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May 7, 2020, 4:43 p.m. EDT

10-Q: FBL FINANCIAL GROUP INC

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(EDGAR Online via COMTEX) -- 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 insurance subsidiaries Farm Bureau Life Insurance Company (Farm Bureau Life) and Greenfields Life Insurance Company (Greenfields 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 year ended December 31, 2019 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 Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2019, and Part II within this report 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. 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. 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 9 to our consolidated financial statements 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 9 to our consolidated financial statements for further information regarding this measure and its relationship to GAAP revenues.

Impact of COVID-19 and Recent Business Environment

The COVID-19 pandemic that swept across the United States during the first quarter of 2020 negatively impacted the economy and caused significant societal disruption as businesses were forced to close and individuals were asked to practice social distancing. As the severity of the pandemic became apparent, we formed an incident management work group in accordance with our business continuity plan. This work group, acting in conjunction with the executive management team, monitors business developments, identifies issues, recommends solutions and develops communications with employees, agents and client/members. The impact of COVID-19 on the economy has been profound.

U.S. unemployment rose to 4.4% at March 31, 2020 from 3.5% at December 31, 2019 and is expected to climb higher.

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The energy sector has come under significant pressure as the price of crude oil decreased to $20.48 per barrel at March 31, 2020 from $61.06 per barrel at December 31, 2019.

The yield on the 10-year U.S. Treasury Note decreased to 0.70% at March 31, 2020 from 1.92% at December 31, 2019.

Overall fixed maturity security yields increased during the first quarter of 2020 as increased business risks caused corporate credit spreads to widen to 276 basis points at March 31, 2020 from 96 basis points at December 31, 2019.

The COVID-19 pandemic has had the following impacts on our company:

Operations

To provide for the health and safety of our employees we transitioned to a mostly work-from-home environment in a matter of days. This transformation was carried out with minimal interruption to supporting our agents, advisors and client/members. We remain vigilant in practicing social distancing and have severely restricted company travel. Our agents continue to serve our client/members, albeit from a distance, using communication technology to service existing business and solicit new business. As summarized in the "Results of Operations" section that follows, we experienced a slight decline in premiums collected during the first quarter of 2020. The issuance of some life insurance business has been delayed due to impediments to completing medical tests.

Our ability to onboard new agents and wealth management advisors has been temporarily slowed due to the closure of governmental offices that issue required licenses. Furthermore, restrictions have prevented in-person training and the ability to have face-to-face meetings with clients.

Financial results

As discussed in the "Results of Operations" section that follows, the economic headwinds brought on by COVID-19 and the attendant decline in the equity markets caused the following negative impacts to operations in the first quarter of 2020:

An increase in the reserve for guaranteed living withdrawal benefits of $2.3 million.

An increase in the amortization of deferred acquisition cost on variable annuities and variable universal life insurance contracts totaling $3.7 million.

The impact of COVID-19 on mortality experience was insignificant. During the first quarter of 2020, we identified two claims totaling $0.4 million relating to COVID-19.

As a result of these items, we recorded a net loss totaling $2.5 million for the first quarter of 2020. The U.S. federal government has taken actions to support the economy, including those unemployed during the crisis. To the extent the economic downturn caused by COVID-19 continues for an extended period, or worsens, it is uncertain how that will impact our operations, including sales and the value of our assets and liabilities although we expect the impact would be negative.

Financial position

The increase in market interest rates has caused a decline in the market value of our fixed maturity securities during the first quarter of 2020. Accumulated other comprehensive income included in stockholders' equity declined to $258.4 million at March 31, 2020 from $354.8 million at December 31, 2019.

Book value per common share totaled $45.73 at March 31, 2020 and $60.12 at December 31, 2019. The decline in book value per share for the quarter is attributable to the decline in accumulated other comprehensive income, our net loss for the first quarter of 2020 and dividends paid to common shareholders totaling $2.00 per share.

Despite these factors, our capital position remains strong with Farm Bureau Life's company action level risk-based capital ratio totaling 525% at March 31, 2020.

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Liquidity

Our liquidity position remains strong with cash being generated by operations and financing activities. In addition, we have a significant portion of our liquid fixed maturity securities in an unrealized gain position. See the "Investments" and "Liquidity and Capital Resources" discussions that follow.

Risk Factors

See "Part II, Item 1A, Risk Factors", for additional discussion.







        Results of Operations for the Periods Ended March 31, 2020 and 2019
                                                                            Three months ended March 31,
                                                                      2020                    2019            Change
                                                                   (Dollars in thousands, except per share data)
        Net income (loss) attributable to FBL Financial
        Group, Inc.                                           $          (2,515 )     $          34,043        (107 )%
        Net income adjustments:
        Net realized gains/losses on investments (1)                     20,112                  (7,230 )      (378 )%
        Change in fair value of derivatives (1)                           2,039                    (911 )      (324 )%
        Adjusted operating income (2)                         $          19,636       $          25,902         (24 )%
        Pre-tax adjusted operating income:
        Annuity segment                                       $          12,019       $          15,662         (23 )%
        Life Insurance segment                                           10,267                  10,092           2  %
        Corporate and Other segment                                         219                   4,319         (95 )%
        Total pre-tax adjusted operating income                          22,505                  30,073         (25 )%
        Income taxes on adjusted operating income                        (2,869 )                (4,171 )       (31 )%
        Adjusted operating income (2)                         $          19,636       $          25,902         (24 )%
        Earnings (loss) per common share - assuming dilution  $           (0.10 )     $            1.37        (107 )%
        Adjusted operating income per common share - assuming
        dilution (2)                                                       0.79                    1.04         (24 )%
        Effective tax rate on adjusted operating income                      13 %                    14 %
        Average invested assets, at amortized cost (3)        $       8,479,853       $       8,292,919           2  %
        Annualized yield on average invested assets (3)                    4.72 %                  4.97 %
        Other data
        Death benefits, net of reinsurance and reserves
        released, net of tax                                  $          23,550       $          26,777         (12 )%
        Estimated impact from separate account performance on
        amortization of deferred acquisition costs, deferred
        sales inducements and unearned revenue reserve, net
        of tax                                                           (2,686 )                 1,738        (255 )%
        Other investment-related income included in net
        investment income (1)(4)                                            454                   1,002         (55 )%
        


(1) 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.

(2) Adjusted operating income is a non-GAAP measure of earnings, see the Overview section above for additional information.

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

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

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Net income (loss) decreased from the prior period primarily due to net realized capital losses from the change in fair value of equity securities and an increase in allowances for credit losses on investments. Net income (loss) and adjusted operating income decreased in the first quarter of 2020, compared to the prior year period, due to less spread income earned from lower yields on invested assets, the impact of market performance on reserves associated with guaranteed living withdrawal benefits and amortization of deferred acquisition costs associated with our variable business, partially offset by a decrease in death benefits. See the discussion that follows for details regarding pre-tax adjusted operating income by segment. See the "Impact of COVID-19 and Recent Business Environment" section above for additional information on market performance.







        Annuity Segment
                                                                    Three months ended March 31,
                                                                   2020           2019        Change
                                                                       (Dollars in thousands)
        Adjusted operating revenues:
        Interest sensitive product charges                     $     1,886     $   1,567         20  %
        Net investment income                                       52,768        51,115          3  %
        Total adjusted operating revenues                           54,654        52,682          4  %
        Adjusted operating benefits and expenses:
        Interest sensitive product benefits                         33,883        28,070         21  %
        Underwriting, acquisition and insurance expenses:
        Commissions net of deferrals                                   421           514        (18 )%
        Amortization of deferred acquisition costs                   2,646         2,679         (1 )%
        Amortization of value of insurance in force                    175           163          7  %
        Other underwriting expenses                                  5,510         5,594         (2 )%
        Total underwriting, acquisition and insurance expenses       8,752         8,950         (2 )%
        Total adjusted operating benefits and expenses              42,635        37,020         15  %
        Pre-tax adjusted operating income                      $    12,019     $  15,662        (23 )%
        Other data
        Annuity premiums collected, direct (1)                $    58,099     $    69,506        (16 )%
        Policy liabilities and accruals, end of period          4,528,280       4,379,558          3  %
        Average invested assets, at amortized cost              4,564,600       4,481,499          2  %
        Other investment-related income included in net
        investment income (2)                                         705           1,039        (32 )%
        Average individual annuity account value                3,179,639       3,179,153          -  %
        Earned spread on individual annuity products:
        Weighted average yield on cash and invested assets           4.59 %          4.76 %
        Weighted average crediting rate                              2.47 %          2.53 %
        Spread                                                       2.12 %          2.23 %
        Individual annuity withdrawal rate                            5.2 %           5.6 %
        


(1) Premiums collected is a non-GAAP measure of sales production, see Note 9 to our consolidated financial statements 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 the first quarter of 2020, compared to the prior year period, primarily due to the impact of market performance on reserves associated with guaranteed living withdrawal benefits and reduced spread income earned from lower yields on invested assets. See the "Impact of COVID-19 and Recent Business Environment" section above for additional information on market performance.

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The average aggregate account value for individual annuity contracts in force at March 31, 2020 remained level with the prior year period as continued sales and the crediting of interest were largely offset by product benefits and withdrawals. Premiums collected were lower in the first quarter of 2020, compared to the prior year period, due to decreased sales of fixed rate deferred annuity products, partially offset by increased sales of indexed annuities. Individual fixed rate deferred annuity collected premiums were $22.9 million in the first quarter of 2020, compared to $39.4 million in the first quarter of 2019. Indexed annuity collected premiums were $32.6 million in the first quarter of 2020, compared to $28.3 million in the first quarter of 2019. Outstanding funding agreements with FHLB totaled $597.5 million at March 31, 2020 and $437.2 million at March 31, 2019.

The weighted average yield on cash and invested assets for individual annuities decreased in the first quarter of 2020, compared to the prior year period, 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 for additional information regarding the yields obtained on investment acquisitions. Weighted average crediting rates on our individual annuity products decreased in the first quarter of 2020, compared to the same period in 2019, due to crediting rate actions taken in 2020 in response to a declining portfolio yield and a change in our mix of business in force.







        Life Insurance Segment
                                                                    Three months ended March 31,
                                                                   2020           2019        Change
                                                                       (Dollars in thousands)
        Adjusted operating revenues:
        Interest sensitive product charges and other income    $    20,332     $  18,875          8  %
        Traditional life insurance premiums                         49,308        49,392          -  %
        Net investment income                                       37,575        38,991         (4 )%
        Total adjusted operating revenues                          107,215       107,258          -  %
        Adjusted operating benefits and expenses:
        Interest sensitive product benefits:
        Interest and index credits                                   7,843         8,051         (3 )%
        Death benefits and other                                    16,371        14,466         13  %
        Total interest sensitive product benefits                   24,214        22,517          8  %
        Traditional life insurance benefits:
        Death benefits                                              26,098        24,416          7  %
        Surrender and other benefits                                10,142         9,723          4  %
        Increase in traditional life future policy benefits          9,970        12,534        (20 )%
        Total traditional life insurance benefits                   46,210        46,673         (1 )%
        Distributions to participating policyholders                 2,529         2,534          -  %
        Underwriting, acquisition and insurance expenses:
        Commission expense, net of deferrals                         4,832         4,639          4  %
        Amortization of deferred acquisition costs                   2,419         4,799        (50 )%
        Amortization of value of insurance in force                    370           372         (1 )%
        Other underwriting expenses                                 16,749        16,002          5  %
        Total underwriting, acquisition and insurance expenses      24,370        25,812         (6 )%
        Total adjusted operating benefits and expenses              97,323        97,536          -  %
                                                                     9,892         9,722          2  %
        Equity income, before tax                                      375           370          1  %
        Pre-tax adjusted operating income                      $    10,267     $  10,092          2  %
        


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        Life Insurance Segment - continued
                                                                   Three months ended March 31,
                                                                 2020             2019         Change
                                                                      (Dollars in thousands)
        Other data
        Life premiums collected, net of reinsurance (1)     $    82,635       $    78,001          6  %
        Policy liabilities and accruals, end of period        3,106,864         3,015,751          3  %
        Life insurance in force, end of period               61,852,616        60,240,261          3  %
        Average invested assets, at amortized cost (2)        3,213,376         3,107,575          3  %
        Other investment-related income included in net
        investment income (3)                                        59               330        (82 )%
        Average interest sensitive life account value           896,688           869,476          3  %
        Interest sensitive life insurance spread:
        Weighted average yield on cash and invested assets
        (2)                                                        4.99 %            5.21 %
        Weighted average crediting rate                            3.87 %            3.68 %
        Spread                                                     1.12 %            1.53 %
        Life insurance lapse and surrender rates                    4.5 %             4.6 %
        Death benefits, net of reinsurance and reserves
        released                                            $    25,668       $    26,672         (4 )%
        


(1) Premiums collected is a non-GAAP measure of sales production, see Note 9 to our consolidated financial statements for additional information.

(2) Average invested assets and weighted average yield including investments held as securities and indebtedness of related parties.

(3) 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 Life Insurance segment increased in the first quarter of 2020, compared to the prior year period, primarily due to a decrease in death benefits, net of reinsurance and reserves released, and amortization of deferred acquisition costs. The impact of these items was largely offset by an increase in expenses and a decrease in net investment income from lower yielding securities.

Amortization of deferred acquisition costs changed during the first quarter of 2020, compared to the prior year period, primarily due to changes in actual and expected profits on the underlying business.

Death benefits, net of reinsurance and reserves released, decreased in the first quarter of 2020, compared to the prior year period, primarily due to a decrease in average claim amounts, net of reinsurance and reserves released, partially offset by an increase in the number of claims.

Other underwriting expenses increased in the first quarter of 2020, compared to 2019, due to system enhancements and other general expense increases associated with growth of our business.

The weighted average yield on cash and invested assets for interest sensitive life insurance products decreased in the first quarter of 2020, compared to the prior year period, due to lower yields on new investment acquisitions from premium receipts and reinvestment of the proceeds from maturing investments and a decrease in other investment-related income. See the "Financial Condition" section for additional information regarding the yields obtained on investment acquisitions. Weighted average crediting rates on our interest sensitive life insurance products increased in the first quarter of 2020, compared to the first quarter of 2019, primarily due to increased amortization on our call options supporting our indexed universal life product.

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        Corporate and Other Segment
                                                                       Three months ended March 31,
                                                                      2020          2019        Change
                                                                          (Dollars in thousands)
        Adjusted operating revenues:
        Interest sensitive product charges                        $   10,956     $  10,405          5  %
        Net investment income                                          8,057         8,640         (7 )%
        Other income                                                   5,027         4,083         23  %
        Total adjusted operating revenues                             24,040        23,128          4  %
        Adjusted operating benefits and expenses:
        Interest sensitive product benefits                            7,626        10,365        (26 )%
        Underwriting, acquisition and insurance expenses:
        Commission expense, net of deferrals                             699           704         (1 )%
        Amortization of deferred acquisition costs                     5,055          (967 )     (623 )%
        Other underwriting expenses                                    1,777         1,153         54  %
        Total underwriting, acquisition and insurance expenses         7,531           890        746  %
        Interest expense                                               1,213         1,212          -  %
        Other expenses                                                 7,421         6,250         19  %
        Total adjusted operating benefits and expenses                23,791        18,717         27  %
                                                                         249         4,411        (94 )%
        Net (income) loss attributable to noncontrolling interest         56            (1 )   (5,700 )%
        Equity income, before tax                                        (86 )         (91 )       (5 )%
        Pre-tax adjusted operating income                         $      219     $   4,319        (95 )%
        Other data
        Average invested assets, at amortized cost (1)        $ 701,876     $ 703,846          -  %
        Other investment-related income included in net
        investment income (2)                                         4           121        (97 )%
        Average interest sensitive life account value           358,936       361,872         (1 )%
        Death benefits, net of reinsurance and reserves
        released                                                  4,343         7,069        (39 )%
        Estimated impact on pre-tax adjusted operating income
        from separate account performance on amortization of
        deferred acquisition costs, deferred sales
        inducements and unearned revenue reserve                 (3,400 )       2,200       (255 )%
        


(1) Average invested assets including investments held as securities and indebtedness of related parties.

. . .

May 07, 2020

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