FBL Financial Group, Inc.
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good day, and welcome to the FBL Financial Group First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, this event is being recorded. I would now like to turn the conference over to Ms. Kathleen Till Stange. Please go ahead.

[Kathleen Till Stange:]

Thank you. Good morning, and welcome to FBL Financial Group’s first quarter earnings conference call. Presenting on today’s call are Jim Brannen, Chief Executive Officer; and Don Seibel, Chief Financial Officer. Also present and available to answer your questions are Charlie Happel, Chief Investment Officer; Scott Stice, Chief Marketing Officer; and Ray Wasilewski, Chief Operating Officer. Certain statements made today may contain forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied. These risks and uncertainties are detailed in FBL’s reports filed with the SEC and are based on assumptions which FBL believes to be reasonable. However, no assurance can be given that the assumptions will prove to be correct. FBL disclaims any obligation to update forward-looking statements after this date. Comments during this call include certain non-GAAP financial measures. These items are reconciled to GAAP in our first quarter earnings release and financial supplement, both of which may be found on our website, fblfinancial.com. Today’s call is being simulcast on FBL’s website. An audio replay and a transcript of the prepared comments may be found on our website shortly after the call. With that, it is now my pleasure to turn the call over to CEO, Jim Brannen.

[Jim Brannen:]

Thanks, Kathleen. Good morning. Thanks to everyone on the call. I’m glad you are able to join us today. FBL Financial Group reported excellent earnings for the first quarter of 2017. In fact it was the best first quarter we’ve ever had. Net income was $1.05 per share and operating income was $1.08 per share. These results reflect our discipline to profitably grow our business. Total premiums collected for the first quarter were $170 million. Annuity premium collected for the first quarter was down 4.9% compared to first quarter 2016. Fixed rate annuity sales grew during the quarter. Sales of these products are impacted by the crediting rate we are able to offer. Rates on our four-year multiyear guaranty annuity product remain relatively low, but are higher than they were a year ago. We continue to maintain our financial discipline and only offer credited rates that allow us to meet our pricing objectives. Premiums collected on our indexed annuity product declined for the quarter after increasing 38% for the full year of 2016. Life premium collected for the first quarter of 2017 was up 2.6% compared to the first quarter of 2016. We saw the greatest growth in our universal life sales, reflecting increased sales of our index universal life product. In April, the Department of Labor modified the applicability dates of the fiduciary rule. We are now required to be in compliance with the Impartial Conduct standards of the rule by June 9 of this year, and the remaining provisions of the rule by January 1, 2018. The majority of our agency force has already completed the necessary training to comply with the requirements of the rule. This new regulation, along with low interest rates and other factors, is challenging growth. Given our desire for further growth, we have a variety of initiatives in place. Our Indexed Academy is helping to ensure that agents understand and are confident about all aspects of indexed products. We’ve created a new Advanced Life Academy for experienced agents. The first one was held at the end of March and was very well received. We’ve introduced a variety of digital initiatives. These are expected to improve customer experience and allow customers a greater range of online access. We recently began an accelerated underwriting program on a pilot basis. This program is a non-medical underwriting approach that includes an oral swab, which can detect nicotine use, an electronic inspection report, which can catch a variety of risks and, a diagnostic review which, for a portion of applicants, will provide insight into previous medical lab results. The pilot program is directed to the middle market to attract customers who’ll need to protect their family’s livelihood with life insurance. The pilot will include a sales campaign in each of our states of operation. This new program is available for ages 18 to 59 and for face amount coverage from $100,000 to $250,000. We have limited the program in order to minimize risk while evaluating the underwriting results and consumer demand. As of March 31st, we had 1,839 agents and agency managers, plus 60 active reserve agents in the pipeline working to complete the steps necessary to become full-time Farm Bureau agents. Our focus is to retain our current agents, add new agents and increase our total agent count. We have seen steady growth in agent numbers over the last few years. We continue to have success with our reserve agent program, and made some refinements at the beginning of 2017 in order to optimize the new agent experience. We lengthened the program to a minimum of two months and a maximum of four months, while increasing validation requirements tied to the duration of the program. Refinements were also made to further assist agents in developing good prospecting and sales habits. Our exclusive agents are critical to our success and we are dedicated to providing them with the tools and training they need to be successful. To conclude, our excellent first quarter financial results give us a great start to 2017. We move forward in 2017 supporting our best-in-class distribution, serving our Farm Bureau niche, and maintaining financial discipline. Now I’ll turn the call over to Don Seibel to review our financial results. Don?

[Don Seibel:]

Thanks, Jim, and good morning everyone. I’m glad to be here today to provide some insights regarding our earnings and capital position. As Jim indicated, net income for the quarter was $1.05 per share and operating income was $1.08 per share. During the quarter, our operating income adjustments totaled $0.03 per share from net realized losses on investments. Results in total were very strong, with results for each our segments better than our expectations. Looking at our Annuity segment, pre-tax operating income was strong and reflects growth in this block of business. However, there continues to be pressure on spreads. Until the first quarter of 2017, we’ve been able to meet or exceed our target spreads on our individual annuity block despite the long period of low market interest rates. This quarter, however, our actual spread moved below our target. At March 31, the total spread on our individual annuity business was 198 basis points, three basis points below target for this business. Next, I’ll comment on the results for our Life Insurance segment. Death benefits in this segment were within our range of expectations, although higher than the first quarter of 2016. This segment also benefited for the first time from equity income. Historically, our alternative investments have been reported in the Corporate & Other segment. These investments are in the securities and indebtedness of related parties line on the balance sheet and consist of low income housing tax credit investments, investment companies and real estate investment partnerships. In the first quarter of 2017, we began to tag a portion of these investments to the Life Insurance segment. This allows us to add capacity to invest in alternative investments, lengthen the duration of the Life Insurance portfolio and increase the investment yield in the Life Insurance segment. This move also improves the liquidity profile of the Corporate & Other segment. You’ll note a new line for this equity income added to the Life Insurance segment in the Form 10-Quarter and investor supplement. These investments contributed $1.2 million before tax to the Life Insurance segment in the first quarter. We also see spread pressure in the Life Insurance segment, where spreads are not meeting our targets. Point-in-time spreads on our universal life business declined during the first quarter to 138 basis points at March 31, below our target for this business of 150 basis points. Results for the Corporate & Other segment were also above expectations. This segment benefitted from lower amortization of acquisition costs due to the positive impact of equity markets on separate account performance. This segment includes our closed block variable business. This segment also benefitted from lower expenses this quarter. I’ll take a moment to discuss our investment portfolio, given the continued pressure on spreads. As of March 31, we had total investments of $8.3 billion, plus $133 million of alternative investments included in the securities and indebtedness of related parties line on the balance sheet. The majority of our investments, $7.1 billion, are fixed maturity securities, with below investment grade bonds accounting for 4.4% of the fixed maturity total. Looking at our portfolio composition compared to public company peers, we generally have a higher allocation to structured product and municipal securities, and a lower allocation to commercial mortgage loans. This past quarter we performed our annual investment peer study. Our investment area is doing an excellent job of managing our investments in this low interest rate environment. Based on this analysis, Farm Bureau Life’s net investment yield exceeds that of peers by 35 basis points on average, while being the same or better risk profile. We’re pleased with this outperformance, but portfolio yields continue to decrease given the maturity of higher yielding assets and purchases of lower yielding assets. For the first quarter, the average tax-adjusted yield on investments acquired backing our long-term business was 4.18%. So far in 2017, we are finding value in structured product and also emphasizing mortgage loan production. We are also focusing on adding duration when appropriate. There is pressure on spreads as the average yield on securities disposed of during the first quarter was 5.53%. It is difficult to lower crediting rates on our inforce business much further as we had only 34% of our annuity business and 22% of our universal life business receiving a crediting rate above the minimum guarantees as of March 31. Before I comment on our capital strength, I’d like to make a couple more comments on our first quarter financial results. In the first quarter of 2017, we adopted new accounting guidance relating to share-based compensation. Specifically, certain tax benefits relating to stock-based compensation, previously recorded directly to equity, are now recorded in the income statement. This resulted in a $0.02 per share federal tax benefit in the first quarter. Periodically, we will recognize similar benefits as stock option exercises and distributions of our stock from certain deferred compensation plans occur. However, we do not expect this to occur on a regular basis and will over time become immaterial as our stock-settled compensation plans have been frozen and replaced with cash-settled plans. To summarize, our operating earnings were very strong this quarter at $1.08 per share. I estimate approximately $0.08 per share of these earnings were from sources that aren’t necessarily repeatable on a consistent basis. These sources include decreased DAC amortization due to market performance, better than expected equity income, tax impact of share-based compensation, and lower expenses. Next, I will make some comments regarding our capital. In March, we announced a 4.8% increase in our regular quarterly dividend rate to $0.44 per share from $0.42 per share. Based on yesterday’s closing stock price, this gives us an indicated dividend yield of 2.6%. We are committed to having an attractive dividend yield, given our strong and consistent operating results. Also in March, because of our strong excess capital position, we elected to pay a $1.50 per share special dividend. We were pleased to pay this special dividend, which totaled $37.4 million. Special dividends are an appealing option for us to distribute some of our excess capital from time to time. At March 31, the capital position of our wholly-owned subsidiary, Farm Bureau Life, was excellent with an estimated company action level risk based capital ratio of 544%. This ratio remains unchanged from year-end 2016. Using 425% RBC as a base, Farm Bureau Life had excess capital of approximately $150 million at March 31. Additionally, we estimate that we have approximately $30 million of excess capital at first quarter end at the holding company level. In closing, FBL had a great first quarter with strong operating profits. We returned more than $48 million to our shareholders in the form of dividends, while maintaining very strong capital levels. I’m pleased to have been able to share these results with you. We will now turn the call over to the operator and open it up to any questions you may have.

[Operator:]

[Operator Instructions] First question today comes from Greg Peters with Raymond James. Please go ahead.

[Greg Peters:]

I wanted to just -- first of all, Don, you were going through a bunch of variables that ran through the first quarter results. And I was just trying to tie them all in together with this one bullet point that you highlight in your press release where you said the benefit of other investment related income of $0.03. Was that the tax credit the housing that added $1.2 million to life insurance results?

[Don Seibel:]

I think that is referring to the investment prepayment fee income which tends to have volatility from period to period, and that level of income was pretty much in line with expectations.

[Greg Peters:]

And so, can you just go through that $0.08 again that you said was unusual that went through the first quarter, can you break that out again?

[Don Seibel:]

Sure. So, with respect to the strong separate account performance we had in the variable segment that reduces the amount of DAC amortization that we recorded during the period and that was I would say $0.02 to $0.03 per share. Equity income, if you take a look at long-term trends in our investments, probably a $0.01 or $0.02, better than expectations. The tax change -- accounting change was $0.02 per share, can’t rely on that. And then, I was estimating about $0.03 per share for expenses being lower than what we can expect long-term.

[Greg Peters:]

Can you just switch gears and comment a little bit about the indexed annuity market conditions? Some of your competitors have reported results and we have some mixed successes and challenges and I just thought I’d get your perspective on that market.

[Scott Stice:]

This is Scott Stice. So for the last three or four years, our indexed annuity market has -- our indexed annuity sales have growing substantially, last year being up around 38%. In Q1, we saw indexed annuity sales down around -- I believe it was around 9% quarter-over-quarter. That’s an impact of quite a few things. It’s the cap rates that we are offering on the product; it’s somewhat most likely related to a lot of the chatter around the Department of Labor Fiduciary Rule, we saw a significant increase on sales and some of our mutual funds to our broker dealer. So that’s the result of the market climbing and a lot of our customers chasing yield, which happens quite often when the market accelerates. So, it’s hard to pinpoint an exact item that drove those sales slightly lower this quarter, but probably a combination of all three of those strings.

[Greg Peters:]

And then, Jim, I think you were talking -- you were talking about your exclusive agents and the pipeline of new prospects. Could you just remind us about sort of the demographic makeup of your distribution force, maybe in terms of length of duration of working with the company?

[Jim Brannen:]

I don’t know, if I brought those along. Do you have the durations with you [multiple speakers] I think we can give you color on that. [Multiple speakers] Scott?

[Scott Stice:]

Yes. Greg, this is Scott Stice again. If I understand your question, it was kind of a two-part question, who we’re recruiting and what the overall agency force looks like, is that correct?

[Greg Peters:]

Yes, essentially. That’s right.

[Scott Stice:]

Our average recruit is -- our average new agent is somewhere around 40 years old. Our average age of our agent across the agency force is somewhere around the age of 55 -- I take that back, somewhere around the age of 45. I can give you some specific now. We have been driving the average age of our agency force down in recent years, as we have accelerated the recruiting and the retention of our new agents, because they come in slightly younger on average than our installed agency force base. We have a pretty good spread across all agent tenures, somewhere around 20%, make up agents four years and under, and the balance is spread between five, up to 45 years of experience.

[Greg Peters:]

Perfect. Thanks for that color. And thanks again for moving your call back. I know it may have been a challenge for you guys but there was a lot of calls this morning. So, it helped free up our schedule. So, we appreciate it. Thank you.

[Operator:]

Our next question comes from Bob Glasspiegel with Janney. Please go ahead.

[Bob Glasspiegel:]

Couple of industry questions and then the substantive one. You said the mortality was normal. Is that normal for first quarter, or it’s normally higher or normal for a normal quarter which would mean it was better than expected?

[Jim Brannen:]

Yes. Bob, good question. I would say it’s normal compared to what we would expect in the first quarter. And in the first quarter we expect about a 10% higher death rate compared to what we see for the average for the entire year.

[Bob Glasspiegel:]

And moving alternatives from corporate to life, does that mean the earnings power of corporate would be a bit less, because still -- more stable bonds or something in corporate that you are placing it with?

[Jim Brannen:]

That would be correct. They are higher yielding securities in this alternative bucket that we are moving to the life line. So there would be a slight decrease in the corporate.

[Bob Glasspiegel:]

What’s the asset level we are talking about that you are moving?

[Jim Brannen:]

See, if we go that.

[Bob Glasspiegel:]

I am just trying to get the annual income that we should move from one line to the other, normalize, recognizing it’s going to be bumpy?

[Jim Brannen:]

Yes, there is about 25 million to 30 million that we moved in the first quarter effective at the beginning of the quarter.

[Bob Glasspiegel:]

That’s a total amount you are moving or is it going to be more…?

[Jim Brannen:]

No, I think moving more assets over time.

[Bob Glasspiegel:]

Okay.

[Charlie Happel:]

Bob, this is Charlie Happel. It has got the other things too. We still feel like we have got meaningful opportunity in equity oriented alternatives that we may restock [ph] that a little bit going forward as well. So, over time, it may adjust back. We think we can do equity oriented alternatives at not much greater than any capital [ph] charge. So we feel like we need to continue to look at that and we’re better little light versus our peers.

[Bob Glasspiegel:]

I thought I heard in the text that you said the agency force increased but maybe that was a goal as opposed to a reported number or maybe I got it wrong. But in the last quarter, you talked about growing your agency force to sort of a near-term goal. And the first quarter handout emphasized you are getting productivity gains from a stable agency force over the last few years. But where do you want the agency force to be three to five years from now? I assume you’re going to say higher but like what level are you shooting to get to?

[Jim Brannen:]

So, it’s Jim and I’ll let Scott follow on. With a multiline exclusive agency force, we think -- and we have tried to grow it faster at times over the years but we really think that 2% to 3% a year is right amount because getting those folks launched into the business -- and back to Gregg’s previous question, most of those are college educated, they are coming from outside the insurance world. And so, starting from scratch and getting people revved up in the business is a significant investment, takes a lot of management time, a lot of joint work time, a lot of training and those kinds of things. So, if we -- whenever we put the foot to the gas paddle little too hard, we tend to see turnover rates at the younger ages or at the newer tenure turn over little too fast because we’re not giving them enough care and feeding. And so, we’ve really found our sweet spot where we think we can peg the number better than last year, year after year and not recelebrate the same number by to thinking about 2% and 3% every year and never going backwards is my goal.

[Bob Glasspiegel:]

And we haven’t grown over the last year. So, this is new push that you think will result in…

[Jim Brannen:]

You look at year end every year which is where my benchmark is. Generally, the flow is a bit of a net loss in the first quarter, more of a breakeven by second, growth by third and growth by fourth and I think that pattern has held pretty true the last four years. But, at year-end, our agent count has been up over the year and each and every year of the last four years, I know.

[Bob Glasspiegel:]

Okay. That doesn’t show in your slide 10, but that’s -- you’re only going back to Q2, so you are not showing year-over-year…

[Jim Brannen:]

Yes…

[Bob Glasspiegel:]

Your quarter two is when you grow and then you contract over the rest of the year?

[Jim Brannen:]

It fluctuates quarter-to-quarter for sure.

[Bob Glasspiegel:]

Got you. Thank you. Good luck.

[Operator:]

[Operator Instruction] And currently showing no further questions, I would like to turn the conference back over to Kathleen Till Stange for any closing remarks.

[Kathleen Till Stange:]

Thank you to everyone who joined us on the call today. Please feel free to give us call if you have any follow-up questions. Thanks and have a good day.

[Operator:]

Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.