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| FFG > SEC Filings for FFG > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
Three months ended September 30, Nine months ended September 30,
2008 2007 2008 2007
(Dollars in thousands, except per share data)
Revenues $ 189,539 $ 237,668 $ 444,885 $ 727,743
Benefits and expenses 173,520 213,805 446,515 617,135
16,019 23,863 (1,630 ) 110,608
Income taxes (4,904 ) (7,904 ) 2,634 (37,251 )
Minority interest and equity income 101 540 75 1,099
Net income 11,216 16,499 1,079 74,456
Less dividends on Series B preferred stock (37 ) (37 ) (112 ) (112 )
Net income applicable to common stock $ 11,179 $ 16,462 $ 967 $ 74,344
Earnings per common share $ 0.37 $ 0.55 $ 0.03 $ 2.50
Earnings per common share - assuming
dilution $ 0.37 $ 0.54 $ 0.03 $ 2.46
Other data
Direct premiums collected, net of
reinsurance ceded:
Traditional Annuity - Exclusive
Distribution $ 73,667 $ 27,848 $ 183,440 $ 99,927
Traditional Annuity - Independent
Distribution 496,115 489,120 1,361,008 1,064,532
Traditional and Universal Life Insurance 47,087 45,015 143,427 138,942
Variable Annuity and Variable Universal
Life (1) 30,943 41,109 111,737 133,599
Reinsurance assumed and other 3,116 3,598 10,508 11,641
Total $ 650,928 $ 606,690 $ 1,810,120 $ 1,448,641
Direct life insurance in force, end of
quarter (in millions) $ 42,750 $ 40,307
Life insurance lapse rates 6.3 % 6.0 %
Withdrawal rates - individual traditional
annuity:
Exclusive Distribution 3.2 % 5.6 %
Independent Distribution 6.7 % 5.2 %
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(1) Amounts are net of portion ceded to and include amounts assumed from alliance partners.
FBL Financial Group, Inc. September 30, 2008
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. Direct premiums collected
in the Traditional Annuity - exclusive distribution and Traditional Annuity -
independent distribution segments increased for the 2008 periods due to lower
short-term market interest rates making certificates of deposits and other
short-term investments less attractive in relation to our traditional annuity
products. In addition, the number of individual licensed independent agents our
EquiTrust Life independent distribution channel increased to 23,651 at
September 30, 2008, from 18,902 at September 30, 2007. In an attempt to preserve
capital, it is our intention to reduce the direct premiums collected through the
Traditional Annuity - independent distribution channel to approximately
$200.0 million per quarter through rate and other actions taken in the second
half of 2008.
Our results of operations are materially affected by conditions in the financial
markets and the economy generally. The stress experienced by financial markets
that began in the second half of 2007 continued and substantially increased
during the third quarter of 2008. The volatility and disruption in the financial
markets have reached unprecedented levels. The availability and cost of credit
has been materially affected. These factors, combined with volatile oil prices,
depressed home prices and increasing foreclosures, falling equity market values,
declining business and consumer confidence and the risks of increased inflation
and unemployment, have precipitated an economic slowdown and fears of a severe
recession. This unprecedented market volatility and general decline in the
equity markets has directly and materially affected our results of operations
and our investment portfolio. Details regarding the impacts of the capital
markets and economy are summarized in the sections that follow. The most
significant impacts during the third quarter include an increase in realized
losses on investments, decreases in derivative income, a decrease in
profitability on variable products and an increase in unrealized losses on fixed
maturity securities and derivatives.
Net income applicable to common stock for the third quarter of 2008 was
$11.2 million compared to $16.5 million for the third quarter of 2007 and was
$1.0 million for the nine months ended September 30, 2008 compared to
$74.3 million for the 2007 period. These decreases are primarily due to realized
losses on investments and an increase in death benefits. These decreases were
partially offset by the change in unrealized gains and losses on derivative
instruments and the impact of an increase in the volume of business in force.
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.
Spreads Earned on our Universal Life and Individual Traditional Annuity Products
Nine months ended September 30,
2008 2007
Weighted average yield on cash and invested assets 5.95 % 6.06 %
Weighted average interest crediting rate/index cost 3.87 3.70
Spread 2.08 % 2.36 %
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The weighted average yield on cash and invested assets represents the yield on cash and investments backing the universal life and traditional annuity products net of investment expenses. The yield also includes gains or losses relating to our interest rate swap program for certain individual traditional annuities. The impact of the swap program was previously reported in the weighted average crediting rate/index costs and the 2007 results above have been restated to conform to the 2008 presentation. 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 spread noted above decreased in 2008 primarily due to a shift in the mix of direct business to products with a lower spread target and a decrease in spread earned on assumed business. See the "Segment Information" section that follows for a discussion of our spreads.
FBL Financial Group, Inc. September 30, 2008
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 periods 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 and (3) the cumulative effect of
change in accounting principles. The rationale for excluding these items from
operating income is also explained in the "Segment Information" section that
follows.
Impact of Operating Adjustments on Net Income
Three months ended September 30, Nine months ended September 30,
2008 2007 2008 2007
(Dollars in thousands)
Realized/unrealized gains (losses) on
investments $ (27,156 ) $ 3,932 $ (130,524 ) $ 6,544
Change in net unrealized gains/losses on
derivatives 21,188 (32,125 ) 64,178 (528 )
Change in amortization of:
Deferred policy acquisition costs (852 ) 9,572 (2,796 ) 191
Deferred sales inducements (4,620 ) 6,429 (13,944 ) (26 )
Value of insurance in force acquired (54 ) (3 ) 503 5
Unearned revenue reserve 23 - (170 ) (10 )
Cumulative effect of change in accounting
principle - - - (283 )
Income tax offset 4,015 4,268 28,964 (2,161 )
Net impact of operating income adjustments $ (7,456 ) $ (7,927 ) $ (53,789 ) $ 3,732
Three months ended September 30, Nine months ended September 30,
2008 2007 2008 2007
(Dollars in thousands, except per share data)
Summary of adjustments noted above after
offsets and income taxes:
Realized/unrealized gains (losses) on
investments $ (12,726 ) $ 2,392 $ (67,533 ) $ 4,713
Change in net unrealized gains/losses on
derivatives 5,270 (10,319 ) 13,744 (698 )
Cumulative effect of change in accounting
principle - - - (283 )
Net impact of operating income adjustments $ (7,456 ) $ (7,927 ) $ (53,789 ) $ 3,732
Net impact per common share - basic $ (0.25 ) $ (0.27 ) $ (1.80 ) $ 0.13
Net impact per common share - assuming
dilution $ (0.25 ) $ (0.26 ) $ (1.80 ) $ 0.12
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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 is recorded in the current period as an increase or decrease to amortization of the respective balances. While the unlocking process can take place at any time, as needs dictate, the process typically takes place annually with different blocks of business unlocked each quarter. The impact of unlocking in 2008 was primarily due to updating the amortization model for assumptions relating to withdrawal rates, mortality and the current volume of business in force. The impact in 2007 was primarily due to decreasing lapse assumptions in the models for our direct index annuity business.
FBL Financial Group, Inc. September 30, 2008
Impact of Unlocking on Pre-tax Income
Three months ended September 30, Nine months ended September 30,
2008 2007 2008 2007
(Dollars in thousands)
Amortization of deferred sales inducements $ 3 $ 8 $ (1,905 ) $ 1,129
Amortization of deferred policy acquisition
costs 1,432 (1,855 ) 2,079 (315 )
Amortization of unearned revenues (246 ) 546 (281 ) 544
Increase (decrease) to pre-tax income $ 1,189 $ (1,301 ) $ (107 ) $ 1,358
Impact per common share (basic and diluted),
net of tax $ 0.03 $ (0.03 ) $ - $ 0.03
Premiums and Product Charges
Three months ended September 30, Nine months ended September 30,
2008 2007 2008 2007
(Dollars in thousands)
Premiums and product charges:
Interest sensitive and index product charges $ 32,931 $ 29,129 $ 93,837 $ 84,045
Traditional life insurance premiums 36,282 34,751 111,184 108,263
Total $ 69,213 $ 63,880 $ 205,021 $ 192,308
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Premiums and product charges increased 8.3% in the third quarter of 2008 to
$69.2 million and 6.6% in the nine months ended September 30, 2008 to
$205.0 million. The increases in interest sensitive and index product charges
are principally driven by surrender charges on annuity and universal life
products and cost of insurance charges on variable universal life and universal
life products.
Surrender charges totaled $23.9 million in the nine-month period ended
September 30, 2008 compared to $16.3 million in the 2007 period. 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
premiums collected as summarized in the "Other data" table above, totaled
$9,699.3 million for the nine-month period in 2008 and $8,205.7 million for the
2007 period. We believe aging of the business in force is driving a portion of
the increase in surrender charges relating to our annuity business 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 a coinsurance agreement in
2001 and started selling annuities directly through EquiTrust Life independent
agents in the fourth quarter of 2003. Surrender charges on this coinsurance and
direct business totaled $21.7 million for the nine months ended September 30,
2008 and $14.1 million for the 2007 period.
Cost of insurance charges totaled $50.7 million in the nine months ended
September 30, 2008 and $48.8 million in the 2007 period. 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 45.9 years at September 30, 2008 and 45.4 years at
September 30, 2007.
Traditional premiums increased 2.7% to $111.2 million for the nine months ended
September 30, 2008 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
$21,776.2 million for the nine-month period in 2008 and $19,773.3 million for
the nine-month period in 2007. 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.
FBL Financial Group, Inc. September 30, 2008
Net investment income, which excludes investment income on separate account
assets relating to variable products, increased 15.8% in the third quarter of
2008 to $181.9 million and 13.2% in the nine months ended September 30, 2008 to
$522.6 million, primarily due to an increase in average invested assets. Average
invested assets in the nine-month period of 2008 increased 14.3% to
$11,688.8 million (based on securities at amortized cost) from $10,229.2 million
in the 2007 period, principally due to net premium inflows from the Life
Companies and proceeds from issuance of Senior Notes in March 2007. The
annualized yield earned on average invested assets decreased to 6.00% in the
nine months ended September 30, 2008 from 6.06% in the respective 2007 period.
Income from bond calls, tender offers and mortgage loan prepayments totaled
$1.7 million in the nine months ended September 30, 2008 compared to
$7.6 million in the respective 2007 period. Net investment income also includes
($0.3) million for the nine-month period in 2008 and ($1.3) million in 2007,
representing the change in net discount accretion on mortgage and asset-backed
securities resulting from changing prepayment speed assumptions as of the end of
each respective period. See the "Financial Condition - Investments" section that
follows for a description of how changes in prepayment speeds impact net
investment income.
Derivative Income (Loss)
Three months ended September 30, Nine months ended September 30,
2008 2007 2008 2007
(Dollars in thousands)
Derivative income (loss):
Components of derivative income (loss) from
call options:
Gains received at expiration $ 8,865 $ 55,010 $ 35,507 $ 117,043
Change in the difference between fair value
and remaining option cost at beginning and
end of period (15,458 ) (18,092 ) (107,289 ) 7,007
Cost of money for call options (32,533 ) (28,156 ) (97,781 ) 77,602
(39,126 ) 8,762 (169,563 ) 46,448
Other (1,825 ) (2,435 ) (1,969 ) 828
Total $ (40,951 ) $ 6,327 $ (171,532 ) $ 47,276
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Gains received at expiration decreased in 2008 as a result of declines in the
market indices on which our options are based, partially offset by growth in the
volume of index annuities in force. The average aggregate account value of index
annuities in force, which has increased due to new sales, totaled
$4,687.4 million for the nine months ended September 30, 2008 compared to
$4,003.8 million for the respective 2007 period. The changes in the difference
between the fair value of the call options and the remaining option costs are
caused primarily by the change in the S&P 500 Index® (upon which the majority of
our options are based).
Range of Index Appreciation for S&P 500 Index Options Expiring During the
Periods
Three months ended September 30, Nine months ended September 30,
2008 2007 2008 2007
Annual point-to-point strategy - 5.9%-22.7 % 0.0%-2.6 % 5.9%-22.7 %
Monthly point-to-point strategy - 5.6%-15.9 % - 4.4%-15.9 %
Monthly average strategy - one-year options - 7.5%-12.9 % 0.0%-6.3 % 1.2%-12.9 %
Monthly average strategy - two-year options 6.1%-12.9 % 8.1%-12.9 % 6.1%-14.1 % 8.1%-12.9 %
Daily average strategy - 6.8%-11.1 % 0.0%-5.2 % 2.1%-11.1 %
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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 growth in the volume of index annuities in force and increased option costs, which is driven largely by increased volatility in the equity markets. Other derivative income (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 income (loss) includes cash flows and the
FBL Financial Group, Inc. September 30, 2008
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." Derivative income (loss) will fluctuate based on market conditions.
Realized/Unrealized Gains (Losses) on Investments
Three months ended September 30, Nine months ended September 30,
2008 2007 2008 2007
(Dollars in thousands)
Realized/unrealized gains (losses) on investments:
Realized gains on sales $ 2,211 $ 4,343 $ 6,339 $ 9,358
Realized losses on sales (3,124 ) (5 ) (3,246 ) (45 )
Realized losses due to impairments (26,243 ) (406 ) (133,617 ) (2,842 )
Unrealized gains on trading securities - - - 73
Total $ (27,156 ) $ 3,932 $ (130,524 ) $ 6,544
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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. Realized losses on sales during the third quarter include a $2.3 million loss on a bank that experienced significant losses during the third quarter of 2008. See "Financial Condition - Investments" for details regarding our unrealized gains and losses on available-for-sale securities at September 30, 2008 and December 31, 2007. . . .
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