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Feb. 26, 2020, 4:57 p.m. EST

10-K: FBL FINANCIAL GROUP INC

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(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When reading the following Management's Discussion and Analysis of Financial Condition and Results of Operations, please refer to our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data," of this report. Unless noted otherwise, all references to FBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including its insurance subsidiaries Farm Bureau Life Insurance Company (Farm Bureau Life) and Greenfields Life Insurance Company (Greenfields Life).

In this discussion and analysis, we explain our consolidated results of operations, financial condition and where appropriate, factors that management believes may affect future performance, including:

our revenues and expenses in the periods presented,

changes in revenues and expenses between periods,

sources of earnings and changes in stockholders' equity,

impact of these items on our overall financial condition and

expected sources and uses of cash.

We have organized our discussion and analysis as follows:

First, we discuss our business and drivers of profitability.

We then describe the business environment in which we operate including factors that affect operating results.

We highlight significant events that are important to understanding our results of operations and financial condition.

We then review the results of operations beginning with an overview of the total Company results, followed by a more detailed review of those results by operating segment.

Finally, we discuss critical accounting policies and recently issued accounting standards. The critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult or complex judgment.

Overview and Profitability

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. Other subsidiaries provide external wealth management services as well as investment management and other support services to our affiliated insurance companies. 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 our wealth management business, 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 adjusted operating income, which excludes the impact of certain items that are included in pre-tax net income. Pre-tax adjusted operating income is the same basis used for segment reporting under U.S. generally accepted accounting principles (GAAP). We also analyze operations using adjusted operating income on a post-tax basis, which excludes the initial impact from changes in tax laws. Adjusted operating income on a post-tax basis is not a measure used in financial statements prepared in accordance with GAAP, but is a common life insurance industry measure of performance. We have included a reconciliation to the comparable GAAP measure herein. See Note 13 to our consolidated financial statements included in Item 8 for further information regarding how we define our segments and pre-tax adjusted operating income.

We also include within our analysis "premiums collected," another measure that is not used in financial statements prepared in accordance with GAAP, but is a common life insurance industry measure of agent productivity. See Note 13 to our consolidated financial statements included in Item 8 for further information regarding this measure and its relationship to GAAP revenues.

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Our profitability is primarily a factor of:

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) we earn on contract holders' general 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, benefit utilization, 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.

Actual experience and changes in assumptions for expected surrender and withdrawal rates, mortality and spreads used in the amortization of deferred acquisition costs.

Our profitability is also impacted by changes in accounting guidance that affect the timing of profit recognition. See Note 1 to our consolidated financial statements included in Item 8 for details on adopted and pending accounting pronouncements.

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 during such times. 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 and other environmental factors that may impact our business include, but are not limited to, the following:

The U.S. 10-year Treasury yield decreased during 2019 from 2.69% at December 31, 2018 to 1.92% at December 31, 2019.

Gross Domestic Product increased at an annual rate of 2.3% during 2019 based on recent estimates.

U.S. unemployment was estimated to be 3.5% at year-end 2019.

U.S. net farm income is estimated to have increased 10.2% and farm real estate value is estimated to have increased 2.1% during 2019 according to recent U.S. Department of Agriculture estimates.

The long-term impact of the Tax Cuts and Jobs Act of 2017 (Tax Act) on the general U.S. economy, business initiatives and consumer demand for our insurance products.

The interest rate environment continues to impact our investment yields as well as the interest we credit on our interest sensitive products. After peaking at 3.24 percent in November of 2018, the 10-year Treasury yield reversed course, ending 2018 at 2.69 percent. Rates continued to move lower throughout 2019 and the 10-year Treasury yield ended the year at 1.92 percent. In addition, average corporate credit spreads decreased by 21 basis points in the fourth quarter of 2019 and 58 basis points for the year. We attempt to keep our crediting rates comparable to other insurance companies to maintain a competitive position within the market, however offering attractive annuity and universal life products is challenging with all-in yields remaining low. The fair value of our fixed maturity security portfolio increased throughout 2019 due to the decrease in market interest rates. See the segment discussion and "Financial Condition" section that follows for additional information regarding the impact of low market interest rates on our business.

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Results of Operations for the Three Years Ended December 31, 2019







                                                              Year ended December 31,                     Change over prior year
                                                     2019                 2018              2017            2019            2018
                                                   (Dollars in thousands, except per share data)
        Net income attributable to FBL
        Financial Group, Inc.                 $       126,209       $        93,793     $   187,305            35  %         (50 )%
        Net income adjustments:
        Initial impact of the Tax Act (1)                   -                  (617 )       (81,157 )        (100 )%         (99 )%
        Net realized gains/losses on
        investments (2)                                (5,813 )               9,546             459          (161 )%       1,980  %
        Change in fair value of derivatives
        (2)                                            (2,703 )               6,188          (2,549 )        (144 )%        (343 )%
        Adjusted operating income (3)         $       117,693       $       108,910     $   104,058             8  %           5  %
        Pre-tax adjusted operating income:
        Annuity segment                       $        52,834       $        62,846     $    68,821           (16 )%          (9 )%
        Life Insurance segment                         67,134                47,680          53,856            41  %         (11 )%
        Corporate and Other segment                    16,309                16,013          23,350             2  %         (31 )%
        Total pre-tax adjusted operating
        income                                        136,277               126,539         146,027             8  %         (13 )%
        Income taxes on adjusted operating
        income                                        (18,584 )             (17,629 )       (41,969 )           5  %         (58 )%
        Adjusted operating income (3)         $       117,693       $       108,910     $   104,058             8  %           5  %
        Earnings per common share - assuming
        dilution                              $          5.09       $          3.75     $      7.47            36  %         (50 )%
        Adjusted operating income per common
        share - assuming dilution (3)         $          4.75       $          4.36     $      4.15             9  %           5  %
        Effective tax rate on adjusted
        operating income                                   14 %                  14 %            29 %
        Average invested assets, at amortized
        cost (4)                              $     8,347,559       $     8,260,499     $ 7,970,374             1  %           4  %
        Annualized yield on average invested
        assets (4)                                       4.95 %                5.13 %          5.28 %
         Other data (2):
        Death benefits, net of reinsurance
        and reserves released                 $       (97,202 )     $       (93,941 )   $   (89,743 )           3  %           5  %
        Unlocking deferred acquisition costs,
        deferred sales inducements, unearned
        revenue reserve and certain interest
        sensitive product reserves            $         5,791       $          (227 )   $       682        (2,651 )%        (133 )%
        Estimated impact from separate
        account performance on amortization
        of deferred acquisition costs,
        deferred sales inducements and
        unearned revenue reserve              $         2,923       $        (3,646 )   $     1,683          (180 )%        (317 )%
        Other investment-related income
        included in net investment income (5) $         4,487       $         4,810     $     7,905            (7 )%         (39 )%
        Voluntary early retirement program
        expense                               $             -       $        (6,056 )   $         -          (100 )%         100  %
        


(1) Amount represents a change in our deferred tax assets and liabilities due to the initial impact of the enactment of the Tax Act. See Note 5 to our consolidated financial statements included in Item 8 for additional information.

(2) Amounts are net of adjustments, as applicable, to amortization of unearned revenue reserves and deferred acquisition costs, as well as changes in interest sensitive product reserves and income taxes attributable to these items.

(3) Adjusted operating income is a non-GAAP measure of earnings, see Note 13 to our consolidated financial statements included in Item 8 for additional information.

(4) Average invested assets and annualized yield, including investments held as securities and indebtedness of related parties.

(5) Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our payment speed assumptions.

Net income increased in 2019, compared to 2018, primarily due to changes in net realized gains/losses from investments and changes in fair value of derivatives. Net income and adjusted operating income increased in 2019, compared to 2018, due to the impact of unlocking actuarial assumptions, a decrease in amortization of deferred acquisition costs from the impact of market

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performance on our variable business and increased earnings from an increase in the volume of business in force. These increases in net income and adjusted operating income were partially offset by increases in death benefits and less spread income earned from lower yields on invested assets.

Net income decreased in 2018, compared to 2017, primarily due to the adjustment made in 2017 for the initial impact of the Tax Act. Net income and adjusted operating income were positively impacted by reduced income tax rates related to changes under the Tax Act and increased earnings from an increase in the volume of business in force. These increases in income were partially offset by an increase in interest sensitive product benefits, an increase in expenses, lower other investment-related income and an increase in amortization of deferred acquisition costs from the impact of market performance on our variable business. Net income was also negatively impacted by net unrealized losses from investments and changes in fair value of derivatives.

We periodically revise key assumptions used in the calculation of the amortization of deferred acquisition costs, value of insurance in force acquired, deferred sales inducements, unearned revenue reserve for participating life insurance and interest sensitive products, as well as certain reserves on 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. See the discussion that follows for further details of the unlocking impact to our operating segments.







        Annuity Segment
                                                      Year ended December 31,             Change over prior year
                                                 2019          2018          2017           2019            2018
                                                      (Dollars in thousands)
        Adjusted operating revenues:
        Interest sensitive product charges    $   6,681     $   5,173     $   4,484          29  %           15  %
        Net investment income                   205,857       218,823       219,700          (6 )%            -  %
        Total adjusted operating revenues       212,538       223,996       224,184          (5 )%            -  %
        Adjusted operating benefits and
        expenses:
        Interest sensitive product benefits     118,085       124,015       122,224          (5 )%            1  %
        Underwriting, acquisition and
        insurance expenses:
        Commissions net of deferrals              2,063         2,027         2,162           2  %           (6 )%
        Amortization of deferred acquisition
        costs                                    16,374        11,243         8,506          46  %           32  %
        Amortization of value of insurance in
        force                                       654           674           678          (3 )%           (1 )%
        Other underwriting expenses              22,528        23,191        21,793          (3 )%            6  %
        Total underwriting, acquisition and
        insurance expenses                       41,619        37,135        33,139          12  %           12  %
        Total adjusted operating benefits and
        expenses                                159,704       161,150       155,363          (1 )%            4  %
        Pre-tax adjusted operating income     $  52,834     $  62,846     $  68,821         (16 )%           (9 )%
        Other data
        Annuity premiums collected, direct
        (1)                                   $  251,971     $  285,438     $  284,620       (12 )%       -  %
        Policy liabilities and accruals, end
        of period                              4,440,276      4,374,798      4,319,064         1  %       1  %
        Average invested assets, at amortized
        cost                                   4,494,934      4,523,665      4,356,670        (1 )%       4  %
        Other investment-related income
        included in net investment income (2)      3,823          5,576          7,075       (31 )%     (21 )%
        Average individual annuity account
        value                                  3,179,197      3,135,247      3,033,636         1  %       3  %
        Earned spread on individual annuity
        products:
        Weighted average yield on cash and
        invested assets                             4.73 %         4.87 %         5.15 %
        Weighted average crediting rate             2.56 %         2.51 %         2.59 %
        Spread                                      2.17 %         2.36 %         2.56 %
        Individual annuity withdrawal rate           5.7 %          5.3 %          4.2 %
        


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(1) Premiums collected is a non-GAAP measure of sales production, see Note 13 to our consolidated financial statements included in Item 8 for additional information.

(2) Includes prepayment fee income and adjustments to the amortization of premium or discounts from changes in our payment speed assumptions.

Pre-tax adjusted operating income for the Annuity segment decreased in 2019, compared to 2018, primarily due to lower spread income earned and the impact of unlocking actuarial assumptions. Pre-tax adjusted operating income decreased in 2018, compared to 2017, primarily due to lower other investment-related income, an increase in other underwriting expenses and an increase in amortization of deferred acquisition costs.

The average aggregate account value for individual annuity contracts in force increased in 2019 and 2018, compared to the prior periods, due to continued sales and the crediting of interest. Continued growth in our indexed annuity business in force drives increases in interest sensitive product charges. Premiums collected decreased in 2019, compared to 2018, due to decreased sales of our fixed rate deferred and indexed annuity products. Premiums collected increased in 2018, compared to 2017, due to increased sales of our indexed annuity products, partially offset by decreased sales of our fixed rate deferred annuity products. Individual fixed rate deferred annuity collected premiums were $118.6 million in 2019, $139.0 million in 2018 and $167.7 million in 2017. Indexed annuity collected premiums were $128.2 million in 2019, $137.6 million in 2018 and $110.6 million in 2017. Outstanding funding agreements with FHLB, which are included in policyholder liabilities, totaled $488.4 million at December 31, 2019, $446.0 million at December 31, 2018 and $415.1 million at December 31, 2017.

The individual annuity withdrawal rate increased in 2019 and 2018, compared to prior year periods, due to certain policies reaching the end of their interest rate guarantee period and the competitiveness of our current crediting rates relative to other financial institutions.

In 2018, we offered a voluntary early retirement program to certain employees. The impact of the program to the Annuity segment was a $1.9 million increase in other underwriting expenses and a $0.6 million increase in investment expenses, which lowered net investment income.

Amortization of deferred acquisition costs and deferred sales inducements changed in 2019 and 2018, compared to prior year periods, due to unlocking actuarial assumptions and changes in actual and expected profits on the underlying business. Unlocking generally reflects changes in our projected earned spreads, policy lapses and mortality assumptions. Unlocking in 2019 was driven by a change in our withdrawal rate assumptions. The impact of unlocking on pre-tax adjusted operating income was as follows:







        Impact of Unlocking on Pre-tax Adjusted
        Operating Income
                                                                   Year ended December 31,
                                                             2019            2018           2017
                                                                   (Dollars in thousands)
        Amortization of deferred sales inducements
        reported in interest sensitive product benefits  $      (195 )   $       13     $       10
        Amortization of deferred acquisition costs            (4,668 )          236          1,743
        Changes in reserves reported in interest
        sensitive product benefits                                 -              -           (228 )
        Increase (decrease) to pre-tax adjusted
        operating income                                 $    (4,863 )   $      249     $    1,525
        


Net investment income decreased in 2019, compared to 2018, due to decreases in yields on invested assets and investment income associated with purchased call options supporting our indexed annuity products. The decrease in interest sensitive product benefits in 2019, compared to 2018, was due to the impact of a decrease in the amount of fixed individual annuity business in force and the impact of changes in the underlying markets to our index credits and certain reserves associated with our indexed annuity products.

The weighted average yield on cash and invested assets for individual annuities decreased in 2019 and 2018, compared to the prior periods, 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 and lower other investment-related income. See the "Financial Condition" section that follows for additional information regarding the yields obtained on investment acquisitions. Weighted average crediting rates on our individual annuity products increased in 2019, compared to 2018, due to increased cost of our call options supporting our indexed annuity products. Weighted average crediting rates on

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our individual annuity products decreased in 2018, compared to 2017, due to crediting rate actions taken in 2018 and 2017 in response to the declining portfolio yield and a change in the underlying product mix.







        Life Insurance Segment
                                                     Year ended December 31,               Change over prior year
                                                2019           2018           2017          2019           2018
                                                      (Dollars in thousands)
        Adjusted operating revenues:
        Interest sensitive product charges
        and other income                    $   76,201     $   73,879     $   64,945          3  %          14  %
        Traditional life insurance premiums    197,863        198,312        195,330          -  %           2  %
        Net investment income                  158,230        158,003        158,318          -  %           -  %
        Total adjusted operating revenues      432,294        430,194        418,593          -  %           3  %
        Adjusted operating benefits and
        expenses:
        Interest sensitive product
        benefits:
        Interest and index credits              35,198         36,286         34,447         (3 )%           5  %
        Death benefits and other                61,069         65,086         57,185         (6 )%          14  %
        Total interest sensitive product
        benefits                                96,267        101,372         91,632         (5 )%          11  %
        Traditional life insurance
        benefits:
        Death benefits                          93,104         84,921         86,901         10  %          (2 )%
        Surrender and other benefits            38,798         37,842         35,416          3  %           7  %
        Increase in traditional life future
        policy benefits                         42,747         52,436         50,708        (18 )%           3  %
        Total traditional life insurance
        benefits                               174,649        175,199        173,025          -  %           1  %
        Distributions to participating
        policyholders                           10,053         10,130         10,140         (1 )%           -  %
        Underwriting, acquisition and
        insurance expenses:
        Commission expense, net of
        deferrals                               19,500         19,113         19,240          2  %          (1 )%
        Amortization of deferred
        acquisition costs                        2,819         15,264         14,368        (82 )%           6  %
        Amortization of value of insurance
        in force                                 1,488          1,492          1,500          -  %          (1 )%
        Other underwriting expenses             63,608         63,784         57,573          -  %          11  %
        Total underwriting, acquisition and
        insurance expenses                      87,415         99,653         92,681        (12 )%           8  %
        Total adjusted operating benefits
        and expenses                           368,384        386,354        367,478         (5 )%           5  %
                                                63,910         43,840         51,115         46  %         (14 )%
        Equity income, before tax                3,224          3,840          2,741        (16 )%          40  %
        Pre-tax adjusted operating income   $   67,134     $   47,680     $   53,856         41  %         (11 )%
        Other data
        Life premiums collected, net of
        reinsurance (1)                       $   310,727     $   304,229     $   292,344         2  %       4  %
        Policy liabilities and accruals, end
        of period                               3,082,364       2,990,962       2,896,255         3  %       3  %
        Life insurance in force, end of
        period                                 61,566,233      59,968,574      58,117,575         3  %       3  %
        Average invested assets, at amortized
        cost (2)                                3,146,631       3,033,978       2,925,719         4  %       4  %
        Other investment-related income
        included in net investment income (3)       1,915           2,320           3,270       (17 )%     (29 )%
        Average interest sensitive life
        account value                             879,263         853,993         830,886         3  %       3  %
        Interest sensitive life insurance
        spread:
        Weighted average yield on cash and
        invested assets (2)                          5.17 %          5.33 %          5.70 %
        Weighted average crediting rate              3.77 %          3.66 %          3.87 %
        Spread                                       1.40 %          1.67 %          1.83 %
        Life insurance lapse and surrender
        rates                                         4.6 %           4.6 %           4.7 %
        Death benefits, net of reinsurance
        and reserves released                 $    96,724     $    97,477     $    88,615        (1 )%      10  %
        . . .
        


Feb 26, 2020

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