FBL Financial Group, Inc.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Good day, and welcome to the FBL Financial Group Incorporated first quarter 2016 earnings conference call and webcast. [Operator Instructions] I would now like to turn the conference over to Ms. Kathleen Till Stange, Vice President, Corporate and Investor Relations. Please go ahead, Ma'am.

[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.

[James Brannen:]

Thanks, Kathleen. Good morning, and thank you to everyone who joined us on the call today. I am pleased to report that FBL Financial Group once again posted strong earnings results. Net income for the first quarter came in at $1.04 per share and operating income was $1.05 per share. In addition to strong earnings results, we enhanced shareholder returns with significant dividends in the first quarter. We also continue to maintain very strong capital levels. These results position us well for a successful remainder of 2016. Sales for the first quarter were strong, with premiums collected up 4.2% over the prior-year quarter. Annuity premiums collected were up 12% and life insurance premiums collected were up 1% compared to first quarter 2015. Given the success of two limited offerings of four-year guaranteed annuities in 2015, we introduced a four-year guaranteed annuity product on an ongoing basis in early February. There is demand for this type of short-term annuity product from agents and customers, even with the lower interest crediting rate needed to meet our pricing objectives. In addition to strong fixed rate annuity sales, premiums collected on our index annuity product continue to grow. We saw an increase of 33% in the first quarter over the first quarter of 2015. Life premiums collected were up 1% compared to the first quarter of '15, led again by sales of whole life insurance. Sales of our index universal life product, which we introduced mid 2015, are making a good contribution, but are overshadowed by declines in sales of our other UL products. Turning now to our agency force. As of March 31 we had 1,848 total agents and agency managers, plus 62 active reserve agents working to complete the steps necessary to become a full-time Farm Bureau agent. Our multiline exclusive agents are one of our most significant competitive advantages. They represent a strong brand and have meaningful relationships with our clients. Our focus in 2016 is to have a fourth straight year of increases in our agent count in the eight states, where we manage the affiliated property casualty companies. We plan to contract more agents and sales associates, grow agent productivity and increase agent retention. Now, let me turn to the Department of Labor Fiduciary Rule, which was announced last month. As you know, the final rule is over 1,000 pages and we continue to parse the text. Clearly, the big negative surprise with the final rule was the inclusion of fixed index annuities under the more onerous Best Interest Contract Exemption, known as BICE. But there were several positive changes as well, including a longer time period to implement, elimination of burdensome data requirements for disclosures, and clarifying that the required contractual documents can be executed at the time of sale, rather than at the initial client meeting. At this early stage, based on our current understanding of the rule, we have not seen anything that would prohibit us from continuing with our current proprietary product offerings and agent compensation models. However, adjustments and refinements to our current practices and procedures, including additional disclosures and record keeping will be required. We expect that these changes will involve additional cost and increased risk to us and to our agents. Our exclusive agency force, which focuses on trusted relationships and needs-based selling, gives us an advantage, as we implement changes as a result of the additional regulation. Our agents already take suitability seriously, and we believe our compensation is reasonable. And while we no longer manufacture variable products, we believe that that experience will make the transition from giving advice that's suitable to giving advice that's in the best interest of our clients easier. We already know our agents and registered representatives, and believe we can deploy the needed training and compliance processes to be compliant with the rule. Our efforts to establish procedures to comply with the new rule include a formal project team with internal subject matter experts, and increased involvement with associations like the Insured Retirement Institute and American Council of Life Insurers and their experts. We are concerned that there remains considerable uncertainty within the industry about the means of complying with various provisions of the rule. We're hopeful that there will be additional guidance provided by the DOL and industry consensus practices that emerge. We're also working to identify ways to mitigate risk and cost to both us and our agents, resulting from doing business under the new regulation. The effective date of the final rule is June 7, 2016, but the provisions of the final rule will not apply until April 10, 2017, with limited transition relief available until January 1, 2018. In addition to this new burdensome rule, we face other challenges, such as continued low interest rates, slowing global and domestic growth, increased information technology and cybersecurity cost and more. While headwinds increase, we continue to produce results. We're able to do this, because we have the best-in-class distribution with our exclusive Farm Bureau agency force and a very loyal niche customer base. We also have a very strong capital position and maintain the industry-leading cross-sell rate. Our book of business is balanced between life and annuity business, and we have a diversified high-quality investment portfolio. These factors increase my confidence in FBL Financial Group, despite the outside pressures. Now, I'll turn the call over to Don Seibel to review of our financial results. Don?

[Donald Seibel:]

Thanks, Jim, and good morning, everyone. I am pleased to share with you today some insights regarding our financial results and financial position. The first quarter of 2016 gave us a strong start to the year. As Jim indicated, operating income for the quarter was $1.05 per share and net income was $1.04 per share. At a high level, I would characterize our first quarter operating income as a little higher than our expectations, primarily due to better than expected mortality results. I'll focus my comments around our operating results by segment. Annuity segment results were strong this quarter with spreads meeting our targets. During the quarter the point-in-time spread on our annuity business decreased by 4 basis points to 201 basis points. This decrease is due to a decline in the investment yield used for these point-in-time spreads, as it was negatively impacted by an increase in assumed default charges due to investment rating declines, primarily in the energy sector. Note, these are assumed, not actual default charges. We use these point-in-time spreads as we make crediting rate decisions, so we believe it's appropriate and conservative to include a level of assumed defaults. While we are meeting our spread targets for our annuity business as of March 31, going forward it will be increasingly difficult to earn the target spread, given the current interest rate environment. We have 33% of our annuity business currently receiving a crediting rate above the guarantees, but there are competitive pressures that make it difficult to be aggressive in taking further rate actions. Investment fee income for the quarter totaled $1.6 million, with the large majority $1.5 million in the annuity segment. Investment fee income has been at an elevated level for the last several years. As we have discussed previously, investment fee income benefits us in the short-term, but negatively impacts future spreads due to the loss of higher yielding securities. Results for our life insurance segment were very strong this quarter, higher than our expectations, primarily due to lower than expected death benefits. As we know from experience, the number of death claims can vary quarter-by-quarter and is typically higher in the first quarter of the year. This year in the first quarter, we did see an increase in the number of claims compared to a typical first quarter. However, it was not as high as we had originally anticipated. Mortality experience also benefited from greater reinsurance on our term business than projected. Spreads on our universal life business are pressured and are not currently meeting our targets, as much of this business is at the minimum guarantee. Point-in-time spreads on our universal life business totaled 139 basis points at March 31, which is below our target for this business of 153 basis points. Like the annuity segment, it will be difficult to improve the current universal life spreads going forward, given today's interest rate environment. While 19% of our universal life business is receiving a crediting rate above the guarantees, there are competitive pressures that make it difficult to be aggressive in taking further rate actions on the in-force block of business. Results for our corporate and other segment were below our expectations due primarily to a higher level of death benefits. Next, I'll turn to our balance sheet and capital position. In our last conference call, I provided detail on our energy exposure. Since that time, oil prices have increased and the outlook for the sector has improved. Our energy portfolio had a carrying value of $518 million as of March 31 and was trading at 91% of amortized cost, with $39 million of net unrealized losses. This exposure represents 6.6% of our total investments and is well diversified across sub-sectors. Further details regarding our investment in securities in the energy sector can be found in our Form 10-Q. Next I'll comment on our capital levels. In March we announced an increase in our regular quarterly dividend rate to $0.42 per share from $0.40 per share. Based on yesterday's closing stock price, this gives us a dividend yield of 2.8%. We are committed to having an attractive dividend yield, given our strong and consistent operating results. With a quarterly dividend rate of $0.42 per share, we expect to pay out approximately $42 million in regular quarterly dividends in 2016. Also, in March we paid a $2 per share special dividend for a total of $49.7 million deployed. We last paid a special dividend in 2015, and view the payment of special dividends on occasion as a viable option for distributing a portion of our excess capital. At March 31 the capital position of our wholly-owned subsidiary, Farm Bureau Life, remained excellent with a company action level risk based capital ratio of 539%. This is a decrease from the yearend level of 570%, reflecting dividends paid from Farm Bureau Life to the holding company to fund the special dividend. Using 425% RBC as a base, Farm Bureau Life had excess capital of approximately $140 million at March 31. At the holding company level, we also have more than adequate liquidity and capital with excess capital at the parent company of approximately $30 million at March 31. Stock repurchases remain a capital deployment option for us, although it is not the focus for us that it once was. During the first quarter we repurchased minimal shares of FBL stock. Our previous stock repurchase authorization expired on March 31, 2016. Our Board approved a new $50 million repurchase program during the first quarter, which expires on March 31, 2018. We plan to use this authorization over time to offset dilution from stock option exercises as well as repurchase FBL shares as we see opportunities. To recap, FBL had a good quarter with strong operating profits. We returned more than $60 million to our shareholders in the form of dividends and have very strong capital levels. I am pleased to have been able to share these results with you. That concludes our prepared remarks. We'll now turn the call over to the operator and open up to any questions you may have.

[Operator:]

[Operator Instructions] We have a question from Steven Schwartz from Raymond James & Associates.

[Steven Schwartz:]

Couple of questions. First, maybe just a definitional one, Jim. You mentioned in your discussion about the DOL, both agents and registered representatives. I don't think since the days that you sold BAs I've heard you mentioned registered representatives. So are we talking one and the same thing, and that was just language, or is this something different?

[James Brannen:]

It's one or the same thing. I mean, we still have a variable product available for our agents and a broker-dealer that manages those agents. And we have been in that business, the only difference is we're not manufacturing the product, but we're still managing the sale of variable products.

[Steven Schwartz:]

And then, Don, on the good mortality in the life business. If I got this right, you said that it sounded to me like frequency was actually higher than you expected, but what claims you got were more reinsured than you would have expected, like some type of mix effect?

[Donald Seibel:]

I'll try to clarify. The claim count for the first quarter is actually little lower than what we would typically expect for the first quarter, but it's still elevated from an average that you have the entire year. So we have that as a piece of it. We also had higher reinsurance offsets than we typically model.

[Steven Schwartz:]

And is that due to the type of claims or the year of the -- the vintage, why would that be?

[Donald Seibel:]

Just claims that were higher over the retention limit that we have on the business. Primarily in terms of the claims count, we did experience a very light flu season compared to the last three.

[Operator:]

We have a question from Bob Glasspiegel from Janney.

[Bob Glasspiegel:]

On the corporate, you said higher death benefits than normal. How many million was that above normal?

[Donald Seibel:]

Approximately $1 million higher than what we would expect.

[Bob Glasspiegel:]

Corporate still ran like to $2 million to $3 million under what sort of prior fourth quarter run rate was. Was there some funny stuff in those quarters helping or is it the pay down of the dividend, maybe resulting less investment income or something else, I'm just guessing?

[James Brannen:]

Well, the last couple of quarters had a lot of noise from unlocking of the variable block of business, we unlocked in the third quarter as well, and the fourth quarter. So that's a contributing factor. We also had fluctuating performance of the underlying separate accounts, which can cause noise in the level of back amortization that flows through and those are in opposite directions, for example, that was a $2 million add to additional expense in the third quarter of 2015.

[Donald Seibel:]

And there's fluctuating mortality in some of those prior quarters too, so there is a lot of contributing factors.

[Bob Glasspiegel:]

Now, you mentioned June and April as sort of implementation dates for the new system. What's in June and what's in April of next year?

[James Brannen:]

Those are just the Department of Labor effective rates. Go ahead.

[Donald Seibel:]

One difference there. The rule is effective on that June date. And by April, you have to warrant that you're acting in the best interest of you clients. And then there is that further date of January 1, 2018, of which you have to be in full compliance with the best interest contract exemption.

[Bob Glasspiegel:]

I'm just curious whether you've looked at five, six weeks of second quarter data, ahead of implementation. Is there some -- just going to cause in surge in industry sales to get ahead of the new rules or have you seen anything in the data that suggests that agents have been motivated to get some more production in before things get more complicated?

[James Brannen:]

Well, I don't know, I think it'd be speculation, Bob, and clearly we have not started to talk about any second quarter results. I'll point out for our company though, working with an exclusive distribution force, I am hoping that out of all the different models that are out there, we'll probably have as little disruption as possible. So I wouldn't speculate that our agents are overly concerned and wanting to get business written before the implementation of the rules. I think if you go back to my comments, you'll see that our expectations are that our full products suite of our proprietary products will still be available in our view.

[Bob Glasspiegel:]

So putting words in your mouth to make you a little bit stronger. You think it's less of a negative to you than to others because of your exclusive agency force and your alignment with your customers by natural sales processes. So you got the pain of implementation and agents learning a new game; new rules that they have to follow, so there's going to be a little bit of disruption, but not that -- that won't be a game changer. Is that a fair sort of summation?

[Donald Seibel:]

I think it's a pretty fair summation indeed, Bob. I think there are couple of differences, and you pointed one out, but of them is we clearly are the financial institution in our model, we know that, we will have to accept that, fiduciary, responsibility and the liability for our agents. We're kind of used to that model by having securities products and variable products sold through a broker-dealer in the past. We're already managing agents in that fashion, et cetera or so. There maybe a new level of liability to the company, but its clear in our model, we are that financial institution. I think it would be more challenging in some other models where agents are choosing products from competing companies and may act on behalf of one company at one time and on another company at another moment in time. And I think some carriers are probably struggling to figure that one out, and that's not on our list right now.

[Operator:]

And we have a follow-up question from Steven Schwartz from Raymond James & Associates.

[Steven Schwartz:]

Just a real quickie. Don, the $1 million that you cited of adverse mentality in corporate and other, was that pre-DAC, pre-tax?

[Donald Seibel:]

It would be pre-DAC, pre-tax.

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn our conference back over to Ms. Kathleen Stange for any closing remarks. End of Q&A

[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 your lines.