FBL Financial Group, Inc.
Q2 2018 Earnings Call Transcript

Published: 3 Aug 2018

[Operator:]

Good morning, and welcome to the FBL Financial Group's Second Quarter 2018 Earnings Conference Call. All participants will be listen-only mode. [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 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 financial 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 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're able to join us today. FBL Financial Group reported excellent earnings for the second quarter 2018. Net income totaled $1.30 per share and non-GAAP operating income was a record at $1.31 per share. These results reflect a growing book of business, our financial discipline, and lower taxes due to tax reform. Don will review the financial results in detail. I'll focus my comments primarily on sales and underwriting. Total premium collected for the second quarter 2018 was $171 million. I'm pleased that total premium collected was almost equally comprised of life insurance and annuity sales. I'm also happy to report that we had good growth from both product segments. Annuity premium collected for the second quarter totaled $79.8 million. This is a 4.3% increase from the second quarter of 2017 and a 1.3% increase from the first quarter 2018. As you're aware, annuity sales last year were negatively impacted by the Department of Labor's fiduciary rule, amongst other factors. With that rule now vacated and a slightly more favorable interest rate environment, second quarter annuity sales were up 37% from the low levels in the third quarter of 2017. Life premium collected for the second quarter of 2018 totaled $77.9 million, up 3.6% from the second quarter of 2017 and up 2.1% compared to the first quarter 2018. Compared to the year ago quarter, premiums collected are up in all categories; universal life, whole life and term life insurance. We're particularly pleased with the growth of our indexed universal life product. In the second quarter, we were recognized by Wink, the competitive intelligence and marketing research firm, as their 2017 Trailblazer in index life insurance sales. Per Wink Sales & Market Report, Farm Bureau Life Insurance Company increased its market share for indexed life insurance, the greatest percentage of any company, from 2016 to 2017. I'd like to take a moment to talk about life insurance. Our purpose at FBL Financial Group is protect livelihoods and futures and the primary we do that is through life insurance. Life sales are also positive for FBL as they provide a long-term profit stream and allow us to balance the spread income we earn from our interest-sensitive products with earnings from other sources such as mortality. Life sales and the life insurance underwriting process are evolving. We are investing to make the life sales experience more customer friendly, while we also increased automation to become more efficient in our administration of the life products. Last year, we began a pilot product -- a pilot of accelerated underwriting. This is a non-medical, underwriting approach and makes the sale of life insurance a better overall customer experience. We've limited the program in order to minimize risks. This approach allows us to attract additional middle-market customers who need to protect their family's livelihood with life insurance. With this pilot, we've developed strategies to incorporate new and expanded data-driven underwriting decisions while removing fluid testing or paramedical exams when we believe doing so will not materially increase risk. Customers find this simplified underwriting approach appealing and are more likely to complete the sales process without a physical exam. We're also making the purchase of life insurance more appealing to certain customer segments. This summer, after extensive research, we introduced a new life insurance underwriting rating for smokeless tobacco users. Previously, customers who used chewing tobacco were classified under the smokers' rate. This new underwriting rating was requested by our agents and has been very well received. It allows agents to have the life insurance conversation with clients who previously opted not to purchase life insurance because their smokeless tobacco usage classified them under the smokers' rate. This change enables us to meet the needs of our customers and agents and more importantly, fulfill our purpose of protecting livelihoods and futures. While we are improving the customer experience and making life insurance more attractive to customers, we've also become more efficient in our life insurance underwriting and administration. We're implementing additional automation in our life underwriting area. We believe this will improve the efficiency and consistency of our underwriting process as well as to write data to improve future risk selection and product offerings. Turning now to our agency force. As of June 30th, 2018, we had 1,787 exclusive agents and agency managers. We have had higher agent attrition over the past year. As a result, we are modifying certain elements of our agent recruiting and compensation plan and introducing a new agent development plan. I'll also briefly update you on our new wealth management initiative. Our goal with this initiative is to allow our agents to add more value, making them the go-to person for all of their clients' insurance and financial needs. Earlier this year, we introduced a new mutual fund platform for our exclusive agents. Agent engagement in this initiative is high and we've seen significant growth in new accounts opened and increased mutual deposits as a result. We're now working on Phase 3. In this phase, our existing investment adviser representatives will be able to position themselves as financial advisers and offer products and tools to deliver holistic financial planning services and advice as well as to offer managed account products. Then in 2019, we plan to add the role of a Farm Bureau Wealth Management Adviser to our distribution system. To conclude, I feel very good about our position halfway through the year. We reported record non-GAAP operating results, grew our sales, and continued to protect livelihoods and futures. Now, I'll 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. As Jim indicated, for the second quarter of 2018, we had net income of $1.30 per share and record non-GAAP operating income of $1.31 per share. Non-GAAP operating income for the second quarter of 2018 was higher than our expectations. The primary driver of this outperformance was favorable mortality experience. By its nature, mortality results fluctuate from quarter-to-quarter, so it's good to take a longer view. In the first quarter this year, we had unfavorable mortality experience followed by fewer death claims in the second quarter. On a year-to-date basis, mortality experience is in line with our expectations. Looking at the investment environment, I'm pleased that we have seen higher market interest rates in 2018, but our portfolio yield continues to decline. The tax adjusted yield on new investment acquisitions backing our long-term business was 4.34% for the second quarter of 2018, which is less than our portfolio yield. This continues to pressure spreads with June 30 point in time spreads lower than our targets. Annuity segment results for the second quarter of 2018 reflect a growing book of business as well as $1.2 million of investment prepayment fee income. Point in time spreads on our individual annuities decreased three basis points during the second quarter 2018 due to a decline in the portfolio yield. Crediting rates in the quarter remained steady. Life Insurance segment results were also strong for the quarter and reflect growing life insurance in force. Mortality experience was in line with expectations for this segment. This segment had $400,000 in investment prepayment fee income earned during the quarter. It also continues to benefit from a small investment in alternatives. We have tagged a portion of our alternative investments to the life insurance segment since the beginning of 2017. This allocation allowed us to add capacity to invest in alternative investments, lengthen the duration of our life insurance portfolio, and increase the investment yield in the life insurance segment. These investments, with a carrying value of $36.3 million, contributed $1.3 million of income before tax to this segment in the second quarter. Point in time spreads on universal life disclosed in our investor supplement were refined in the second quarter of 2018 to account for the cost of hedging our growing block of indexed universal life business. For comparability, we have adjusted prior periods for this refinement, the impact being a three to six basis point increase to the disclosed crediting rate. Point in time spreads on universal life decreased during the second quarter of 2018 due to a couple of factors. First, similar to the annuity segment, the portfolio yield declined; second, the credited rate increased to a change in the mix of business and increased option costs. Spreads on universal life business, which were 126 basis points at June 30, 2018, are lower than annuity spreads due to additional profit components on universal life business aside from spread income. Corporate and other segment results were better than our expectations for the second quarter due primarily to lower death benefits because of fewer variable universal life insurance claims. The favorable mortality experience in this segment accounted for approximately $0.04 per share. We are investing in the startup of our wealth management initiative and incurred $800,000 of related expenses in this segment during the second quarter. Next, I'd like to comment on our effective tax rate. Excluding equity income and related taxes, the second quarter 2018 effective tax rate was 18%. This is right in line with our expected effective tax rate of 17.5% to 18.5% for full year 2018. This rate is less than the statutory rate of 21% due primarily to the impact of tax-exempt dividend and interest income. The effective tax rate on pretax non-GAAP operating income, including equity income, was 7.8% for the second quarter of 2018. This rate is significantly impacted by tax credits received in our low-income housing tax credit investments. Next, I'll comment on our capital levels. At June 30, 2018, our subsidiary, Farm Bureau Life, had an estimated company action level risk based capital ratio of 541%. This is a decline of only two points from the end of the first quarter, but there are several significant offsetting components. Our RBC ratio benefited from an increase in capital during the quarter due to our strong earnings. Additionally, asset risk charges declined due to security rating upgrades and the disposition of lower-quality investments. These positive items were offset by a 40-point decrease related to the NAIC's recently adopted change to the RBC formula to reflect the lower tax rate due to the Tax Act. These new factors are effective for year-end 2018. We have incorporated this change in our estimated RBC as of June 30. Our capital levels remain high despite this change, and we have significant financial flexibility. A.M. Best also views our capital levels as very strong. In June, A.M. Best affirmed Farm Bureau Life's financial strength rating of A (Excellent). Per A.M. Best, Farm Bureau Life has very strong capital, solid liquidity and strong financial flexibility with access to capital markets. This commentary is notable as A.M. Best has a new capital model in place. One last item I'll mention is that Farm Bureau Life was recently named to the 2018 Ward's 50 Group of Top Performing Companies. This marks the 19th time that Farm Bureau Life has been named to the Life-Health Ward's 50 List. Our managed property casualty company was also named to Ward's 50 for the fourth year in a row. This makes Farm Bureau Financial Services one of only nine organizations with affiliated companies named to both lists. Ward Group analyzes more than 700 life insurance companies and 3,000 P&C insurers. So, we are honored to be recognized for strong operating performance and consistent financial strength. To recap, we had great financial results for the first half of the year. Spread pressure continues, but we see some relief with higher market interest rates. We are focused on financial discipline as we grow our business. We will now turn the call over to the operator and open up to any questions you may have.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Greg Peters with Raymond James. Please go ahead.

[Greg Peters:]

Good morning everyone.

[James Brannen:]

Hi Greg.

[Greg Peters:]

Thanks for the call and for taking my questions. So, Jim, I wanted to give you an opportunity to deviate from your script a little bit and provide some additional color around two things you talked about. First of all, you talked about the overall agent count being down and developing some new plans there. And then also, you mentioned that the new wealth management initiatives. So, I was wondering if you could give us more color on those two topics.

[James Brannen:]

Sure. Good morning. Hey, on the agent count, I would say that over the past 12 to 18 months, we've been pushing harder and struggling a little more on the growth side and retention side. Its several factors. I'll let Scott chime in, but I'll just mention a couple. I mean when we're recruiting into this business, we're using a model where you're independent contractors. And to be honest, under the ACA, with the ACA premiums that have been going on and being a non-employer plan, et cetera, that's a pretty hefty lift for new recruits. Having said that, we've been doing pretty well on the new recruits' side and maybe on the agent attrition side a little harder. On one of the previous calls, I talked about just one hotspot that really changed our numbers last year where one agency in South Dakota was particularly troubling in terms exit as kind of as a group. And so that kind of skewed our numbers for last year. The good news is the pipelines are full and the second half of the year is looking good on the recruiting side and the retention is starting to pick up as well. Scott, you want to add anything there?

[D. Scott Stice:]

No, I think I would just reinforce what you said. Topline recruiting has been and remain relatively strong. The pipelines are in good shape. We would expect that to continue going forward. And as far as the attrition increase, it's a minor uptick but minor amounts of increased attrition spread over 1,800 agents and can move the needle. And so while we just have to close that gap and our new plans are going to do that, we're very confident, which we just put into place on August 1.

[James Brannen:]

And then on the wealth management side, for us this is a really exciting adjacency. We've offered mutual funds in the past, but frankly, we've offered them through mutual fund partners. Statements would go out. If you met with a client and they pick a few different funds, they will get statements directly from each one of those. We've become a full service broker-dealer, and we are on an electronic mutual fund platform where we can offer virtually most all mutual funds, consolidated statements branded Farm Bureau. And so that's a big first step. I mean, more than half of our customers have mutual funds, and we've only tapped about 4% and so a big adjacency. They already trust us with their financial products and insurance needs. We already have folks licensed, trained, et cetera, so this is a natural adjacency for extending that relationship business that we have with the customer. We're -- we've got other phases as well, though. We also want this to be an additional source of revenue. As I look at spread income, Greg, it's been a challenge for this industry for quite a few years, and the low interest rate environment continues to put pressure on spreads. So, there is a fee-based business aspect of this as well to diversify our earnings stream. And I expect that will happen through this as well as our advisers begin to do fee-based business. And then as we add the final step, what we call the Farm Bureau Wealth Management Adviser, which will be pretty much exclusively in the fee-based business. Any other comments over that, Scott?

[D. Scott Stice:]

Yes, I think I would relate it back to agent count as well. So, in addition to all the benefits to the company that Jim just described in terms of fee-based income and those sorts of things, this enables us to recruit to a different type of individual as well with a full-service broker-dealer and begin to widen our value proposition as it relates to more of the existing markets. So, we're very excited about the opportunity there as well.

[Greg Peters:]

Thanks for the answers. I'm just going to follow-up. I might be going out on a limb here, but it won't be the first time. So, as you look to diversify your earnings stream, and I don't know what the state of the ACA plans are in the various states you operate, but I did note that the Department of Health and Human Services recently came out and clarified the rules around what is the definition of short-term medical. And I'm curious what your perspective is on, one, how the ACA is across your customer base; and would a medical product be an adjacency worth considering or you've looked at it and maybe it's not worth considering. I thought I'd just throw that out on the table for you guys to comment on.

[James Brannen:]

Yes, I mean, I'm not going to go down the rabbit hole of the ACA. The short-term did get changed from kind of a six-month rule to three years, which we think will probably bring a few carriers back to the individual market. It likely will not be FBL Financial Group, but we've had a mantra for many years to be good at who you are, and this is a true adjacency in wealth management health or anything else like -- I mean, you even look at our life business and you look at our disability income and you look at our long-term care and products like that, we've chosen not to underwrite anything that's health-like over the years, and we continue to hold that position. That's probably where we're at on that.

[Greg Peters:]

Yes, that's fine. I guess the final question, I know there's probably another question or two on your call, is a bigger picture question. It's hard to ignore the fact that there is an emerging potential trade war going on and it seems like some of the counter punches by other countries seem to be targeting the farm community. I'm curious if you had seen any impact, any early signs in your customer base from what is emerging as a tariff war or trade war and if there's been any impact there.

[James Brannen:]

Yes, it's a good question. Clearly, with our partnership with the 14 Farm Bureau federations in the states where we do business, we understand that there is some pain particularly in certain industries. Dairy is getting hit pretty good and others. But clearly, they are enduring some pain as it relates to these trade discussions. But I'd also point you to -- and I'm not seeing signs of stress, I guess, in our business related to it, but I'd point you back to the two largest farm cycles during my time or the farm crisis in the 1980s where Farm Bureau Life continued to grow each and every year during that farm crisis. And then just a couple years ago, there was probably the second largest downturn in the ag economy, and we continued to grow, albeit not as large, but we continued to grow during that cycle as well. And I don't see -- have any unforeseen reasons why we wouldn't continue to grow if this becomes a cycle. It does concern me at times that these economic cycles cause our farmers and ranchers to look at their operating costs and that has some impact on our property casualty business more than our life business, frankly. Our life business for the farm and ranching community is a lot around protecting that family farm, which is always top of mind and, through any cycle, something that's very important to them and we bring solutions to that.

[Greg Peters:]

Great. Congratulations on your quarter and thank you for your answers.

[James Brannen:]

Hey thanks Greg.

[Operator:]

[Operator Instructions] Our next question comes from Bob Glasspiegel with Janney. Please go ahead.

[Robert Glasspiegel:]

Good morning FBL. Greg, you basically didn't ask my question -- which is how your new product innovation of smokeless tobacco and the other one of not doing the testing. I can understand how those are the moves that could help sales, but they might expose yourself to [Indiscernible] selection. What tests are you doing? Or what steps are you taking to make sure that it's worth taking a little bit more risk with going after the specialty area?

[James Brannen:]

Yes. And I'll pass that up to Ray in just a second, but I'll assure you we're not just throwing caution to the wind. The industry is moving this way, and we need to move this way as well. There's a lot of not takens because of the long processes that you have to go through in the medical part. Clearly, it is a good underwriting practice. There's times when we don't get much out of it. And with the data that's available on the marketplace these days, you can get a whole lot of information about folks pretty quickly if they give you permission. So, one of the gut checks that I have when Ray's team bring me something like this is, how does a rancher who's dealing with these issues feel about this? And are they in with this or are they out with this. And clearly, we're not doing these programs without the ranchers' eyes looking over us as well, yes. So, just kind of an overarching comment, and I'll let Ray to add specifically little more about risk selection.

[Raymond Wasilewski:]

Yes. So, on the smokeless tobacco, we did add a test that's called bio-cyanate, and that is one of the few ways that we can measure and pick up the difference between having nicotine in your system that's from combustion or from smokeless tobacco. And it's not perfect and it does require a blood test. So, it's not frictionless for the person applying. But they want to do it. I mean, they want the better rate, and so they're willing to go through the test. Agents are excited about that. It's--

[James Brannen:]

It's not -- so not a non-smoker -- or it's a non-smoker rate, but it's not a best-in-class rate.

[Raymond Wasilewski:]

Right. Right. It -- yes, you cannot qualify for our best-in-class rate as a smokeless tobacco user. And then overall, when we talk about accelerated underwriting, we have added additional tests as well. And we still have parts of that program under design. So, it is not fully rolled out by any means. It's very limited right now. But when we do the fluid free, we add an oral swab and with that, we can pick up nicotine. So, that one doesn't differentiate between smokeless or smoking, but it does pick up nicotine. We do a thing called electronic inspection report, which is really just a way of kind of picking up sort of moral hazards. We can be very sure of things that go into underwriting decisions like criminal records, bankruptcies, all of those different types of things. And then we have another new source of data where we can pick up whether people have had past physicals or doctors' visits that they may not have disclosed and you can get views into what people were being seen for. And we get those in about -- those -- we get about a 75% hit rate on those in our markets. So, those are very telling as well. So, it's about adding data, carefully monitoring what's going on. And as Jim said, we discuss and get these things approved to our ranchers so there's that extra look at it. And we're happy that there -- we know that there will be some increase in mortality, but we're charging for that. So, we're happy with the program so far.

[Robert Glasspiegel:]

Quick follow-up on -- I mean -- go ahead, sir. Okay, I thought you were going to add something.

[James Brannen:]

No.

[Robert Glasspiegel:]

A quick follow-up on Greg's question on attrition. Do you know whether you're losing them to other insurance companies? Or is this because of the strengthening economy and improved wages that there are other options outside of insurance to pay more?

[D. Scott Stice:]

Yes, Bob, this is Scott Stice. We always see some amount of our agent attrition go to other carriers. It's pretty small, the percent. I don't have an exact figure, but its south of 10%. It's a relatively small number. There are multitudes of factors driving the increased attrition. Jim talked about the ACA. That's a significant issue that affects newer agents. And particularly if they don't have a spouse that has some sort of group health plan through their employer, it just adds a significant amount of cost to their operation. Another thing that we are seeing and this is a relatively recent phenomenon in the last six months or so, is that as we recruit agents, they are being re-contacted by current employers offering -- offer increased salaries and other sorts of things. So, yes, the strengthening job market ironically does work against us in terms of both recruiting and agent attrition, but we've been able to maintain the topline fairly well and we think some of these changes that we're implementing will strengthen the back door as well for attrition.

[Robert Glasspiegel:]

Well, it's probably shaking out your least productive agents more than your most productive agents.

[D. Scott Stice:]

Yes, I think that's a fair comment. If you just look at sales results this year, even though we're down in total age count, total agent count, total sales are up. So, that reinforces that notion that we are seeing increased productivity out of our current agents.

[Robert Glasspiegel:]

Thank you very much.

[James Brannen:]

Thanks Bob.

[Operator:]

This concludes our question-and-answer session. I'd 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.