FBL Financial Group, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Good morning, and welcome to the FBL Financial Group Second Quarter 2015 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 also note, this event is being recorded. I would now like to turn the conference over to Kathleen Till Stange. Please go ahead, Ma’am.

[Kathleen Stange:]

Thank you. Good morning 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. 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 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. Thanks for taking time to join us today and for your interest in FBL Financial Group. I’m pleased to report that FBL Financial Group posted excellent earnings results in the second quarter 2015. Net income came in at $1.29 per share and operating income was $1.11 per share. Premiums collected for the second quarter were lower with annuity premiums collected down 17% and life insurance premiums collected down 3% compared to the second quarter of 2014. Annuity sales reflect the challenge of the extended low interest rate environment. In the second quarter, sales of our shorter term annuity products remain suspended. Our index annuity product however continues to be popular and increased 21% in the quarter over the second quarter of 2014. Similar to the last several quarters, the decline in life premiums collected compared to the year ago reflects lower first year universal-life sales. This is because there is less excess premium in our cash value of accumulation product. All premiums collected activity is increasing nicely. I’m optimistic as we’re seeing an increase and life and annuity applications of 9.6% year-over-year through June. We also have a number of programs underway to increase both life and annuity sales. At the beginning of July, we held sales rallies with agents across our various states. As these events got diced and other sales leaders introduced several new products, as well as more tools and support of our agents. We launched our new index universal-life product at the rallies. This product features an index segment. Interest rate [indiscernible] annually on a point-to-point basis on the percentage change in the S&P 500. Our product has only one interest crediting strategy consistent with our focus on keeping insurance simple. Our point-to-point gap is currently a 10%, which makes it very attractive. Clients who participate in the market gains, protect their downside and have permanent death benefit protection. Agents are pleased to have this as part of our product portfolio. It is the fastest growing product in the life insurance industry, I expect demand for our IUL product to build as our agents become more comfortable with it. Other launches at the sales rallies included an updated universal-life product as well as a limited four-year guarantee annuity, which is available through September. Agent attendance for these rallies was high and agents welcome these new products. We have marketing campaigns in place to support the product launches, those include email, social media, and targeted mailings. Next, I’ll comment on our agent count. As of June 30, we had 1,810 total agents and agency managers, plus 88 active reserve agents in the pipeline. This is an increase to 28 agents under contract during the second quarter. I’m pleased with this increase, as expanding our agent count is critical to our growth and success. I’m also very pleased that our first year agent retention has climbed to 86%, up from 76% in the second quarter of 2014. This growth in agent count and the increased retention reflect the effectiveness of our reserve agent and other programs. As you’ll recall at the beginning of this year, we increased the reserve agent requirements making it more difficult to become an exclusive formulary agent. I’m pleased with this high quality growth and I’m excited about our future as we add to our agency force. Before I conclude my comments, I have to take a few minutes to comment briefly on the Department of Labor’s proposed fiduciary rule. Our agent training has always been focused on needs-based selling, which is design to identify customer needs and provide products that will help meet those needs. Our needs-based selling approach has served our customers well. My concern is that the proposed DOL rule as written would lead to a number of unintended consequences. My top concern is the impact of consumers as they will ultimately pay the price of increased regulation. Consumers need savings advice more than ever. We want to make it easier not harder or Middle America to plan and safe for retirement. We advocated for changes to DOL proposed rule through our membership in the American Council of Life Insurers and the insured retirement institute. Their comment letters incorporate our concerns. In addition, several Farm Bureau leaders across the country provided comment letters in support of the ACLI and IRI letters. I’m pleased that the DOL has stated on several occasions recently that they are willing to consider some changes to the provisions of the rule. As long our goal of the best interest standard is accomplished. Given those remarks and the significant number of comment letter submitted, I hope that there will be changes to the proposed rule. I’m confident that we’ll be able to adapt any changes that come from this proposed rule. In fact, I believe our exclusive agency force which focuses on trust, relationships and needs-based selling will give us an advantage at approaching any changes from the DOL. In conclusion, I’m pleased with FBL’s second quarter results. I am optimistic about the remainder of 2015. Now, I’m going to 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 had very strong second quarter financial results with operating income of $1.11 per share and net income of $1.29 per share. During the quarter, our operating income adjustments totaled $0.18 per share and consisted primarily a net realized gains on investments. I’m pleased to share with you today some insights around these results. At a high level, our book of business continues to steadily and consistently grow and again this quarter we benefited from investment fee income, which was partially offset by increased debt benefits. During the quarter we had $0.09 per share of investment fee income, impacting primarily the Annuity segment, but also the Life Insurance segment. With the extended low interest rate environment, we’ve experienced increased investment fee income for a number of quarters, due to higher bond calls in commercial mortgage loan repayments. At some point, I expect this level of investment fee income is diminished, but today, that has not been the case. These prepayments temporarily increased our investment yield, due to the income in the period of repayment, but ultimately lower our investment yield as we’re reinvesting at lower rates. Our mortality experience for the quarter was worse than our expectations, by about $0.04 per share. By its nature, mortality experience fluctuates on a quarterly basis. The fluctuation we experience this quarter primarily related to our term business and was attributable to higher average claim size. This relates to a limited number of policies and there’s nothing out of the ordinary. Most other areas of focus such as expense levels were right around are a little better than where we expected them to be. Taking into account, investment fee income and fluctuating mortality experience, I would put normalized operating earnings right around $1.06 per share, a strong quarter. Turning now to spreads. We continue to successfully manage spreads despite the extended low interest rate environment. As of June 30, in total we are achieving our target spreads. During the quarter, our point-in-time spread on our annuity business increased by 3 basis points to 210 basis points. This increase reflects a recent 15 basis point credit rate change on several annuity products. 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 the fact the more of this business is at the minimum guarantee. So we have less flexibility to make crediting rate changes. Point-in-time spreads on our universal-life business totaled a 143 basis points at June 30, which is below our target for this business of a 155 basis points. As of June 30, 82% of this business is at the minimum guarantee. The increase in treasury yields, modest spread widening incorporates and the record levels of bond issuance, combined to provide us with some good opportunities put mind to work, particularly in the latter half of the quarter. A little more than half of our purchases during the quarter were NAIC 1 rated corporate bonds. We also added some private labeled mortgage and asset back securities as well as several municipal bonds among other asset classes. Overall our portfolio quality remains high with 96% investment grade and 33% being NAIC 2. During the first half of 2015, the average tax adjusted yield on our investments acquired backing our long-term business was 4.61%. Next I’ll comment on our capital levels. In June 30, the capital position of our wholly owned subsidiary Farm Bureau Life remained excellent with an estimated company action level risk based capital ratio of 549%, a slight increase from 545% at year-end 2014. Using 425% RBC as a base, Farm Bureau Life had excess capital of approximately $145 million at June 30. At the holding company level, we also had more than adequate liquidity, and capital with excess capital at the parent company of approximately $45 million at June 30. While we have a stock repurchase plan in place, we did not repurchase any shares during the second quarter. I do expect us to repurchase shares going forward albeit relatively low levels barring any major market changes. While, we have not been buying back our shares, we have been returning capital to shareholders in the form of dividends. Our total return to shareholders for the 12 months ending June 30 was 33.4% or with 25.5% from the increase in our stock price, and 7.9% from our special dividend and regular quarterly dividends. Our regular quarterly dividend continues to be very attractive. Based on yesterday’s closing price, our regular dividend yield is 2.8%. To recap, it was a great quarter for FBL Financial Group with strong earnings. As we move forward, we’ll continue with our disciplined approach to managing the growth and profitability of our business. I’m pleased to have been able to share these results with you. That concludes our prepared comments. We will now turn the call over to the operator, and open it up to any questions that you may have.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Colin Wayne Devine of Jefferies. Please go ahead.

[Colin Devine:]

Good morning. Just a couple of questions. One, could you provide a little more granularity or just you’re making the comments pretty fast, but on the annuity block where 82% of it’s down to the minimum crediting rate guarantee? So that would be number one. And then two, with respect to the DOL proposal, where do you see the more significant parts that’s going to touch your company?

[James Brannen:]

[indiscernible]. Sure, I’ll start off with some more details on our spreads

[Colin Devine:]

Yeah.

[James Brannen:]

The 82% that I reference is the percentage of the universal-life block, which is that...

[Colin Devine:]

Okay.

[Donald Joseph Seibel:]

Yeah, that’s a block of business was about $900 million of account value, the much larger block, the annuity block that business about 65% of theirs as the guarantee. So we have much more flexibility there with that particular block of business. And that is the block where we are still in excess of spread. So overall we think we’ll be able to manage spreads going forward although it’s getting tougher and tougher, because of the room that we have in our portfolio.

[Colin Devine:]

Thank you. And now the DOL?

[James Brannen:]

Colin, this is Jim. I think there’s several things that give us pause, and I’ll let others chime in with me as well. I think the ambiguity of the rules would be one of them, given example reasonable comp is not defined, don’t know where reasonable comp is. I feel like, with our exclusive agency force, and the wide breadth of product portfolio that we have in the way that we pay agents within the industry. I think, that I feel clearly, really good about that but not knowing what is meant in the DOL rules and the sale of these products as reasonable comp, just it’s the uncertainty that we have to deal with. I do think that, consumers are probably on the shortest end of the stick. We’ve done nothing in this country except for make it harder to see if the retirement and I think that adds on to it, but ambiguity in the rules I think is my biggest concern and the concern for the consumers. I’ll let Ray or Scott grab on to that.

[RaymondWasilewski:]

Colin, this is Ray Wasilewski. We – one fortunate part of the ruling at least as I just proposed so far is that we would fall primarily under the 84-24 exception and that is certainly less concerning than if we were primarily a variable or mutual fund business and would fall under the best interest contract exemption. So we do have that going for us, but still within there, there are, as Jim said part of – one of our biggest challenges is, it’s just ambiguous in there and another example in partial conduct is just not explained well enough and you can’t tell – it’d be hard to talk to an agent now and tell what they should different under these new rules than they’re doing today. And those things are going to have to change. We also have a concern about retroactive, how it applies retroactively to contracts we already have in force. So that’s called out in the best interest, it’s exemption, not really touched on in 84-24, and even in the best interest one it’s there are concerns about, if you just take another payment from somebody, are we going to have to build back and then do all the disclosures in retroactive. But all that said, our read out of it so far is, we will be able to make that work. It’s going to increase costs, but with our exclusive agency force, and our primary business being in fixed annuities we definitely see a pass-through that.

[Colin Devine:]

Maybe to drill on to this a little bit more, so let’s take comp. I think it would probably be helpful to frame the levels of commissions that you’re paying on your equity index annuities, I think that it’s fair to say that DOL has highlighted, that is one of the concerns that, that and you’ve brought it up that, clearly comp on these things from one company to another, from one distribution channel to another can vary materially. And so, I think some clarification there, as well, see, if I’m looking at the roll force of the DAC, DSI, then my assumption is that you’re not capitalizing a lot of sales inducements which is certainly different than one other Iowa company I can think of. But, perhaps some just sort of clarification on that would also help. And then if I think about your business, how much of it is into retirement accounts, so fitting obviously the life pieces in, but if we’re looking at the annuity business, roughly what percentage is being sold into retirement accounts?

[James Brannen:]

Well, first I’ll start with the comp levels and the sales inducements. I don’t have specifics on sales inducements, but your observation is generally correct on our level of sales inducements. 4% on our index annuity product. And finally, our enforce of our traditional annuity business, based on account balance is 37% are in qualified plans.

[Colin Devine:]

And would sales today still be about the same amount roughly?

[James Brannen:]

I can’t say it for sure, but it feels about right, that seems about right.

[Colin Devine:]

Okay. So considerably lower than again some other companies that were up maybe running twice that. Okay. That’s very helpful. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Steven Schwartz of Raymond James & Associates. Please go ahead.

[StevenSchwartz:]

Yeah. Two as well. Good morning, everybody. Don or Jim, could you give us the sales credits for UL in the quarter and how that compared to last quarter, you gave those numbers out last quarter?

[James Brannen:]

I think in the sales credit for UL?

[StevenSchwartz:]

Yeah. I know you said, you said apps for everything was up 9%, I’m just wondering about the ....

[James Brannen:]

They are about 9.6 times life in and annuity the apps are up. Are you looking for UL sales?

[StevenSchwartz:]

Yeah.

[James Brannen:]

But quarter-to-quarter or year-over-year?

[StevenSchwartz:]

Yeah.

[Scott Stice:]

Scott Stice here. I don’t have the specific on application count for UL per se relative to quarter-over-quarter, but the production credit for universal-life business in Q2 was right at 6% below production credit Q2 a year ago.

[StevenSchwartz:]

Okay.

[Scott Stice:]

Overall, that is – we have imperfect data, but generally, ex excess cash [ph] C back we call it, going in universal-life sales production credit premium are essentially flat to slightly up quarter-over-quarter and year-over-year.

[StevenSchwartz:]

You just lost me there. So it’s down with the excess – but with the excess bump in or it’s flat without it?

[Scott Stice:]

That’s correct.

[StevenSchwartz:]

Okay. Got it. All right. And then, and then going back to the DOL and PTE 84-24, just a couple of quickies, did you participate in the – in putting together the commentary by the index annuity leadership counsel?

[Scott Stice:]

No. We produced – we participated in ACLI and IRI.

[StevenSchwartz:]

Okay.

[Scott Stice:]

That index annuity input, though we have read, and it’s, a lot of that is in product handling.

[StevenSchwartz:]

Okay. Is there, Ray, is there anything in particular, I mean, of the two other – the two other public companies, AEL and FGL, obviously operate through in a most, you do not use exclusive agents. Does that create any twists that you are aware of these are the PTE 84-24 compared to the other two?

[James Brannen:]

We’ve talked about how ambiguous and complex this is to interpret. So, to get into how they’ve interpreted is, I can’t really go there, that’s a difficult one. We believe because we have our exclusive agents for us, that they do provide an advantage for us. We have an advantage with setting up sales practices, and those types of processes and procedures that just gives us in our mind an advantage when a rule like this goes into effect.

[StevenSchwartz:]

Okay. And then actually one more [ph] encompassing a bit, this is, maybe there’s an actuary round. I’m just kind of interested in because we’re getting to the end here of earnings. The industry as a whole has seen higher claim severity this quarter, now the first quarter was mostly frequency probably having to do with the weather. This quarter really in severity. What kind of reason would cause the – does anybody have an idea what kind of reason would cause the industry en masse to see higher severity?

[James Brannen:]

Steven, this is James, I’ll tackle that and ask anybody else wants to add on, but it’s tough for me to speak about the industry, but I can talk about our own situation in that. For us we missed our mortality estimate by $0.4, it doesn’t take many large, large policies to do that. We in this particular quarter, we had two insured that had 10 policies between the two insureds. Our net retained loss on those two insureds death benefits is $1.75 million, you [indiscernible] that and you have our miss for the quarter. So those two individuals did not pass review spot on with our estimates. So that’s kind of our story, I am not sure industry wise what we’re would be driving some more instances. So in the first quarter there was definitely impact in the older ages, and that was flu, and other diseases that were causing that, there could be some hangover from that goes into the second quarter. We regularly see seasonality in our first quarter especially, and our best guess on that has been health issues related to winter and the Midwest where write a lot of our business. But that’s not a new phenomenon for us.

[StevenSchwartz:]

Okay. All right. I appreciate it guys. Thanks.

[Operator:]

And we have a follow up from Colin Devine of Jefferies. Please go ahead.

[Colin Devine:]

Thank you. Just coming back to the DOL, on the impartial conduct standard requirement, how much of an issue is that given the way you sell? Do your current agents have access to other products. And I guess with this if they DOL view them as a fiduciary and is that level a legal risk? How significant an issue is that?

[James Brannen:]

Well, I’ll comment real quick on the impartial standard. So there is wording in the document that certainly indicates that as long as you disclose that you’re selling your products and only your products and not others, that’s acceptable and is part of the exemption. There are several comment letters though that call for that to be stated more specifically, just so that there is no question at all about it. It’s one of those ones where you read and you can guess that that’s their intention, but the word is not specific enough to get that.

[Colin Devine:]

Okay. That’s helpful. Thank you very much.

[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 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:]

And thank you ma’am. Today’s conference has now concluded, and we thank you all for attending today’s presentation. You may now disconnect your lines and have a great day.