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| FFG > SEC Filings for FFG > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
channel offer a market value adjustment (MVA) feature which is based on U.S.
Treasury rates. This feature provides us interest rate protection when U.S.
Treasury interest rates are greater than the rates in effect when a contract is
issued and provides a benefit to contract holders when U.S. Treasury interest
rates are less than the rates in effect when a contract is issued. Late in 2008
and continuing into 2009, market conditions emerged with unprecedented low U.S.
Treasury yields providing an environment where contract holders were able to
surrender with smaller net surrender charges, increasing the level of surrender
activity. While we updated surrender assumptions in the models used to calculate
amortization of deferred policy acquisition costs and deferred sales inducements
in the fourth quarter of 2008, variances in actual net surrender charge income
during 2009 compared to projections resulted in additional amortization of
deferred policy acquisition costs in the first quarter. In addition, the
increased surrender activity negatively impacted our spreads in 2009 as we now
have call option assets that no longer back an index product.
We maintain certain capital levels in accordance with statutory and rating
agency requirements. Fixed annuity products generally place a strain on
statutory capital when sold and add to capital in subsequent years. As a result
of the significant growth of the EquiTrust Life independent distribution channel
business, our need for capital has increased in recent years. In addition, our
capital levels were negatively impacted during 2008 and 2009 as a result of the
impact of the increased surrender activity and realized and unrealized losses on
our investments. In the last half of 2008, we incurred additional debt to assist
with our capital requirements and increase our financial flexibility. We also
took rate and other actions to reduce sales of new fixed rate annuity contracts
at EquiTrust Life and are evaluating the terms and conditions for future
products to preserve our capital position. See the "Liquidity and Capital
Resources" section below for additional details regarding our capital position.
Results of Operations for the Three Months Ended March 31, 2009 and 2008
Three months ended March 31,
2009 2008
(Dollars in thousands,
except per share data)
Revenues $ 223,478 $ 111,370
Benefits and expenses 226,335 102,600
(2,857 ) 8,770
Income taxes 1,256 (2,458 )
Equity income 73 117
Net income (loss) (1,528 ) 6,429
Net loss attributable to noncontrolling interest 38 9
Net income (loss) attributable to FBL Financial Group, Inc. $ (1,490 ) $ 6,438
Earnings per common share $ (0.05 ) $ 0.21
Earnings per common share - assuming dilution $ (0.05 ) $ 0.21
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FBL Financial Group, Inc. March 31, 2009
Three months ended March 31,
2009 2008
(Dollars in thousands,
except per share data)
Other data
Direct premiums collected, net of reinsurance ceded:
Traditional Annuity - Exclusive Distribution $ 96,368 $ 45,348
Traditional Annuity - Independent Distribution 324,699 326,686
Traditional and Universal Life Insurance 49,860 47,259
Variable Annuity and Variable Universal Life (1) 26,180 41,921
Reinsurance assumed and other 2,936 3,680
Total $ 500,043 $ 464,894
Direct life insurance in force, end of quarter (in millions) $ 43,993 $ 41,576
Life insurance lapse rates 7.1 % 6.3 %
Withdrawal rates - individual traditional annuity:
Exclusive Distribution 4.9 % 3.6 %
Independent Distribution 20.8 % 5.9 %
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(1) Amounts are net of portion ceded to and include amounts assumed from alliance partners.
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 Traditional Annuity
- Exclusive Distribution premiums collected segment increased in 2009 primarily
due to lower short-term market interest rates making certificates of deposits
and other short-term investments less attractive in relation to our traditional
fixed annuity products. Direct premiums collected in the Traditional Annuity -
Independent Distribution segment decreased in 2009 as a result of rate and other
actions taken to preserve capital in the second half of 2008, partially offset
by a more favorable market environment for traditional annuity products.
Variable premiums collected tend to vary with 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.
The increase in the withdrawal rate for the Traditional Annuity - Independent
Distribution segment in 2009 is primarily due to the impact of low U.S. Treasury
yields on the MVA feature for our direct fixed annuity products, which provided
an environment where contract holders could surrender with smaller net surrender
charges. See additional details on this feature in the "Liquidity and Capital
Resources" section that follows. We also believe aging of the business in force
relating to the annuity business assumed under coinsurance agreements and
business written directly through the EquiTrust Life independent agents is
driving a portion of the increase in withdrawal rates 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.
Net Income (Loss) Attributable to FBL Financial Group, Inc.
Net income (loss) attributable to FBL Financial Group, Inc. (FBL Net Income
(Loss)) was ($1.5) million in the first quarter of 2009 compared to $6.4 million
for the 2008 period. As discussed in detail below, this decrease was primarily
due to the impact of increased surrender activity in the Traditional Annuity -
Independent Distribution segment and poor equity market performance on the
Variable segment. These items are partially offset by lower death benefits and
the impact of an increase in the volume of business in force in the Traditional
Annuity - Exclusive Distribution and Traditional and Universal Life Insurance
segments. The increase in volume of business in force is quantified by
summarizing the face amount of insurance in force for traditional 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 following discussion provides additional
details on the items impacting FBL Net Income (Loss).
Spreads Earned on our Universal Life and Individual Annuity Products
Three months ended March 31,
2009 2008
Weighted average yield on cash and invested assets 6.15 % 6.10 %
Weighted average interest crediting rate/index cost 3.98 3.92
Spread 2.17 % 2.18 %
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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 individual 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 2008 results above have
been restated to conform to the 2009 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. See the "Segment Information" section that follows for a discussion
of our spreads.
Impact of Operating Adjustments on FBL Net Income (Loss)
As noted in the "Segment Information" section that follows, we use both net
income (loss) and operating income to measure our operating results. Operating
income for the periods covered by this report equals net income (loss),
excluding the impact of realized gains and losses on investments and the change
in net unrealized gains and losses on derivatives. Our rationale for excluding
these items from operating income is also explained in Note 9 to our
consolidated financial statements.
Three months ended March 31,
2009 2008
(Dollars in thousands)
Realized losses on investments $ (19,670 ) $ (29,347 )
Change in net unrealized gains/losses on derivatives 16,159 22,199
Change in amortization of:
Deferred policy acquisition costs (6,850 ) (586 )
Deferred sales inducements (4,031 ) (5,613 )
Value of insurance in force acquired 5 156
Unearned revenue reserve (10 ) (85 )
Income tax offset 5,039 4,646
Net impact of operating income adjustments $ (9,358 ) $ (8,630 )
Summary of adjustments noted above after offsets and income
taxes:
Realized losses on investments $ (11,040 ) $ (12,165 )
Change in net unrealized gains/losses on derivatives 1,682 3,535
Net impact of operating income adjustments $ (9,358 ) $ (8,630 )
Net impact per common share - basic $ (0.31 ) $ (0.29 )
Net impact per common share - assuming dilution $ (0.31 ) $ (0.29 )
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Changes in FBL Net Income (Loss)
FBL Net Income (Loss) totaled ($1.5) million in 2009 and $6.4 million in 2008. A
detailed discussion of changes in FBL Net Income (Loss) is included below.
Three months ended
March 31,
2009 vs. 2008
(Dollars in thousands)
Premiums and product charges $ 13,840
Net investment income 15,575
Derivative loss 74,295
Realized losses on investments 9,677
Other income and other expenses (254 )
Interest sensitive and index products benefits and change in value of
index product embedded derivative (104,176 )
Traditional life insurance policy benefits 7,169
Underwriting, acquisition and insurance expenses (25,272 )
Interest expense (2,481 )
Income taxes 3,714
Noncontrolling interest and equity income (15 )
Total change in FBL Net Income (Loss) $ (7,928 )
Premiums and Product Charges
Three months ended March 31,
2009 2008
(Dollars in thousands)
Premiums and product charges:
Interest sensitive and index product charges $ 41,140 $ 29,121
Traditional life insurance premiums 37,954 36,133
Total $ 79,094 $ 65,254
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Premiums and product charges increased 21.2% in the first quarter of 2009 to
$79.1 million. The increase in interest sensitive and index product charges is
principally driven by surrender charges on annuity products.
Surrender charges totaled $17.9 million in the three months ended March 31, 2009
and $6.1 million in the 2008 period. Surrender charges increased primarily due
to an increase in surrenders relating to the impact of MVAs on certain products
sold by our EquiTrust Life independent distribution, as discussed in the "Impact
of Recent Business Environment" section above, and also due to growth in the
volume and aging of business in force.
Surrender Charges on EquiTrust Life Direct Fixed Annuity Contracts
Three months ended March 31,
2009 2008
(Dollars in thousands)
Surrender charges:
Gross surrender charges $ 64,609 $ 4,656
Market value adjustments (49,771 ) (1,263 )
Net surrender charges $ 14,838 $ 3,393
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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 $10,299.6 million for the three-month period in 2009 and $9,259.6 million for the three-month period in 2008.
Traditional premiums increased 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
$23,203.4 million for the three-month period in 2009 and $21,355.4 million for
the three-month period in 2008. 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
Net investment income, which excludes investment income on separate account
assets relating to variable products, increased 9.2% in the first quarter of
2009 to $184.1 million primarily due to an increase in average invested assets.
Average invested assets in the three-month period of 2009 increased 10.0% to
$12,446.5 million (based on securities at amortized cost) from $11,317.6 million
in the 2008 period, due principally to net premium inflows from the Life
Companies during the twelve-month period ended March 31, 2009. The annualized
yield earned on average invested assets decreased to 6.09% in the three months
ended March 31, 2009 from 6.14% in the respective 2008 period. The decrease in
yield is primarily due to holding higher cash and short-term investment balances
in order to maintain a more liquid position during a period of increased
surrender activity. In addition, short-term interest rates have declined
significantly. The yield on our primary short-term investment account was 0.19%
at March 31, 2009 compared to 3.20% at March 31, 2009.
Fee income from bond calls, tender offers and mortgage loan prepayments totaled
$0.1 million in the three months ended March 31, 2009 compared to $1.3 million
in the respective 2008 period. Net investment income also includes $1.3 million
in the three months ended March 31, 2009 compared to less than $0.1 million in
the 2008 respective period of acceleration of net discount accretion on mortgage
and asset-backed securities resulting from changing prepayment speed assumptions
at the end of each respective period.
Derivative Loss
Three months ended March 31,
2009 2008
(Dollars in thousands)
Derivative loss:
Components of derivative loss from call options:
Gains received at expiration $ 227 $ 15,017
Change in the difference between fair value and remaining
option cost at beginning and end of period 8,804 (77,551 )
Cost of money for call options (30,742 ) (32,228 )
(21,711 ) (94,762 )
Other (2,890 ) (4,134 )
Total $ (24,601 ) $ (98,896 )
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Gains received at expiration decreased in the first quarter of 2009 as a result
of declines in the S&P 500 Index® (upon which the majority of our options are
based). These gains are used to fund index credits on index annuities, which
also decreased in 2009, as discussed below under "Interest Sensitive and Index
Product Benefits." The change in the difference between fair value and remaining
option cost at beginning and end of period decreased derivative loss by
$86.4 million. This change is primarily due to the decrease in the S&P 500 Index
compared to the price of the outstanding options, which generated larger losses
for the 2008 period.
The cost of money for call options decreased primarily due to a decrease in the
cost of options on assumed business, partially offset by an increase in option
costs resulting from volatility in the equity markets. The average aggregate
account value of index annuities in force, which has increased due to new sales,
partially offset by increased surrender activity from the independent
distribution channel and run-off of assumed business, totaled $4,686.6 million
for the three months ended March 31, 2009 compared to $4,594.3 million for the
respective 2008 period. Other derivative loss is comprised of income or loss
from the embedded derivatives included in our modified
coinsurance contracts and interest rate swaps. In 2009, derivative loss also
includes realized losses on the interest rate swap that previously hedged our
line of credit, which totaled $2.4 million. Derivative loss will fluctuate based
on market conditions. See Note 3 to our consolidated financial statements for
additional details on our derivatives.
FBL Financial Group, Inc. March 31, 2009
Realized Losses on Investments
Three months ended March 31,
2009 2008
(Dollars in thousands)
. . .
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