FBL Financial Group, Inc.
Q2 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good day, and welcome to the FBL Financial Group Second 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 Kathleen Till Stange, Vice President of Corporate and Investor Relations. Please go ahead.

[Kathleen Till Stange:]

Thank you. Good morning, and welcome to FBL Financial Group’s second 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 measures, where applicable these items are reconciled to GAAP in our second 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. And thanks to everyone on the call. I’m glad you are able to join us today. FBL Financial Group reported excellent earnings for the second quarter of 2017. In fact it was a recording operating income quarter. Net income totaled $1.29 per share and operating income was $1.23 per share. I attribute these excellent financial results to our discipline to profitably grow our business. I’ll begin by discussing sales results. Total premiums collected for the second quarter of 2017 was $166 million. We experienced further strengthening of life sales for the quarter, while annuity sales weakened. Life premium collected for the second quarter of 2017 was up 7.1% compared to the second quarter of 2016. We saw the greatest growth in Universal life insurance reflecting increased sales of our indexed universal life products. We also saw good growth in our term life sales. Our accelerated underwriting pilot program is going well. This program is designed for the middle market to attract customers who need to protect their families with Life Insurance. In June, we held accelerated underwriting events in conjunction with their annual summer sales rallies. This non-medical underwriting approach has been well received by agents and customers. As a result, we established an all time record for life applications submitted during the summer sales rally. I am pleased with the increase in life policies as it is currently our main focus. It enables us to further fulfill our purpose of protecting livelihoods and futures of our policy holders. In addition, these life sales position us for a long term profit stream and allows us to continue to grow earnings from sources other than spread income. The increase in life sales is particularly important when annuity sales are under pressure, due to low interest rates and increased regulation. Annuity premium collected for the second quarter was down 23.8% compared to the second quarter of 2016. The Department of Labor’s Fiduciary Rule went into effect on June 9. We are now required to comply with the impartial conduct standards of the rule with the remaining provision the rule is effective January 1, 2018. Given the annual requirements qualified annuities now take longer to process and or slower to be issued. For the time being we completed some processes manually and will automate the remaining processes by January 1 assuming the rule goes into full effect. The increased regulation coupled with low interest rates has pressured annuity sales. Sales of annuity products particularly fixed rate annuities are impacted by the crediting rate we are able to offer. We lowered crediting rates on our four year guarantee annuity product in June and have made a couple of changes since then given this investment environment. We continue to be nimble and update the rates on our annuity product offerings regularly in response to changes in the market place. This allows us to provide appropriate credit rates based on available investment opportunities, maintain financial discipline and meet our pricing objectives. We are not selling annuities unless we believe we can hit our targets. While the annuity sales environment is a challenge the 7.1% increase in life premium shows once again the benefits of our balanced life and annuity portfolio. I am proud of my team’s ability to respond to these market conditions and drive growth in life sales. Next, I’ll mention our branded annual review program called SuperCheck. Our research tells us that the more our agents meet with their customers, the higher the customer satisfaction level. Our agents regularly perform Super checks with their customers to highlight the critical importance of these annual review on June 2, we held our first ever SuperCheck [Indiscernible] Day. On that day, our Farm Bureau agents and their staff made more than 75,000 phone calls resulting in over 11,000 SuperCheck appointments. Knowing our customers and in getting together with them regularly to meet their needs has led to our industry-leading cross sell rate. As of June 30 we have 1828 exclusive agent and agency managers, which is year-to-date decline in total agents. I remain positive however, as in July we added a net 21 agents for the month, and the pipeline for new agents is full. As of July 31, we had 95 active reserve agents working to complete the steps necessary to become fulltime Farm Bureau agents. By year end, I expect us to again grow total agent count and to continue the steady growth and agent numbers we’ve seen over the past few years. To conclude, more than halfway through the year, we feel very good about our financial results year-to-date and we are looking to executing on the opportunity which is ahead of us. Now I’ll turn the call over to Don Seibel to review our financial results. Don?

[Don Seibel:]

Thanks, Jim. I also want to welcome everybody on the call. 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 $1.29 per share in operating income was a record $1.23 per share. During the quarter, our operating income adjustments totaled $0.06 per share from net realized gains on investments and the change in net unrealized gains and losses on derivatives. Results were strong across the board with results for each of our segments better than our expectations. Looking at her annuity segment, pre-tax operating income was strong and reflects growth in this block of business. In addition, the segment benefited from a onetime reserve release totaling $1 million during the second quarter to 2017. There continues to be pressure on annuity spreads. We’ve been active in lowering crediting rates were appropriate, and in the second quarter, we reduced crediting rates on multiple products. However, this is not enough to offset the decline in yields on investments back in this business due to the maturity of higher-yielding assets and purchases of lower yielding assets. At June 30, the spread on our individual annuity business was 196 basis points, five basis points below target for this business. Next, I’ll comment on the results of our life insurance segment. Death benefits in this segment were in line with expectations. Also, beginning in 2017, this segment benefited from equity income. In the second quarter, alternative investments with a stable value of $27.7 million tagged to the life insurance segment contributed $1.3 million of income before tax. We also see spread pressure in the life insurance segment, where spreads improved in the second quarter, but are not meeting our targets. Point of time spreads in our universal life business increased three basis points in the second quarter to 141 basis points at June 30, but are below our target for this business of 149 basis points. The improvement in spreads was the result of crediting rate actions taken in the second quarter. Results for the corporate and other segment were also above expectations. This segment benefited from fewer death claims on our closed, block variable universal life business. The variable business also benefited this quarter from the positive impact of equity markets on separate account performance. To summarize, our operating earnings were excellent this quarter at a $1.23 per share. I estimate approximately $0.10 per share of these earnings were from sources that aren’t necessarily repeatable on a consistent basis. These sources include better-than-expected investment prepayment fee income, the onetime release of annuity reserves, better-than-expected mortality experience in the corporate and other segment, and decreased DAC amortization on variable business due to market performance. Next, I’ll comment on capital levels. At June 30, the capital position of our subsidiary Farm Bureau life was very strong, with an estimated company action level risk-based capital ratio of 563%. This is an an increase of 19 points from year-end 2016. Using 425% RBC as the base, Farm Bureau Life had excess capital of approximately $170 million at June 30. Additionally, we estimate that we have approximately $35 million of excess capital at second quarter and at the holding company level. A final note of good news is the Farm Bureau life has been named to the 2017 words, words 50 group of top performing companies. This marks the 18th time that Farm Bureau life has been named to the Life Health Awards 50 list. Also, with our managed property casualty company being named to the words 50th for the third time, this makes Farm Bureau financial services one of seven organizations with affiliated companies name to both list. Award group analyzes more than 700 life insurance companies and 3000 property-casualty insurers, so we are honored to be recognized for strong operating performance and consistent financial strength. In closing, FBL had an excellent second quarter with record operating profits. We had strong life sales, which positions us well for future non-spread profit streams. We continue to pay an attractive quarterly stockholder dividend while also increasing our strong capital levels. I am pleased to have been able to share these results with you. We will now turn call over to the operator and open up to any questions you may have.

[Operator:]

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

[Greg Peters:]

Good morning everyone. Thanks for pushing the call back and congratulations on your quarter. I -- just looking over a couple of items in your press release, one on mortality, can you remind me of the history of your company’s mortality experience. It seems like more often than not, you have some favorable experience, but maybe I have a misperception.

[Don Seibel:]

Yes Greg, this is Don. I’ll take that call. Our mortality experience does have some seasonality to it. If you take a look at the entire year of death benefits, we have about 27% of the annual total flow through the first quarter and I think that’s consistent with a lot of companies. The second and third quarter are typically a little below if you take the annual amount and divide by four, and the fourth quarter is typically right in line with that average. But as you know, death benefits do fluctuate year-to-year and period-to-period and but we do have that seasonality trend.

[Greg Peters:]

But aside from seasonality if I look from year-to-year, can you remind me of the trend over the last several years, has it been favorable, has it been neutral, has it been adverse? Yes, our mortality experience in general has been in line with our pricing expectations, that’s been pretty consistent.

[Greg Peters:]

All right, thanks for that color. On the annuity spreads, I think you said that was 196 bips and five bips below your target, it seems like there is downward pressure on the spreads, is there any other mechanisms you can employ or deploy to get this back to target, or is this just a function of where rates are in the marketplace?

[Don Seibel:]

Well, it is a bit of the function of where the rates are in the marketplace. The cure is the rising interest rate environment, which obviously is going to be. We haven’t seen for a while and it may be slow to come. We do have some room to make crediting rate changes further, but we need to balance that with a where the crediting rates are relative to where market rates are in general. And we have seen a consistent decline in our overall spread; we’ve been able to manage it with outperforming on the investment front with which we talked about last quarter and making crediting rate changes when it makes sense. But despite that, there are pressures in the spread environment.

[Jim Brannen:]

And then I’d just take that as an opportunity to plug one more time our strategies really to have a wide variety of products so we are working on economic environments in all stages of our policy holders lives and currently we’ve got a big pushing on the life side. And the premium volume doesn’t go as fast --- excited and I’m not as excited about annuities, I certainly want to keep the flow going and want to keep them moving forward, but clearly our best opportunity is sale protection and compo protection investment products right now.

[Greg Peters:]

Thanks for that color. Just one final question on capital, you guys have done a great job of maintaining what I would consider to be a conservative balance sheet and with dividends and special dividends and the like. I presume that the -- on the M&A side which will be one source or use of capital that there's just not a lot of activity out there. Can you comment on if there is any viable pipeline in M&A and if not is it reasonable to assume, if the current progress of your company continues to the balance of the year that there might be the possibility for an additional special dividend at some point?

[Jim Brannen:]

So, I’ll start with that if anybody wants to live on they can. Greg, it’s Jim. On the M&A front we are clearly open to things that might be what I would say close to our niche marketplace, clearly the Farm Bureau niche or things that would be close to that niche multiline exclusive niche, but there's not a lot out there and clearly if something gets lit up when telegraphic, but that there is not a lot to talk about on the M&A front. We continue to focus on organic growth and on profitability and some internal initiatives that we think that will make a difference that we can share out at some point. In terms of the dividends, that decision we made is we go along, I know that we have a pretty good track record of sharing out that excess capital as our best use of capital with our lower float right now. And I guess they don't see that position changing in the near future which makes it a possibility of history repeats itself, but we’re clearly not going to telegraph timing and when we’re comfortable in making those dividends. But I don't see that the overall environment is changed dramatically from when we made that decision in the past.

[Greg Peters:]

Excellent. Thanks for the answers.

[Operator:]

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

[Bob Glasspiegel:]

Am I right that – I know you’re always try to be opportunistic on annuity of sales and so when its profitable and step back when it's less so. Am I right that that annuity production is below what your plan might have been going into the year?

[Jim Brannen:]

Yes. I think that’s fair. We did plan on a decreased, but clearly quarter over quarter 23% was – is bigger than what was the plan.

[Bob Glasspiegel:]

So, if we play out the year and things don't change then we sort to stay in a low interest rate environment where rates are -- where yields are tough to earn and your production is much less. Does that mean that you generate more capital or you have more excess capital if you have less volume of annuities? Or how does the math work out on just the profit contributions versus just strain of growth in that business?

[Jim Brannen:]

Yes. And I’ll let Don chime here too. But I guess what I would tell you is that our overall sales depending on how you look at it. We use a weighted measure called…

[Don Seibel:]

Production credit.

[Jim Brannen:]

The production credit. Thank you. And where we value the sales based on the type of business come in and in clearly a $1 premium and life product to me apparently product is worth weighing more on a long-term profit perspective with dollar annuity. So yes, there would be less capital used, less strain if you will by not writing those annuities, but some of those life products are more capital intensive and when we’re push and push hard on the life side, I would say that that would be more than made up since we’re over our plan on the life growth side in terms of capital. to the point that I was make in the lower production of the site generates or more capital that reusing out some additional capital with a strong light sales which we like to see is roughly a place your were not material change versus your original plan on sales during this is not a material change in Kate is following Greg's it seems like you got a nice problem move continue to generate too much excess capital but you can use in the then it still the same sort of arsenal of of opportunities or snowstorm acquisition opportunities for her and the landscape we don't have anything to talk about today on that but stuff you love to do but nothings

[Don Seibel:]

Yes. Those are the points that I was going to make in that lower production annuity side generates little more capital, but we’re using some additional capital with the strong life sales which we like to see.

[Bob Glasspiegel:]

So its roughly push or not material change versus your original plan on sales strain?

[Don Seibel:]

It’s not a material change.

[Bob Glasspiegel:]

Okay. And just following on Greg’s, it seems like you’ve got a nice problem of continuing to generate too much excess capital that you can use in – its still the same sort of arsenal of opportunities. There’s no sort of acquisition or opportunities that are in the landscape?

[Jim Brannen:]

We don’t have anything to talk about today on that.

[Bob Glasspiegel:]

But stuff you love to do, but nothings available near-term, is that what you’re saying?

[Jim Brannen:]

Well, I think I answered Greg and I think I’ve answered you as well, Bob. I don't have anything talked about on that front today.

[Bob Glasspiegel:]

Okay. We look forward to talk you about it when you can talk about it. Thank you.

[Operator:]

[Operator Instructions] The next question comes from Jamie Inglis with Philo Smith. Please go ahead.

[Jamie Inglis:]

Hi. Good morning.

[Jim Brannen:]

Good morning Jamie.

[Jamie Inglis:]

I wondered if you could – Hey, could you guys expand a little bit on these special sales programs if you will, that I think you referenced to Jim. It reminds us, what that were about and were they a typical or was the pump in production about average relative to in the year prior years?

[Jim Brannen:]

I think the bump in production can be related to activities that we’re always have and including the couple of special things that we talked about, the SuperCheck list and the sales rallies with the underwriting that we talked about. But I’d also say it's really where the focus of the field force is right now, because that's what the market giving us. So there is there is a bump and a lift from these special things we mentioned. But I want to tell you that the main reason for the lift is that's what the markets given us and that's what we’re focusing people on and that's what we’re incenting is those life sales right now. That’s the main part. I'd probably ask Ray to talk a little bit about the underwriting and the non-medical underwriting a little bit and about how we’re controlling the risk on that and how the reinsurers are in with some of that as well?

[Raymond Wasilewski:]

Yes. Sure. The accelerated underwriting event that were mentioned in the comments there’s a restricted offering, so that restricted by policy size. We only got the 250,000 on though that restricted by age so it's between 18 and 59. It is open to all products but we only offer that at those specific times. And so the underwriting events that we had during the summer sale rallies for our main agent force that’s the only time that it is available just when we open that window up. So that’s how we’re controlling risk while we go through that. We do partner with reinsurers as Jim mentioned. In this case not to reinjure business but it's a data sharing, so that we can view the results of that along with the result that we had in the past and with a larger data set just to make sure that we’re not being increase in mortality or exposing ourselves on that side as that business comes in.

[Jamie Inglis:]

Would you say this window, sales window if you will, does that give you a bump only or does it give you a bump up to a level a higher plateau that you go forward from there? Do you understand know what I’m asking?

[Jim Brannen:]

Hi, Jamie, I think Scott can probably take that for me. I’ll say from my experience it generate excitement which is always good and we get the agents engaged. And Scott do you want to take that.

[Scott Stice:]

Yes. This is Scott. Thank you for the question. I would characterize it as follows; we’ve had summer sales rallies every year for the last three or four years. Certainly we do things leading into those to drive additional agent behavior, face some additional excitement may be an additional a small incentive or two. This year we preceded it these sales rally with that SuperCheck or [Blitz] day which was a day dedicated across our agency force just towards talking to customers, talking to prospects and opening up live conversations for additional sales at the summer sales rallies. We saw a significant lift in application activity this year as a result of all of those additional appointments. We also saw some additional activity because of the underwriting without medicals that Ray spoke about, but because of the limitations wrapped around those there were many, many, many more applications written currently going through underwriting process that were ineligible for that. So it has a bump not only in the accelerated underwriting component but it spreads. And it does create a little bit of a new normal. Jim mentioned that this year we’re heavily focusing on life applications, annuity applications. We’re seen a bump year along between 5% and 7% in written life apps and feel pretty good about agent activity so far.

[Jamie Inglis:]

Great. Thanks a lot.

[Operator:]

This concludes our question and answer session. 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:]

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.