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FFG > SEC Filings for FFG > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for FBL FINANCIAL GROUP INC

Form 10-Q for FBL FINANCIAL GROUP INC


1-May-2014

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 Form 10-K for the fiscal year ended December 31, 2013 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2013 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 8 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 8 to our consolidated financial statements for further information regarding this measure and its relationship to GAAP revenues.

Impact of Recent Business Environment

Our business generally benefits from moderate to strong economic expansion. Conversely, a lackluster economy 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.

Economic environmental factors which may impact our business include, but are not limited to the following:

Gross Domestic Product increased approximately 2.6% during the fourth quarter 2013 based on recent estimates.

U.S. unemployment remains high at 6.7% through March 2014.

Based on USDA estimates, U.S. net farm income is forecasted to decrease 26.6% and farm real estate value is forecasted to grow 2.9% during 2014.

The U.S. 10 Year Treasury yield declined during the first quarter 2014 to 2.73% at March 31, 2014

Continued uncertainty as to actions the United States Congress will take to address the national debt, including potential actions to change the tax advantages of life insurance.


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The decrease in market interest rates during the first quarter 2014, increased the fair value of our fixed maturity portfolio. Strong liquidity and favorable corporate profitability continue to support fundamental credit quality of our investment portfolio. In the securitized markets, spreads on agency residential mortgage-backed securities rose but declined for commercial mortgage-backed securities and asset-backed securities.

Low current interest rates creates a challenging environment for sales of new money fixed annuity products. Lower investment yields also continue to place strain on the spreads we earn from our investment products, as highlighted in the business segment discussion that follows.

Results of Operations for the Periods Ended March 31, 2014 and 2013

                                                               Three months ended March 31,
                                                         2014                    2013            Change
                                                      (Dollars in thousands, except per share data)
Pre-tax operating income:
Annuity segment                                  $          15,447       $          14,681           5  %
Life Insurance segment                                      10,092                   9,932           2  %
Corporate and Other segment                                  4,593                   7,098         (35 )%
Total pre-tax operating income                              30,132                  31,711          (5 )%
Income taxes on operating income                            (7,048 )                (8,577 )       (18 )%
Operating income                                            23,084                  23,134           -  %

Realized gains/losses on investments (1)                      (328 )                 1,895        (117 )%
Change in net unrealized gains/losses on
derivatives (1)                                                236                     (63 )      (475 )%
Net income attributable to FBL Financial Group,
Inc.                                             $          22,992       $          24,966          (8 )%

Operating income per common share - assuming
dilution                                         $            0.92       $            0.89           3  %
Earnings per common share - assuming dilution                 0.91                    0.96          (5 )%
Effective tax rate on operating income                          23 %                    27 %
Average invested assets, at amortized cost       $       6,810,577       $       6,602,654           3  %
Annualized yield on average invested assets                   5.57 %                  5.69 %

(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 decreased in the first quarter of 2014, compared to the prior year period, primarily due to an increase in death benefits, partially offset by an increase in the volume of business in force. Net income decreased in the first quarter of 2014, compared to the prior period, due to the decrease in operating income and realized investment losses. See the discussion that follows for details regarding operating income by segment.

Earnings per share and operating income per common share benefited from repurchases of Class A common shares in 2014 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 6 to the consolidated financial statements.


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Annuity Segment

                                                          Three months ended March 31,
                                                       2014               2013         Change
                                                             (Dollars in thousands)
Operating revenues:
Interest sensitive product charges and other
income                                            $        554       $        313        77  %
Net investment income                                   49,025             47,794         3  %
Total operating revenues                                49,579             48,107         3  %

Benefits and expenses:
Interest sensitive product benefits                     26,755             24,679         8  %
Underwriting, acquisition and insurance expenses:
Commissions net of deferrals                               454                937       (52 )%
Amortization of deferred acquisition costs               2,461              2,821       (13 )%
Amortization of value of insurance in force                143                164       (13 )%
Other underwriting expenses                              4,319              4,825       (10 )%
Total underwriting, acquisition and insurance
expenses                                                 7,377              8,747       (16 )%
Total benefits and expenses                             34,132             33,426         2  %
Pre-tax operating income                          $     15,447       $     14,681         5  %

Other data
Annuity premiums collected, direct                $     86,252       $     79,264         9  %
Policy liabilities and accruals, end of period       3,607,425          3,436,311         5  %
Average invested assets, at amortized cost           3,666,791          3,484,687         5  %
Investment fee income included in net investment
income (1)                                                 880              1,417       (38 )%
Average individual annuity account value             2,484,000          2,358,513         5  %

Earned spread on individual annuity products:
Weighted average yield on cash and invested
assets                                                    5.62 %             5.86 %
Weighted average interest crediting rate                  2.93 %             2.95 %
Spread                                                    2.69 %             2.91 %

Individual annuity withdrawal rate                         5.2 %              5.5 %

(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 first quarter of 2014, compared to the prior year period, primarily due to higher spread income earned from an increase in the volume of business in force.

The average aggregate account value for individual annuity contracts in force increased in 2014, compared to prior year period, due to continued sales and the crediting of interest. Premiums collected were higher in the first quarter of 2014 due to increased sales of indexed annuity products. Indexed annuity collected premiums were $21.2 million during the 2014 period, compared with $2.2 million during the prior year period.

Also included within our policy liabilities are advances on our funding agreements with the Federal Home Loan Bank (FHLB). Outstanding funding agreements totaled $334.4 million at March 31, 2014 and $281.0 million at March 31, 2013.

The weighted average yield on cash and invested assets for individual annuities decreased in the first quarter of 2014 primarily due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing


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investments, compared with the average existing portfolio yield, and a decrease in investment fee income. See the "Financial Condition" section which follows for additional information regarding the yields obtained on investment acquisitions. Weighted average interest crediting rates on our individual annuity products decreased due to a change in the underlying product mix.

Life Insurance Segment

                                                             Three months ended March 31,
                                                            2014            2013         Change
                                                                (Dollars in thousands)
Operating revenues:
Interest sensitive product charges and other income    $     14,675     $    13,675         7  %
Traditional life insurance premiums                          45,492          44,934         1  %
Net investment income                                        35,650          34,729         3  %
Total operating revenues                                     95,817          93,338         3  %

Benefits and expenses:
Interest sensitive product benefits:
Interest credited                                             8,002           7,448         7  %
Death benefits and other                                     11,410           9,875        16  %
Total interest sensitive product benefits                    19,412          17,323        12  %
Traditional life insurance benefits:
Death benefits                                               19,754          18,368         8  %
Surrender and other benefits                                  9,009           9,101        (1 )%
Increase in traditional life future policy benefits          12,734          12,329         3  %
Total traditional life insurance benefits                    41,497          39,798         4  %
Distributions to participating policyholders                  3,345           3,358         -  %
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals                          4,152           6,100       (32 )%
Amortization of deferred acquisition costs                    3,831           3,022        27  %
Amortization of value of insurance in force                     306             373       (18 )%
Other underwriting expenses                                  13,182          13,432        (2 )%
Total underwriting, acquisition and insurance expenses       21,471          22,927        (6 )%
Total benefits and expenses                                  85,725          83,406         3  %
Pre-tax operating income                               $     10,092     $     9,932         2  %


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Life Insurance Segment - continued

                                                           Three months ended March 31,
                                                         2014             2013         Change
                                                              (Dollars in thousands)
Other data
Life premiums collected, net of reinsurance         $    72,838       $    76,653         (5 )%
Policy liabilities and accruals, end of period        2,482,578         2,340,410          6  %
Life insurance in force, end of period               49,594,860        46,921,625          6  %
Average invested assets, at amortized cost            2,497,940         2,325,630          7  %
Investment fee income included in net investment
income (1)                                                   96               516        (81 )%
Average interest sensitive life account value           746,624           674,772         11  %

Interest sensitive life insurance spread:
Weighted average yield on cash and invested assets         5.80 %            6.30 %
Weighted average interest crediting rate                   4.03 %            4.10 %
Spread                                                     1.77 %            2.20 %

Life insurance lapse and surrender rates                    5.5 %             5.5 %
Death benefits, net of reinsurance and reserves
released                                            $    20,613       $    18,727         10  %

(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 first quarter of 2014, compared to the prior year period, primarily due to an increase in the volume of business in force, partially offset by increased death benefits.

Premiums collected were lower during the first quarter of 2014, compared to the prior year period, primarily due to lower universal life sales. The reduction in sales also contributed to lower non-deferrable commission expenses. Commission expense was also lower during the first quarter 2014 compared to the prior year period, due to additional non-deferrable sales incentives paid during the first quarter 2013, which were not paid during the current period.

Death benefits, net of reinsurance and reserves released, increased in the first quarter of 2014 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 in the first quarter of 2014 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, and a decrease in investment fee income. 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 insurance products were impacted by crediting rate decreases taken on various products in 2013 and 2014 in response to the declining portfolio yield, partially offset by sales of products with higher crediting rates.


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Corporate and Other Segment

                                                        Three months ended March 31,
                                                       2014            2013         Change
                                                           (Dollars in thousands)
Operating revenues:
Interest sensitive product charges                $     11,777     $    11,242         5  %
Net investment income                                    7,646           8,879       (14 )%
Other income                                             3,946           3,776         5  %
Total operating revenues                                23,369          23,897        (2 )%

Benefits and expenses:
Interest sensitive product benefits                      7,334           6,507        13  %
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals                     1,047           1,147        (9 )%
Amortization of deferred acquisition costs               1,655             259       539  %
Other underwriting expenses                              1,863           1,848         1  %
Total underwriting, acquisition and insurance
expenses                                                 4,565           3,254        40  %
Interest expense                                         1,212           1,975       (39 )%
Other expenses                                           4,128           4,384        (6 )%
Total benefits and expenses                             17,239          16,120         7  %
                                                         6,130           7,777       (21 )%
Net loss attributable to noncontrolling interest            43              28        54  %
Equity loss, before tax                                 (1,580 )          (707 )     123  %
Pre-tax operating income                          $      4,593     $     7,098       (35 )%

Other data
Average invested assets, at amortized cost        $    645,847     $   792,337       (18 )%
Investment fee income included in net investment
income (1)                                                 (14 )            25      (156 )%
Average interest sensitive life account value          330,153         319,239         3  %
Death benefits, net of reinsurance and reserves
released                                                 4,350           3,595        21  %
Estimated impact on pre-tax income from separate
account performance on amortization of deferred
acquisition costs                                         (145 )         1,180      (112 )%

(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 decreased in the first quarter of 2014, compared to the prior year period, primarily due to a decrease in net investment income and an increase in amortization of deferred acquisition costs.

Other income and other expenses includes fees and expenses from sales of brokered products and operating results of our non-insurance subsidiaries, which include management, advisory, marketing and distribution services and leasing activities.

Death benefits net of reinsurance and reserves released increased in the first quarter of 2014, compared to the prior year period, due to an increase in the average size of claims.

Net investment income decreased during 2014 primarily due to lower invested assets held in this segment during the 2014 period, due to debt repayment, a special $2.00 per share dividend paid in 2013 on our common stock and share repurchases that occurred in 2013 and 2014.

Amortization of deferred acquisition costs increased in the first quarter of 2014 primarily due to the impact of separate account performance in the prior year quarter.


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Equity loss 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 bond and equity securities held by the investment partnerships, timing and success of initial public offerings or exit strategies, and the timing of the sale of investments held by the partnerships and joint ventures. We also invest in low income housing tax credit partnerships which generate pre-tax losses but after-tax gains as the related tax credits are realized. The timing of the realization of the tax credits is subject to fluctuation from period to period due to the timing of the housing project completions and when tax credits are approved. Equity income, net of related income taxes, was as follows:

Equity income (loss), net of related income taxes

                                                     Three months ended March 31,
                                                        2014               2013
                                                        (Dollars in thousands)
Equity income (loss):
Low income housing tax credit partnerships        $      (1,761 )     $      (1,346 )
Other equity method investments                             181                 639
                                                         (1,580 )              (707 )
Income taxes:
Taxes on equity income (loss)                               566                 247
Investment tax credits                                    2,662               1,772
Equity income, net of related income taxes        $       1,648       $       1,312

Income Taxes on Operating Income

The effective tax rate on operating income was 23.4% for the quarter ended March 31, 2014 compared to 27.0% for the first quarter of 2013. The effective tax rates differ from the federal statutory rate of 35% primarily due to the impact of low-income housing credits from equity method investees, tax-exempt interest and dividend income and incentive stock option deductions. The 2014 effective tax rate decreased, compared to the prior period, primarily due to an increase in tax credits from low income housing tax credit partnerships.

Impact of Operating Income Adjustments on FBL Net Income

                                                            Three months ended March 31,
                                                              2014                2013
                                                               (Dollars in thousands)
Realized gains (losses) on investments                   $       (540 )     $       3,286
Change in net unrealized gains/losses on derivatives              431                (370 )
Change in amortization of:
Deferred acquisition costs                                        (34 )               (74 )
Value of insurance in force acquired                                3                 (35 )
Unearned revenue reserve                                            -                  12
Income tax offset                                                  48                (987 )
Net impact of operating income adjustments               $        (92 )     $       1,832


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Impact of Operating Income Adjustments on FBL Net
Income, continued

                                                            Three months ended March 31,
                                                               2014               2013
                                                               (Dollars in thousands)
Summary of adjustments noted above after offsets and
income taxes:
Realized gains/losses on investments                     $        (328 )     $       1,895
Change in net unrealized gains/losses on derivatives               236                 (63 )
Net impact of operating income adjustments               $         (92 )     $       1,832
Net impact per common share - basic                      $           -       $        0.07
Net impact per common share - assuming dilution          $       (0.01 )     $        0.07

Income taxes on operating income adjustments on continuing operations are recorded at 35% as there are no permanent differences between book and taxable income relating to these adjustments.

Realized Gains (Losses) on Investments

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