FBL Financial Group, Inc.
Q4 2017 Earnings Call Transcript

Published: 9 Feb 2018

[Operator:]

Good morning, and welcome to the FBL Financial Group Fourth 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 note this event is being recorded. I would now like to turn the conference over to Kathleen Till Stange. Please go ahead.

[Kathleen Till Stange:]

Thank you and welcome to FBL Financial Group's fourth 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 fourth 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 thank you to everyone on the call. I'm glad you are able to join us today. FBL Financial Group reported solid earnings for the fourth quarter of 2017. Net income totaled an unusually high $4.33 per share and non-GAAP operating income was $0.99 per share. Net income was impacted by solid earnings and the large adjustments due to tax reform. We will discuss those in detail later. We had expected somewhat stronger non-GAAP operating earnings for the fourth quarter, but a one-time item drove results, somewhat lower than anticipated. Full year 2017 results however were at record highs with FBL Financial Group reporting 2017 net income of $7.75 per share and non-GAAP operating income of $4.32 per share. Don will review the financial results in detail, as well as the impact of tax reform. I’ll focus my comments on sales, Farm Bureau Financial Services agents’ force [ph] and the new wealth management initiative. Total premium collected for the fourth quarter of 2017 was $154 million. Annuity premium collected for the fourth quarter totaled $68.5 million, a decline from the fourth quarter of 2016. Full year annuity premium collected declined 19% was impacted by a combination of lower interest rates, increased regulation, the relative attractiveness of the equity markets and our increased focus on life insurance. I am pleased that fourth quarter annuity premium collected increased 18% from the third quarter of 2017, this reflects an increase in both fixed rate annuities and index annuities. In September, we introduced a flexible premium index annuity, this product replaced our single premium index annuity products. The ability to make additional contributions into the indexed annuity contract has been a really attractive option for our clients. Life premium collected for the fourth quarter of 2017 totaled $72.4 million, and was essentially flat compared to a very strong fourth quarter of 2016, and up slightly compared to third quarter of 2017. Overall, 2017 was a positive year from a life sales perspective. Full year life premium collected grew 4% in 2017, we experienced strong growth in Universal Life Insurance sales, we also had a positive reception to our accelerated underwriting pilot program. The renewed focus in 2017 was to increase the number of life applications, and I am pleased with the results. Life applications rose by 5.5%, which means we’re reaching more clients with the products they need. In addition, these life sales positioned us for a long-term profit stream and allow us to continue to grow earnings from sources other than spread income. It is positive to have a balance book of life and annuity business, particularly with the year like 2017, where we were able to focus more on life sales. Turning now to our agency force, as of year-end 2017, we had 1,840 exclusive agents, and agency managers, a decline from year-end 2016. While of our markets grew agents as planned and top-line recruiting was strong, we experienced higher than average tenured agent attrition in a few markets. This drove the majority of the decline. We have taken steps to address this issue and expect to continue resume growing the agency force. Last month I met with agency leadership at our annual sales pickup meeting, I am optimistic about our prospects for 2018. Because we are focused on agent support, new products, digital strategy, increased advertising and our newest initiative wealth management. As you recall on last quarter’s call, I mentioned that we were adding advisory capabilities, through newly formed registered investment advisor. We have four phases related to this initiative. The first phase occurring this quarter is to introduce a new mutual fund platform to our exclusive agents. Early reaction to this from our agents has been extremely positive, many of our agents are already registered representatives, but for those who are not, we've seen an increase in additional agents seeking securities licensing. Phase 1 of this rollout includes required online training for our agents as well as classroom instruction. The second phase of this initiative will be to convert our existing mutual fund business, nearly $1 billion of mutual fund assets to the new platform. The third and fourth phases include introducing financial planning and a managed account platform to our agents, as well as adding the role of Farm Bureau wealth management advisor to our distribution system. Once fully implemented, we expect this initiative will allow our agents to add more value, enhance the customer experience and further strengthen the agent customer relationship. There will be costs associated with the build out of the initiative, estimated to be a couple of pennies per share each quarter of 2018 to be included in our corporate and other segment. Ultimately, we expect our wealth management initiative to add a diversified earning stream to FBL Financial Group given the fee-based nature of this business. To conclude 2017, was not without the challenges, but I am pleased with our accomplishments, record earnings, growth in life sales and introducing wealth management initiative. Most importantly I am proud of the meaningful work we do to protect the livelihoods and futures of our clients, and I am confident in our future as we move forward in 2018. 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 discuss our fourth quarter earnings results with you. I'll begin my comments by discussing the impact of tax reform on our financial results. The Tax Cuts and Jobs Act to 2017 enacted December 22nd reduced the federal statutory tax rate from 35% to 21% effective for 2018. This resulted in an $85.8 million or $3.42 per share benefit to earnings in the fourth quarter of 2017. This benefit is due to the remeasurement of net deferred tax liabilities using the reduced corporate income tax rate. This was onetime non-cash accounting adjustment given its nonrecurring nature, this onetime gain is excluded from non-GAAP operating income. Going forward, we estimate FBL's effective tax rate to be approximately 17% to 20% in 2018, this compares to our effective tax rate prior to tax reform of 31.7% for 2017. We are currently evaluating the impact to tax reform and how the lower tax rate will affect our business going forward. As we assess opportunities, we will consider possible benefits for a variety of constituents including policyholders, shareholders and employees. Now I'll turn to financial results for the quarter. As Jim indicated, net income for the fourth quarter of 2017 was $4.33 per share. This includes the large benefit from tax reform, as well as net realized losses on our investments and the change in net unrealized gains and losses on derivatives. Excluding these items, non-GAAP operating income for the fourth quarter of 2017 was $0.99 per share. Non-GAAP operating earnings for the quarter were below our expectations. These results however allowed FBL to end of the year with record full year non-GAAP operating income. The results for the fourth quarter were negatively impacted by $0.04 per share of higher than expected mortality experience, and a onetime $0.10 per share reduction of income due to the correction of product charges on a closed block of Universal Life business. These negative items were partially offset by the benefit of investment prepayment fee income totaling $0.13 per share. In this low market interest rate environment, we have averaged approximately $0.06 per share per quarter from this source of income. Next I'll focus my comments for the quarter on each of our segments. Looking at our annuity segment, it is performing well and continues to grow. Annuity pre-tax non-GAAP operating income increased in the fourth quarter of 2017 compared to the prior year, primarily due to the benefit of other investment related income. There is continued pressure on annuity spreads. At December 31, 2017, the spread on our index annuity business was 194 basis points, 6 basis points below target for this business. We've been active in managing this business and lowering crediting rates where appropriate. We recently decreased crediting rates on a portion of this business by 25 basis points subject to guarantees. But this has not been enough to offset the decline in yield on investments backing this business due to the maturity of higher yielding assets and purchases of lower yielding assets. Competitive pressures make it difficult to be aggressive in taking further rate actions. At year-end 2017, we had 32% of our annuity business receiving a crediting rate above the minimum guarantees. Next, I'll comment on the results of our Life Insurance segment. In the fourth quarter of 2017, this segment also experienced the benefit from other investment related income. But this was more than offset by the correction of the product charges I previously mentioned. In addition, debt benefits for the Life Insurance segment were slightly elevated this quarter primarily due to an increased number of claims. I am pleased to say that spreads for the Life Insurance segment increased in the fourth quarter, but remain below our targets. The point in time spread on our Universal Life business was at 143 basis points at December 31, 2017, below our target for this business of 147 basis points. Yields on investments backing this business declined due to the maturity of higher yielding assets and purchases of lower yielding assets. But this was more than offset by a variety of crediting rate changes we made. It is difficult for us to lower crediting rates further as we now only have 5% of the Universal Life business receiving a crediting rate above the minimum guarantees at December 31. Results for the Corporate and Other segment where solid for the fourth quarter of 2017, this segment benefited from the positive impact of equity markets on separate account performance. This segment also experienced slightly elevated death benefits on our closed block variable Universal Life business. By their nature, death benefit levels can vary quarter-to-quarter. Turning to investments, in the fourth quarter of 2017 the average tax adjusted yield on investments acquire backing our long-term business was 3.92%. During 2017, we found value and structured product in commercial mortgage loans. Fixed maturity security acquisitions in 2017 had an average life of 12 years and were of high quality with 76% designated NAIC 1, and 23% designated NAIC 2. While U.S. treasury yields have increased the investment environment remains challenging. The treasury curve continues to flatten and corporate spreads continue to tighten in relative treasuries. Next I'll comment on capital levels. At year-end 2017, our subsidiary Farm Bureau Life had an estimated company action level risk based capital ratio of 552%. This is a decrease from September 30, due to the impact of federal tax reform. On a statutory accounting basis Farm Bureau Life revalue its deferred tax asset using the reduced corporate tax rate. In addition, our low income housing tax credit investments and credit charge from lower future tax benefits due to federal tax reform. These items reduce surplus, lowering the RBC ratio by 27 points. Despite this decrease, Farm Bureau Life continues to have an excellent capital position. Using 425% RBC as a base, Farm Bureau Life had excess capital of approximately $160 million at December 31, 2017. Additionally, we estimate that we have approximately $40 million of excess capital at year-end at a holding company level. As we review our options for deploying our current level of excess capital, we consider stock repurchases, our regular quarterly dividend and the payment of special dividends. We expect future stock repurchases to be limited as we are constrained by our limited public float. Our Board of Directors reviews the dividend rate regularly and has committed to having an attractive dividend yield, given our strong and consistent operating results. We also view the payment of special dividends on vocation as an attractive option for distributing a portion of our excess capital. Our Board will next review the payment of dividends when they meets in March. In closing, 2017 was a strong year for FBL Financial Group, despite some fluctuations on a quarter-to-quarter basis FBL achieved record full year net income and non-GAAP operating income. The environment for life insurers remains challenging, but during 2017 we were able to grow our business, deliver record financial results and return $81 million in dividends to shareholders. We moved forward in 2018 with financial discipline to continue to profitably grow our business, while maintaining a strong financial foundation. I'm pleased to have been able to share these results with you. We will now turn the call over the operator and open up to any questions you may have.

[Operator:]

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

[Greg Peters:]

Good morning, everyone and thank you for the call. I had a couple of questions for you. First of all in the context of your tax rate guidance for 2018, I think of 17% to 20%, can you walk us through the bridge of how we get from a federal tax rate of 21% down to the 17% to 20% range?

[Donald Seibel:]

Yes, sure. This is Don, I'll answer that question. As you know historically we've had an effective tax rate lower than the statutory rate of 35% in the fourth quarter of 2017, our effective rate was 31.7%. And the primary driver of that difference in rate is tax-exempt municipal income, investment income and there are other sources of tax-exempt income as well. And that will carry through under the tax act that was recently enacted. So taking those into estimated tax rate, and it's a range because there are estimates that are used in coming up with that range with the 17% to 20%.

[Greg Peters:]

Okay. And I noted your comments about the record non-GAAP operating income for 2017. And of course you commented about RBC and excess capital at the life and the holding company. And I look at your total dividend paid in 2017 it's down versus 2016. And I guess without stepping on or in front of the Board, just wondering the thought process behind the down total dividend payment to shareholders in 2017. And what kind of color we could derive as we think about 2018?

[James Brannen:]

Thanks, Greg, this is Jim. So the regular dividend the one that shareholders can expect year-in-year-out no matter what's going on it's our objective to try to always keep that and if possible increase it in fact did go up. I think the only decrease you saw was the size of the special dividend during 2017. And in the year before that was a little larger. And so I think that's the main difference. And I would expect that we'll continue with our dividend strategy around the regular dividends and try to keep those where they're at. While we've been pretty regular about specials, I'm not going to say that it's always going to be the same or always going to be the same time or anything else because we’re just not in a position to do that or we just build it into our regular. But when you look at Don’s numbers on capital, it's still is a viable option for us.

[Greg Peters:]

Okay. And then I guess the final question. Jim I know you were commenting a little bit about the agency count -- agent count. And so, it sounds like there were some retirements. And I'm wondering if you could take this opportunity to sort of walk us through the demographics of your current agency force. I know you have a robust recruiting program. Maybe just provide us more color around that as we think about the count going forward?

[James Brannen:]

Well just to add a little more clarity to the comments around tenured agents. It was really an issue around a competitor that liked how we train and go in agency and then kind of attack the territory. So that's what it was around versus retirements. Of course we have there every year. But Scott are you in the room?

[Scott Stice:]

I am.

[James Brannen:]

Okay. I'll let you take the rest of that.

[Scott Stice:]

Yes, so I believe your question was around demographics and perhaps how our agency force is aging or not aging is that correct?

[Greg Peters:]

Correct. And the recruitment, I mean, Jim you added a twist to this. So you have your competitors taking your agents away from you. What can you -- and is that an anomaly, is that a one-off deal or do you anticipate a retention issue going forward?

[James Brannen:]

No, it was an isolated incident that just happened over the years it happened on occasion. We usually wrestle pretty hard and fight pretty hard about it and protect that. And we have protections in place in the contracts and we can try to enforce those and that kind of thing. But it doesn’t mean it doesn’t happen.

[Greg Peters:]

And then just the overall demographic profile of the agency plan?

[Scott Stice:]

Yes, I'll take that portion, this is Scott. I think like most insurance companies with an exclusive agency force, we are generally flowing the demographic trends of the market overall. The baby boomer population exploding aging. And so we are not immune from that. We've seen that coming for a very long time, which is why we've significantly ramped up our recruiting and training efforts around new agents over the last four to five years. All up, our new recruiting has actually lowered the average age of our agency force by about two or three years down from 53 to right about 50 on average. But we still do have a bubble of agents that are nearing retirement age. And we're just going to continue to need to recruit and develop new agents for the foreseeable future.

[Greg Peters:]

Okay, thank you very much for the call and for the answers.

[James Brannen:]

Thank you, Greg.

[Operator:]

[Operator instructions]. Our next question comes from Janie Inglis with Philo Smith. Please go ahead.

[Jamie Inglis:]

Good morning, guys. Greg, asked lots of questions, I was getting at the agency thing. But maybe if you could give us a sense of your ability to recruit in today's environment, it appears we've got an improving economy, theoretically more opportunities for agents to do whatever else might want to do. How is that -- how do you feel about it right now and can you compare it to another period in past history, where you’ve had a strong economy and how is that affected your ability to recruit?

[Scott Stice:]

That a very good and insightful question. This is Scott, again. I think intuitively, one would think that as unemployment lowers, as salaries grow that it does become more difficult to recruit. However, that's not always the case and probably rarely the case. We are not in the market recruiting for folks who are unemployed. We’re in the market recruiting folks who are very gainfully employed, but are looking to start their own small business and do so in the insurance ranks. So over the last handful of years as unemployment has continued to drift lower as wage gains have finally started to accelerate, our top-line recruiting has been as strong as ever. Last year was not a record, but not far off, 2016 was a very, very strong year better than 2015. So we are very confident in our ability to continue to recruit going forward. And, we continue to enhance and improve our value proposition to agent candidates particularly relative to our competition and the wealth management initiative is going to be a big component of that going forward.

[Jamie Inglis:]

If I could ask a question about those agents that left, Jim I think you said they went to an agency, I assume that's an independent agency, meaning not a competitor of yours?

[James Brannen:]

No, I am not going to get too far into the details, there Jamie, but clearly it was competitor play against us. So…

[Jamie Inglis:]

Okay, okay. Okay, great. Thanks a lot guys.

[James Brannen:]

Thank you.

[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 is now concluded. Thank you for attending today’s presentation. You may now disconnect.