FBL FINANCIAL GROUP, INC. This section includes a summary ofFBL 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 toFBL Financial Group, Inc. (we or the Company) include all of its direct and indirect subsidiaries, including insurance subsidiariesFarm Bureau Life Insurance Company (Farm Bureau Life) andGreenfields Life Insurance Company . 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 endedDecember 31, 2020 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 may include 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 endedDecember 31, 2020 , 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 toFarm Bureau members and other individuals and businesses in the Midwestern and Western sections ofthe 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 twoFarm Bureau affiliated property-casualty companies. We analyze operations by reviewing financial information regarding our primary products that are aggregated inAnnuity 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 underU.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 8 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 8 to our consolidated financial statements for further information regarding this measure and its relationship to GAAP revenues.
Merger Agreement
OnMay 2, 2021 , the Company entered into an amendment (the Merger Agreement Amendment) to the Agreement and Plan of Merger, dated as ofJanuary 11, 2021 (the Original Agreement and, the Original Agreement as amended by the Merger Agreement Amendment, the Merger Agreement), by and among the Company,Farm Bureau Property & Casualty Insurance Company , anIowa domiciled stock property and casualty insurance company (FBPCIC) and 5400Merger Sub, Inc. , anIowa corporation (Merger Sub). Pursuant to the Merger Agreement, FBPCIC will acquire all of the outstanding Class A common shares, without par value, and Class B common shares, without par value (collectively, the Common Shares), of the Company that are not currently owned or controlled by FBPCIC or theIowa Farm Bureau Federation , anIowa non-profit corporation (IFBF). IFBF and FBPCIC currently own approximately 61% of the outstanding Common Shares. Pursuant to the transactions contemplated by the Merger Agreement, each outstanding Common Share of the Company (other than shares held by the Company in treasury or by any wholly-owned Company subsidiary, or held by Merger Sub or FBPCIC, or held by holders who have properly exercised dissenters' rights under applicableIowa law) will be converted into the right to receive$61.00 per 32 -------------------------------------------------------------------------------- Table of Content Common Share in cash, without interest and less any required withholding taxes. The Merger Agreement Amendment provided for an increase in the consideration to be received in exchange for the Common Shares in the amount of$5.00 per share, from$56.00 per share under the Original Agreement. Consummation of the Merger is subject to certain specified closing conditions, including a non-waivable condition that the Merger Agreement be adopted by the affirmative vote of (i) holders of at least a majority of all outstanding Class A common shares and Series B preferred shares, voting together as a single class, (ii) holders of at least a majority of all outstanding Class B common shares and (iii) holders of at least a majority of all outstanding Common Shares held by all of the holders of outstanding Common Shares (excluding IFBF and its affiliates, FBPCIC and its affiliates, and the directors and officers of IFBF, FBPCIC and each of their respective affiliates), in each case, entitled to vote on such matter at a meeting of shareholders duly called and held for such purpose. The Company's adjourned special meeting of shareholders to approve the proposal to adopt the Merger Agreement is expected to reconvene onMay 21, 2021 . In addition, FBPCIC's obligation to consummate the Merger is subject to the condition that no more than 5% of the Common Shares outstanding as of the effective time of the Merger (other than the Common Shares held by FBPCIC, IFBF, certain of their affiliates, their respective subsidiaries, the directors and officers of the foregoing persons and any holders of Common Shares which have failed to perfect, have effectively withdrawn or which otherwise have lost their rights to appraisal underIowa law) shall have properly demanded and not withdrawn appraisal rights underIowa law in connection with the Merger, as further described in the Merger Agreement. The obtaining of financing is not a condition to the obligations of FBPCIC or Merger Sub to effect the Merger. Also onMay 2, 2021 , FBPCIC, IFBF and Merger Sub entered into an amendment (the Rollover Agreement Amendment) to the Rollover Agreement, dated as ofJanuary 11, 2021 (as amended by the Rollover Agreement Amendment, the Rollover Agreement) by and among the same parties. Pursuant to the Rollover Agreement, FBPCIC and IFBF will contribute to Merger Sub all of their Common Shares in exchange for the number of shares of common stock of Merger Sub set forth therein, and to fund the Merger consideration, FBPCIC will contribute approximately$528 million in cash to Merger Sub in exchange for shares of common stock of Merger Sub and IFBF will contribute approximately$47 million in cash to Merger Sub in exchange for shares of preferred stock of Merger Sub. With respect to Merger Sub, under the terms of the Merger Agreement, at the effective time of the Merger, the Common Shares held by Merger Sub will automatically be cancelled and will cease to exist, each common share of Merger Sub will be converted into one common share of the surviving corporation and each preferred share of Merger Sub will be converted into one share of newly-designated Series C Cumulative Non-Voting Preferred Stock of the surviving corporation. At the effective time of the Merger, the Common Shares that are not currently controlled by FBPCIC or IFBF (other than shares held by the Company in treasury or by any wholly-owned Company subsidiary, or held by Merger Sub or FBPCIC, or held by holders who have properly exercised dissenters' rights under applicableIowa law) will be converted into the right to receive the Merger consideration. Each share of Series B Cumulative Voting Preferred Stock of the Company will remain outstanding in accordance with its terms following the effective time of the Merger. Impact of COVID-19 and 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. During the first quarter of 2021, theU.S. economy continued its recovery (S&P 500 was up +80% sinceMarch 23, 2020 ), driven by massive amounts of monetary and fiscal stimulus, optimism on vaccines and the reopening of the economy. This recovery follows the significant impact to theU.S. economy from COVID-19 beginning in the first quarter 2020, resulting in slowed economic growth, elevated unemployment and business interruption, particularly in the hospitality and travel sectors. Interest rates, which particularly impact our business declined significantly and continue to fluctuate. The following are key measures which partially illustrate the state of theU.S. economy: •U.S. gross domestic product is estimated to have increased at an annual rate of 6.4% in the first quarter of 2021, compared to a 3.5% decrease during 2020. 33 -------------------------------------------------------------------------------- Table of Content •U.S. unemployment decreased to 6.0% atMarch 31, 2021 , compared to 6.7% atDecember 31, 2020 . •The yield on the 10-yearU.S. Treasury Note increased to 1.74% atMarch 31, 2021 , from 0.93% atDecember 31, 2020 .
The impact of COVID-19 and economic conditions on our Company includes:
FBL Operations
We have provided flexibility for our workforce by allowing up to 50% of our employees to return to work in our facilities. However, our workforce continues to work predominantly from their homes. For those that choose to work in our facilities, proper social distancing and other safeguards have been put in place to provide for the safety of our workforce and minimize the risk of business interruption. Financial results While mortality experience was in line with expectations for the first quarter of 2021, we continue to see elevated death claims associated with COVID-19. We incurred death benefits, net of reinsurance and reserves released, with COVID-19 reported as a cause of death totaling$4.1 million during the first quarter of 2021. We do not have an estimate of how many of these death claims would have been reported in the quarter regardless of COVID-19.
Financial position
HigherU.S. Treasury interest rates resulted in an decrease in the fair value of our fixed maturity securities during the three-month period endedMarch 31, 2021 . The decrease in fair value of our fixed maturity securities resulted in an decrease in our book value per common share to$60.95 atMarch 31, 2021 from$69.24 atDecember 31, 2020 .
Our capital position remains strong, with
Liquidity
Our liquidity position remains strong with cash being generated by operations
and financing activities. In addition, a significant portion of our liquid fixed
maturity securities are in an unrealized gain position. See the "Investments"
and "Liquidity and Capital Resources" discussions that follow.
34
--------------------------------------------------------------------------------
Table of Content
Results of Operations for the Periods Ended March 31, 2021 and 2020
Three months ended March 31,
2021 2020 Change
(Dollars in thousands, except per share data)
Net income (loss) attributable to FBL Financial Group, Inc. $ 27,680 $ (2,515) (1,201) %
Net income adjustments:
Proposed acquisition transaction expenses 2,577 - - %
Net realized gains/losses on investments (1) (269) 20,112 (101) %
Change in fair value of derivatives (1) (6,537) 2,039 (421) %
Adjusted operating income (2) $ 23,451 $ 19,636 19 %
Pre-tax adjusted operating income:
Annuity segment $ 14,016 $ 12,019 17 %
Life Insurance segment 10,886 10,267 6 %
Corporate and Other segment 1,431 219 553 %
Total pre-tax adjusted operating income 26,333 22,505 17 %
Income taxes on adjusted operating income (2,882) (2,869) - %
Adjusted operating income (2) $ 23,451 $ 19,636 19 %
Earnings per common share - assuming dilution $ 1.13 $ (0.10) (1,230) %
Adjusted operating income per common share - assuming dilution (2)
0.96 0.79 22 %
Effective tax rate on adjusted operating income 11 % 13 %
Average invested assets, at amortized cost net of allowance for credit losses (3)
$ 8,708,466 $ 8,479,853 3 % Annualized yield on average invested assets (4) 4.75 % 4.72 %
Other data Death benefits, net of reinsurance and reserves released, net of tax
$ 27,577 $ 23,550 17 %
Estimated impact from separate account performance on amortization of deferred acquisition costs, deferred sales inducements and unearned revenue reserve, net of tax (5)
711 (2,686) (126) %
Other investment-related income included in net investment
income (1)(6) 1,572 454 246 %
(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, including investments held as securities and
indebtedness of related parties and cash equivalents, is the average of
investment balances at the beginning of the reporting period and as of the end
of each quarter throughout the reporting period. Average invested assets are
used in the calculation of the annualized investment yield.
(4)Annualized yield is the actual annualized investment earnings during the
reporting period divided by average invested assets. Annualized yield is used as
a measure of investment performance during the reporting periods.
(5)Amounts represent the estimated effect of market performance of policyholder
funds invested in the separate accounts on the value of deferred acquisition
costs, deferred sales inducements and unearned revenue reserve, net of tax.
(6)Includes prepayment fee income and adjustments to the amortization of premium
or discounts from changes in our payment speed assumptions on mortgage and other
asset-backed securities.
Net income increased in the first quarter of 2021, compared to the prior year
period, primarily due to increases from changes in realized gains and losses on
investments and fair value of derivatives. In addition, net income and pre-tax
adjusted operating income increased in the first quarter of 2021, compared to
the prior year period, due to an increase in equity income and the impact of
market performance on variable product deferred acquisition cost amortization
and reserves associated with guaranteed living withdrawal benefits. These
increases were partially offset by an increase in death benefits. See the
discussion that follows for details regarding pre-tax adjusted operating income
by segment.
35
--------------------------------------------------------------------------------
Table of Content
Footnotes applicable to the segment discussion that follows are summarized
below:
(1)Premiums collected is a non-GAAP measure of sales production, see Note 8 to
our consolidated financial statements for additional information.
(2)Average invested assets, including applicable investments held as securities
and indebtedness of related parties and cash equivalents, is the average of
investment balances at the beginning of the reporting period and as of the end
of each quarter throughout the reporting period. Average invested assets are
used in the calculation of the annualized investment yield.
(3)Includes prepayment fee income and adjustments to the amortization of premium
or discounts from changes in our payment speed assumptions on mortgage and other
asset-backed securities.
(4)Average aggregate individual annuity account value is a measure used to
monitor business growth in our individual fixed and indexed annuity product
lines and is calculated using a simple average of policyholder account values as
of the beginning and end of the reporting period.
(5)Annualized yield is the actual annualized investment earnings during the
reporting period divided by average invested assets. Annualized yield is used as
a measure of investment performance during the reporting periods.
(6)Annualized average crediting rates consist of annualized interest credited
and index credits applied to policyholders during the reporting period, along
with amortization of call option costs and proceeds from sales or maturing call
options associated with the call options that back our indexed products as a
percentage of the simple average of policyholder account values as of the
beginning of the reporting period and end of the reporting period, adjusted for
interest credited during the period. Annualized average crediting rates along
with annualized average investment yields provides a view of spread margin
earned on the underlying products.
(7)Individual annuity withdrawal rate represents annualized withdrawal benefits
incurred during the reporting period, excluding internal exchanges, as a percent
of the simple average of related policy reserves at the beginning and end of the
reporting period. The individual annuity withdrawal rate is a measure of
customer retention.
(8)Average aggregate interest sensitive life account value is a measure used to
monitor business growth in our universal life product lines and is calculated
using a simple average of policyholder account values as of the beginning and
end of the reporting period.
(9)Life insurance lapse and surrender rate represents the annualized face amount
of policyholder lapses and surrenders, incurred during the reporting period, as
a percent of the simple average of related insurance in force at the beginning
and end of the reporting period. The life insurance lapse and surrender rate is
a measure of customer retention.
(10)Average aggregate interest sensitive account value is a measure used to
monitor business volume of our variable universal life and variable annuity
product lines and is calculated using a simple average of policyholder account
values allocated to the declared interest option as of the beginning and end of
the reporting period.
(11)Amounts represent the estimated effect of market performance of policyholder
funds invested in the separate accounts on actual and expected profits and the
related impact on the value of deferred acquisition costs, deferred sales
inducements and unearned revenue reserve.
Annuity Segment
Three months ended
March 31,
2021 2020 Change
(Dollars in thousands)
Adjusted operating revenues:
Interest sensitive product charges $ 2,114 $ 1,886 12 %
Net investment income 50,867 52,768 (4) %
Total adjusted operating revenues 52,981 54,654 (3) %
Adjusted operating benefits and expenses:
Interest sensitive product benefits 30,667 33,883 (9) %
Underwriting, acquisition and insurance expenses:
Commissions net of deferrals 201 421 (52) %
Amortization of deferred acquisition costs 2,415 2,646 (9) %
Amortization of value of insurance in force 147 175 (16) %
Other underwriting expenses 5,535 5,510 - %
Total underwriting, acquisition and insurance expenses 8,298 8,752 (5) %
Total adjusted operating benefits and expenses 38,965 42,635 (9) %
Pre-tax adjusted operating income $ 14,016 $ 12,019 17 %
36--------------------------------------------------------------------------------
Table of Content
Annuity Segment - continued
Three months ended March
31,
2021 2020 Change
(Dollars in thousands)
Other data
Annuity premiums collected, direct (1) $ 55,666 $ 58,099 (4) %
Policy liabilities and accruals, end of period 4,657,666 4,528,280 3 %
Average invested assets, at amortized cost net of allowance for credit losses (2)
4,659,253 4,564,600 2 %
Other investment-related income included in net investment income (3)
1,984 705 181 %
Average aggregate individual annuity account value (4) 3,178,941 3,179,639 - %
Earned spread on individual annuity products:
Annualized yield on average invested assets (5) 4.49 % 4.59 %
Annualized average crediting rate (6) 2.48 % 2.47 %
Spread 2.01 % 2.12 %
Individual annuity withdrawal rate (7) 3.8 % 5.2 %
Pre-tax adjusted operating income for the Annuity segment increased in the first
quarter of 2021, compared to the prior year period, primarily due to the impact
of market performance on reserves associated with guaranteed living withdrawal
benefits and an increase in other investment-related income, partially offset by
reduced spread income earned from lower yields on invested assets.
The average aggregate account value for individual annuity contracts in force at
March 31, 2021 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 2021,
compared to the prior year period, due to decreased sales of indexed annuity
products, partially offset by increased sales of fixed rate deferred annuity
products. Individual fixed rate deferred annuity collected premiums were $29.1
million in the first quarter of 2021, compared to $22.9 million in the first
quarter of 2020. Indexed annuity collected premiums were $24.9 million in the
first quarter of 2021, compared to $32.6 million in the first quarter of 2020.
To increase spread income given lower indexed annuity sales, we have increased
the issuance of funding agreements with the Federal Home Loan Bank (FHLB) during
the three months ended March 31, 2021 . Outstanding funding agreements with FHLB
totaled $726.0 million at March 31, 2021 , compared to $585.2 million at December
31, 2020 and $597.5 million at March 31, 2020 .
The annualized average yield on invested assets for individual annuities
decreased in the three months ended March 31, 2021 , 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. The annualized average yield
decrease was partially offset by higher other investment-related income. See the
"Financial Condition" section for additional information regarding the yields
obtained on investment acquisitions. Annualized average crediting rates on our
individual annuity products increased slightly in the three months ended March
31, 2021 , compared to the prior year period, primarily due to increased
amortization of call option costs supporting our indexed annuity products,
partially offset by a decrease in interest credited due to changes in our mix of
business in force.
37--------------------------------------------------------------------------------
Table of Content
Life Insurance Segment
Three months ended
March 31,
2021 2020 Change
(Dollars in thousands)
Adjusted operating revenues:
Interest sensitive product charges and other income $ 20,195 $ 20,332 (1) %
Traditional life insurance premiums 52,010 49,308 5 %
Net investment income 40,199 37,575 7 %
Total adjusted operating revenues 112,404 107,215 5 %
Adjusted operating benefits and expenses:
Interest sensitive product benefits:
Interest and index credits 11,095 7,843 41 %
Death benefits and other 17,156 16,371 5 %
Total interest sensitive product benefits 28,251 24,214 17 %
Traditional life insurance benefits:
Death benefits 29,798 26,098 14 %
Surrender and other benefits 11,120 10,142 10 %
Increase in traditional life future policy benefits 8,932 9,970 (10) %
Total traditional life insurance benefits 49,850 46,210 8 %
Distributions to participating policyholders 1,605 2,529 (37) %
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals 5,184 4,832 7 %
Amortization of deferred acquisition costs 4,066 2,419 68 %
Amortization of value of insurance in force 369 370 - %
Other underwriting expenses 16,717 16,749 - %
Total underwriting, acquisition and insurance expenses 26,336 24,370 8 %
Total adjusted operating benefits and expenses 106,042 97,323 9 %
6,362 9,892 (36) %
Equity income, before tax 4,524 375 1,106 %
Pre-tax adjusted operating income $ 10,886 $ 10,267 6 %
Other data
Life premiums collected, net of reinsurance (1) $ 85,505 $ 82,635 3 %
Policy liabilities and accruals, end of period 3,253,413 3,106,864 5 %
Life insurance in force, end of period 64,040,179 61,852,616 4 %
Average invested assets, at amortized cost net of allowance for credit losses (2)
3,281,314 3,213,376 2 %
Other investment-related income included in net investment income (3)
283 59 380 %
Average aggregate interest sensitive life account value (8) 930,418 896,688 4 %
Interest sensitive life insurance spread:
Annualized yield on average invested assets (5) 5.26 % 4.99 %
Annualized average crediting rate (6) 3.99 % 3.87 %
Spread 1.27 % 1.12 %
Life insurance lapse and surrender rates (9) 4.3 % 4.5 %
Death benefits, net of reinsurance and reserves released $ 28,751 $ 25,668 12 %
Pre-tax adjusted operating income for the Life Insurance segment increased in
the first quarter of 2021, compared to the prior year period, primarily due to
increases in equity income and growth in business in force, partially offset by
increases in death benefits, net of reinsurance and reserves released, and
amortization of deferred acquisition costs.
Equity income can fluctuate from period to period, see 'Equity Income' section as follows for additional information.
38
--------------------------------------------------------------------------------
Table of Content
Amortization of deferred acquisition costs increased during the first quarter of
2021, compared to the prior year period, due to changes in actual and expected
profits on the underlying business.
Death benefits, net of reinsurance and reserves released, increased in the first
quarter of 2021, compared to the prior year period, due to an increase in the
number of claims. Death benefits in the Life Insurance segment include COVID-19
related claims, net of reinsurance and reserves released, totaling $3.4 million
for the first quarter of 2021 and $0.3 million in the first quarter of 2020.
The annualized average yield on invested assets for interest sensitive life
insurance products increased in the three months ended March 31, 2021 , compared
to the prior year period, due to higher equity income, partially offset by lower
yields on new investment acquisitions from premium receipts and reinvestment of
the proceeds from maturing investments. See the "Financial Condition" section
for additional information regarding the yields obtained on investment
acquisitions. Annualized average crediting rates on our interest sensitive life
insurance products increased in the three months ended March 31, 2021 , compared
to the prior year period, primarily due to increased amortization of call option
costs supporting our indexed universal life products.
Corporate and Other Segment
Three months ended
March 31,
2021 2020 Change
(Dollars in thousands)
Adjusted operating revenues:
Interest sensitive product charges $ 10,418 $ 10,956 (5) %
Net investment income 7,494 8,057 (7) %
Other income 6,396 5,027 27 %
Total adjusted operating revenues 24,308 24,040 1 %
Adjusted operating benefits and expenses:
Interest sensitive product benefits 9,303 7,626 22 %
Underwriting, acquisition and insurance expenses:
Commission expense, net of deferrals 658 699 (6) %
Amortization of deferred acquisition costs 526 5,055 (90) %
Other underwriting expenses 1,619 1,777 (9) %
Total underwriting, acquisition and insurance expenses 2,803 7,531 (63) %
Interest expense 1,213 1,213 - %
Other expenses 9,886 7,421 33 %
Total adjusted operating benefits and expenses 23,205 23,791 (2) %
1,103 249 343 %
Net loss attributable to noncontrolling interest 67 56 20 %
Equity income (loss), before tax 261 (86) (403) %
Pre-tax adjusted operating income $ 1,431 $ 219 553 %
Other data Average invested assets, at amortized cost net of allowance for credit losses (2)
$ 767,899 $ 701,876 9 %
Other investment-related income included in net investment income (3)
136 4 3,300 %
Average aggregate interest sensitive account value (10) 365,836 358,936 2 %
Death benefits, net of reinsurance and reserves released 5,903 4,343 36 %
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 (11)
900 (3,400) (126) %
Pre-tax adjusted operating income increased for the Corporate and Other segment
in the first quarter of 2021, compared to the prior year period, primarily due
to a decrease in amortization of deferred acquisition costs resulting from the
impact of market performance on our variable business, partially offset by
increases in death benefits and other expenses.
Death benefits, net of reinsurance and reserves released, increased in the first
quarter of 2021, compared to the prior year period, primarily due to an increase
in the number of claims. Death benefits in the Corporate and Other segment
include
39
--------------------------------------------------------------------------------
Table of Content
COVID-19 related claims, net of reinsurance and reserves released, totaling $0.7
million for the first quarter of 2021 and no noted impact in the first quarter
of 2020.
Other income and other expenses include fees and expenses from sales of brokered
products and operating results of our non-insurance subsidiaries, which include
wealth management services, advisory, management and leasing activities. Other
income and other expenses increased in the first quarter of 2021, compared to
the prior year period, primarily due to expanding our wealth management
business. The expansion of our wealth management business has increased
administrative costs along with the costs of implementing a new delivery
platform to allow for additional product offerings and an enhanced customer
experience. Revenues associated with our wealth management business increased as
we continue to develop this business, increasing $1.2 million in the first
quarter of 2021, compared to the prior year period. Expenses, including
commissions, associated with our wealth management expansion have increased $1.5
million in the first quarter of 2021, compared to the prior year period.
Equity Income
Equity income includes our proportionate share of gains and losses attributable to our ownership interest in partnerships, joint ventures and certain companies over which we exhibit some control but have a minority ownership interest. We consistently use the most recent financial information available to account for equity income. 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. The level of gains and losses for these entities normally fluctuates from period to period depending on the prevailing economic environment, changes in the value of underlying investments held by the investment partnerships, the 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. Equity income, net of related taxes, was$3.8 million for the first quarter of 2021 and$0.2 million for the same period in 2020. See Note 8 to our consolidated financial statements for further information.
Income Taxes on Adjusted Operating Income
The effective tax rate on adjusted operating income was 10.9% for the first
quarter of 2021, compared with 12.7% for the first quarter of 2020. The
effective tax rates differ from the federal statutory rate of 21% primarily due
to the impact of LIHTC investments and tax-exempt investment income.
Components of income tax
Three months ended March
31,
2021 2020
(Dollars in thousands)
Income tax benefit (expense) $ (3,687) $ 3,081
Income tax expense on equity income (1,005) (61)
Income tax offset on net income adjustments 1,810 (5,889)
Income taxes on adjusted operating income $ (2,882) $ (2,869) Income taxes on adjusted operating income before benefits of LIHTC investments
$ (3,640) $ (3,752) Amounts related to LIHTC investments 758 883 Income taxes on adjusted operating income$ (2,882) $ (2,869) 40
--------------------------------------------------------------------------------
Table of Content
Impact of Adjustments to Net Income (Loss) Attributable to FBL
Three months ended March
31,
2021 2020
(Dollars in thousands) Realized gains (losses) on investments and change in fair value of equity securities and derivatives
$ 10,745 $ (28,069) Proposed acquisition transaction expenses (2,577) - Offsets: (1) Change in amortization (890) (176) Reserve change on interest sensitive products (1,239) 205 Income tax (1,810) 5,889 Net impact of adjustments to net income (loss)$ 4,229 $ (22,151) Net impact per common share - basic and assuming dilution$ 0.17 $ (0.89)
(1)The items excluded from adjusted operating income impact the amortization of deferred acquisition costs and unearned revenue reserve. Certain interest sensitive reserves as well as income taxes are also impacted.
Realized Gains (Losses) on Investments
Three months ended
March 31,
2021 2020
(Dollars in thousands)
Realized gains (losses) on investments:
Realized gains $ 148 $ 12
Realized losses (868) (182)
Change in unrealized gains/losses on equity securities (149) (13,231)
Total allowance for credit losses 1,113 (12,261)
Net realized investment gains (losses) The level of realized gains (losses) is subject to fluctuation from period to period due to movements in credit spreads and prevailing interest rates, changes in the economic environment, the timing of the sales of the investments generating the realized gains and losses, as well as the timing of allowances, recovery of allowances and unrealized gains and losses on equity securities. See "Financial Condition - Investments" and Note 2 to our consolidated financial statements for details regarding our unrealized gains and losses on available-for-sale securities atMarch 31, 2021 andDecember 31, 2020 . Change in Allowances Recognized in Net Income Three months ended March 31, 2021 2020 (Dollars in thousands) Corporate securities: Financial$ (1,260) $ 5,430 Energy - 6,716 Other asset-backed 115 - Mortgage loans 32 115 Total allowance for credit (gains) losses reported in net income$ (1,113) $ 12,261
See Note 2 "Investment Operations" to our consolidated financial statements for more detail on the allowance for credit losses.
41
--------------------------------------------------------------------------------Table of Content Financial Condition Investments Our investment portfolio decreased 2.8% to$9,412.8 million atMarch 31, 2021 compared to$9,684.0 million atDecember 31, 2020 . The portfolio decrease is due in part to a$400.4 million decrease in the net unrealized appreciation of fixed maturities. The decrease in unrealized appreciation is primarily due to an increase in market yields during the first quarter of 2021. Additional details regarding securities in an unrealized gain or loss position atMarch 31, 2021 are included in the discussion that follows and in Note 2 to our consolidated financial statements. Details regarding investment impairments are discussed above in the "Realized Gains (Losses) on Investments" section under "Results of Operations." We manage the investment portfolio to optimize risk-adjusted yield within the context of prudent asset-liability management. We evaluate multiple cash flow testing scenarios as part of this process. The Company's investment policy calls for investing primarily in high quality fixed maturities and commercial mortgage loans.
Fixed Maturity Acquisitions Selected Information
Three months ended March 31,
2021 2020
(Dollars in thousands)
Cost of acquisitions:
Corporate $ 186,536 $ 123,877
Mortgage- and asset-backed 106,187 95,381
United States Government and agencies 10,165 -
Tax-exempt municipals 14,285 -
Total $ 317,173 $ 219,258
Effective annual yield 2.91 % 3.50 %
Credit quality
NAIC 1 designation 62.8 % 66.1 %
NAIC 2 designation 33.4 % 24.8 %
Non-investment grade 3.8 % 9.1 %
Weighted-average life in years 21.0 7.0
The table above summarizes selected information for fixed maturity purchases.
The effective annual yield shown is the yield calculated to the "first-call"
date. For non-callable bonds, the first-call date is the maturity date. The
weighted-average life is calculated using scheduled pay-downs and expected
prepayments for amortizing securities. For non-amortizing securities, the
weighted-average life is equal to the stated maturity date.
A portion of the securities acquired during the three months ended March 31,
2021 and March 31, 2020 were acquired with the proceeds from advances on our
funding agreements with the FHLB. The securities acquired to support these
funding agreements often carry a lower average yield than securities acquired to
support our other insurance products, due to the shorter maturity and relatively
low interest rate paid on those advances. In addition, certain municipal
securities acquired are exempt from federal income taxes, and accordingly have a
higher actual return than reflected in the yields stated above. The average
yield of the securities acquired, excluding the securities supporting the
funding agreements and using a tax-adjusted yield for the municipal securities,
was 3.13% during the three months ended March 31, 2021 and was 4.73% during the
three months ended March 31, 2020 .
42
--------------------------------------------------------------------------------
Table of Content
Investment Portfolio Summary
March 31, 2021 December 31, 2020
Carrying Value Percent Carrying Value Percent
(Dollars in thousands)
Fixed maturities - available for sale:
Public $ 5,920,167 62.9 % $ 6,139,811 63.4 %
144A private placement 1,809,025 19.2 1,823,768 18.8
Private placement 298,891 3.2 320,108 3.3
Total fixed maturities - available for
sale 8,028,083 85.3 8,283,687 85.5
Equity securities 88,564 0.9 88,281 0.9
Mortgage loans 992,938 10.6 994,101 10.4
Real estate 955 - 955 -
Policy loans 191,580 2.0 195,666 2.0
Short-term investments 42,252 0.5 63,062 0.7
Other investments 68,424 0.7 58,258 0.5
Total investments $ 9,412,796 100.0 % $ 9,684,010 100.0 %
As of March 31, 2021 , 95.8% (based on carrying value) of the available-for-sale
fixed maturities were investment grade debt securities, defined as being in the
highest two National Association of Insurance Commissioners (NAIC) designations.
Non-investment grade debt securities generally provide higher yields and involve
greater risks than investment grade debt securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment grade issuers. In addition, the trading market for
these securities is usually more limited than for investment grade debt
securities. We regularly review the percentage of our portfolio that is invested
in non-investment grade debt securities (NAIC designations 3 through 6). As of
March 31, 2021 , no single non-investment grade holding exceeded 0.2% of total
investments.
Credit Quality by NAIC Designation and Equivalent Rating
March 31, 2021 December 31, 2020
NAIC Designation Equivalent Rating (1) Carrying Value Percent Carrying Value Percent
(Dollars in thousands)
1 AAA, AA, A $ 5,163,977 64.3 % $ 5,440,737 65.7 %
2 BBB 2,532,172 31.5 2,516,020 30.4
Total investment grade 7,696,149 95.8 7,956,757 96.1
3 BB 261,219 3.3 256,122 3.1
4 B 56,382 0.7 57,746 0.7
5 CCC 10,046 0.1 10,036 0.1
6 In or near default 4,287 0.1 3,026 -
Total below investment grade 331,934 4.2 326,930 3.9
Total fixed maturities - available
for sale $ 8,028,083 100.0 % $ 8,283,687 100.0 %
(1)Equivalent ratings are based on those provided by nationally recognized
rating agencies with some exceptions for certain residential mortgage,
commercial mortgage- and asset-backed securities that are based on the expected
loss of the security rather than the probability of default. This may result in
a final designation being higher or lower than the equivalent credit rating.
See Note 2 to our consolidated financial statements for a summary of fixed
maturities by contractual maturity date.
43--------------------------------------------------------------------------------
Table of Content
Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification
March 31, 2021
Carrying Value
Carrying Value of Securities
of Securities Gross with Gross Gross
Total Carrying with Gross Unrealized Unrealized Unrealized
Value Unrealized Gains Gains Losses Losses
(Dollars in thousands)
Corporate securities:
Basic industrial $ 351,378 $ 338,552 $ 44,589 $ 12,826 $ (1,110)
Capital goods 337,515 296,289 33,807 41,226 (1,167)
Communications 164,341 150,376 20,528 13,965 (809)
Consumer cyclical 190,240 178,485 15,337 11,755 (806)
Consumer non-cyclical 666,542 639,653 84,771 26,889 (2,803)
Energy 434,097 391,989 41,336 42,108 (3,268)
Finance 748,046 697,013 67,869 51,033 (2,659)
Transportation 141,417 124,199 12,194 17,218 (669)
Utilities 851,939 757,159 121,353 94,780 (5,414)
Technology 175,294 156,795 17,164 18,499 (839)
Other 30,799 20,660 2,561 10,139 (791)
Total corporate securities 4,091,608 3,751,170 461,509 340,438 (20,335)
Mortgage- and asset-backed securities 2,527,892 2,129,202 144,817 398,690 (16,269)
United States Government and agencies 39,245 10,369 1,716 28,876 (6,822)
States and political subdivisions 1,369,338 1,287,650 147,496 81,688 (3,222)
Total $ 8,028,083 $ 7,178,391 $ 755,538 $ 849,692 $ (46,648)
December 31, 2020
Carrying Value
Carrying Value of Securities
of Securities Gross with Gross Gross
Total Carrying with Gross Unrealized Unrealized Unrealized
Value Unrealized Gains Gains Losses Losses
(Dollars in thousands)
Corporate securities:
Basic industrial $ 361,658 $ 358,786 $ 63,739 $ 2,872 $ (102)
Capital goods 343,285 341,328 55,049 1,957 (43)
Communications 165,105 160,706 29,896 4,399 (78)
Consumer cyclical 193,800 189,287 24,883 4,513 (473)
Consumer non-cyclical 710,628 704,598 136,956 6,030 (905)
Energy 442,603 419,114 56,920 23,489 (1,724)
Finance 773,430 764,564 96,649 8,866 (693)
Transportation 144,760 144,621 22,195 139 (5)
Utilities 902,980 893,310 188,764 9,670 (219)
Technology 178,839 178,734 26,636 105 -
Other 21,179 21,179 2,899 - -
Total corporate securities 4,238,267 4,176,227 704,586 62,040 (4,242)
Mortgage- and asset-backed securities 2,593,203 2,323,830 227,200 269,373 (7,113)
United States Government and agencies 36,252 12,622 2,887 23,630 (1,809)
States and political subdivisions 1,415,965 1,400,820 188,542 15,145 (785)
Total $ 8,283,687 $ 7,913,499 $ 1,123,215 $ 370,188 $ (13,949)
44--------------------------------------------------------------------------------
Table of Content
Credit Quality of Available-for-Sale Fixed Maturities with Unrealized Losses
March 31, 2021
Carrying Value of
Securities with Gross
Gross Unrealized Percent of Unrealized Percent of
NAIC Designation Equivalent Rating Losses Total Losses Total
(Dollars in thousands)
1 AAA, AA, A $ 624,584 73.5 % $ (32,814) 70.4 %
2 BBB 160,731 18.9 (8,689) 18.6
Total investment grade 785,315 92.4 (41,503) 89.0
3 BB 50,937 6.0 (3,797) 8.1
4 B 13,437 1.6 (1,348) 2.9
6 In or near default 3 - - -
Total below investment grade 64,377 7.6 (5,145) 11.0
Total $ 849,692 100.0 % $ (46,648) 100.0 %
December 31, 2020
Carrying Value of
Securities with Gross
Gross Unrealized Percent of Unrealized Percent of
NAIC Designation Equivalent Rating Losses Total Losses Total
(Dollars in thousands)
1 AAA, AA, A $ 269,478 72.8 % $ (6,871) 49.3 %
2 BBB 43,988 11.9 (1,397) 10.0
Total investment grade 313,466 84.7 (8,268) 59.3
3 BB 41,906 11.3 (3,317) 23.8
4 B 14,812 4.0 (2,364) 16.9
6 In or near default 4 - - -
Total below investment grade 56,722 15.3 (5,681) 40.7
Total $ 370,188 100.0 % $ (13,949) 100.0 %
Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
Amortized Cost Gross Unrealized Losses
Fair Value Fair Value is Fair Value is Fair Value is
is Less than 75% or Greater Less than 75% 75% or Greater
75% of Cost than Cost of Cost than Cost
(Dollars in thousands)
Three months or less $ - $
601,885 $ -
- 49,978 - (2,045)
Greater than six months to nine months 25,532 80,015 (6,507) (5,725)
Greater than nine months to twelve months - 177 - (1)
Greater than twelve months - 138,753 - (5,941)
Total $ 25,532 $ 870,808 $ (6,507) $ (40,141)
45--------------------------------------------------------------------------------
Table of Content Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time
Amortized Cost Gross Unrealized Losses
Fair Value Fair Value is Fair Value is Fair Value is
is Less than 75% or Greater Less than 75% of 75% or Greater
75% of Cost than Cost Cost than Cost
(Dollars in thousands)
Three months or less $ - $ 63,287 $ - $ (1,338)
Greater than three months to six months - 112,343 - (3,572)
Greater than six months to nine months - 11,786 - (180)
Greater than nine months to twelve months - 80,799 - (2,228)
Greater than twelve months - 115,922 - (6,631)
Total $ - $ 384,137 $ - $ (13,949) Available-For-Sale Fixed Maturities with Unrealized Losses by Maturity Date
March 31, 2021 December 31, 2020
Carrying Value of Carrying Value of
Securities with Gross Securities with Gross
Gross Unrealized Unrealized Gross Unrealized Unrealized
Losses Losses Losses Losses
(Dollars in thousands)
Due in one year or less $ 3,260 $
(65) $ 3,200
7,124 (55) 9,224 (21)
Due after five years through ten years 52,595 (1,811) 14,260 (1,349)
Due after ten years 388,023 (28,448) 74,131 (5,333)
451,002 (30,379) 100,815 (6,836)
Mortgage- and asset-backed 398,690 (16,269) 269,373 (7,113)
Total $ 849,692 $ (46,648) $ 370,188 $ (13,949) See Note 2 to our consolidated financial statements for additional analysis of these unrealized losses.
Mortgage-backed and other asset-backed securities are purchased when we believe these types of investments provide superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securities are diversified as to collateral types, cash flow characteristics and maturity. The repayment pattern on mortgage and other asset-backed securities is more variable than that of more traditional fixed maturity securities because the repayment terms are tied to underlying debt obligations that are subject to prepayments. The prepayment speeds (e.g., the rate of individuals refinancing their home mortgages) can vary based on a number of economic factors that cannot be predicted with certainty. These factors include the prevailing interest rate environment and general status of the economy. At each balance sheet date, we review and update our expectation of future prepayment speeds and the book value of the mortgage and other asset-backed securities purchased at a premium or discount is reset, if needed. See Note 1 to our consolidated financial statements included in Item 8 of our Form 10-K for the year endedDecember 31, 2020 for more detail on accounting for the amortization of premium and accrual of discount on mortgage-backed and asset-backed securities. Our direct exposure to the Alt-A home equity and subprime first-lien sectors is limited to investments in structured securities collateralized by senior tranches of residential mortgage loans. We also have a partnership interest in one fund atMarch 31, 2021 andDecember 31, 2020 , that owns securities backed by Alt-A home equity, subprime first-lien and adjustable rate mortgage collateral. The fund is reported as securities and indebtedness of related parties in our consolidated balance sheets with a fair value of$0.8 million atMarch 31, 2021 and atDecember 31, 2020 . We do not own any direct investments in subprime lenders. 46 -------------------------------------------------------------------------------- Table of ContentMortgage- and Asset-Backed Securities by Collateral Type March 31, 2021 December 31, 2020 Percent Percent of Fixed of Fixed Amortized Cost Carrying Value Maturities Amortized Cost Carrying Value Maturities (Dollars in thousands)
Government agency$ 213,806 $ 233,951 2.9 %$ 202,989 $ 231,161 2.8 % Prime 385,235 399,332 5.0 384,638 405,016 4.9 Alt-A 54,758 64,722 0.8 56,717 66,139 0.8 Subprime 115,684 124,862 1.6 118,705 127,302 1.5 Commercial mortgage 1,014,949 1,079,827 13.5 991,944 1,136,333 13.7 Collateralized loan obligation 223,861 222,582 2.8 219,481 217,162 2.6 Non-mortgage 391,835 402,616 5.0 399,311 410,090 5.0 Total$ 2,400,128 $ 2,527,892 31.6 %$ 2,373,785 $ 2,593,203 31.3 %
The mortgage- and asset-backed securities can be summarized into three broad categories: residential, commercial and other asset-backed securities.
The residential mortgage-backed portfolio includes government agency pass-through and collateralized mortgage obligation (CMO) securities. With a government agency pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" with varying stated maturities that provide sequential retirement of the bonds. While each tranche receives monthly interest payments, a subsequent tranche is not entitled to receive payment of principal until the entire principal of the preceding tranche is paid off. We primarily invest in sequential tranches, which allow us to manage cash flow stability and prepayment risk by the level of tranche in which we invest. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. PAC bonds provide more predictable cash flows within a range of prepayment speeds and provide some protection against prepayment risk. TAC bonds provide protection from a rise in the prepayment rate due to falling interest rates. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to excessive prepayment risk.Residential Mortgage-Backed Securities by NAIC Designation and Origination Year March 31, 2021 2004 & Prior 2005 to 2008 2009 & After Total Amortized Carrying Amortized Carrying Amortized Carrying Amortized Carrying NAIC Designation Cost Value Cost Value Cost Value Cost Value (Dollars in thousands) 1$ 35,890 $ 37,586 $ 48,721 $ 63,544 $ 552,379 $ 578,002 $ 636,990 $ 679,132 2 3,436 3,429 - - - - 3,436 3,429 3 583 566 123 121 2,370 2,410 3,076 3,097 4 4,403 3,781 491 389 - - 4,894 4,170 5 - - 6,876 8,447 - - 6,876 8,447 6 3 3 - - - - 3 3 Total$ 44,315 $ 45,365 $ 56,211 $ 72,501 $ 554,749 $ 580,412 $ 655,275 $ 698,278 December 31, 2020 2004 & Prior 2005 to 2008 2009 & After Total Amortized Carrying Amortized Carrying Amortized Carrying Amortized Carrying NAIC Designation Cost Value Cost Value Cost Value Cost Value (Dollars in thousands) 1$ 37,892 $ 40,008 $ 53,930 $ 67,889 $ 537,274 $ 577,319 $ 629,096 $ 685,216 2 3,659 3,667 - - - - 3,659 3,667 3 591 567 139 136 - - 730 703 4 4,457 3,885 549 447 - - 5,006 4,332 5 - - 7,008 8,197 - - 7,008 8,197 6 4 4 - - - - 4 4 Total$ 46,603 $ 48,131 $ 61,626 $ 76,669 $ 537,274 $ 577,319 $ 645,503 $ 702,119 47
--------------------------------------------------------------------------------
Table of Content
The commercial mortgage-backed securities (CMBS) are primarily sequential securities. CMBS typically have cash flows that are less subject to refinance risk than residential mortgage-backed securities principally due to prepayment restrictions on many of the underlying commercial mortgage loans.Commercial Mortgage-Backed Securities by NAIC Designation and Origination Year March 31, 2021 2004 & Prior 2005 to 2008 2009 & After Total Amortized Carrying Amortized Carrying Amortized Carrying Amortized Carrying NAIC Designation Cost Value Cost Value Cost Value Cost Value (Dollars in thousands) 1$ 7,262 $ 8,046 $ 91,567 $ 106,622 $ 846,498 $ 890,599 $ 945,327 $ 1,005,267 2 - - 40,875 45,032 21,521 22,129 62,396 67,161 3 - - - - 7,226 7,399 7,226 7,399 Total (1)$ 7,262 $ 8,046 $ 132,442 $ 151,654 $ 875,245 $ 920,127 $ 1,014,949 $ 1,079,827 December 31, 2020 2004 & Prior 2005 to 2008 2009 & After Total Amortized Carrying Amortized Carrying Amortized Carrying Amortized Carrying NAIC Designation Cost Value Cost Value Cost Value Cost Value (Dollars in thousands) 1$ 7,396 $ 8,453 $ 91,675 $ 113,610 $ 823,004 $ 934,637 $ 922,075 $ 1,056,700 2 - - 41,084 49,229 21,544 22,987 62,628 72,216 3 - - - - 7,242 7,417 7,242 7,417 Total (1)$ 7,396 $ 8,453 $ 132,759 $ 162,839 $ 851,790 $ 965,041 $ 991,945 $ 1,136,333 (1) The CMBS portfolio included government agency-backed securities with a carrying value of$849.7 million atMarch 31, 2021 and$911.4 million atDecember 31, 2020 . Also included in the CMBS portfolio are military housing bonds totaling$157.6 million atMarch 31, 2021 and$170.0 million atDecember 31, 2020 . These bonds are used to fund the construction of multi-family homes onUnited States military bases. The bonds are backed by a first mortgage lien on residential military housing projects. The other asset-backed securities are backed by both residential and non-residential collateral. The collateral for residential asset-backed securities primarily consists of second lien fixed-rate home equity loans. The cash flows of these securities are less subject to prepayment risk than residential mortgage-backed securities as the borrowers are less likely to refinance than those with only a first lien mortgage. The collateral for non-residential asset-backed securities primarily includes securities backed by credit card receivables, auto dealer receivables, auto installment loans, aircraft leases, middle market and syndicated business loans, timeshare receivables and trade and account receivables. The majority of these securities are high quality, short-duration assets with limited cash flow variability. Our CLO portfolio included in other asset-backed securities is high quality, with all of the securities rated NAIC-1. Internal stress testing has indicated that the weighted average constant default rate (CDR) of our portfolio without suffering loss is 17%. The CDR is the constant default rate (annually) that a CLO must suffer before our tranche takes its first dollar loss. Other Asset-Backed Securities by NAIC Designation and Origination Year March 31, 2021 2004 & Prior 2005 to 2008 2009 & After Total Amortized Carrying Amortized Carrying Amortized Carrying Amortized Carrying NAIC Designation Cost Value Cost Value Cost Value Cost Value (Dollars in thousands) 1$ 2,940 $ 2,906 $ 115,494 $ 126,588 $ 467,101 $ 471,695 $ 585,535 $ 601,189 2 - - - - 124,602 129,932 124,602 129,932 3 2,092 1,951 - - 11,994 12,054 14,086 14,005 4 1,116 1,185 - - 2,838 2,533 3,954 3,718 5 - - - - 1,727 943 1,727 943 Total$ 6,148 $ 6,042 $ 115,494 $ 126,588 $ 608,262 $ 617,157 $ 729,904 $ 749,787 48
-------------------------------------------------------------------------------- Table of ContentOther Asset-Backed Securities by NAIC Designation and Origination Year December 31, 2020 2004 & Prior 2005 to 2008 2009 & After Total Amortized Carrying Amortized Carrying Amortized Carrying Amortized Carrying NAIC Designation Cost Value Cost Value Cost Value Cost Value (Dollars in thousands) 1$ 3,196 $ 3,120 $ 118,478 $ 129,822 $ 471,367 $ 475,762 $ 593,041 $ 608,704 2 - - - - 123,376 127,292 123,376 127,292 3 2,204 2,045 - - 11,965 11,995 14,169 14,040 4 1,179 1,256 - - 2,846 2,401 4,025 3,657 5 - - - - 1,727 1,058 1,727 1,058 Total$ 6,579 $ 6,421 $ 118,478 $ 129,822 $ 611,281 $ 618,508 $ 736,338 $ 754,751
State and political subdivision securities totaled$1,369.3 million , or 17.1% of total fixed maturities, atMarch 31, 2021 , and$1,416.0 million , or 19.2% of total fixed maturities atDecember 31, 2020 and include investments in general obligation, revenue and municipal housing bonds. Our investment strategy is to utilize municipal bonds in addition to corporate bonds, as we believe they provide additional diversification and have historically low default rates compared with similarly rated corporate bonds. We evaluate the credit strength of the underlying issues on both a quantitative and qualitative basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are investment grade credits without consideration of insurance. Our municipal bonds are well diversified by type and geography with the top exposure being water and sewer revenue bonds. Our municipal bond holdings were trading at 111.8% of amortized cost atMarch 31, 2021 . We do not hold anyPuerto Rico -related bonds. Exposure to the state ofIllinois and municipalities within the state accounted for 1.1% of our total fixed maturities atMarch 31, 2021 . As ofMarch 31, 2021 , ourIllinois -related portfolio holdings were rated investment grade and were trading at 117.6% of amortized cost.
Mortgage Loans
Mortgage loans totaled$992.9 million atMarch 31, 2021 and$994.1 million atDecember 31, 2020 . Our mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. The total number of commercial mortgage loans outstanding was 213 atMarch 31, 2021 and 212 atDecember 31, 2020 . In the first three months of 2021, new loans ranged from$2.9 million to$14.7 million in size, with an average loan size of$6.7 million , an average loan term of 13 years and an average net yield of 3.26%. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. The majority of our mortgage loans amortize principal, with 4.3% that are interest-only loans as ofMarch 31, 2021 . AtMarch 31, 2021 , the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 49.9% and the weighted average debt service coverage ratio was 1.7 based on the results of our 2019 annual study. See Note 2 to our consolidated financial statements for further discussion regarding our mortgage loans. 49
--------------------------------------------------------------------------------
Table of Content
Other Assets and Liabilities
March 31, December 31,
2021 2020 Percentage change
Selected other assets:
Cash and cash equivalents 70,854 12,882 450.0 %
Reinsurance recoverable 108,640 115,168 (5.7) %
Deferred acquisition costs 282,682 176,085 60.5 %
Other assets 155,996 152,929 2.0 %
Assets held in separate accounts 686,968 674,182 1.9 %
Selected other liabilities:
Future policy benefits 7,773,635 7,616,272 2.1 %
Other policyholder funds 602,443 602,989 (0.1) %
Deferred income taxes 150,654 211,180 (28.7) %
Other liabilities 100,012 102,127 (2.1) %
Liabilities held in separate accounts 686,968 674,182 1.9 %
Cash and cash equivalents increased primarily due to normal fluctuations in
timing of payments made and received. Deferred acquisition costs increased
compared to the prior year end primarily due to a $105.2 million decrease in the
impact of the change in net unrealized appreciation on fixed maturity securities
during the period. Assets and liabilities held in separate accounts increased
due to investment earnings, partially offset by charges, surrenders and benefits
on this closed block of business.
Future policy benefits increased primarily due to increases in our funding
agreements with the FHLB. Deferred income taxes decreased primarily due to the
tax impact of the change in unrealized appreciation/depreciation on investments.
Stockholders' Equity
March 31, December 31,
2021 2020 Percentage change
(dollars in thousands, except per
share data)
Total FBL Financial Group, Inc. stockholders' equity $ 1,489,909 $ 1,692,099 (11.9) %
Common stockholders' equity 1,486,909 1,689,099 (12.0) %
Book value per share $ 60.95 $ 69.24 (12.0) %Less: Per share impact of accumulated other comprehensive income
15.17 24.08 (37.0) %
Book value per share, excluding accumulated other
comprehensive income (1) $ 45.78 $ 45.16 1.4 %
(1)Book value per share excluding accumulated other comprehensive income is a
non-GAAP financial measure. Since accumulated other comprehensive income
fluctuates from quarter to quarter due to unrealized changes in the fair value
of investments caused principally by changes in market interest rates, we
believe this non-GAAP financial measure provides useful supplemental
information.
Our stockholders' equity decreased compared to the prior year end primarily due
to the change in unrealized appreciation on fixed maturity securities during the
period and dividends paid, partially offset by net income.
50
--------------------------------------------------------------------------------
Table of Content
Liquidity and Capital Resources
Cash Flows
During the first three months of 2021, our operating activities generated cash flows totaling$36.5 million , consisting of net income of$27.6 million adjusted for non-cash operating revenues and expenses netting to$8.9 million . We used cash of$120.1 million in our investing activities during the 2021 period. The primary uses were$383.3 million of investment acquisitions, mostly in fixed maturity securities, partially offset by$246.2 million in sales, maturities and repayments of investments. Our financing activities provided cash of$141.6 million during the 2021 period. The primary financing source was$259.5 million in receipts from interest sensitive products credited to policyholder account balances, which was offset by$105.2 million for return of policyholder account balances on interest sensitive products and$12.7 million for dividends paid to stockholders. The change in policyholder account balances includes a net increase of$140.8 million in funding agreements with the FHLB during the first three months of 2021.
Sources and Uses of Capital Resources
Parent company cash inflows from operations consist primarily of fees that it charges various subsidiaries and affiliates for management of their operations, expense reimbursements and tax settlements from subsidiaries and affiliates, investment income, and dividends from subsidiaries, if declared and paid. Revenue sources for the parent company during the three months endedMarch 31, 2021 included management fees from subsidiaries and affiliates totaling$2.0 million and dividends of$12.5 million . Cash outflows are principally for salaries, taxes and other expenses related to providing management services, contributions to non-insurance subsidiaries, dividends on outstanding stock, stock repurchases and interest on our parent company debt. During the first quarter 2021, our parent company also incurred$2.6 million in expenses related to the proposed merger transaction discussed in Note 1 to our consolidated financial statements. We paid regular cash dividends on our common and preferred stock during the three-month period endedMarch 31 totaling$12.7 million in 2021 and$12.4 million in 2020. In addition, we paid a special$1.50 per common share cash dividend totaling$37.0 million inMarch 2020 . Under the Merger Agreement, the Company is permitted to declare and pay, and has agreed to declare and pay, quarterly cash dividends of$0.52 per share of common stock. Common stock dividend rates are analyzed quarterly and are dependent upon our capital and liquidity positions. In addition, alternative uses of excess capital may impact future dividend levels. Assuming these quarterly dividend rates, the common and preferred dividends would total approximately$38.2 million for the remainder of 2021. The parent company expects to have sufficient resources and cash flows to meet its interest and dividend payments throughout 2021. The parent company had available cash and investments totaling$28.1 million atMarch 31, 2021 . The parent company expects to rely on available cash resources, dividends from Farm Bureau Life and management fee income to make dividend payments to its stockholders, interest payments on its debt and to fund any capital initiatives such as stock repurchases. In addition, our parent company and Farm Bureau Life have entered into a reciprocal line of credit arrangement, which provides additional liquidity for either entity up to$20.0 million . We had no material commitments for capital expenditures as ofMarch 31, 2021 . As discussed in Note 6 to our consolidated financial statements, we have periodically taken advantage of opportunities to repurchase our outstanding Class A common stock through Class A common stock repurchase programs approved by our Board of Directors. AtMarch 31, 2021 ,$26.3 million remains available for repurchase under the current Class A common stock repurchase program. Under this program, we had no repurchases during the three months endedMarch 31, 2021 . Completion of this program is dependent on market conditions and other factors. There is no guarantee as to the exact timing of any repurchases or the number of shares that we will repurchase. The share repurchase program may be modified or terminated at any time without prior notice. Under the Merger Agreement, we have agreed not to repurchase any additional shares of our capital stock from the date of the Merger Agreement through the closing of the Merger, subject to certain exceptions, including pursuant to our equity awards plans. Interest payments on our debt totaled$1.2 million for the three months endedMarch 31, 2021 andMarch 31, 2020 . Interest payments on our debt outstanding atMarch 31, 2021 are estimated to be$3.6 million for the remainder of 2021.Farm Bureau Life's cash inflows primarily consist of premiums; deposits to policyholder account balances; income from investments; sales, maturities and calls of investments; and repayments of investment principal.Farm Bureau Life's cash outflows are primarily related to withdrawals of policyholder account balances, investment purchases, payment of policy acquisition costs, policyholder benefits, income taxes, current operating expenses and dividends. Life insurance companies generally produce a positive cash flow that may be measured by the degree to which cash inflows are adequate to meet benefit 51 -------------------------------------------------------------------------------- Table of Content obligations to policyholders and normal operating expenses as they are incurred. The remaining cash flow is generally used to increase the asset base to provide funds to meet the need for future policy benefit payments and for writing new business. Continuing operations and financing activities from Farm Bureau Life relating to interest sensitive products provided funds totaling$199.8 million for the three months endedMarch 31, 2021 and$135.8 million for the prior year period.Farm Bureau Life's ability to pay dividends to the parent company is limited by law to earned profits (statutory unassigned surplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of theState of Iowa . AtDecember 31, 2020 ,Farm Bureau Life's statutory unassigned surplus was$494.6 million . There are certain additional limits on the amount of dividends that may be paid within a year without approval of the Insurance Division,Department of Commerce of the State of Iowa as discussed in Note 7 to our consolidated financial statements included in Item 8 of our Form 10-K for the year endedDecember 31, 2020 . During the remainder of 2021, the maximum amount legally available for distribution to the parent company without further regulatory approval is$74.9 million . We manage the amount of capital held by our insurance subsidiaries to ensure they meet regulatory requirements. State laws specify regulatory actions if an insurer's risk-based capital (RBC) ratio, a measure of solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC based on the various risk factors related to an insurance company's capital and surplus, including insurance, business, asset and interest rate risks. The insurance regulators monitor the level of RBC against a statutory "authorized control level" RBC at which point regulators have the option to assume control of the insurance company. The company action level RBC is 200% of the authorized control level and is the first point at which any action would be triggered. Our adjusted capital and RBC is reported to our insurance regulators annually based on formulas that may be revised throughout the year. We estimate our adjusted capital and RBC quarterly; however, these estimates may differ from actual results. As ofMarch 31, 2021 ,Farm Bureau Life's statutory total adjusted capital is estimated at$721.5 million , resulting in an RBC ratio of 531%, based on company action level capital of$135.9 million . On a consolidated basis, we anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally generated funds. However, there can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since benefits and surrender levels are influenced by such factors as the interest rate environment, our financial strength ratings, the economy and other factors that impact policyholder behavior. COVID-19 continues to have a significant impact to theU.S. economy. Although there have been economic impacts associated with COVID-19, we expect to continue generating sufficient funds from operations to maintain sufficient liquidity. Our investment portfolio atMarch 31, 2021 , included$42.3 million of short-term investments,$70.9 million of cash and cash equivalents and$1,861.6 million in carrying value ofU.S. Government andU.S. Government agency backed securities that could be readily converted to cash at or near carrying value. In addition, Farm Bureau Life is a member of the FHLB, which provides a source for additional liquidity, if needed. This membership allows us to utilize fixed or floating rate advances offered by the FHLB and secured by qualifying collateral. Our total capacity to utilize such advances is impacted by multiple factors including the market value of eligible collateral, our level of statutory admitted assets and excess reserves and our willingness or capacity to hold activity-based FHLB common stock.
Merger Agreement
Under the Merger Agreement, we are required to pay a termination fee of up to$20.1 million , if the Merger Agreement is terminated in specified circumstances, and reimburse the out-of-pocket expenses of FBPCIC, Merger Sub and their respective affiliates up to a maximum of$5.3 million , if the Merger Agreement is terminated in specified circumstances.
© Edgar Online, source
