FBL Financial Group, Inc.
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good morning, and welcome to the FBL Financial Group Third Quarter 2017 Earnings Release 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 note this event is being recorded. I would now like to turn the conference over to Kathleen Till Stange, Vice President, Corporate and Investor Relations. Please go ahead.

[Kathleen Till Stange:]

Thank you and welcome to FBL Financial Group’s third 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, where applicable these items are reconciled to GAAP in our third 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.

[James Brannen:]

Thanks, Kathleen. And thanks to everyone on the call. I’m glad you are able to join us today. FBL Financial Group reported solid earnings for the third quarter of 2017, but they were below our expectations and income totaled $1.08 per share and operating income was $1.03 per share. Don will go deeper into the financial results in a few minutes, but the largest difference from our expectations was increased mortality which tends to fluctuate from quarter-to-quarter. I’ll begin by discussing sales results. Total premiums collected for the third quarter of 2017 was $142 million. Life sales strengthened again this quarter while annuity sales continued to weaken. Life premium collected for the third quarter of 2017 was up 5.9% compared to the third quarter of 2016. We saw the greatest growth in Universal Life Insurance reflecting increased sales of our Indexed Universal Life products. We also saw continued good growth in our term life sales. A positive aspect of our life sales, as that we expect they will provide a long-term profit stream and allows grow earnings from sources other than spread income. Our accelerated underwriting program is going well. This pilot program takes non-medical underwriting approach and is underwritten that turn in events in each of our 14 states. We help several events and conjunction with our annual summer sales rallies and we have additional events planned for this law. I feel fortunate that we have a balance book of life in annuity business particularly at times like the current challenging annuity sales environment. Annuity premium collected for the third quarter was down 23.5% compared to the third quarter 2016. This reflects a combination of the pressure of low interest rates, increased regulation and the relative attractiveness of the equity markets. This decline in annuity sales also reflects our financial discipline and then we only offer fixed rate annuities at rates which we believe we could meet our profit objectives. In September, we introduced a flexible premium indexed annuity. We've had a single premium indexed annuity in place for several years now and it's been a popular product. Claims have been asking to make additional contributions into their indexed annuity contract so we believe this new flexible indexed annuity meets that need. We've also lowered the minimum initial premium for this product making it an attractive option for even more clients who are looking to obtain certain rate of return without risk associated with investing directly in the stock market. As of September 30, we had 1,866 exclusive agents and agency managers. I am pleased with this count as it reflects growth of 38 agents for the third quarter and an increase from year end 2016. In addition, as of September 30, we had 79 active reserve agents working to complete the steps necessary to become full-time Farm Bureau agents. For the last several years, we have experienced year-over-year growth in agent count which is critical to our success. In addition to product and agent growth, we are also focused on efficient operations. We are implementing additional automation in our life underwriting areas. We are also in the middle of a multi-year modernization of our life administration system. This new system allows for greater speed to market for new products like our recently introduced flexible premium indexed annuity. It also provides greater flexibility in addressing change in consumer and agent expectations and reduces technology and staffing risks. Now I would like to share with the news about the launch of one of our long-term strategies. We call this our wealth management initiative. Our Farm Bureau Financial Services agents are known as trusted advisors on insurance and financial services matters, but to date they have had limited number of mutual funds available to offer our clients. This has been a missed opportunity for us as fewer than 4% of our customers buying mutual funds through our broker dealer subsidiary. The data suggest that half of our clients currently own mutual funds purchased elsewhere. In the coming days, we plan to enter into a new arrangement to significantly enhance our offerings. We expect to enter into a clearing firm agreement that will offer an open architecture mutual fund platform. We also expect to add advisory capabilities through a newly formed registered investment advisor. Once implemented this will allow our agents to add more value, enhance the customer experience, and further strengthen the agent customer relationship. We expect that this will also add a diversified earnings stream FBL Financial Group given the fee-based nature of wealth management. This is a long-term strategy and we expect to invest in and build it out over time. With this initiative, we will create a new role known as the Farm Bureau Wealth Management advisor. This advisor will serve as a wealth management resource for other Farm Bureau agents. I will provide additional detail as we launch to build out this new component of our business. To conclude, with the first three quarters of the year completed, I am pleased with our financial results to date and look forward to the remainder of 2017 to executing on the opportunities ahead of us. Now, I will turn the call over to Don Seibel to review our financial results. Don?

[Donald 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 $1.08 per share and operating income was $1.03 per share. During the quarter, our operating income adjustments totaled $0.05 per share primarily from the change in net unrealized gains and losses on derivatives. During our third quarter, we performed a review or unlocking of the key assumptions used in the calculation of the amortization of deferred acquisition costs, unearned revenue reserves and certain reserves on interest sensitive products. This unlocking positively impacted earnings by $0.03 per share and varied by segment. Please see Page 14 of our third quarter investor supplement where we have included detail on the impact of this unlocking on the various financial statement line items. Our operating earnings for the quarter were solid, but below our expectations. We had the benefit from unlocking which was more than offset by elevated mortality experience. I'll focus my comments on the results for each of our segments. Looking at our Annuity segment, pretax operating income benefited by $1.5 million of unlocking, primarily due to lower surrender rate assumptions. Our Annuity segment is performing well and continues to grow albeit a slower pace this quarter given the decline in new annuity sales. There is continued pressure on annuity spreads. We've been active in managing this business and lowering crediting rates were appropriate. This has not been 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 September 30, the spread in our individual annuity business was 195 basis points, 6 basis points below target for this business. Next, I’ll comment on the results of our Life Insurance segment. Unlocking, negatively impact this segment by $2.4 million pre-tax. Our updated assumptions reflect the benefit of lower surrender rates, but that was more than offset by the impact of lower market interest rate assumptions. Spreads for the Life Insurance segment remain steady in the third quarter, but did not meet our targets. The point in time spreads on our universal life business was 141 basis points at September 30, below our target for this business of 148 basis points. Results for the corporate and other segment were below our expectations, despite a $1.9 million pre-tax benefit from unlocking a variety of assumptions. This segment experienced increased number of death claims on our closed, block variable universal life business, as well as the higher level of expenses this quarter. As previously discussed on these calls, death benefit levels can vary from quarter-to-quarter. The increase in expenses is partially due to expenses associated with our routine state insurance department examination that occurs every five years and various expenses that we do not expect to recur. To summarize the segment results at a high level, our operating income was impacted by $0.03 per share benefit due to unlocking, $0.06 per share of higher than expected mortality experience and $0.02 per share of expenses tied to our state exam or that are not expected to recur. Turning to investments, at September 30, we had total investments of $8.5 billion plus $134 million of alternative investments included in the securities and indebtedness of related parties’ line on the balance sheet. The majority of our investment $7.2 billion, our fixed maturity securities with below investment grade bonds accounting for only 3.6% of fixed maturity total. In the third quarter, our average tax adjusted yield on investments acquired backing our long-term business was 3.92%. To-date in 2017, we are finding value in structured products and also emphasizing commercial mortgage loan production. Year-to-date, our fixed maturity security acquisitions have had an average life of 13 years and have been of high quality with 71% designated NAIC 1, and 29% designated NAIC 2. Next I’ll comment on capital levels. We are financially strong with growing capital. At September 30, our subsidiary, Farm Bureau Life had an estimated company action level risk-based capital ratio of 575%. This is an increase of 31 points from year end 2016. Our increase in capital has been stronger than expected during 2017, due to net realized gains on investments, sales of investments with higher capital charges, the impact of ratings upgrades within our investment portfolio, lower annuity production and strong year-to-date [death free] operating results. Using 425% RBC as a base, Farm Bureau Life had excess capital of approximately $185 million of September 30. Additionally, we estimate that we have approximately $35 million of excess capital at third quarter end at the holding company level. In closing FBL has solid third quarter – had a solid third quarter with strong life sales, growing book value and increased financial flexibility. I am pleased to have been able to share these results with you. We will now turn the call over to the operator and open up to any questions you may have.

[Operator:]

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

[Greg Peters:]

Good morning, everyone. I thought I'd just deviate perhaps a little bit. I was listening to your opening comments and I wanted to – Jim, maybe if you could focus on two things. One, in the annuity premium explanation, you talked about increased regulation. But maybe you could spend a second, adding more detail around that? And then secondly, on the life administration system, can you talk to us a little bit about that system, the expenses that are associated with implementing the system, savings and how it's going to help you produce more business in the future?

[James Brannen:]

Great. Thanks for both of those Greg, I'll start touching on those and bring others in as well. The regulatory component of the annuity comment was really around the DOL and while the DOL has been delayed. There were certain aspects of it that so we put in place and kicked off and frankly it made the sales process clunkier and you've got a pretty weak environment already in terms of the value prop around annuities during this quarter spread the tightened it's just a very very tough situation in terms of some of the value. And so the additional steps that agent said take with customers and opening counts et cetera with DOL certainly have we think was a contributing factor throughout 2017 so far in terms of annuity sales. So that would be that piece. On the new policy administration system, so we've been on similar or on a platform for approximately 40 years and while you can picture that it went through many revisions and it looked nothing like it did when we purchased it that long ago it did start from a very old platform and while it served us well it didn't have the same functionality and flexibility that many of the systems have. It's one of those hard decisions Greg to pull the trigger and because you're right it's not necessarily a direct link to selling more products and it's not a revenue driver, but it is table stakes to stay competitive in terms of your ability to process business efficiently and design new business and new products efficiently. Don, I’m not sure if you're prepared to talk about FAS related costs at all.

[Donald Seibel:]

It is a multi-year project and we've been incurring expenses for several years related to it as we build it up and we are using the functionality in stages and we have some products that are life the flexible premium deferred annuity as one and as we utilize a system and put it in operation we start to depreciate those costs. And has been coming into our financial statements at a very reasonable pace over time and we don't expect to see overall a meaningful impact to our expense level is a result of the project.

[Greg Peters:]

Perfect. Thank you. Thank you for those answers. Jim, there's been a lot of news in the marketplace on the other side of the equation the Property Casualty business around catastrophe losses. I was wondering if you could step back for a second and comment on the Farm Bureau’s Property Casualty operations and specifically how they performed and what turning out to be a pretty challenging environment for other publicly traded Property Casualty companies?

[James Brannen:]

Right. So first of all, I want to make really, really clear that our property casualty operations that we manage are in the form of the mutual insurance company and none of those results would be reflected in any of FBL’s results for those listening to the answer. But we are regional carrier. Our exposure to the hurricanes are really nil. The impact to us in a year like this is really more around Midwestern wind and hail type of events, tornado type of the events which were very active this year by the way, and then the impact on the whole capitalization of the reinsurance market and what next year's reinsurance buyers are going to look like. And I think clearly the mood of the reinsurers are little lumpier. And I’ll probably stop there as I kind of take this off track a little here.

[Greg Peters:]

Got it. Thank you for the answers.

[James Brannen:]

You bet.

[Operator:]

[Operator Instructions] The next question comes from Bob Glasspiegel of Janney. Please go ahead.

[Robert Glasspiegel:]

Good morning, FBL.

[James Brannen:]

Good morning, Bob.

[Robert Glasspiegel:]

The wealth management initiative, do you anticipate that you need to add some products to your arsenal and if so do you need to manufacture them or would you outsource them?

[James Brannen:]

It’s great question, Bob. I’ve got Scott Stice here who is our Chief Marketing Officer and he has really been kind of spearheading the whole effort and I’m going to let him just to describe it a little more in full detail.

[Scott Stice:]

Thanks Jim. Thanks for the question, Bob. It's not really about Farm Bureau Life adding or building new products. What we're really building is an additional capability using a third-party clearing firm for existing agency force who are – we currently have around 70% of them registered to sell mutual funds, but we have a very limited portfolio. This arrangement greatly expands our portfolio, Jim mentioned is open architecture which is another way of saying they'll have access to the entire mutual fund market. That's a component of it. The wealth management component of it is creating, again through the same clearing firm arrangement. The ability for a very small number of our agents to began offering managed accounts which will be fee-based, which we do not offer today as well as hiring and on-boarding a number of what we are currently calling wealth management advisors, which will be focused exclusively on the wealth management fee-based business, and they will partner with our existing agency force to provide some additional capability. So we intend to use what's already available in the market, not build anything ourselves other than really the distribution capabilities.

[James Brannen:]

I’ll also add, Bob I mean the attractiveness to the wealth advisor is clearly are untapped book of business and the relationship – the deep relationship that we have with our customers and the trust that we have in their financials already, so I think there is a huge untapped possibility there.

[Robert Glasspiegel:]

So the idea is if you could cross sell, I mean you would tie the agent into the customer in a stronger level and would help your retention rate in life and other products. I assume that’s part of the thought process?

[James Brannen:]

That’s everything we do from our cross sell perspective and expanding the customer relationship as part of our DNA and this would add to that for sure.

[Robert Glasspiegel:]

So you'd be paid on – the fee would be earned on production or would there be sort of licensing to have access to the sales force. How does it work?

[Donald Seibel:]

So the fee is earned on assets under management. Instead of a customer and by the way Bob, there's two ways to buy funds really or three ways if you count NAV sales. But you can buy a mutual fund and just pay a simple commission as a customer or you can create a wrap account where you don't pay commissions for any individual sales, but rather you pay a fee based on the total account value that you have. And so the wealth management advisors are focused on the fee-based component, whereas the vast majority of our agents will continue to offer the individual mutual fund sales and the difference is simply comes down to what's best for the customer. And today, we have zero ability on the fee-based side and so our agents have the relationships, but they are losing the ability because they don't have the ability to bring in those additional dollars and secure additional assets of our existing customer set. So from our perspective, the revenue stream comes from the fees.

[Robert Glasspiegel:]

Got it. Last question, your stat earnings generation year-to-date and I assume that's all – you dividend most of without given your RBC ratios are still strong?

[Donald Seibel:]

Yes, Bob through the first nine months our statutory earnings were about $83 million after-tax and we dividend it up $55 million in the first three quarters of the year. So we actually earn more in excess of what we dividend it.

[Robert Glasspiegel:]

Any reason why your keep in the insurance hub?

[Donald Seibel:]

Not in immediate need that – not in immediate need to have it at the holding company and we are mindful of the dividend, restrictions and don't want to have to go to the insurance department for approval, every year if we don't need to.

[James Brannen:]

I’d also say if you look back at history, we've been using some of that excess capital for shareholder distributions on a non-regular basis or a special dividend, we continue to evaluate that. We won’t – in any one quarter or any one year do at the same time or – but look at just the circumstances as they come along and as we get comfortable releasing, we’ll do it.

[Robert Glasspiegel:]

Okay, I’ll follow-up with Kathleen. Thanks a lot.

[Kathleen Till Stange:]

Thank you. End of Q&A

[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 a call if you have any follow-up questions. Thanks and have a good day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.