UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 2, 2004
-------------
FBL Financial Group, Inc.
-------------------------
(Exact name of registrant as specified in its charter)
Iowa 1-11917 42-1411715
--------------------------------------------------------------------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
5400 University Avenue, West Des Moines,
Iowa 50266
----------------------------------------------------------------------------
(Address of principal executive
offices) (Zip Code)
Registrant's telephone number, including area code (515) 225-5400
---------------
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
Exhibit 99.1 News release dated April 2, 2004 announcing a $75 million senior
notes offering.
Item 9. Reg FD Disclosure
On April 2, 2004, FBL issued a press release in the form of Exhibit 99.1.
RISK FACTORS
As a holding company, we will depend on our subsidiaries for funds to meet
our payment obligations but our subsidiaries' ability to make distributions is
limited by law.
As a holding company, we primarily rely on dividends from subsidiaries to meet
our obligations.
The ability of our subsidiaries, Farm Bureau Life and EquiTrust Life Insurance
Company (collectively, the "Life Companies"), to pay dividends to FBL Financial
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 the State of Iowa. In
addition, under the Iowa Insurance Holding Company Act, the Life Companies may
not pay an "extraordinary" dividend without prior notice to and approval by the
Iowa Insurance Commissioner. An "extraordinary" dividend is defined under the
Iowa Insurance Holding Company Act as any dividend or distribution of cash or
other property whose fair market value, together with that of other dividends or
distributions made within the preceding 12 months, exceeds the greater of (i)
10% of policyholders' surplus (total statutory capital stock and statutory
surplus) as of December 31 of the preceding year, or (ii) the statutory net gain
from operations of the insurer for the 12-month period ending December 31 of the
preceding year. On December 31, 2003, Farm Bureau Life transferred the stock of
EquiTrust to FBL Financial through an "extraordinary" dividend, which was
approved by the Iowa Insurance Commissioner. As a result, Farm Bureau Life will
not be able to distribute dividends to FBL Financial during 2004 without further
regulatory approval. During 2004, the maximum amount legally available for
distribution to FBL Financial from EquiTrust without further regulatory approval
is $13.4 million.
FBL Financial and its subsidiaries are separate and distinct legal entities, and
the subsidiaries of FBL Financial have no obligation to pay interest or
principal due on the obligations of FBL Financial or to make funds available for
that purpose, whether in the form of loans, dividends or other distributions.
In addition, the Life Companies are subject to the risk-based capital, or RBC,
requirement of the National Association of Insurance Commissioners ("NAIC") set
forth in the Risk-Based Capital for Insurers Model Act, or the Model Act. The
main purpose of the Model Act is to provide a tool for insurance regulators to
evaluate the capital of insurers relative to the risks assumed by them and
determine whether there is a need for possible corrective action. U.S. insurers
and reinsurers are required to report the results of their RBC calculations as
part of the statutory annual statements filed with state insurance regulatory
authorities.
The Model Act provides for four different levels of regulatory actions based on
annual statements, each of which may be triggered if an insurer's total adjusted
capital, as defined in the Model Act, is less than a corresponding RBC.
o The company action level is triggered if an insurer's total adjusted
capital is less than 200% of its authorized control level RBC, as
defined in the Model Act. At the company action level, the insurer must
submit a plan to the regulatory authority that discusses proposed
corrective actions to improve its capital position.
o The regulatory action level is triggered if an insurer's total
adjusted capital is less than 150% of its authorized control level RBC.
At the regulatory action level, the regulatory authority will perform a
special examination of the insurer and issue an order specifying
corrective actions that must be followed.
o If an insurer's total adjusted capital is less than its authorized
control level RBC, the regulatory authority is authorized (although not
mandated) to take regulatory control of the insurer.
o The mandatory control level is triggered if an insurer's total
adjusted capital is less than 70% of its authorized control level RBC,
and at that level the regulatory authority must take regulatory control
of the insurer. Regulatory control may lead to rehabilitation or
liquidation of an insurer.
As of December 31, 2003, the total adjusted capital of Farm Bureau Life was 724%
of authorized control level RBC and the total adjusted capital of EquiTrust was
520% of authorized control level RBC.
Although we believe our current sources of funds provide adequate cash flow to
us to meet our current and reasonably forseeable future obligations, there can
be no assurance that we will continue to have access to these sources in the
future.
Risk Factors Relating to our Business and the Insurance Industry
Our business is highly dependent on our relationship with Farm Bureau
organizations.
Our business relies significantly upon the maintenance of our right to use the
"Farm Bureau" and "FB" trade names and related trademarks and service marks,
which are controlled by the American Farm Bureau Federation. The American Farm
Bureau Federation has granted to each state Farm Bureau federation the right to
use these designations in their respective states and to allow their
subsidiaries and affiliates, upon receipt of written permission from the
American Farm Bureau Federation, to do so. The American Farm Bureau Federation
requires the state Farm Bureau federations to ensure, through stock ownership,
positions on the Board or license provisions, that the subsidiary or affiliate
permitted to use such designations conducts its operations in a manner
consistent with the policies of the American Farm Bureau Federation and the
state Farm Bureau federations. Policies of the American Farm Bureau Federation
and state Farm Bureau federations are responsive to the purposes of the
organizations, which is to improve the financial well being and quality of life
of farmers, ranchers and other rural residents through education and
representation with respect to public policy issues. Under the agreements
governing our use of such designations and marks, the American Farm Bureau
Federation and each state Farm Bureau federation have the right to terminate our
rights. We use the designations and marks for each of the states in our Farm
Bureau marketing territory. Our right to use the designations and marks could be
terminated by the American Farm Bureau Federation as to all states (i) in the
event of a material breach of the trademark license not cured by us within 60
days, (ii) immediately, in the event of termination by the American Farm Bureau
Federation of the State Farm Bureau's membership in the American Farm Bureau
Federation or (iii) in the event of a material breach of the state Farm Bureau's
membership agreement with the American Farm Bureau Federation, including by
reason of the failure of the state Farm Bureau to cause us to adhere to the
aforementioned policies. In addition, our royalty agreements with the state Farm
Bureau Federations can be terminated without cause at the conclusion of the
royalty agreements. The royalty agreements range in length from one year, which
renew automatically unless either party gives notification to terminate the
agreement, to 30 years, depending on the state. We believe our relationship with
the Farm Bureau provides a number of advantages. Farm Bureau organizations in
our current territory tend to be well known and long established, have active
memberships and provide a number of member benefits other than financial
services. The strength of these organizations provides enhanced prestige and
brand awareness for our products and increased access to Farm Bureau members.
The loss of the right to use these designations in a key state or states could
have a material adverse effect upon operating results.
We may have conflicts of interests with the Farm Bureau.
Our business and operations and the business and operations of the American Farm
Bureau Federation, its affiliates, and state Farm Bureaus are interrelated. The
substantial overlap of the business, executive officers and Directors of the
Company and the state Farm Bureau federations may give rise to conflicts of
interest among such companies. Such conflicts could arise, for example, with
respect to business dealings among such companies, the use of a common agency
force, the sharing of employees, space and other services and facilities under
intercompany agreements, and the allocation of business opportunities among the
companies. Additional conflicts of interest could arise due to the fact that the
Presidents of the state Farm Bureau federations, who serve as Directors elected
by Class B stockholders pursuant to the Stockholders Agreement, are elected as
Presidents by members of Farm Bureau organizations, many of whom are also
purchasers of our products. Conflicts of interest could also arise between the
Company and the various state Farm Bureau Federations in our life-only states,
whose presidents serve as Directors of the Company, and which control their
state affiliated property-casualty insurance company, with respect to the use of
the common agency force. We have adopted a conflict of interest policy which
requires a Director to disclose to the Board of Directors and any appropriate
committee of the Board, the existence of any transaction or proposed transaction
in which the Director has a direct or indirect interest, and the material facts
relating thereto.
Changes in interest rates may affect our earnings negatively.
The profitability of our life insurance and annuity businesses is affected by
interest rate changes. In periods of increasing interest rates, life insurance
policy loans and life insurance policy and annuity surrenders and withdrawals
may increase as policyholders seek investments with higher perceived returns. If
these circumstances arise, then the resulting increase in cash outflows could
require us to sell invested assets at a time when the prices for those assets
have declined because of the increase in market interest rates, which could
cause us to suffer investment losses.
Periods of low or declining interest rates have the potential to affect our
earnings negatively in the following principal ways:
o Decreased yield on our fixed income investments. Low or declining interest
rates decrease the yield we earn on fixed income investments added to our
portfolio, thereby reducing our overall portfolio yield. A lower yield
could compress the margins we earn on many of our products, such as
universal life and certain annuities, on which we are contractually
obligated to pay customers a fixed minimum interest rate.
o Increased surrenders and reinvestments at lower rates. In a period of low
or declining interest rates, if policyholders cancel their policies or
withdraw the cash values of their policies to seek better investment
yields, our revenues are likely to decrease. In the absence of new sales,
cancellations and withdrawals by policyholders will tend to decrease our
long-term earnings. Also, if market interest rates decline, net investment
income will decrease if higher yielding fixed income securities mature or
are redeemed and the proceeds are reinvested in lower yielding securities.
o Impact on sales of fixed annuities. A period of generally low or declining
interest rates could result in lower sales of fixed annuities, relative to
other investment options, than we otherwise might have achieved.
o Impact on unfunded liability of pension plan. Declining interest rates may
lead to increases in the unfunded liability of our pension plans (or
creation of unfunded liability where no such liability previously existed),
which could lead to significant costs for us in the form of increased
contributions to our pension plans to satisfy required funding obligations.
o Exposure to guaranteed crediting rates. Declining interest rates could
increase our exposure to losses from life insurance and fixed annuity
products featuring guaranteed interest credits.
General economic conditions, including changing interest rates and market
volatility, affect both the risks and the returns on both our products and our
investment portfolio.
The market value of our investments and our investment performance,
including yields and realization of gains or losses, may vary depending on
economic and market conditions. Such conditions include the shape of the yield
curve, the level of interest rates and recognized equity and bond indices,
including, without limitation, the S&P 500 Index(R), S&P 500, the Dow Jones
Industrial Average, the NASDAQ 100, the Lehman Aggregate Bond Index and the
Lehman U.S. Treasury Bond Index (the "Indices"). Interest rate risk is our
primary market risk exposure. Substantial and sustained increases and decreases
in market interest rates can materially and adversely affect the profitability
of our products, the market value of our investments and the reported value of
stockholders' equity.
From time to time, for business or regulatory reasons, we may be required to
sell certain of our investments at a time when their market value is less than
the carrying value of these investments. Rising interest rates may cause
declines in the value of our fixed maturity securities. With respect to our
available for sale fixed maturity securities, such declines (net of income taxes
and certain adjustments for assumed changes in amortization of deferred policy
acquisition costs, value of insurance in force acquired and unearned revenue
reserve) reduce our reported stockholders' equity and book value per share.
A key component of our net income is the investment spread. A narrowing of
investment spreads may adversely affect operating results. Although we have the
right to adjust interest crediting rates on a substantial portion of our direct
business in force, changes to crediting rates may not be sufficient to maintain
targeted investment spreads in all economic and market environments. In general,
our ability to lower crediting rates is subject to a minimum crediting rate
filed with and approved by state regulators. In addition, competition and other
factors, including the potential for increases in surrenders and withdrawals,
may limit our ability to adjust or maintain crediting rates at levels necessary
to avoid the narrowing of spreads under certain market conditions.
The profitability of our index annuities that are tied to market indices is
significantly affected by the spread on interest earned on investments, by the
cost of underlying call options purchased to fund the credits owed to contract
holders and by the minimum interest guarantees owed to the contract holder, if
any. If there were little or no gains in the one-year options purchased over the
expected life of an index annuity, we would incur expenses for credited interest
over and above our option costs. This would cause our spreads to tighten and
reduce our profits, or potentially result in losses on these products.
We assume a significant amount of business through coinsurance agreements.
In addition to writing direct insurance business, we assume through coinsurance
agreements a percentage of certain annuity business written by American Equity
Investment Life Insurance Company ("American Equity") and certain traditional
life, universal life and annuity business written by EMC National Life Company
("NTL"). Our ability to manage the products covered by the coinsurance
arrangements is limited and we can make no assurances that our coinsurance
counterparties will make decisions regarding the operations of the business
covered by the coinsurance agreements in the same manner that we would or in a
manner that would have a positive impact on the business covered by the
coinsurance arrangements. In addition, we rely on American Equity and NTL to
supply us with accurate financial and accounting data relating to the business
coinsured.
Our reinsurance program involves risks because we remain liable with respect to
the liabilities ceded to reinsurers if the reinsurers fail to meet the
obligations assumed by them.
We reinsure a portion of our life insurance exposure with unaffiliated
insurance companies under traditional indemnity reinsurance agreements. New
sales of participating whole life and universal life products are reinsured
above prescribed limits and do not require the reinsurer's prior approval within
certain guidelines. New sales of term life products are reinsured on a first
dollar quota share basis and do not require the reinsurer's prior approval
within certain guidelines. These treaties are automatically renewed and
nonterminable for the first 10 years with regard to cessions already made and
are terminable after 90 days with regard to future cessions. After 10 years, we
have the right to recapture previously ceded business up to the level of current
cessions. Generally, we enter into indemnity reinsurance arrangements to assist
in diversifying our risks and to limit our maximum loss on risks that exceed our
policy retention limits. Our maximum retention limit on an insured life after
June 30, 1999 is $1,100,000. For business issued prior to July 1, 1999, the
maximum retention is generally limited to $600,000. However, we are exercising
our recapture rights to increase retention to current levels after this business
is 10 years old. Indemnity reinsurance does not fully discharge our obligation
to pay claims on the reinsured business. As the ceding insurer, we remain
responsible for policy claims to the extent the reinsurer fails to pay claims.
Should any reinsurer fail to meet the obligations assumed under such
reinsurance, we remain liable with respect to the liabilities ceded.
A significant ratings downgrade may have a material adverse effect on our
business.
Ratings are an important factor in establishing the competitive position of
insurance companies. If our ratings were lowered significantly, our ability to
market products to new customers could be harmed and existing policyholders
might cancel their policies or withdraw the cash values of their policies. These
events, in turn, could have a material adverse effect on our net income and
liquidity. Our ratings reflect the agencies' opinions as to the financial
strength, operating performance and ability to meet obligations to policyholders
of our insurance company subsidiaries but are not ratings of the Notes offered
hereby. There is no assurance that a credit rating will remain in effect for any
given period of time or that a rating will not be reduced, suspended or
withdrawn entirely by the applicable rating agency, if in the rating agency's
judgment, circumstances so warrant.
Farm Bureau Life and EquiTrust are rated "A" (Excellent) by A.M. Best Company,
Inc. ("A.M. Best"), A.M. Best's third highest rating of 13 ratings assigned to
solvent insurance companies, which currently range from "A++" (Superior) to "D"
(Poor). In addition, both Farm Bureau Life and EquiTrust are rated "A" by
Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc.
("S&P"), whose financial strength ratings for solvent insurance companies range
from "AAA" (Extremely Strong) to "CC" (Extremely Weak). A.M. Best and S&P
ratings consider claims paying ability and are not a rating of investment
worthiness. The current A A.M. Best rating for EquiTrust was issued with a
negative outlook.
Our investment portfolio is also subject to credit quality risks which may
diminish the value of our invested assets and affect our sales, profitability
and reported book value per share.
We are subject to the risk that the issuers of our fixed maturity
securities and other debt securities (other than our U.S. agency securities),
and borrowers on our commercial mortgages, will default on principal and
interest payments, particularly if a major downturn in economic activity occurs.
As of December 31, 2003, we held $5.4 billion of fixed income securities, $321
million of which represented below-investment grade holdings. Of these $321
million of below-investment grade holdings, 81% were acquired as investment
grade holdings but, as of December 31, 2003, had been downgraded to below
investment grade. An increase in defaults on our fixed maturity securities and
commercial mortgage loan portfolios could harm our financial strength and reduce
our profitability.
We use derivative instruments to fund the annual credits on our index annuities.
We purchase derivative instruments from a number of counterparties through
American Equity. If our counterparties fail to honor their obligations under the
derivative instruments, we will have failed to provide for crediting to
policyholders related to the appreciation in the applicable indices. Any such
failure could harm our financial strength and reduce our profitability.
We also have three interest rate swaps with a notional amount of $150.0 million
to manage interest rate risk on a portion of our flexible premium deferred
annuity contracts. We purchased these instruments from two different
counterparties. If these counterparties fail to honor their obligations, we will
have additional exposure to an increase in interest rates, which could harm our
financial strength and reduce our profitability.
We may experience volatility in net income due to changes in standards for
accounting for derivatives.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards, or SFAS No. 133, which became effective for us on January
1, 2001. Under SFAS No. 133, as amended, all derivative instruments (including
certain derivative instruments embedded in other contracts) are recognized in
the balance sheet at their fair values and changes in fair value are recognized
immediately in earnings. This impacts the items of revenue and expense we report
in four ways.
o We must mark to market the purchased call options we use to fund the annual
index credits on our index annuities based upon quoted market prices from
related counterparties. We record the change in fair value of these options
as a component of our revenues. Included within the change in fair value of
the options is an element reflecting the time value of the options, which
initially is their purchase cost declining to zero at the end of their
one-year lives. The change in the difference between fair value and
remaining option cost at beginning and end of year totaled $15.6 million in
2003, $2.8 million in 2002 and $2.7 million in 2001.
o Under SFAS No. 133, the future annual index credits on our index annuities
are treated as a "series of embedded derivatives" over the expected life of
the applicable contracts. We are required to estimate the fair value of
these embedded derivatives. Our estimates of the fair value of these
embedded derivatives are based on assumptions related to underlying policy
terms (including annual cap rates, participation rates, asset fees and
minimum guarantees), index values, notional amounts, strike prices and
expected lives of the policies. The change in fair value of embedded
derivatives increases with increases in volatility in the Indices and
interest rates. The change in fair value of the embedded derivatives will
not correspond to the change in fair value of the purchased options because
the purchased options are one-year options while the options valued in the
fair value of embedded derivatives cover the expected life of the contract
which typically exceeds 10 years. Changes in the value of the embedded
derivatives included in the index annuity contracts totaled $14.2 million
in 2003, $1.0 million in 2002 and $1.2 million in 2001.
o We adjust the amortization of deferred policy acquisition costs to reflect
the impact of the two items discussed above. o Our earnings are also
affected by the changes in the value of the embedded derivatives in
convertible fixed maturity securities that allow the conversion of fixed
maturity securities into equity securities. Changes in the value of the
embedded derivatives totaled $0.4 million in 2003, $(0.6) million in 2002
and $(1.1) million in 2001. The application of SFAS No. 133 in future
periods to the revenues and expenses related to our index annuity business
may cause volatility in our reported net income.
Our earnings are influenced by our claims experience, which is difficult to
estimate. If our future claims experience does not match our pricing assumptions
or past results, our earnings could be materially adversely affected.
Our earnings are significantly influenced by the claims paid under our
insurance contracts and will vary from period to period depending upon the
amount of claims incurred. There is only limited predictability of claims
experience within any given month or year. The liability that we have
established for future insurance and annuity policy benefits is based on
assumptions concerning a number of factors, including interest rates, expected
claims, persistency and expenses. In the event our future experience does not
match our pricing assumptions or our past results, our operating results could
be materially adversely affected.
Inaccuracies in assumptions regarding future persistency, mortality and interest
rates used in calculating reserve and deferred policy acquisition expense
amounts could have a material adverse impact on our net income.
The process of calculating reserve and deferred policy acquisition expense
amounts for an insurance organization involves the use of a number of
assumptions including those related to persistency (how long a contract stays
with the company), mortality (the relative incidence of death in a given time or
place) and interest rates (the rates expected to be paid or received on
financial instruments, including insurance or investment contracts). Actual
results could differ significantly from those assumed. Inaccuracies in one or
more of these assumptions could have a material adverse impact on our net
income.
The insurance industry has been the target of sales practice litigation.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class actions, relating to life insurance and annuity sales
and pricing practices, market timing issues, fee sharing arrangements and other
issues. A number of these lawsuits have resulted in substantial jury awards or
settlements. Future litigation relating to sales or other business practices may
affect us negatively by requiring us to pay substantial awards or settlements,
increasing our legal costs, diverting management attention from other business
issues or harming our reputation with customers.
We are highly regulated and changes in these regulations could affect our
business negatively.
Our Life Companies are subject to government regulation in their state of
domicile and also in each of the jurisdictions in which they are licensed or
authorized to do business. Governmental agencies have broad administrative power
to regulate many aspects of the insurance business, including trade and claim
practices, accounting methods, premium rates, marketing practices, advertising,
policy forms and capital adequacy. These agencies are concerned primarily with
the protection of policyholders rather than shareholders or creditors.
Moreover, insurance laws and regulations, among other things:
o establish solvency requirements, including minimum reserves and capital and
surplus requirements;
o limit the amount of dividends, tax distributions, intercompany loans and
other payments insurance company subsidiaries can make without prior
regulatory approval;
o impose restrictions on the amounts and types of investments insurance
companies may hold; and
o require assessments to pay claims of insolvent insurance companies.
The NAIC continuously examines existing laws and regulations. We cannot
predict the effect that any NAIC recommendations or proposed or future
legislation or rule making in the United States or elsewhere may have on our
financial condition or operations.
Our investment management and broker/dealer subsidiaries are highly regulated
and these regulations could affect our business negatively.
Our investment management subsidiary is registered with the SEC as an
investment adviser and is subject to the requirements of the Investment Advisers
Act of 1940, as amended, and the rules thereunder ("Advisers Act"), and certain
of its employees may be subject to state regulation. In addition, this
subsidiary also manages investment companies that are registered under the
Investment Company Act of 1940, as amended, and the rules thereunder
("Investment Company Act"), which place additional restrictions on its managers.
Moreover, certain of our separate accounts are registered as investment
companies under the Investment Company Act. The investment companies we advise
and our registered separate accounts are themselves highly regulated under the
Investment Company Act. In addition, our broker/dealer subsidiary that
distributes the shares of our managed investment companies and separate accounts
is a broker/dealer registered with the SEC and is subject to regulation under
the Exchange Act and is a member of, and is subject to regulation by, the
National Association of Securities Dealers, Inc. ("NASD"), and is subject to
various state laws. The registered representatives of our broker/dealer
subsidiary and of other broker/dealers who distribute our securities products
are regulated by the SEC and NASD and are further subject to applicable state
laws. We cannot predict the effect that any proposed or future legislation or
rule making by the SEC, NASD or the states will have on our financial condition
or operational flexibility.
We face competition from companies that have greater financial resources,
broader arrays of products, higher ratings and stronger financial performance,
which may impair our ability to retain existing customers, attract new customers
and maintain our profitability and financial strength.
We operate in a highly competitive industry. The operating results of companies
in the insurance industry historically have been subject to significant
fluctuations due to competition, economic conditions, interest rates, investment
performance, maintenance of insurance ratings from rating agencies and other
factors. We believe our ability to compete with other insurance companies is
dependent upon, among other things, our ability to attract and retain agents to
market our insurance products, our ability to develop competitive and profitable
products and our ability to maintain high ratings from A.M. Best and S&P. In
connection with the development and sale of our products, we encounter
significant competition from other insurance companies, and other financial
institutions, such as banks and broker/dealers, many of which have financial
resources substantially greater than ours.
National banks, with pre-existing customer bases for financial services
products, may increasingly compete with insurers, as a result of legislation
removing restrictions on bank affiliations with insurers. This legislation, the
Gramm-Leach-Bliley Act of 1999, permits mergers that combine commercial banks,
insurers and securities firms under one holding company. Until passage of the
Gramm-Leach-Bliley Act, prior legislation had limited the ability of banks to
engage in securities-related businesses and had restricted banks from being
affiliated with insurance companies. The ability of banks to increase their
securities-related business or to affiliate with insurance companies may
materially and adversely affect sales of all of our products by substantially
increasing the number and financial strength of our potential competitors.
Certain changes in the accounting standards issued by the Financial Accounting
Standards Board or other standard-setting bodies could have a material impact on
our reported net income.
We are subject to the application of GAAP, which is periodically revised
and/or expanded. As such, we are periodically required to adopt new or revised
accounting standards issued by a number of recognized authoritative bodies,
including the Financial Accounting Standards Board, the SEC and the American
Institute of Certified Public Accountants. It is possible that future changes
required to be adopted could change the current accounting treatment that we
apply and such changes could have material adverse effects on our reported net
income and/or equity. In addition, changes in statutory accounting principles
could also adversely affect our statutory net income and/or statutory surplus.
Changes in state and federal regulation may affect our profitability.
We are subject to regulation under applicable insurance statutes, including
insurance holding company statutes, in the various states in which our life
subsidiaries write insurance. The Life Companies are domiciled in Iowa. We are
currently licensed to sell our products in 47 states in the United States.
Insurance regulation is intended to provide safeguards for policyholders rather
than to protect shareholders of insurance companies or their holding companies.
Regulators oversee matters relating to trade practices, policy forms, claims
practices, guaranty funds, types and amounts of investments, reserve adequacy,
insurer solvency, minimum amounts of capital and surplus, transactions with
related parties, changes in control and payment of dividends.
State insurance regulators and the NAIC continually reexamine existing laws and
regulations, and may impose changes in the future.
Our life subsidiaries are subject to the NAIC's risk-based capital requirements
which are intended to be used by insurance regulators as an early warning tool
to identify deteriorating or weakly capitalized insurance companies for the
purpose of initiating regulatory action. Our life subsidiaries also may be
required, under solvency or guaranty laws of most states in which they do
business, to pay assessments up to certain prescribed limits to fund
policyholder losses or liabilities of insolvent insurance companies.
Although the federal government does not directly regulate the insurance
business, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation, securities regulation and federal taxation, can significantly affect
the insurance business. As increased scrutiny has been placed upon the insurance
regulatory framework, a number of state legislatures have considered or enacted
legislative proposals that alter, and in many cases increase, state authority to
regulate insurance companies and holding company systems. In addition,
legislation has been introduced in Congress which could result in the federal
government assuming some role in the regulation of the insurance industry. The
regulatory framework at the state and federal level applicable to our insurance
products is evolving. The changing regulatory framework could affect the design
of such products and our ability to sell certain products. Any changes in these
laws and regulations could materially and adversely affect our business,
financial condition or results of operations.
From time to time, various tax law changes have been proposed that could have an
adverse effect on our business, including the elimination of all or a portion of
the income tax advantage for annuities and life insurance. If the legislation
were enacted to eliminate the tax deferral for annuities, such a change would
have a material adverse effect on our ability to sell non-qualified annuities.
Changes in federal income taxation laws, including recent reductions in
individual income tax rates, may affect sales of our products and profitability.
The annuity products that we market generally offer tax advantages to the
policyholders, as compared to other savings instruments such as certificates of
deposit and taxable bonds. This tax preference is the deferral of income tax on
the earnings during the accumulation period of the annuity as opposed to the
current taxation of other savings instruments. Legislation eliminating the tax
deferral for certain annuities would have a material adverse effect on our
ability to sell non-qualified annuities. Non-qualified annuities are annuities
that are sold to a policyholder other than an individual retirement account or
other qualified retirement plan.
The favorable tax treatment of insurance products may give certain of our
products a competitive advantage over other noninsurance products. Legislation
may be enacted that, while not directly affecting the taxation of insurance
products, may have the effect of reducing or eliminating this relative
advantage. On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief
Reconciliation Act of 2003, which reduces the federal income tax rates
applicable to certain dividends and capital gains realized by individuals. This
legislation may lessen the competitive advantage of certain of our products
relative to other investments that generate dividend and/or capital gain income.
As a result, demand for certain of our products that offer income tax deferral
may be affected negatively. Additionally, Congress has from time to time
considered other legislation that would reduce or eliminate the benefits to
policyowners of the deferral of taxation on the accretion of value within
certain insurance products or might otherwise affect the taxation of insurance
products and insurance companies relative to other investments. To the extent
that the Internal Revenue Code of 1986, as amended (the "Code"), is revised to
reduce the tax-deferred status of insurance products, or to reduce the taxation
of competing products, all life insurance companies, including us, could be
adversely affected.
The 2001 modification of federal income tax law, which increases the size of
estates exempt from the federal estate tax, phases in reductions in the estate
tax rate and repeals the estate tax entirely in 2011, could have a negative
impact on our revenues from the sale of estate planning products, including in
particular our new sales of second-to-die life insurance policies. While we
cannot predict what future legislation will be enacted, additional legislation
could be enacted that negatively impacts industry sales of certain products.
We face risks relating to litigation, including the costs of such litigation,
management distraction and the potential for damage awards, which may adversely
impact our business.
We are occasionally involved in litigation, both as a defendant and as a
plaintiff. In addition, state regulatory bodies, such as state insurance
departments, the SEC, the NASD, the Department of Labor, and other regulatory
bodies regularly make inquiries and conduct examinations or investigations
concerning our compliance with, among other things, insurance laws, securities
laws, the Employee Retirement Income Security Act of 1974, as amended, and laws
governing the activities of broker-dealers. Companies in the life insurance and
annuity business have faced litigation, including class action lawsuits,
alleging improper product design, improper sales practices and similar claims.
While we are not a party to any lawsuit that we believe will have a material
adverse effect on our business, financial condition or results of operations,
there can be no assurance that such litigation, or any future litigation, will
not have such an effect, whether financially, through distraction of our
management or otherwise.
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
Exhibit 99.1 News release of the registrant dated April 2, 2004
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FBL Financial Group, Inc.
-------------------------
(Registrant)
Date April 2, 2004
/s/ James W. Noyce
------------------
James W. Noyce
Chief Financial Officer