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FFG > SEC Filings for FFG > Form 10-Q on 31-Oct-2013All Recent SEC Filings

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Form 10-Q for FBL FINANCIAL GROUP INC


31-Oct-2013

Quarterly Report


ITEM 2. 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. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its life insurance subsidiary, Farm Bureau Life Insurance Company (Farm Bureau Life). Please read this discussion in conjunction with the accompanying consolidated financial statements and related notes. In addition, we encourage you to refer to our 2012 Form 10-K for a complete description of our significant accounting policies and estimates. Familiarity with this information is important in understanding our financial position and results of operations.

This Form 10-Q 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. See Part 1A, Risk Factors, of our 2012 Annual Report on Form 10-K for additional information on the risks and uncertainties that may affect the operations, performance, development and results of our business.

Overview

We operate predominantly in the life insurance industry through our principal subsidiary, Farm Bureau Life. 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. Several subsidiaries support various functional areas of Farm Bureau Life and other affiliates by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage two Farm Bureau affiliated property-casualty companies.

We analyze operations by reviewing financial information regarding our primary products that are aggregated in Annuity and Life Insurance product segments. In addition, our Corporate and Other segment includes various support operations, corporate capital and other product lines that are not currently underwritten by the Company. We analyze our segment results based on pre-tax operating income, which excludes the impact of certain items that are included in net income. See Note 9 to our consolidated financial statements for further information regarding how we define our segments and operating income.

We also include within our analysis "premiums collected" which is not a measure used in financial statements prepared in accordance with GAAP, but is a common industry measure of agent productivity. See Note 9 to our consolidated financial statements for further information regarding this measure and its relationship to GAAP revenues.

During the third quarter of 2013, we took several steps to utilize excess capital including a 36 percent increase in the quarterly cash dividend to $0.15 per share, a special cash dividend of $2.00 per share on Class A and Class B common stock, a tender offer for 99 percent of our Class B common shares and the repayment of $50 million of affiliate debt. These equity transactions had minimal impact on net income for the three and nine months ended September 30, 2013 as the transactions took place near the end of the quarter.

In December 2011, we completed the sale of our wholly-owned subsidiary, EquiTrust Life Insurance Company (EquiTrust Life). As a result of the sale, certain lines of business are considered discontinued operations, and unless otherwise indicated, have been removed from the discussion that follows. See our 2012 Form 10-K for additional information related to the sale.

Impact of Recent Business Environment

Our business generally benefits from moderate to strong economic expansion. Conversely, a lackluster economic recovery characterized by higher unemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future. We also may experience a higher incidence of claims, lapses or surrenders of policies. We cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations, cash flows or financial condition.


While there have been positive economic signs in 2013, the U.S. economy continues to face a number of challenges. Pertinent recent economic events include, but are not limited to the following:

Continued uncertainty from the failure of the U.S. government to reach consensus over debt reduction strategies, resulting in a government shutdown during October.

Gross Domestic Product increased by 2.5% during the second quarter 2013 based on August estimates. Estimates suggest third quarter growth will be slowed due to the recent U.S. government shutdown.

U.S. unemployment remains high at 7.2% through September 2013.

Growth in personal income generally remains below average.

Based on USDA estimates, U.S. net farm income is forecasted to grow 6.0% and farm real estate value is forecasted to grow 7.1% during 2013.

The European debt crisis continues to cause intermittent stress within the markets.

An increase in market interest rates during 2013 has reduced the fair value of our fixed maturity portfolio. The benchmark 10-year U.S. Treasury yield rose over the quarter, while credit spreads decreased. Strong liquidity and favorable corporate profitability continue to support fundamental credit quality. In the securitized markets, spreads on agency residential mortgage-backed securities and commercial mortgage-backed securities declined but rose for asset-backed securities. The yield curve remained moderately steep at the end of the third quarter, but low current interest rates create a challenging environment for sales of new money fixed annuity products.

We intentionally decreased the amount of annuity sales beginning in 2012 by suspending sales of certain products and reducing agent commission rates on certain products where it was difficult to achieve profitability targets during this period of low interest rates. We expect modest increases in annuity sales due to the recent rise in market interest rates and a renewed emphasis placed on sales of products with low guaranteed crediting rates. Our life sales have increased, reflecting the attractiveness of enhanced universal life and term life product offerings and the strong farm and energy subsectors of the economy in our marketplace, as well as Farm Bureau Life's emphasis on life insurance product sales.


Results of Operations for the Periods Ended September 30, 2013 and 2012

                                    Three months ended September 30,              Nine months ended September 30,
                                   2013               2012         Change         2013            2012         Change
                                              (Dollars in thousands, except per share data)
Pre-tax operating income:
Annuity segment               $     16,427       $     12,113        36  %   $     48,181     $    40,649         19  %
Life Insurance segment              14,263             12,870        11  %         35,198          31,343         12  %
Corporate and Other segment          4,409              1,766       150  %         17,548          10,288         71  %
Total pre-tax operating
income                              35,099             26,749        31  %        100,927          82,280         23  %
Income taxes on operating
income                              (8,540 )           (8,003 )       7  %        (25,597 )       (23,701 )        8  %
Operating income                    26,559             18,746        42  %         75,330          58,579         29  %

Realized gains/losses on
investments (1)                        406              1,324       (69 )%          6,714           1,297        418  %
Change in net unrealized
gains/losses on derivatives
(1)                                     88                351       (75 )%           (438 )           461       (195 )%
Loss on debt redemption (1)              -                  -        NA                 -             (22 )       NA
Net impact of discontinued
operations (1)                           -                 55        NA                 -          (2,961 )       NA
Net income attributable to
FBL Financial Group, Inc.     $     27,053       $     20,476        32  %   $     81,606     $    57,354         42  %

Operating income per common
share - assuming dilution     $       1.02       $       0.70        46  %   $       2.90     $      2.06         41  %

Earnings per common share -
assuming dilution:
Continuing operations         $       1.04       $       0.76        37  %   $       3.14     $      2.11         49  %
Discontinued operations                  -                  -        NA                 -           (0.10 )       NA
Earnings per common share -
assuming dilution             $       1.04       $       0.76        37  %   $       3.14     $      2.01         56  %

Effective tax rate on
operating income                        24 %               30 %                        25 %            29 %

Average invested assets                                                      $  6,709,289     $ 6,284,041          7  %
Annualized yield on average
invested assets                                                                      5.70 %          5.92 %
Impact on operating income of
unlocking deferred
acquisition costs, value of
insurance in force acquired
and unearned revenue reserve,
net of tax                    $          -       $     (3,418 )      NA      $        151     $    (3,188 )      105  %

(1) Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves, deferred acquisition costs, value of insurance in force acquired and income taxes attributable to these items.

Our operating income increased in the third quarter of 2013 and the nine months ended September 30, 2013, compared to the prior year periods, primarily due to an increase in the volume of business in force, the impact of unlocking and a refinement in the calculation of unearned revenue reserves. These increases were partially offset by increases in mortality and general expenses. See the discussion that follows for details regarding operating income by segment and the impact of discontinued operations.

Earnings per share from continuing operations and operating income per common share benefited from repurchases of Class A common shares in 2012 and 2013, as well as a tender offer of Class B common shares completed in the third quarter of 2013. Details regarding the share repurchases are included in Note 7 to the consolidated financial statements.


We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired and unearned revenue reserve for participating life insurance, variable and interest sensitive products, as applicable, through an "unlocking" process. These assumptions typically consist of withdrawal and lapse rates, earned spreads and mortality with revisions 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. For all of our blocks of business we unlocked our valuation assumptions for deferred policy acquisition costs, value of insurance in force and unearned revenue reserves during the second quarter 2013 and the second and third quarters of 2012. See the discussion that follows for further details of the unlocking impact to our operating segments.


Annuity Segment

                                 Three months ended September 30,           Nine months ended September 30,
                                   2013           2012       Change         2013              2012        Change
                                                            (Dollars in thousands)
Operating revenues:
Interest sensitive product
charges and other income      $        279     $    166        68  %   $        936       $      572        64  %
Net investment income               50,156       49,301         2  %        146,839          142,894         3  %
Total operating revenues            50,435       49,467         2  %        147,775          143,466         3  %

Benefits and expenses:
Interest sensitive product
benefits                            25,754       25,717         -  %         75,832           77,379        (2 )%
Underwriting, acquisition and
insurance expenses:
Commissions net of deferrals           458          590       (22 )%          1,990            2,029        (2 )%
Amortization of deferred
acquisition costs                    2,748        4,124       (33 )%          6,729            6,452         4  %
Amortization of value of
insurance in force                     208        2,024       (90 )%            741            2,191       (66 )%
Other underwriting expenses          4,840        4,899        (1 )%         14,302           14,766        (3 )%
Total underwriting,
acquisition and insurance
expenses                             8,254       11,637       (29 )%         23,762           25,438        (7 )%
Total benefits and expenses         34,008       37,354        (9 )%         99,594          102,817        (3 )%
Pre-tax operating income      $     16,427     $ 12,113        36  %   $     48,181       $   40,649        19  %

Other data
Annuity premiums collected,
direct                        $     58,377     $ 61,498        (5 )%   $    200,015       $  258,616       (23 )%
Policy liabilities and
accruals, end of period                                                   3,539,711        3,444,284         3  %
Average invested assets                                                   3,560,074        3,422,078         4  %
Investment fee income
included in net investment
income (1)                           1,803        2,039       (12 )%          4,374            2,853        53  %
Average individual annuity
account value                                                             2,381,260        2,252,818         6  %

Earned spread on individual
annuity products:
Weighted average yield on
cash and invested assets                                                       5.85 %           6.05 %
Weighted average interest
crediting rate                                                                 2.96 %           3.19 %
Spread                                                                         2.89 %           2.86 %

Individual annuity withdrawal
rate                                                                            5.4 %            4.7 %

Impact on pre-tax income of
unlocking deferred
acquisition costs and value
of insurance in force
acquired                                 -       (1,853 )      NA             1,436              234       514  %

(1) Includes prepayment fee income and net discount accretion on mortgage and asset-backed securities resulting from changing prepayment speed assumptions at the end of each period.

Pre-tax operating income for the Annuity segment increased in the third quarter of 2013 and nine months ended September 30, 2013, compared to the prior year periods, primarily due to higher spread income earned from an increase in the volume of business in force and the impact of unlocking. Spread income during the nine month period also benefited from higher investment fee income. In addition, decreased amortization of deferred acquisition costs resulted in higher operating income in the third quarter.


Amortization of deferred acquisition costs was impacted by changes in actual profits on the underlying business and a refinement increasing amortization $1.4 million in the third quarter of 2012. Amortization of the value of insurance in force decreased in the three month and nine month periods ending September 30, 2013 due to the impact of unlocking.

The average aggregate account value for individual annuity contracts in force increased in the 2013 periods due to continued sales and the crediting of interest. Premiums collected were lower in the 2013 periods as we had decreased our emphasis on annuity sales during this period of low interest rates. The amount of traditional annuity premiums collected is highly dependent upon the relationship between the current crediting rate and perceived security of our products compared to those of competing products.

Also included within our policy liabilities are advances on our funding agreements with the Federal Home Loan Bank (FHLB). Outstanding funding agreements totaled $343.3 million at September 30, 2013 and $356.0 million at September 30, 2012.

The weighted average yield on cash and invested assets for individual annuities decreased for the nine months ended September 30, 2013, compared to the prior year period. The decrease was primarily due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield, partially offset by an increase in investment fee income. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. The weighted average interest crediting rate decreased due to crediting rate actions taken on a significant portion of our annuity portfolio during 2012 in response to the declining portfolio yield.


Life Insurance Segment

                                   Three months ended September 30,          Nine months ended September 30,
                                     2013            2012       Change         2013           2012       Change
                                                             (Dollars in thousands)
Operating revenues:
Interest sensitive product
charges and other income        $      20,758     $ 13,770        51  %   $     48,864     $ 40,154        22  %
Traditional life insurance
premiums                               43,883       41,886         5  %        134,875      130,917         3  %
Net investment income                  35,210       35,089         -  %        105,003      103,776         1  %
Total operating revenues               99,851       90,745        10  %        288,742      274,847         5  %

Benefits and expenses:
Interest sensitive product
benefits:
Interest credited                       8,057        7,075        14  %         23,236       21,425         8  %
Death benefits and other               11,582        7,808        48  %         31,088       26,112        19  %
Total interest sensitive
product benefits                       19,639       14,883        32  %         54,324       47,537        14  %
Traditional life insurance
benefits:
Death benefits                         18,740       16,261        15  %         52,788       49,700         6  %
Surrender and other benefits            8,263       12,220       (32 )%         26,428       29,037        (9 )%
Increase in traditional life
future policy benefits                 12,723        8,980        42  %         40,571       38,183         6  %
Total traditional life
insurance benefits                     39,726       37,461         6  %        119,787      116,920         2  %
Distributions to participating
policyholders                           3,244        3,279        (1 )%          9,997       10,893        (8 )%
Underwriting, acquisition and
insurance expenses:
Commission expense, net of
deferrals                               4,407        4,073         8  %         16,373       12,505        31  %
Amortization of deferred
acquisition costs                       4,667        5,482       (15 )%         12,074       16,725       (28 )%
Amortization of value of
insurance in force                        424          538       (21 )%          1,210        2,579       (53 )%
Other underwriting expenses            13,481       12,159        11  %         39,779       36,345         9  %
Total underwriting, acquisition
and insurance expenses                 22,979       22,252         3  %         69,436       68,154         2  %
Total benefits and expenses            85,588       77,875        10  %        253,544      243,504         4  %
Pre-tax operating income        $      14,263     $ 12,870        11  %   $     35,198     $ 31,343        12  %


Life Insurance Segment -
continued

                                 Three months ended September 30,            Nine months ended September 30,
                                   2013           2012       Change          2013              2012         Change
                                                             (Dollars in thousands)
Other data
Life premiums collected, net
of reinsurance                $     76,947     $ 61,853        24  %   $     238,062       $   184,409        29  %
Policy liabilities and
accruals, end of period                                                    2,422,077         2,264,518         7  %
Life insurance in force, end
of period                                                                 48,093,854        45,284,218         6  %
Average invested assets                                                    2,377,198         2,243,836         6  %
Investment fee income
included in net investment
income (1)                             449        1,222       (63 )%           1,609             2,560       (37 )%
Average interest sensitive
life account value                                                           698,215           643,446         9  %

Interest sensitive life
insurance spread:
Weighted average yield on
cash and invested assets                                                        6.06 %            6.47 %
Weighted average interest
crediting rate                                                                  4.08 %            4.08 %
Spread                                                                          1.98 %            2.39 %

Life insurance lapse and
surrender rates                                                                  5.5 %             6.1 %

Death benefits, net of
reinsurance and reserves
released                            18,215       17,004         7  %   $      55,169       $    49,824        11  %
Impact on pre-tax income of
unlocking deferred
acquisition costs, value of
insurance in force acquired
and unearned revenue reserve             -         (975 )      NA               (595 )          (3,762 )      84  %

(1) Includes prepayment fee income and net discount accretion on mortgage and asset-backed securities resulting from changing prepayment speed assumptions at the end of each period.

Pre-tax operating income for the Life Insurance segment increased in the third quarter of 2013 and the nine months ended September 30, 2013, compared to the prior year periods, primarily due to an increase in the volume of business in force, the impact of unlocking and a refinement in the calculation of unearned revenue reserves. These results were partially offset by increased mortality and general expenses. The three-month and the nine-month periods of 2012 were also impacted by reserve refinements, as discussed below, which impacted comparability with the 2013 periods.

Premiums collected were higher during the quarter and the nine months ended September 30, 2013 compared to the prior year periods due to the relative attractiveness of life insurance products. The increased sales activity, along with the overall increase in business in force, is contributing to the increase in revenues and expenses, including non-deferrable underwriting and commission related expenses. Increases in general expenses were also due to changes in expense allocations between segments and additional expenses associated with upgrading software. Reserve refinement in the third quarter of 2013 was related to a reclassification of certain product loads from deferred revenue to earned income and increased interest sensitive product charges $6.3 million, changes in reserves classified with interest sensitive death benefits $2.5 million and amortization of deferred acquisition costs $1.0 million.

Amortization of deferred acquisition costs and value of insurance in force was lower in the three and nine months ended September 30, 2013 compared to the prior year periods primarily due to changes in actual profits on the underlying business and the impact of unlocking.

Refinements in reserving methods during 2012 resulted in a $1.4 million decrease in interest sensitive death benefits during the third quarter 2012, and a $1.8 million increase in traditional life future policy benefits for the nine months ended September 30, 2012.


Death benefits, net of reinsurance and reserves released, increased in the third quarter of 2013 primarily due to an increase in the number of claims and increased in the nine months ended September 30, 2013 primarily due to an increase in the average size of claims.

The weighted average yield on cash and invested assets for interest sensitive life insurance products decreased primarily due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments, compared with the average existing portfolio yield. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our interest sensitive life products were impacted by crediting rate decreases taken on various products in 2012 and 2013 in response to the declining portfolio yield, offset by sales of products with higher crediting rates.


Corporate and Other Segment

                                      Three months ended September 30,              Nine months ended September 30,
                                     2013               2012         Change         2013              2012        Change
                                                                 (Dollars in thousands)
Operating revenues:
Interest sensitive product
charges                         $     11,067       $     11,669        (5 )%   $     34,313       $   34,222         -  %
Net investment income                  9,083              8,154        11  %         27,588           21,675        27  %
Other income                           3,361              2,948        14  %         10,902           13,770       (21 )%
Total operating revenues              23,511             22,771         3  %         72,803           69,667         5  %

Benefits and expenses:
. . .
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