Our investment strategy is to (1) achieve a long-term return sufficient to
satisfy all plan obligations, (2) assume a prudent level of risk and (3) to maintain adequate
liquidity. The expected return on plan assets is set at the long-term rate expected to be earned
based on the long-term investment strategy of the plans. In estimating the expected rate of return
for each asset class, we take into account factors such as historical rates of return, expected
future risk free rates of return and anticipated returns expected given the risk profile of each
asset class.
Effective January 1, 2008, certain provisions in the plans were modified. As a result of these
modifications, we expect a reduction in future costs associated with the plans of $1.0 million per
year.
Other Retirement Plans
We participate with several affiliates in a 401(k) defined contribution plan which covers
substantially all employees. We contribute FBL Financial Group, Inc. stock in an amount equal to
100% of an employee’s contributions up to 2% of the annual salary contributed by the employee and
an amount equal to 50% of an employee’s contributions between 2% and 4% of the annual salary
contributed by the employee. Costs are allocated among the affiliates on a basis of time incurred
by the respective employees for each company. Expense related to the plan totaled $1.0 million in
2007 and $0.9 million in 2006 and 2005.
106
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We have established deferred compensation plans for certain key current and former employees and
have certain other benefit plans which provide for retirement and other benefits. Liabilities for
these plans are accrued as the related benefits are earned.
Certain of the assets related to these plans are on deposit with us and amounts relating to these
plans are included in our financial statements. In addition, certain amounts included in the
policy liabilities for interest sensitive products relate to deposit administration funds
maintained by us on behalf of affiliates.
In addition to benefits offered under the aforementioned benefit plans, we and several other
affiliates sponsor a plan that provides group term life insurance benefits to retirees who have
worked full-time for ten years and attained age 55 while in service. Postretirement benefit
expense for this plan is allocated in a manner consistent with pension expense discussed above. We
also have two single employer plans that provide health and medical benefits to retirees. See Note
1, “Significant Accounting Policies — Accounting Changes,” for additional details regarding the
impact of adopting Statement No. 158 for these plans. Postretirement benefit expense aggregated
$0.1 million in 2007 and 2006 and $0.2 million in 2005.
Stock Compensation Plans
We have two share-based payment arrangements under our Class A Common Stock Compensation Plan,
which are described below. Compensation expense for these arrangements totaled $4.9 million for
2007, $3.1 million for 2006 and $2.1 million for 2005. The income tax benefit recognized in the
income statement for these arrangements totaled $1.8 million for 2007, $1.1 million for 2006 and
$0.6 million for 2005.
Stock Option Awards
We grant stock options for Class A common stock to directors, officers and employees. For officers
and employees, the options have a contractual term of 10 years and generally vest over a period up
to five years, contingent upon continued employment with us. Options to directors are fully vested
upon grant and have a contractual term that varies with the length of time the director remains on
the Board, up to ten years. The stock price for all options is equal to the fair market value of
the common stock on the grant date. The fair value of each option award is estimated on the date
of grant using a Black-Scholes-Merton option valuation model. Assumptions used in our valuation
model are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
| |
|
2007 |
|
2006 |
|
2005 |
Weighted average risk-free interest rate |
|
|
4.73 |
% |
|
|
4.33 |
% |
|
|
4.01 |
% |
Dividend yield |
|
|
1.35 |
% |
|
|
1.40 |
% |
|
|
1.50 |
% |
Weighted average volatility factor of
the expected market price |
|
|
0.20 |
|
|
|
0.24 |
|
|
|
0.32 |
|
Weighted average expected term |
|
5.7 |
years |
|
5.6 |
years |
|
6.4 |
years |
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of
grant. We use the historical realized volatility of our stock for the expected volatility
assumption within the valuation model. For 2007 and 2006, the weighted-average expected term for
the majority of our options was presumed to be the mid-point between the vesting date and the end
of the contractual term, also known as the “shortcut method.” We assume the contractual term
approximates the expected life for the remaining options. For 2005, we used historical data to
estimate option exercises and employee terminations to determine the expected term assumption. For
2007 and 2006 we used the shortcut method, as permitted under Statement No. 123(R), due to limited
historical share option exercise experience. The change in this assumption in 2006 did not have a
material impact on the expected term of the stock options.
107
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of stock option activity is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
Contractual |
|
|
Aggregate |
|
| |
|
Number of |
|
|
Average Exercise |
|
|
Term (in |
|
|
Intrinsic |
|
| |
|
Shares |
|
|
Price per Share |
|
|
Years) |
|
|
Value (1) |
|
| |
|
(Dollars in thousands, except per share data) |
|
Shares under option at January 1, 2007 |
|
|
2,091,712 |
|
|
$ |
24.22 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
487,976 |
|
|
|
37.83 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(294,774 |
) |
|
|
20.72 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(24,317 |
) |
|
|
31.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option at December 31, 2007 |
|
|
2,260,597 |
|
|
|
27.54 |
|
|
|
5.85 |
|
|
$ |
17,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2007 or expected
to vest in the future |
|
|
2,203,849 |
|
|
$ |
27.47 |
|
|
|
5.81 |
|
|
$ |
17,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at December 31, 2007 |
|
|
1,341,172 |
|
|
$ |
24.64 |
|
|
|
4.53 |
|
|
$ |
13,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Represents the difference between the stock price and exercise price for each option, excluding
options where the exercise price is above the stock price, at December 31, 2007. |
The weighted average grant-date fair value of options granted per common share was $9.27 for 2007,
$8.64 for 2006 and $8.86 for 2005. The intrinsic value of options exercised during the year
totaled $5.4 million for 2007, $6.9 million for 2006 and $5.0 million for 2005.
Unrecognized compensation expense related to nonvested share-based compensation granted under the
stock option arrangement totaled $3.0 million as of December 31, 2007. This expense is expected to
be recognized over a weighted-average period of 2.4 years.
We issue new shares to satisfy stock option exercises. We do not have a policy of repurchasing
shares on the open market to satisfy share-based payment arrangements. Cash received from stock
options exercised totaled $5.9 million for 2007, $6.6 million for 2006 and $5.1 million for 2005.
The actual tax benefit realized from stock options exercised totaled $1.6 million for 2007, $2.0
million for 2006 and $1.5 million for 2005.
Performance Based Restricted Stock
We also grant restricted Class A common shares to certain executives. The restrictions on this
stock lapse and the stock vests if we meet or exceed operating goals, such as earnings per share
and return on equity targets within or during a three year period. Depending on performance, the
actual amount of shares issued could range from zero to 100% of the granted amount. The value of
the awards is based on the grant date fair value of the restricted stock adjusted for expected
forfeitures and an estimate of the number of shares expected to vest. The estimate for the number
of shares to vest is reviewed each period and the impact of any changes in the estimate on expense
is recorded in the current period. These awards are charged to expense using the straight-line
method over the required service period. Dividends on the restricted stock during the restriction
period are currently contingent upon vesting.
108
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of restricted stock activity is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
Average Grant- |
|
| |
|
|
|
|
|
Date Fair Value |
|
| |
|
Number of Shares |
|
|
per Share |
|
Restricted stock at January 1, 2007 |
|
|
214,588 |
|
|
$ |
30.78 |
|
Granted |
|
|
106,966 |
|
|
|
40.25 |
|
Released |
|
|
(40,667 |
) |
|
|
25.65 |
|
Forfeited |
|
|
(24,346 |
) |
|
|
32.87 |
|
|
|
|
|
|
|
|
|
Restricted stock at December 31, 2007 |
|
|
256,541 |
|
|
|
34.99 |
|
|
|
|
|
|
|
|
|
Unrecognized compensation expense related to unvested share-based compensation granted under the
restricted stock arrangement totaled $1.3 million as of December 31, 2007. This expense is
expected to be recognized over a weighted-average period of 1.2 years. The tax benefit realized
from restricted stock released to employees was $0.6 million as of December 31, 2007. We have a
policy of withholding shares to cover tax payments and expect to withhold approximately 15,000
shares during 2008, based on estimates of restricted shares we expect to vest and be released.
At December 31, 2007, shares of Class A common stock available for grant as additional awards under
the Class A Common Stock Compensation Plan totaled 4,409,078.
Other
We have a Director Compensation Plan under which non-employee directors on our Board may elect to
receive a portion of their compensation in the form of cash, Class A common shares or deferred
stock units. Under this plan, we have deferred stock units outstanding totaling 46,846, at
December 31, 2007 and 41,272 at December 31, 2006. At December 31, 2007, shares of Class A common
stock available for future issuance under the Director Compensation Plan totaled 50,369. We also
have an Executive Salary and Bonus Deferred Compensation Plan under which officers of the Company
who are required to meet certain stated common stock ownership guidelines are allowed to use their
base salary and annual cash bonus to purchase deferred stock units. Under this plan, we have
deferred stock units outstanding totaling 19,600 at December 31, 2007 and 11,960 at December 31,
2006. At December 31, 2007, shares of Class A common stock available for future issuance under
this plan totaled 230,400.
Also see Note 1, “Significant Accounting Policies – Stock Based Compensation,” for further
discussion of the accounting for our stock option plans and certain pro forma financial information
due to the adoption of Statement No. 123 and Statement 123(R).
10) Management and Other Agreements
We share certain office facilities and services with the IFBF, Kansas Farm Bureau (through December
2005) and their affiliated companies. These expenses are allocated on the basis of cost and time
studies that are updated annually and consist primarily of rent, salaries and related expenses,
travel and other operating costs.
We leased office space from Farm Bureau Mutual through December 2005. Related lease expense
totaled $0.8 million in 2005.
We have management agreements with Farm Bureau Mutual and other affiliates under which we provide
general business, administrative and management services. Fee income for these services totaled
$3.1 million in 2007 and $2.6 million in 2006 and 2005. In addition, Farm Bureau Management
Corporation, a wholly-owned subsidiary of the IFBF, provides certain management services to us
under a separate arrangement. We incurred related expenses totaling $1.0 million in 2007, $1.1
million in 2006 and $1.0 million in 2005.
We have marketing agreements with the Farm Bureau property-casualty companies operating within our
marketing territory, including Farm Bureau Mutual and another affiliate. Under the marketing
agreements, the property-casualty companies are responsible for development and management of our agency force for a fee.
We incurred expense totaling $7.6 million in 2007, $7.2 million in 2006 and $7.3 million in 2005
relating to these arrangements.
109
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We are licensed by the IFBF to use the “Farm Bureau” and “FB” designations in Iowa. In connection
with this license, we incurred royalty expense totaling $0.4 million in 2007, 2006 and 2005. We
have similar arrangements with the Kansas Farm Bureau and other state Farm Bureau organizations in
our market territory. Total royalty expense to Farm Bureau organizations other than the IFBF
totaled $1.3 million in 2007, $1.2 million in 2006 and $1.1 million in 2005.
Prior to 2006, we had an administrative services agreement with a subsidiary of AEL under which we
provided investment accounting and claims processing, accounting, compliance and other
administrative services. Fee income from performing these services totaled $0.4 million in 2005.
11) Commitments and Contingencies
In the normal course of business, we may be involved in litigation where amounts are alleged that
are substantially in excess of contractual policy benefits or certain other agreements. At
December 31, 2007, management is not aware of any claims for which a material loss is reasonably
possible. See Note 1, “Significant Accounting Policies – Recognition of Premium Revenue and Costs”
for disclosure of a gain contingency relating to a lawsuit.
We self-insure our employee health and dental claims. However, claims in excess of our
self-insurance limits are fully insured. We fund insurance claims through a self-insurance trust.
Deposits to the trust are made at an amount equal to our best estimate of claims incurred during
the period. Accordingly, no accruals are recorded on our financial statements for unpaid claims
and claims incurred but not reported. Adjustments, if any, resulting in changes in the estimate of
claims incurred will be reflected in operations in the periods in which such adjustments are known.
We lease our home office properties under a 15-year operating lease from a wholly-owned subsidiary
of the IFBF. Future remaining minimum lease payments under this lease, as of December 31, 2007,
are as follows: 2008 — $2.6 million; 2009 — $2.7 million; 2010 — $2.7 million; 2011 — $2.7 million;
2012 — $2.7 million and 2013 — $0.7 million. Rent expense for the lease totaled $3.1 million in
2007, $3.0 million in 2006 and $3.1 million in 2005. These amounts are net of $1.4 million in
2007, 2006 and 2005 in amortization of a deferred gain on the exchange of our home office
properties for common stock in 1998. The remaining unamortized deferred gain totaled $7.3 million
at December 31, 2007 and $8.7 million at December 31, 2006.
110
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12) Earnings per Share
The following table sets forth the computation of earnings per common share and earnings per common
share – assuming dilution:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands, except per share data) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
86,339 |
|
|
$ |
90,129 |
|
|
$ |
72,842 |
|
Dividends on Series B preferred stock |
|
|
(150 |
) |
|
|
(150 |
) |
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
Numerator for earnings per common share - income
available to common stockholders |
|
$ |
86,189 |
|
|
$ |
89,979 |
|
|
$ |
72,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares |
|
|
29,653,470 |
|
|
|
29,332,661 |
|
|
|
28,879,177 |
|
Deferred common stock units relating to deferred compensation
plans |
|
|
60,792 |
|
|
|
46,704 |
|
|
|
30,446 |
|
|
|
|
|
|
|
|
|
|
|
Denominator for earnings per common share –
weighted-average shares |
|
|
29,714,262 |
|
|
|
29,379,365 |
|
|
|
28,909,623 |
|
Effect of dilutive securities - stock-based compensation |
|
|
607,355 |
|
|
|
525,259 |
|
|
|
505,365 |
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share –
adjusted weighted-average shares |
|
|
30,321,617 |
|
|
|
29,904,624 |
|
|
|
29,414,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
$ |
2.90 |
|
|
$ |
3.06 |
|
|
$ |
2.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – assuming dilution |
|
$ |
2.84 |
|
|
$ |
3.01 |
|
|
$ |
2.47 |
|
|
|
|
|
|
|
|
|
|
|
Based upon the provisions of the underlying agreement and the application of the “two class” method
to our capital structure, we have not allocated any undistributed net income to the Class C
preferred stock since the Class C preferred stockholder’s participation in dividends with the
common stockholders was limited to the amount of the annual regular dividend.
Options to purchase 592,768 shares of common stock in 2007 at $31.43 to $40.85 per share were
outstanding during 2007 but were not included in the computation of 2007 diluted earnings per share
because the options were antidilutive to the calculation. The options, which expire through 2017,
were still outstanding at December 31, 2007.
Options to purchase 325,434 shares of common stock in 2006 at $25.60 to $39.48 per share were
outstanding during 2006 but were not included in the computation of 2006 diluted earnings per share
because the options were antidilutive to the calculation. The options, which expire through 2016,
were still outstanding at December 31, 2006.
Options to purchase 747,232 shares of common stock in 2005 at $24.57 to $32.25 per share were
outstanding during 2005 but were not included in the computation of 2005 diluted earnings per share
because the options were antidilutive to the calculation. The options, which expire through 2015,
were still outstanding at December 31, 2005.
111
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13) Statutory Information
The financial statements of the Life Companies included herein differ from related statutory-basis
financial statements principally as follows: (a) the bond portfolio is classified as either
available-for-sale or trading and carried at fair value rather than generally being carried at
amortized cost; (b) changes in the fair value of call options
held directly by the Life Companies are recorded as a component of derivative income rather than,
prior to 2006, directly to surplus; (c) acquisition costs of acquiring new business are deferred
and amortized over the life of the policies rather than charged to operations as incurred; (d)
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; (e) future policy benefit reserves on certain interest sensitive products are based on
full account values, rather than discounting methodologies utilizing statutory interest rates; (f)
net realized gains or losses attributed to changes in the level of market interest rates are
recognized as gains or losses in the statements of income when the sale is completed rather than
deferred and amortized over the remaining life of the fixed maturity security or mortgage loan; (g)
the established formula-determined statutory investment reserve, changes in which are charged
directly to surplus, is not recorded as a liability; (h) certain deferred income tax assets,
agents’ balances and certain other assets designated as “nonadmitted assets” for statutory purposes
are reported as assets rather than being charged to surplus; (i) revenues for interest sensitive,
indexed and variable products consist of policy charges for the cost of insurance, policy
administration charges, amortization of policy initiation fees and surrender charges assessed
rather than premiums received; (j) pension income or expense is recognized for all employees in
accordance with Statement No. 87, “Employers’ Accounting for Pensions” rather than for vested
employees only; (k) the financial statements of subsidiaries are consolidated with those of the
insurance subsidiary rather than being accounted for under the equity method, and (l) assets and
liabilities are restated to fair values when a change in ownership occurs that is accounted for as
a purchase, with provisions for goodwill and other intangible assets, rather than continuing to be
presented at historical cost.
Net income of the Life Companies, as determined in accordance with statutory accounting practices,
was $77.4 million in 2007, $73.8 million in 2006 and $66.1 million in 2005. Statutory capital and
surplus totaled $756.6 million at December 31, 2007 and $663.3 million at December 31, 2006.
The ability of the Life Companies to pay dividends to the parent company is restricted because
prior approval of the Iowa Insurance Commissioner is required for payment of dividends to the
stockholder which exceed an annual limitation. An annual dividend limitation is defined under the
Iowa Insurance Holding Company Act as any dividend or distribution of cash or other property whose
fair market value, together with that of other dividends or distributions made within the preceding
12 months, exceeds the greater of (i) 10% of policyholders’ surplus (total statutory capital stock
and statutory surplus) as of December 31 of the preceding year, or (ii) the statutory net gain from
operations of the insurer for the 12-month period ending December 31 of the preceding year. During
2008, the maximum amount legally available for distribution to FBL Financial Group, Inc. without
further regulatory approval is $51.7 million for Farm Bureau Life and $39.2 million for EquiTrust
Life.
14) Segment Information
We analyze operations by reviewing financial information regarding products that are aggregated
into four product segments. The product segments are: (1) Traditional Annuity – Exclusive
Distribution (“Exclusive Annuity”), (2) Traditional Annuity – Independent Distribution
(“Independent Annuity”), (3) Traditional and Universal Life Insurance and (4) Variable. We also
have various support operations and corporate capital that are aggregated into a Corporate and
Other segment.
The Exclusive Annuity segment primarily consists of fixed rate annuities and supplementary
contracts (some of which involve life contingencies) sold through our exclusive agency
distribution. Fixed rate annuities provide for tax-deferred savings and supplementary contracts
provide for the systematic repayment of funds that accumulate interest. Fixed rate annuities
consist primarily of flexible premium deferred annuities, but also include single premium deferred
and immediate contracts. With fixed rate annuities, we bear the underlying investment risk and
credit interest to the contracts at rates we determine, subject to interest rate guarantees.
The Independent Annuity segment consists of fixed rate annuities and supplementary contracts (some
of which involve life contingencies) sold through our independent distribution or assumed through
coinsurance agreements. The Independent Annuity segment also includes index annuities. With index
annuity products, we bear the underlying investment risk and credit interest in an amount equal to
a percentage of the gain in a specified market index, subject to minimum guarantees.
112
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Traditional and Universal Life Insurance segment consists of whole life, term life and
universal life policies. These policies provide benefits upon the death of the insured and may
also allow the customer to build cash value on a tax-deferred basis.
The Variable segment consists of variable universal life insurance and variable annuity contracts.
These products are similar to universal life insurance and traditional annuity contracts, except
the contract holder has the option to direct the cash value of the contract to a wide range of
investment sub-accounts, thereby passing the investment risk to the contract holder.
The Corporate and Other segment consists of the following corporate items and products/services
that do not meet the quantitative threshold for separate segment reporting:
| |
• |
|
investments and related investment income not specifically allocated to our product
segments; |
| |
• |
|
interest expense; |
| |
• |
|
accident and health insurance products, primarily a closed block of group policies; |
| |
• |
|
advisory services for the management of investments and other companies; |
| |
• |
|
marketing and distribution services for the sale of mutual funds and insurance products
not issued by us; and |
| |
• |
|
leasing services, primarily with affiliates. |
We analyze our segment results based on pre-tax operating income (loss). Accordingly, income taxes
are not allocated to the segments. In addition, operating results are generally reported net of
any transactions between the segments. Operating income (loss) represents net income excluding the
impact of:
| |
• |
|
realized and unrealized gains and losses on investments; |
| |
• |
|
changes in net unrealized gains and losses on derivatives; |
| |
• |
|
the cumulative effect of changes in accounting principles; |
| |
• |
|
a nonrecurring lawsuit settlement; and |
| |
• |
|
discontinued operations. |
We use operating income, in addition to net income, to measure our performance since realized and
unrealized gains and losses on investments and the change in net unrealized gains and losses on
derivatives can fluctuate greatly from quarter to quarter. Also, the cumulative effect of changes
in accounting principles, discontinued operations and the lawsuit settlement in 2006 are
nonrecurring items. These fluctuations make it difficult to analyze core operating trends. In
addition, for derivatives not designated as hedges, there is a mismatch between the valuation of
the asset and liability when deriving net income. Specifically, call options relating to our index
business are one or two-year assets while the embedded derivative in the index contracts represents
the rights of the contract holder to receive index credits over the entire period the index
annuities are expected to be in force. For our other embedded derivatives in the product segments
and interest rate swaps backing our annuity liabilities, the derivatives are marked to market, but
the associated insurance liabilities are not marked to market. A view of our operating performance
without the impact of these mismatches and nonrecurring items enhances the analysis of our results.
We use operating income for goal setting, determining company-wide bonuses and evaluating
performance on a basis comparable to that used by many in the investment community.
113
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial information concerning our operating segments is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Annuity – Exclusive Distribution |
|
$ |
150,403 |
|
|
$ |
147,365 |
|
|
$ |
147,436 |
|
Traditional Annuity – Independent Distribution |
|
|
376,887 |
|
|
|
236,447 |
|
|
|
169,988 |
|
Traditional and Universal Life Insurance |
|
|
335,093 |
|
|
|
326,018 |
|
|
|
320,523 |
|
Variable |
|
|
63,380 |
|
|
|
59,010 |
|
|
|
56,195 |
|
Corporate and Other |
|
|
38,351 |
|
|
|
29,673 |
|
|
|
31,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
964,114 |
|
|
|
798,513 |
|
|
|
725,508 |
|
Realized/unrealized gains on investments (A) |
|
|
(55,264 |
) |
|
|
13,970 |
|
|
|
2,959 |
|
Change in net unrealized gains/losses on derivatives (A) |
|
|
5,749 |
|
|
|
74,870 |
|
|
|
(319 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
914,599 |
|
|
$ |
887,353 |
|
|
$ |
728,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Annuity – Exclusive Distribution |
|
$ |
146,267 |
|
|
$ |
146,433 |
|
|
$ |
146,620 |
|
Traditional Annuity – Independent Distribution |
|
|
309,131 |
|
|
|
225,206 |
|
|
|
161,566 |
|
Traditional and Universal Life Insurance |
|
|
144,231 |
|
|
|
142,620 |
|
|
|
141,933 |
|
Variable |
|
|
13,658 |
|
|
|
14,437 |
|
|
|
14,653 |
|
Corporate and Other |
|
|
14,744 |
|
|
|
7,140 |
|
|
|
10,671 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated net investment income |
|
$ |
628,031 |
|
|
$ |
535,836 |
|
|
$ |
475,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Annuity – Exclusive Distribution |
|
$ |
10,453 |
|
|
$ |
8,159 |
|
|
$ |
10,995 |
|
Traditional Annuity – Independent Distribution |
|
|
67,508 |
|
|
|
53,727 |
|
|
|
35,426 |
|
Traditional and Universal Life Insurance |
|
|
20,474 |
|
|
|
13,283 |
|
|
|
16,472 |
|
Variable |
|
|
8,489 |
|
|
|
8,763 |
|
|
|
7,810 |
|
Corporate and Other |
|
|
9,953 |
|
|
|
9,959 |
|
|
|
9,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,877 |
|
|
|
93,891 |
|
|
|
80,011 |
|
Realized/unrealized gains (losses) on investments (A) |
|
|
(1,171 |
) |
|
|
(164 |
) |
|
|
453 |
|
Change in net unrealized gains/losses on derivatives (A) |
|
|
(28,592 |
) |
|
|
3,134 |
|
|
|
(2,479 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization |
|
$ |
87,114 |
|
|
$ |
96,861 |
|
|
$ |
77,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Annuity – Exclusive Distribution |
|
$ |
33,011 |
|
|
$ |
35,555 |
|
|
$ |
34,426 |
|
Traditional Annuity – Independent Distribution |
|
|
39,875 |
|
|
|
30,439 |
|
|
|
22,174 |
|
Traditional and Universal Life Insurance |
|
|
58,685 |
|
|
|
58,706 |
|
|
|
54,814 |
|
Variable |
|
|
12,514 |
|
|
|
3,596 |
|
|
|
2,609 |
|
Corporate and Other |
|
|
(2,020 |
) |
|
|
(3,935 |
) |
|
|
(2,675 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
142,065 |
|
|
|
124,361 |
|
|
|
111,348 |
|
Income taxes on operating income |
|
|
(46,444 |
) |
|
|
(41,218 |
) |
|
|
(37,811 |
) |
Realized/unrealized gains on investments (A) |
|
|
(13,500 |
) |
|
|
9,222 |
|
|
|
1,633 |
|
Change in net unrealized gains/losses on derivatives (A) |
|
|
4,501 |
|
|
|
936 |
|
|
|
(2,328 |
) |
Cumulative effect of change in accounting principle |
|
|
(283 |
) |
|
|
– |
|
|
|
– |
|
Lawsuit settlement (A) |
|
|
– |
|
|
|
(3,172 |
) |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
$ |
86,339 |
|
|
$ |
90,129 |
|
|
$ |
72,842 |
|
|
|
|
|
|
|
|
|
|
|
114
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
(Dollars in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Annuity – Exclusive Distribution |
|
$ |
2,459,833 |
|
|
$ |
2,488,634 |
|
|
$ |
2,466,017 |
|
Traditional Annuity – Independent Distribution |
|
|
7,147,166 |
|
|
|
5,640,189 |
|
|
|
3,763,282 |
|
Traditional and Universal Life Insurance |
|
|
2,544,906 |
|
|
|
2,504,689 |
|
|
|
2,463,722 |
|
Variable |
|
|
1,247,877 |
|
|
|
1,150,290 |
|
|
|
1,025,723 |
|
Corporate and Other |
|
|
727,254 |
|
|
|
404,174 |
|
|
|
452,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,127,036 |
|
|
|
12,187,976 |
|
|
|
10,171,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains in accumulated other
comprehensive income (loss) (A) |
|
|
(54,819 |
) |
|
|
43,799 |
|
|
|
126,591 |
|
Other classification adjustments |
|
|
(69,241 |
) |
|
|
(77,763 |
) |
|
|
(143,750 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated assets |
|
$ |
14,002,976 |
|
|
$ |
12,154,012 |
|
|
$ |
10,153,933 |
|
|
|
|
|
|
|
|
|
|
|
| |
(A) |
|
Amounts are net of adjustments, as applicable, to amortization of unearned revenue
reserves, deferred policy acquisition costs, deferred sales inducements, value of insurance
in force acquired and income taxes attributable to these items. |
Depreciation and amortization related to property, plant and equipment are allocated to the product
segments while the related property, equipment and capitalized software are generally allocated to
the Corporate and Other segment. Depreciation and amortization for the Corporate and Other segment
include $7.8 million for 2007, $7.6 million for 2006 and $6.8 million for 2005 relating to leases
with affiliates. In the consolidated statements of income, we record these depreciation amounts
net of related lease income from affiliates.
Our investment in equity method investees and the related equity income and interest expense are
attributable to the Corporate and Other segment. Expenditures for long-lived assets were not
significant during the periods presented above. Goodwill at December 31, 2007 and 2006 is
allocated among the segments as follows: Exclusive Annuity ($3.9 million), Traditional and
Universal Life Insurance ($6.1 million) and Corporate ($1.2 million).
Net statutory premiums collected, which include premiums collected from annuities and universal
life-type products that are not included in revenues for GAAP reporting, totaled $2,078.4 million
in 2007, $2,296.2 million in 2006 and $1,432.7 million in 2005. Premiums are concentrated in the
following states:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
| |
|
2007 |
|
2006 |
|
2005 |
Life and annuity collected premiums (excluding
Independent Annuity segment): |
|
|
|
|
|
|
|
|
|
|
|
|
Iowa |
|
|
27.7 |
% |
|
|
28.1 |
% |
|
|
27.1 |
% |
Kansas |
|
|
15.7 |
|
|
|
16.5 |
|
|
|
18.6 |
|
Oklahoma |
|
|
6.0 |
|
|
|
7.4 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent Annuity segment collected premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
10.1 |
|
|
|
7.9 |
|
|
|
3.6 |
|
Florida |
|
|
9.2 |
|
|
|
10.3 |
|
|
|
14.4 |
|
Texas |
|
|
7.1 |
|
|
|
9.2 |
|
|
|
8.2 |
|
California |
|
|
7.1 |
|
|
|
7.6 |
|
|
|
10.2 |
|
North Carolina |
|
|
5.1 |
|
|
|
5.5 |
|
|
|
8.3 |
|
115
FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15) Quarterly Financial Information (Unaudited)
Unaudited quarterly results of operations are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
| Quarter ended |
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
| |
|
(Dollars in thousands, except per share data) |
|
Premiums and product charges |
|
$ |
61,523 |
|
|
$ |
66,905 |
|
|
$ |
63,880 |
|
|
$ |
66,903 |
|
Net investment income |
|
|
149,962 |
|
|
|
154,582 |
|
|
|
157,016 |
|
|
|
166,471 |
|
Derivative income (loss) |
|
|
(3,877 |
) |
|
|
44,826 |
|
|
|
6,327 |
|
|
|
(52,227 |
) |
Realized/unrealized gains (losses)
on investments |
|
|
1,456 |
|
|
|
1,156 |
|
|
|
3,932 |
|
|
|
(775 |
) |
Total revenues |
|
|
216,160 |
|
|
|
273,915 |
|
|
|
237,668 |
|
|
|
186,856 |
|
Net income |
|
|
24,111 |
|
|
|
33,846 |
|
|
|
16,499 |
|
|
|
11,883 |
|
Net income applicable to common stock |
|
|
24,073 |
|
|
|
33,809 |
|
|
|
16,462 |
|
|
|
11,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
$ |
0.81 |
|
|
$ |
1.14 |
|
|
$ |
0.55 |
|
|
$ |
0.40 |
|
Earnings per common share – assuming
dilution |
|
$ |
0.80 |
|
|
$ |
1.12 |
|
|
$ |
0.54 |
|
|
$ |
0.39 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
| Quarter ended |
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
| |
|
(Dollars in thousands, except per share data) |
|
Premiums and product charges |
|
$ |
59,702 |
|
|
$ |
62,268 |
|
|
$ |
60,290 |
|
|
$ |
61,174 |
|
Net investment income |
|
|
122,380 |
|
|
|
128,972 |
|
|
|
137,378 |
|
|
|
147,106 |
|
Derivative income (loss) |
|
|
16,832 |
|
|
|
(22,431 |
) |
|
|
29,042 |
|
|
|
46,897 |
|
Realized/unrealized gains (losses)
on investments |
|
|
11,604 |
|
|
|
222 |
|
|
|
(256 |
) |
|
|
2,401 |
|
Total revenues |
|
|
216,067 |
|
|
|
175,196 |
|
|
|
232,439 |
|
|
|
263,651 |
|
Net income |
|
|
27,734 |
|
|
|
17,702 |
|
|
|
20,706 |
|
|
|
23,987 |
|
Net income applicable to common stock |
|
|
27,696 |
|
|
|
17,665 |
|
|
|
20,669 |
|
|
|
23,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
$ |
0.95 |
|
|
$ |
0.60 |
|
|
$ |
0.70 |
|
|
$ |
0.81 |
|
Earnings per common share – assuming
dilution |
|
$ |
0.93 |
|
|
$ |
0.59 |
|
|
$ |
0.69 |
|
|
$ |
0.80 |
|
The differences between the derivative income (loss) by quarter primarily correspond to the
performance of the indices upon which our call options are based and the timing of option
settlements. These differences are partially offset by changes to the embedded derivatives in
index contracts included in benefits and expenses. The net impact of changes in unrealized gains
and losses on derivates on net income is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter ended |
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
| |
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
2007 |
|
$ |
1,343 |
|
|
$ |
8,278 |
|
|
$ |
(10,319 |
) |
|
$ |
(12,802 |
) |
2006 |
|
|
2,455 |
|
|
|
475 |
|
|
|
(1,864 |
) |
|
|
(130 |
) |
Net income was decreased $3.2 million in the second quarter of 2006 due to the settlement of a
lawsuit. Net income was increased $2.6 million in the third quarter of 2006 due to an adjustment
to an embedded derivative. The lawsuit settlement and embedded derivative adjustment are explained
in Note 1, “Significant Accounting Policies – Recognition of Premium Revenues and Costs.”
116
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
At the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective. Disclosure controls and procedures are designed
to ensure that information required to be disclosed in reports filed or submitted under the
Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files or submits under the
Act is accumulated and communicated to the issuer’s management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Our internal control over financial reporting changes from time-to-time as we modify and enhance
our systems and processes to meet our dynamic needs. Changes are also made as we strive to be more
efficient in how we conduct our business. Any significant changes in controls are evaluated prior
to implementation to help ensure the continued effectiveness of our internal controls and internal
control environment. While changes have taken place in our internal controls during the quarter
ended December 31, 2007, there have been no changes that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
See page 70 for Management’s Report on Internal Control Over Financial Reporting. There have been
no significant changes in our internal controls or in other factors that could significantly affect
these controls subsequent to the date of this examination.
ITEM 9B. OTHER INFORMATION
There is no information required to be disclosed on Form 8-K for the quarter ended December 31,
2007 which has not been previously reported.
PART III
The information required by Part III, Items 10 through 14, is hereby incorporated by reference from
our definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within
120 days after December 31, 2007.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
|
|
|
|
|
|
|
|
| (a) |
|
|
1. |
|
|
Financial Statements. See Table of Contents following the cover page for a list
of financial statements included in this Report. |
|
|
|
|
|
|
|
|
|
| |
|
|
2. |
|
|
Financial Statement Schedules. The following financial statement
schedules are included as part of this Report immediately following the signature
page: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule I – Summary of Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule II – Condensed Financial Information of Registrant (Parent Company) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule III – Supplementary Insurance Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule IV – Reinsurance |
117
All other schedules are omitted, either because they are not applicable, not required,
or because the information they contain is included elsewhere in the consolidated
financial statements or notes.
| |
|
|
3(i)(a)
|
|
Restated Articles of Incorporation, filed with Iowa Secretary of State March 19, 1996 (G) |
3(i)(b)
|
|
Articles of Amendment, Designation of Series A Preferred Stock, filed with Iowa Secretary
of State April 30, 1996 (G) |
3(i)(c)
|
|
Articles of Amendment, Designation of Series B Preferred Stock, filed with Iowa Secretary
of State May 30, 1997 (G) |
3(i)(d)
|
|
Articles of Correction, filed with Iowa Secretary of State October 27, 2000 (G) |
3(i)(f)
|
|
Articles of Amendment, filed with Iowa Secretary of State May 15, 2003 (G) |
3(i)(g)
|
|
Articles of Amendment, filed with Iowa Secretary of State May 14, 2004 (G) |
3(ii)(a)
|
|
Second Restated Bylaws, adopted May 14, 2004 (G) |
3(ii)(b)
|
|
Amendment to Article VI of Second Restated Bylaws adopted May 16, 2007 (P) |
4.1
|
|
Form of Class A Common Stock Certificate of the Registrant (A) |
4.2
|
|
Restated Stockholders’ Agreement Regarding Management and Transfer of Shares of Class B
Common Stock of FBL Financial Group, Inc. dated as of March 31, 2004 (G) |
4.3
|
|
Certificate of Trust; Declaration of Trust of FBL Financial Group Capital Trust dated May
30, 1997, including in Annex I thereto the form of Trust Preferred Security and the form
of Trust Common Security; Subordinated Deferrable Interest Note Agreement dated May 30,
1997 between FBL Financial Group, Inc. and FBL Financial Group Capital Trust, including
therein the form of Subordinated Deferrable Interest Note; Preferred Securities Guarantee
Agreement of FBL Financial Group, Inc., dated May 30, 1997 (B) |
4.4(a)
|
|
Master Transaction Agreement between Federal Home Loan Bank of Des Moines and Farm Bureau
Life Insurance Company dated May 1, 2006 (M) |
4.4(b)
|
|
Advance Agreement between Federal Home Loan Bank of Des Moines and Farm Bureau Life
Insurance Company dated September 12, 2006 (M) |
4.5
|
|
Amended and Restated Credit Agreement and related Schedules and Exhibits dated as of
October 7, 2005 between FBL Financial Group, Inc. and LaSalle Bank National Association.
These documents are not filed pursuant to the exception of Regulation S-K, Item
601(b)(4)(iii)(A); FBL Financial Group, Inc. agrees to furnish these documents to the
Commission upon request. |
4.6
|
|
Indenture, dated as of April 12, 2004, between FBL Financial Group, Inc. and Deutsche
Bank Trust Company Americas as Trustee (F) |
4.7
|
|
Form of 5.85% Senior Note Due 2014 (F) |
4.8
|
|
Revolving Demand Note, dated as of September 20, 2004, between Farm Bureau Life Insurance
Company and Farm Bureau Mutual Insurance Company (H) |
4.9
|
|
Revolving Demand Note, dated as of September 20, 2004, between EquiTrust Life Insurance
Company and Farm Bureau Mutual Insurance Company (H) |
4.10
|
|
Indenture, dated as of March 12, 2007, between FBL Financial Group, Inc. and LaSalle
Bank National Association as Trustee (O) |
4.11
|
|
Form of 5.875% Senior Note Due 2017 (O) |
10.1
|
|
2006 Class A Common Stock Compensation Plan adopted May 17, 2006 (L) * |
10.1(a)
|
|
Form of Stock Option Agreement, pursuant to the FBL Financial Group, Inc. 2006 Class A
Common Stock Compensation Plan (L)* |
10.2
|
|
Trademark License from the American Farm Bureau Federation to Farm Bureau Life Insurance
Company dated May 20, 1987 (A) |
10.3
|
|
Membership Agreement between American Farm Bureau Federation to the Iowa Farm Bureau
Federation dated February 13, 1987 (A) |
10.4
|
|
Form of Royalty Agreement with Farm Bureau organizations (I) |
10.5
|
|
Executive Salary and Bonus Deferred Compensation Plan, effective June 1, 2005 (J) * |
10.6
|
|
2008 Revised Rules for Payment of Meeting Fees, Retainers and Expenses to the Board of
Directors * |
10.7
|
|
Form of Services Agreement between FBL Financial Group, Inc. and Farm Bureau Management
Corporation, dated as of January 1, 1996 (A) |
10.8
|
|
Management Services Agreement between FBL Financial Group, Inc. and Farm Bureau Mutual
effective as of January 1, 2003 (E) |
10.10
|
|
Management Performance Plan (2008) sponsored by FBL Financial Group, Inc. * |
118
| |
|
|
10.14
|
|
Lease Agreement dated as of March 31, 1998 between IFBF Property
Management, Inc., FBL Financial Group, Inc. and Farm Bureau Mutual
Insurance Company (C) |
10.15
|
|
Building Management Services Agreement dated as of March 31, 1998
between IFBF Property Management, Inc. and FBL Financial Group, Inc.
(C) |
10.16
|
|
Coinsurance Agreement between EquiTrust Life Insurance Company and
American Equity Investment Life Insurance Company, dated December 29,
2003 (E) |
10.17
|
|
First Amendment to the Coinsurance Agreement by and between EquiTrust
Life Insurance Company and American Equity Investment Life Insurance
Company, effective August 1, 2004 (H) |
10.18
|
|
Form of Change In Control Agreement Form B, dated as of April 22, 2002
between the Company and each of James W. Noyce, Stephen M. Morain,
John M. Paule and JoAnn Rumelhart, and dated as of November 24, 2004
between the Company and Bruce A. Trost, and January 1, 2007 between
the Company and James P. Brannen (D) * |
10.19
|
|
Form of Change In Control Agreement Form B, dated as of April 22, 2002
between the Company and each of Douglas W. Gumm, Donald J. Seibel and
Lou Ann Sandburg, dated as of November 24, 2004 between the Company
and David T. Sebastian, and dated as of August 16, 2007 between the
Company and Richard J. Kypta (D) * |
10.22
|
|
Form of Restricted Stock Agreement, dated as of January 16, 2006
between the Company and each of James W. Noyce, Stephen M. Morain,
John M. Paule, JoAnn Rumelhart, Bruce A. Trost, James P. Brannen,
Douglas W. Gumm, Lou Ann Sandburg and David T. Sebastian (K) * |
10.23
|
|
Form of Early Retirement Agreement, dated June 1, 1993 executed by the
Company and each of Stephen M. Morain, James W. Noyce and JoAnn
Rumelhart (K) * |
10.24
|
|
Summary of Named Executive Officer Compensation * |
10.25
|
|
Form of Restricted Stock Agreement, dated as of February 20, 2007
between the Company and each of James W. Noyce, Stephen M. Morain,
John M. Paule, JoAnn Rumelhart, Bruce A. Trost, James P. Brannen,
Douglas W. Gumm, Lou Ann Sandburg, David T. Sebastian and Donald J.
Seibel (N) * |
10.26
|
|
Form of Restricted Stock Agreement, dated as of February 19, 2008
between the Company and each of James W. Noyce, Richard J. Kypta, John
M. Paule, JoAnn Rumelhart, Bruce A. Trost, James P. Brannen, Douglas
W. Gumm, Lou Ann Sandburg, David T. Sebastian and Donald J. Seibel * |
12
|
|
Statement Regarding Computation of Ratios of Earnings to Fixed Charges |
21
|
|
Subsidiaries of FBL Financial Group, Inc. |
23
|
|
Consent of Independent Registered Public Accounting Firm |
31.1
|
|
Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2
|
|
Certification Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
* exhibit relates to a compensatory plan for management or directors
Incorporated by reference to:
(A) Form S-1 filed on July 11, 1996, File No. 333-04332
(B) Form 8-K filed on June 6, 1997, File No. 001-11917
(C) Form 10-Q for the period ended March 31, 1998, File No. 001-11917
(D) Form 10-Q for the period ended June 30, 2002, File No. 001-11917
(E) Form 10-K for the period ended December 31, 2003, File No. 001-11917
(F) Form S-4 filed on May 5, 2004, File No. 333-115197
(G) Form 10-Q for the period ended June 30, 2004, File No. 001-11917
(H) Form 10-Q for the period ended September 30, 2004, File No. 001-11917
(I) Form 10-Q for the period ended March 31, 2005, File No. 001-11917
(J) Form 10-Q for the period ended June 30, 2005, File No. 001-11917
(K) Form 10-K for the period ended December 31, 2005, File No. 001-11917
(L) Form 10-Q for the period ended June 30, 2006, File No. 001-11917
(M) Form 10-Q for the period ended September 30, 2006, File No. 001-11917
(N) Form 10-K for the period ended December 31, 2006, File No. 001-11917
(O) Form S-4 filed on April 6, 2007, File No. 333-141949
(P) Form 8-K filed on May 16, 2007, File No. 001-11917
119
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, this 20th day of February, 2008.
| |
|
|
|
|
| |
FBL Financial Group, Inc.
|
|
| |
By: |
/s/ James W. Noyce
|
|
| |
|
James W. Noyce |
|
| |
|
Chief Executive Officer |
|
| |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated;
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
/s/ JAMES W. NOYCE
|
|
Chief Executive Officer (Principal Executive Officer)
|
|
February 20, 2008 |
James W. Noyce
|
|
and Director |
|
|
|
|
|
|
|
/s/ JAMES P. BRANNEN
|
|
Chief Financial Officer and Chief Administrative Officer
|
|
February 20, 2008 |
James P. Brannen |
|
|
|
|
|
|
|
|
|
/s/ CRAIG A. LANG
|
|
Chairman of the Board and Director
|
|
February 20, 2008 |
Craig A. Lang |
|
|
|
|
|
|
|
|
|
/s/ JERRY L. CHICOINE
|
|
Vice Chair and Director
|
|
February 20, 2008 |
Jerry L. Chicoine |
|
|
|
|
|
|
|
|
|
/s/ STEVE L. BACCUS
|
|
Director
|
|
February 20, 2008 |
Steve L. Baccus |
|
|
|
|
|
|
|
|
|
/s/ TIM H. GILL
|
|
Director
|
|
February 20, 2008 |
Tim H. Gill |
|
|
|
|
|
|
|
|
|
/s/ ROBERT H. HANSON
|
|
Director
|
|
February 20, 2008 |
Robert H. Hanson |
|
|
|
|
|
|
|
|
|
/s/ CRAIG D. HILL
|
|
Director
|
|
February 20, 2008 |
Craig D. Hill |
|
|
|
|
|
|
|
|
|
/s/ PAUL E. LARSON
|
|
Director
|
|
February 20, 2008 |
Paul E. Larson |
|
|
|
|
|
|
|
|
|
/s/ EDWARD W. MEHRER
|
|
Director
|
|
February 20, 2008 |
Edward W. Mehrer |
|
|
|
|
|
|
|
|
|
/s/ KEITH R. OLSEN
|
|
Director
|
|
February 20, 2008 |
Keith R. Olsen |
|
|
|
|
|
|
|
|
|
/s/ KIM M. ROBAK
|
|
Director
|
|
February 20, 2008 |
Kim M. Robak |
|
|
|
|
|
|
|
|
|
/s/ JOHN E. WALKER
|
|
Director
|
|
February 20, 2008 |
John E. Walker |
|
|
|
|
120
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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,
2007 and 2006, 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, 2007, and have issued
our report thereon dated February 14, 2008 (included elsewhere in this Form 10-K). Our audits also
included the financial statement schedules listed in Item 15(a)2 of this Form 10-K. These
schedules are the responsibility of the Company’s management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material respects the
information set forth therein. As discussed in Note 1 to the consolidated financial statements, in
2007 the Company changed its methods of accounting for the treatment of modifications or exchanges
of insurance contracts, income tax contingencies and cash flow hedges on certain fixed annuity
contracts.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 14, 2008
121
Schedule I — Summary of Investments — Other
Than Investments in Related Parties
FBL FINANCIAL GROUP, INC.
December 31, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column B |
|
|
Column C |
|
|
Column D |
|
| |
|
|
|
|
|
|
|
|
|
Amount at which |
|
| |
|
|
|
|
|
|
|
|
|
shown in the balance |
|
| Type of Investment |
|
Cost (1) |
|
|
Value |
|
|
sheet |
|
| |
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Fixed maturity securities, available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
4,423,999 |
|
|
$ |
4,364,676 |
|
|
$ |
4,364,676 |
|
Mortgage and asset-backed securities |
|
|
2,772,552 |
|
|
|
2,685,973 |
|
|
|
2,685,973 |
|
United States Government and agencies |
|
|
550,410 |
|
|
|
554,340 |
|
|
|
554,340 |
|
State, municipal and other governments |
|
|
1,248,887 |
|
|
|
1,252,899 |
|
|
|
1,252,899 |
|
Public utilities |
|
|
633,920 |
|
|
|
631,706 |
|
|
|
631,706 |
|
Redeemable preferred stocks |
|
|
33,218 |
|
|
|
32,998 |
|
|
|
32,998 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
9,662,986 |
|
|
$ |
9,522,592 |
|
|
|
9,522,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities, available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks: |
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts, and insurance companies |
|
|
20,152 |
|
|
$ |
21,062 |
|
|
|
21,062 |
|
Industrial, miscellaneous, and all other |
|
|
2,258 |
|
|
|
2,571 |
|
|
|
2,571 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
22,410 |
|
|
$ |
23,633 |
|
|
|
23,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate |
|
|
1,221,638 |
|
|
|
|
|
|
|
1,221,573 |
|
Derivative instruments |
|
|
122,443 |
|
|
$ |
114,771 |
|
|
|
114,771 |
|
Investment real estate |
|
|
2,559 |
|
|
|
|
|
|
|
2,559 |
|
Policy loans |
|
|
179,490 |
|
|
|
|
|
|
|
179,490 |
|
Other long-term investments |
|
|
1,300 |
|
|
|
|
|
|
|
1,300 |
|
Short-term investments |
|
|
72,005 |
|
|
|
|
|
|
|
72,005 |
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
11,284,831 |
|
|
|
|
|
|
$ |
11,137,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
On the basis of cost adjusted for repayments and amortization of premiums and accrual of
discounts for fixed maturities and short-term investments; original cost for equity
securities, derivative instruments, real estate and other long-term investments; and unpaid
principal balance for mortgage loans on real estate and policy loans. |
122
Schedule II — Condensed Financial Information of Registrant
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
Condensed Balance Sheets
(Dollars in thousands)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
53 |
|
|
$ |
952 |
|
Amounts receivable from affiliates |
|
|
10,831 |
|
|
|
9,515 |
|
Amounts receivable from subsidiaries (eliminated in consolidation) |
|
|
4,630 |
|
|
|
913 |
|
Accrued investment income |
|
|
509 |
|
|
|
69 |
|
Current income taxes recoverable |
|
|
2,927 |
|
|
|
1,596 |
|
Deferred income taxes |
|
|
6,660 |
|
|
|
2,871 |
|
Other assets |
|
|
2,481 |
|
|
|
2,293 |
|
Derivative instruments |
|
|
— |
|
|
|
368 |
|
Short-term investments |
|
|
5,916 |
|
|
|
2,126 |
|
Fixed maturities–available for sale, at market
(amortized cost: 2007 - $46,990) |
|
|
45,774 |
|
|
|
— |
|
Investments in subsidiaries (eliminated in consolidation) |
|
|
1,154,336 |
|
|
|
1,087,853 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,234,117 |
|
|
$ |
1,108,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities |
|
$ |
14,047 |
|
|
$ |
6,955 |
|
Amounts payable to affiliates |
|
|
35 |
|
|
|
1,161 |
|
Amounts payable to subsidiaries (eliminated in consolidation) |
|
|
214 |
|
|
|
1,321 |
|
Long-term debt |
|
|
316,930 |
|
|
|
218,399 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
331,226 |
|
|
|
227,836 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
3,000 |
|
|
|
3,000 |
|
Class A common stock |
|
|
101,221 |
|
|
|
86,462 |
|
Class B common stock |
|
|
7,525 |
|
|
|
7,519 |
|
Accumulated other comprehensive income (loss) |
|
|
(36,345 |
) |
|
|
28,195 |
|
Retained earnings |
|
|
827,490 |
|
|
|
755,544 |
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
902,891 |
|
|
|
880,720 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
1,234,117 |
|
|
$ |
1,108,556 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed financial statements.
123
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, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
4,425 |
|
|
$ |
408 |
|
|
$ |
2,211 |
|
Realized gains (losses) on investments |
|
|
(2,488 |
) |
|
|
408 |
|
|
|
3 |
|
Dividends from subsidiaries (eliminated in consolidation) |
|
|
13,900 |
|
|
|
98,200 |
|
|
|
42,400 |
|
Management fee income from affiliates |
|
|
3,072 |
|
|
|
2,631 |
|
|
|
2,590 |
|
Management fee income from subsidiaries (eliminated in
consolidation) |
|
|
6,345 |
|
|
|
6,808 |
|
|
|
4,384 |
|
Other income |
|
|
512 |
|
|
|
107 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
25,766 |
|
|
|
108,562 |
|
|
|
51,630 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
16,611 |
|
|
|
11,744 |
|
|
|
13,590 |
|
General and administrative expenses |
|
|
6,360 |
|
|
|
5,135 |
|
|
|
4,991 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
22,971 |
|
|
|
16,879 |
|
|
|
18,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,795 |
|
|
|
91,683 |
|
|
|
33,049 |
|
Income tax benefit |
|
|
4,376 |
|
|
|
2,221 |
|
|
|
2,667 |
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed income of subsidiaries |
|
|
7,171 |
|
|
|
93,904 |
|
|
|
35,716 |
|
Equity in undistributed income (dividends in excess of
equity income) of subsidiaries (eliminated in consolidation) |
|
|
79,168 |
|
|
|
(3,775 |
) |
|
|
37,126 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
86,339 |
|
|
$ |
90,129 |
|
|
$ |
72,842 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed financial statements.
124
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, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net cash provided by (used in) operating activities |
|
$ |
(5,502 |
) |
|
$ |
(53,760 |
) |
|
$ |
39,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Sale, maturity or repayment of investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities – available for sale |
|
|
1,383 |
|
|
|
– |
|
|
|
39,017 |
|
Short-term investments – net |
|
|
– |
|
|
|
48,550 |
|
|
|
– |
|
Acquisition of investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments – net |
|
|
(6,527 |
) |
|
|
– |
|
|
|
(44,651 |
) |
Fixed maturities – available for sale |
|
|
(97,600 |
) |
|
|
(14,930 |
) |
|
|
– |
|
Investment in subsidiaries (eliminated in consolidation) |
|
|
– |
|
|
|
(45,783 |
) |
|
|
(15,823 |
) |
Dividends from subsidiaries (eliminated in consolidation) |
|
|
13,900 |
|
|
|
64,624 |
|
|
|
23,064 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(88,844 |
) |
|
|
52,461 |
|
|
|
1,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
98,460 |
|
|
|
– |
|
|
|
– |
|
Repayment of short-term debt |
|
|
– |
|
|
|
– |
|
|
|
(46,273 |
) |
Excess tax deductions on stock-based compensation |
|
|
1,376 |
|
|
|
1,591 |
|
|
|
– |
|
Issuance of common stock |
|
|
8,004 |
|
|
|
12,663 |
|
|
|
8,639 |
|
Dividends paid |
|
|
(14,393 |
) |
|
|
(13,731 |
) |
|
|
(12,309 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
93,447 |
|
|
|
523 |
|
|
|
(49,943 |
) |
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(899 |
) |
|
|
(776 |
) |
|
|
(8,414 |
) |
Cash and cash equivalents at beginning of year |
|
|
952 |
|
|
|
1,728 |
|
|
|
10,142 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
53 |
|
|
$ |
952 |
|
|
$ |
1,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash received during the year for income taxes |
|
$ |
1,591 |
|
|
$ |
5,633 |
|
|
$ |
3,109 |
|
Cash paid during the year for interest |
|
|
15,095 |
|
|
|
11,744 |
|
|
|
11,779 |
|
Non-cash investing activity:
Fixed maturity securities contributed to subsidiary |
|
|
(47,263 |
) |
|
|
(49,117 |
) |
|
|
(34,177 |
) |
Short-term investments contributed to subsidiary |
|
|
(2,737 |
) |
|
|
– |
|
|
|
– |
|
Fixed maturity securities received from subsidiary |
|
|
– |
|
|
|
33,576 |
|
|
|
19,336 |
|
See accompanying notes to condensed financial statements.
125
Schedule II — Condensed Financial Information of Registrant (Continued)
FBL FINANCIAL GROUP, INC. (PARENT COMPANY)
Notes to Condensed Financial Statements
December 31, 2007
1. Basis of Presentation
The accompanying condensed financial statements should be read in conjunction with the consolidated
financial statements and notes thereto of FBL Financial Group, Inc.
In the parent company only financial statements, our investments in subsidiaries are stated at cost
plus equity in undistributed earnings of subsidiaries since the date of acquisition. In addition,
the carrying value includes net unrealized gains/losses on the subsidiaries’ investments classified
as “available-for-sale” and derivative instruments accounted for as hedges.
2. Dividends from Subsidiary
The parent company received cash dividends totaling $13.9 million in 2007, $64.6 million in 2006
and $23.1 million in 2005 and non-cash dividends consisting of fixed maturity securities including
purchased interest with a market value of $33.6 million in 2006 and $19.3 million in 2005. There
were no non-cash dividends received during 2007.
3. Debt
See Note 7 to the consolidated financial statements for a description of the parent company’s
long-term debt. This debt matures as follows: 2010 — $46.0 million, 2013 and thereafter — $270.9
million.
126
Schedule III — Supplementary Insurance Information
FBL FINANCIAL GROUP, INC.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column B |
|
|
Column C |
|
|
Column D |
|
|
Column E |
|
| |
|
Deferred |
|
|
Future policy |
|
|
|
|
|
|
|
|
| |
|
policy |
|
|
benefits, losses, |
|
|
|
|
|
|
Other |
|
| |
|
acquisition |
|
|
claims and loss |
|
|
Unearned |
|
|
policyholder |
|
| |
|
costs |
|
|
expenses |
|
|
revenues |
|
|
funds |
|
| |
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
Annuity-Exclusive
Distribution |
|
$ |
80,684 |
|
|
$ |
1,825,394 |
|
|
$ |
– |
|
|
$ |
392,257 |
|
Traditional
Annuity-Independent
Distribution |
|
|
468,528 |
|
|
|
6,769,663 |
|
|
|
– |
|
|
|
56,050 |
|
Traditional and
Universal Life
Insurance |
|
|
230,398 |
|
|
|
2,003,916 |
|
|
|
10,970 |
|
|
|
153,555 |
|
Variable |
|
|
156,055 |
|
|
|
204,877 |
|
|
|
17,287 |
|
|
|
7,032 |
|
Corporate and Other |
|
|
– |
|
|
|
68,360 |
|
|
|
– |
|
|
|
– |
|
Impact of
unrealized gains/
losses |
|
|
55,490 |
|
|
|
– |
|
|
|
191 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
991,155 |
|
|
$ |
10,872,210 |
|
|
$ |
28,448 |
|
|
$ |
608,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
Annuity-Exclusive
Distribution |
|
$ |
78,169 |
|
|
$ |
1,830,561 |
|
|
$ |
– |
|
|
$ |
399,051 |
|
Traditional
Annuity-Independent
Distribution |
|
|
384,375 |
|
|
|
5,366,681 |
|
|
|
– |
|
|
|
1,268 |
|
Traditional and
Universal Life
Insurance |
|
|
220,858 |
|
|
|
1,966,198 |
|
|
|
11,801 |
|
|
|
153,549 |
|
Variable |
|
|
146,934 |
|
|
|
211,048 |
|
|
|
17,319 |
|
|
|
8,976 |
|
Corporate and Other |
|
|
– |
|
|
|
71,675 |
|
|
|
– |
|
|
|
– |
|
Impact of
unrealized gains/
losses |
|
|
(2,616 |
) |
|
|
– |
|
|
|
(684 |
) |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
827,720 |
|
|
$ |
9,446,163 |
|
|
$ |
28,436 |
|
|
$ |
562,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
Annuity-Exclusive
Distribution |
|
$ |
71,879 |
|
|
$ |
1,821,989 |
|
|
$ |
– |
|
|
$ |
391,030 |
|
Traditional
Annuity-Independent
Distribution |
|
|
290,246 |
|
|
|
3,570,388 |
|
|
|
– |
|
|
|
977 |
|
Traditional and
Universal Life
Insurance |
|
|
207,957 |
|
|
|
1,926,884 |
|
|
|
12,352 |
|
|
|
159,542 |
|
Variable |
|
|
138,651 |
|
|
|
216,908 |
|
|
|
17,399 |
|
|
|
9,314 |
|
Corporate and Other |
|
|
– |
|
|
|
69,363 |
|
|
|
– |
|
|
|
– |
|
Impact of
unrealized gains/
losses |
|
|
(13,666 |
) |
|
|
– |
|
|
|
(361 |
) |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
695,067 |
|
|
$ |
7,605,532 |
|
|
$ |
29,390 |
|
|
$ |
560,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
Schedule III — Supplementary Insurance Information (Continued)
FBL FINANCIAL GROUP, INC.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column F |
|
|
Column G |
|
|
Column H |
|
|
Column I |
|
|
Column J |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Benefits, |
|
|
of deferred |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
claims, losses |
|
|
policy |
|
|
Other |
|
| |
|
Premium |
|
|
Net investment |
|
|
and settlement |
|
|
acquisition |
|
|
operating |
|
| |
|
revenue |
|
|
income |
|
|
expenses |
|
|
costs |
|
|
expenses |
|
| |
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Annuity-Exclusive
Distribution |
|
$ |
1,111 |
|
|
$ |
146,267 |
|
|
$ |
97,204 |
|
|
$ |
9,942 |
|
|
$ |
10,246 |
|
Traditional Annuity-Independent
Distribution |
|
|
20,466 |
|
|
|
309,131 |
|
|
|
277,212 |
|
|
|
47,588 |
|
|
|
12,212 |
|
Traditional and Universal Life
Insurance |
|
|
190,860 |
|
|
|
144,231 |
|
|
|
191,030 |
|
|
|
20,133 |
|
|
|
43,825 |
|
Variable |
|
|
46,790 |
|
|
|
13,658 |
|
|
|
18,482 |
|
|
|
7,587 |
|
|
|
24,059 |
|
Corporate and Other |
|
|
– |
|
|
|
14,744 |
|
|
|
– |
|
|
|
– |
|
|
|
3,096 |
|
Change in net unrealized
gains/losses on derivatives |
|
|
– |
|
|
|
– |
|
|
|
(18,265 |
) |
|
|
(16,233 |
) |
|
|
– |
|
Impact of realized gains/losses |
|
|
(16 |
) |
|
|
– |
|
|
|
(536 |
) |
|
|
(623 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
259,211 |
|
|
$ |
628,031 |
|
|
$ |
565,127 |
|
|
$ |
68,394 |
|
|
$ |
93,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Annuity-Exclusive
Distribution |
|
$ |
1,091 |
|
|
$ |
146,433 |
|
|
$ |
94,394 |
|
|
$ |
7,074 |
|
|
$ |
10,342 |
|
Traditional
Annuity-Independent
Distribution |
|
|
15,612 |
|
|
|
225,206 |
|
|
|
155,787 |
|
|
|
39,550 |
|
|
|
10,671 |
|
Traditional and Universal Life
Insurance |
|
|
183,398 |
|
|
|
142,620 |
|
|
|
188,784 |
|
|
|
12,823 |
|
|
|
43,201 |
|
Variable |
|
|
43,334 |
|
|
|
14,437 |
|
|
|
22,794 |
|
|
|
7,533 |
|
|
|
24,381 |
|
Corporate and Other |
|
|
– |
|
|
|
7,140 |
|
|
|
– |
|
|
|
– |
|
|
|
2,558 |
|
Change in net unrealized
gains/losses on derivatives |
|
|
– |
|
|
|
– |
|
|
|
71,688 |
|
|
|
1,742 |
|
|
|
– |
|
Impact of realized gains/losses |
|
|
(1 |
) |
|
|
– |
|
|
|
17 |
|
|
|
(181 |
) |
|
|
(54 |
) |
Lawsuit settlement |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
4,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
243,434 |
|
|
$ |
535,836 |
|
|
$ |
533,464 |
|
|
$ |
68,541 |
|
|
$ |
95,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Annuity-Exclusive
Distribution |
|
$ |
824 |
|
|
$ |
146,620 |
|
|
$ |
93,439 |
|
|
$ |
9,097 |
|
|
$ |
10,474 |
|
Traditional
Annuity-Independent
Distribution |
|
|
10,895 |
|
|
|
161,566 |
|
|
|
108,529 |
|
|
|
30,559 |
|
|
|
8,726 |
|
Traditional and Universal Life
Insurance |
|
|
178,590 |
|
|
|
141,933 |
|
|
|
182,800 |
|
|
|
12,438 |
|
|
|
47,610 |
|
Variable |
|
|
40,569 |
|
|
|
14,653 |
|
|
|
20,769 |
|
|
|
6,569 |
|
|
|
25,573 |
|
Corporate and Other |
|
|
– |
|
|
|
10,671 |
|
|
|
– |
|
|
|
– |
|
|
|
2,944 |
|
Change in net unrealized
gains/losses on derivatives |
|
|
– |
|
|
|
– |
|
|
|
5,111 |
|
|
|
(1,848 |
) |
|
|
– |
|
Impact of realized gains/losses |
|
|
(2 |
) |
|
|
– |
|
|
|
61 |
|
|
|
392 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
230,876 |
|
|
$ |
475,443 |
|
|
$ |
410,709 |
|
|
$ |
57,207 |
|
|
$ |
95,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
Schedule IV — Reinsurance
FBL FINANCIAL GROUP, INC.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column B |
|
|
Column C |
|
|
Column D |
|
|
Column E |
|
|
Column F |
|
| |
|
|
|
|
|
|
|
|
|
Assumed from |
|
|
|
|
|
|
Percent of |
|
| |
|
|
|
|
|
Ceded to other |
|
|
other |
|
|
|
|
|
|
amount |
|
| |
|
Gross amount |
|
|
companies |
|
|
companies |
|
|
Net amount |
|
|
assumed to net |
|
| |
|
(Dollars in thousands) |
Year ended December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force, at
end of year |
|
$ |
41,092,455 |
|
|
$ |
8,482,773 |
|
|
$ |
1,573,705 |
|
|
$ |
34,183,387 |
|
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and other
considerations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive and
index product charges |
|
$ |
94,686 |
|
|
$ |
952 |
|
|
$ |
20,795 |
|
|
$ |
114,529 |
|
|
|
18.2 |
% |
Traditional life insurance
premiums |
|
|
159,436 |
|
|
|
18,455 |
|
|
|
3,701 |
|
|
|
144,682 |
|
|
|
2.6 |
|
Accident and health premiums |
|
|
11,715 |
|
|
|
11,361 |
|
|
|
– |
|
|
|
354 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
265,837 |
|
|
$ |
30,768 |
|
|
$ |
24,496 |
|
|
$ |
259,565 |
|
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force, at
end of year |
|
$ |
38,371,878 |
|
|
$ |
8,012,799 |
|
|
$ |
1,626,519 |
|
|
$ |
31,985,598 |
|
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and other
considerations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive and
index product charges |
|
$ |
84,825 |
|
|
$ |
1,726 |
|
|
$ |
21,934 |
|
|
$ |
105,033 |
|
|
|
20.9 |
% |
Traditional life insurance
premiums |
|
|
151,338 |
|
|
|
17,028 |
|
|
|
4,091 |
|
|
|
138,401 |
|
|
|
3.0 |
|
Accident and health premiums |
|
|
12,356 |
|
|
|
11,941 |
|
|
|
– |
|
|
|
415 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
248,519 |
|
|
$ |
30,695 |
|
|
$ |
26,025 |
|
|
$ |
243,849 |
|
|
|
10.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force, at
end of year |
|
$ |
35,916,963 |
|
|
$ |
7,068,167 |
|
|
$ |
1,844,484 |
|
|
$ |
30,693,280 |
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and other
considerations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive and
index product charges |
|
$ |
77,611 |
|
|
$ |
1,709 |
|
|
$ |
20,356 |
|
|
$ |
96,258 |
|
|
|
21.1 |
% |
Traditional life insurance
premiums |
|
|
145,990 |
|
|
|
15,839 |
|
|
|
4,467 |
|
|
|
134,618 |
|
|
|
3.3 |
|
Accident and health premiums |
|
|
13,245 |
|
|
|
12,860 |
|
|
|
– |
|
|
|
385 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
236,846 |
|
|
$ |
30,408 |
|
|
$ |
24,823 |
|
|
$ |
231,261 |
|
|
|
10.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129