FBL Financial Group, Inc.
Q1 2015 Earnings Call Transcript

Published: 8 May 2015

[Operator:]

Good morning and welcome to the FBL Financial Group Incorporated first quarter 2015 earnings conference call. [Operator Instructions] 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. 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 Siebel, 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 welcome to everyone on the call. Thank you for taking the time to join us and your interest in FBL Financial Group. I am pleased to report that FBL Financial Group is off to a solid start in 2015. First quarter net income was $0.94 per share, operating income was $0.95 per share. Also in the first quarter we returned capital to shareholders with the payment of $2.00 per share special dividend and an increased regular quarterly dividend of $0.40 per share. Premiums collected for the first quarter were lower, with life insurance premiums collected down 2% and annuity premiums collected down 12% compared to the first quarter of 2014. While at first glance this might appear to be negative. I am very pleased with the productivity of our agents in the first quarter, due to the increase in core life sales and our activity. Annuity sales continue to reflect the challenge of the extended low interest rate environment. Sales of our shorter-term annuity products are suspended and we expect will remain so, until rates are such that we can support a greater value proposition for the customer, agent and our own return requirements. The type of annuity that continues to grow is our indexed annuity product, which has been popular with our agents and customers. The decline in life premiums collected reflects lower first year universal life sales, given that there is less excess premium in our cash value accumulation product. This has been the trend for the last several quarters following changes made to the universal life product. We report premiums collected in our financial supplement, but in our performance indicator internally we use production credit. It's a measure of commissionable premium and a more accurate reflection of our agents' activity during the quarter. Life production credit was up 20% for the first quarter, driven by a 24% increase in life policies issued. This positive activity has resulted in strong and consistent growth in our total number of life policies over the last few quarters. I am pleased with the increase in life policies, as it enables us to further fulfill our purpose of protecting livelihoods and futures of our policyholders. In addition, we expect these life sales to lead to a long-term profit stream and allow us to continue to grow earnings from sources other than spread income. Our book of business is fairly evenly distributed between life and annuities, which provides earnings stability. We benefit from a balanced mix of business. In the first quarter premiums collected were 48% life insurance and 52% annuities. Next, I'll comment on our agent count. As of March 31, we had 1,782 total agents and agency managers, plus 67 active reserve agents in the pipeline. I am very pleased that our first year agent retention has climbed to 80% and is continuing to improve. This demonstrates the effectiveness of our reserve agent program. The downside is that this program has lengthened the agent recruiting cycle to 180 days or longer, and has impacted our appointment numbers. During the first quarter, in eight states, where we control the agency force, we contracted with 35 new agents. This compares to 50 new agent appointments in the first quarter 2014. Also, at the beginning of this year, we increased the reserve agent requirements and made it more difficult to become an exclusive Farm Bureau agent. This more rigorous program gives us a greater opportunity to assess whether the potential agent has the ability to be successful for a long-term career with us. We expect this will result in more effective and engaged producers, who will drive increased sales going forward. Our recruiting numbers have increased since quarter end. I am pleased with the momentum and I am optimistic about further growth in the agency force for the remainder of the year. Supporting our agents efforts are a number of marketing and sales campaigns. In March, we launched SuperCheck, our branded review program. It reinforces the message that Farm Bureau agents make insurance simple. Our advertising dollars are increasingly being spent online and drive online engagement and traffic to our consumer website, FBFS.com. Consumers are researching insurance online, but still want the value that comes from having a relationship with a trusted agent. Advertising of our SuperCheck program connects consumers to our exclusive Farm Bureau agents, who work with them to assess and fulfill their insurance needs, and offer solutions that help protect what matters most. The SuperCheck review program is helping agents grow their business, improve retention and strengthen the client/agent relationship. This focus on relationships, the personal connections our agents have with their customers, leads to our industry-leading cross-sell success. Our cross-sell rate has continued to increase and is now at 23.9%, which is double the industry average. We also have a robust direct mail program we use to drive targeted prospects to agents as leads as well as programs targeted at existing customers. Recent mailing is focused on our annuity products and term conversions to whole life. These mailings have resulted in increased life product ownership and cross-sell of property casualty and life products. From a product development standpoint, efforts continue on an indexed universal life product that we plan to introduce later this year. In conclusion, I am pleased with FBL's first quarter, and optimistic about the remainder of 2015. Now, I'll turn the call over to Don Seibel for a review of our financial results. Don?

[Donald Seibel:]

Thanks, Jim, and good morning, everyone. As Jim indicated, we are off to a solid start in 2015 with first quarter operating income of $0.95 per share and net income of $0.94 per share. I am pleased to share with you today some insights as to the key drivers of these results. At a high level, an increase in investment fee income in the quarter was offset by adverse mortality experienced and lower-than-expected equity income. At the same time, our spread income was in line with our expectations. During the quarter, we benefited from $0.12 per share of investment fee income, impacting both the life and annuity segments. More than half of this fee income came from the prepayment of one commercial mortgage loan. This reflects how volatile this fee income can be. Generally this is a short-term positive, given that it increases income in the period of the repayment, but it's a long-term negative, as we are reinvesting at lower rates. Mortality experience for the quarter was worse than expectations, by about $0.10 per share. Like several other insurers, this quarter we experienced a significant increase in a number of claims and an increase in the average claim size. The increase in claims generally came from policies with higher durations and insureds with higher attained ages. We've analyzed this and we are not particularly concerned regarding a trend, and expect mortality results to even out over time. Equity income results, which we look at on an after-tax basis, were similar to the results we achieved in the first quarter of last year, but they were below our expectations by about $0.03 per share. Taking into account these items, with the positive and negative items generally offsetting each other, I would put normalized operating earnings right around our recorded earnings of $0.95 per share. The level of death benefits in the first quarter is typically about $0.05 per share higher than what we expect during the balance of the year due to seasonality in our claims. So going into the quarter, we were expecting operating results a little under our normalized earnings recorded in the second half of 2014. We are successfully in managing spreads, despite the continuing challenges of the low interest rate environment. As of March 31, in total we are achieving our target spreads. During the quarter, the point-in-time spread on our annuity business remained steady at 207 basis points. This spread remains above our target of 203 basis points for this business. Spreads on our universal life business are a bit more pressured, reflecting declining portfolio yields. As a result, we recently took a 25 basis point crediting rate decrease on one of our main universal life products. Despite this action, point-in-time spreads on our universal life business decreased 3 basis points during the quarter, totaling 146 basis points at March 31. This is below our target for this business of 156 basis points. From an investment perspective, as is typical, a significant portion of our purchases during the quarter were long, NAIC 1 rated corporate bonds. We also added some fixed rate collateralized loan obligations to our portfolio. This quarter we leaned a little heavier toward NAIC 2 issues, with 44% of our security acquisitions being NAIC 2. Our portfolio quality remains high with 96% investment grade and 33% being NAIC 2. Commercial mortgage loans continue to offer an attractive alternative to BBB corporate bonds in the 10 year maturity area. We added a significant $58 million in commercial mortgage loans during the first quarter. This asset class makes up 8.6% of our total investments and continues to perform very well. During the first quarter, the average tax-adjusted yield on investments acquired backing our long-term business was 4.43%. Next, I'll comment on our capital levels. In March, we announced an increase in our regular quarterly dividend rate to $0.40 per share from $0.35 per share. Based on yesterday's closing stock price, this gives us a dividend yield of 2.7%. We are committed to having an attractive dividend yield, given our strong and consistent operating results. With a quarterly dividend rate of $0.40 per share, we expect to pay out approximately $40 million in regular quarterly dividends in 2015. Also, in March we paid a $2 per share special dividend, for a total of $49.5 million deployed. We last paid a special dividend in 2013, and view the payment of special dividends, on occasion, as a viable option for distributing a portion of our excess capital. At March 31, Farm Bureau Life's capital position remained excellent with an estimated company action level risk based capital ratio of 535%. Using 425% RBC as a base, Farm Bureau Life has excess capital of approximately $130 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 $45 million at March 31. Stock repurchases remain a capital deployment option for us, albeit a less attractive one than it once was. We didn't repurchase any shares during the quarter, but at a minimum, over time I would expect share repurchases to offset any potential dilution from stock option exercises. To recap, FBL had a good quarter with strong operating profits. We returned nearly $60 million to our shareholders in the form of dividends, and have very strong capital levels. We have been successful to date in meeting the challenges of the low interest rate environment and are earning spreads in line with our targets. I am pleased to have been able to share these results with you. That concludes our prepared comments. We'll now turn the call over to the operator, and open it up to any questions you may have.

[Operator:]

[Operator Instructions] The first question comes from Steven Schwartz of Raymond James & Associates.

[Steven Schwartz:]

A quick question, I guess, for Jim. Jim, you talked about production credits, you were going a little fast there, and I'll admit this is new to me. Could you discuss why kind of the differences why they are up, but collective premium is down or UL deposits would be down?

[James Brannen:]

So production credit, a lot of companies will call it weighted premium. In other words, kind of think about how we pay commissions, we pay full commissions on first year of traditional life products and something that was spread business is more in a 4% range. So production credit would be kind of weighted that way. So in other words, we value a new traditional life insurance policy coming in the door considerably more than we value production credit. So if you break down the life sales and you can go into first year of premium, I think, on the investor supplement and see that we're strong in a lot of lines. The universal life product that I talked about, it's really the excess premium part which we pay basically like a spread product. And that's what was tightened up last year was really the spread component of that. And so it's similar to our annuities. And if you really break down the true life product sales, very strong on apps during the quarter, very strong on traditional life sales during the quarter. So that's why I'm pretty pleased, even though premium year-over-year is down and that really is annuity type premium inside of a life product plus annuity premium that's driving that, if you will.

[Steven Schwartz:]

And then, for Don, equity income down in the quarter, exclusive of LIHTC credits. Could you just give a quick look at what was there and what happened there?

[Donald Seibel:]

We have some fixed income partnerships, one of which is energy base, which didn't perform very well, as everyone knows what's going on with the energy sector. So that was a drag on earnings and deploying through equity income in the quarter. And there is volatility in that line with respect to, for example, some of our real estate partnerships, where the income flows depends on timing of property sales and low income housing tax credit investment that returned can bounce a bit with timing of tax credits, and we expect that to increase going forward a bit.

[Steven Schwartz:]

And then just on the adverse mortality in the quarter, you said it was claims and claim size. The claims were longer duration, higher ages. My assumption would be higher ages would also tend to be higher face value. Would that be accurate? The two would be kind of a double whammy when that happens?

[Raymond Wasilewski:]

We definitely saw, and it's what we would like. We'd like the claims to come in the longer duration at the higher ages and we also did have a slight uptick in the overall client size, and that was due to some of the policies having a higher value, but we're talking an increase on average claim size from right around 40,000 to around 43,000. I mean, that's the magnitude of that average increase. So Steven, I guess, the good news is that it's a traditional product. It's the way it was supposed to happen. The reserves have built up on those folks over time. And if it's a term product, which some of this was, while the reserves don't build up as much, for instance, it drops to the bottomline a little quicker, at least you get more confidence in your underwriting of the term business.

[Operator:]

The next question comes from Colin Devine from Jefferies.

[Colin Devine:]

I don't think we could have an earnings call this quarter if we didn't talk about the DoL's fiduciary proposal. So perhaps you could give us your thoughts a bit on that? And also just maybe expand on, if I look at your annuity sales today, what percentage of those are into IRAs? What percentage of them are held within your clients' IRAs and sort of how significant this may be for you guys?

[James Brannen:]

You're right. We were not surprised to maybe get it today listening in on other calls. We're following along. It's very, very early in the process. From our size of company, it will probably be advocating through our membership with ACLI and we're clearly engaged with them. Don't know where this is going for sure, but again think it's pretty early. There are some insurance company exemptions that are not very clarifying, that will be interesting to watch see how those play out. But specifically to your question, I think our new annuity sales, about 43% of those go into tax qualified product. I can't say exactly what the breakdowns of tax qualified products are, but presumably IRAs are a big portion of them, because we saw mostly to the personal lines of space. So that's really about where we're at in new sales. In terms of holding, I don't have that number. Does anybody in the room have that?

[Kathleen Till Stange:]

37% of total account balance.

[James Brannen:]

Anybody want to add anything to that?

[Raymond Wasilewski:]

I would add that we've been through similar things like this before with other rules, we know to monitor them. We have a regular process for doing that. You just can't tell at this point in the process, what the final impact will be. So that's the internal process that we take. We do, as Jim mentioned, we will participate as necessary with ACLI and their goal will be similar to ours to make sure that the people who need this advice need these services can continue to get that. So that's where we are right now. We know that it doesn't look like the DoL is going to extend the comment period. And the people in the industry, including us of course, are on top of that. And in the worse case I believe implementation would be a year from now when final ruling is, because we've got to do comments, they've got to issue other rule again. There's got to be another comment period, and then they have to give eight months after that.

[Colin Devine:]

Could you give us some sense, just a couple of follow-ups on this, what sort of commission levels you are paying on your traditional fixed rate? And then also on your equity indexed? And are your agents selling any other company's annuities or is it exclusively FBL?

[Scott Stice:]

I'll address that question for you. On our annuity products our commission rates range from 3% to 4%. We've made some moves over the past couple of years to take those down and have them slowly restoring them in a handful of product lines. Our agents do have access to some external products, primarily the external product that they write on the annuity line is a variable annuity. And the commissions for that product are slightly reduced from ours.

[Colin Devine:]

Are you paying the same commission level then on the index as well as on the traditional fixed? And the other thing I meant to ask was, what sort of surrender charge period? I mean, if I think about what specifically is in the DoL language, they are looking at commission. And obviously as you guys know better than I do, particularly in the index market, I think it's fair to say commissions levels vary considerably from one period to another?

[Scott Stice:]

Yes, we, of course, monitor our product offering relative to what competitors do. Our commission is about mid-tier and we do pay the same rate across our fixed and our indexed, unless for some reason they are writing something outside, where we have a different arrangement with the agency force. In terms of surrender charge it's seven years.

[Colin Devine:]

I think just as we're going along, anything you can add in subsequent calls, because it seems to me particularly on the things going into IRAs and qualified accounts, the business model, the sales model for many companies may be changing.

[James Brannen:]

Don't disagree, Colin. I mean, I believe that the sales process may end up changing. Of course, I am concerned and will follow closely. My intuition tells me that our clients will still have access to these. We have strong and controlled kind of exclusive agency force where we can probably do a good job of meeting requirement should we need to, but you're right, this will continue to be an industry issue that we'll talk about.

[Colin Devine:]

Wanted you to know that your commissions are mid-tier if not towards the lower end from some of the others that are out there that I think are probably about double the level you're paying. So you're certainly not on that radar screen, but thank you, I appreciate it.

[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. 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.