FBL Financial Group, Inc.
Q3 2015 Earnings Call Transcript

Published: 8 Nov 2015

[Operator:]

Hello and welcome to the FBL Financial Group Third 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 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 Till Stange:]

Thank you. Good morning and welcome to FBL Financial Group's third 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.

[Jim Brannen:]

Thanks, Kathleen. Good morning and welcome to everyone. Thank you for joining us today for the call and for your interest in FBL Financial Group. I'm pleased to report that FBL Financial Group once again posted strong earnings results in the third quarter of 2015. Net income came in at $1.06 per share and operating income was $1.09 per share. A highlight of the quarter was an increase in the premiums collected. Annuity premiums collected were up 50% and life insurance premiums collected were up 1% compared to the third quarter of 2014. The annuity sales reflected a limited offering of the four-year guaranteed annuity, which we offer from July to August. Our shorter term annuity product had been suspended. During the summer, we were able to selectively acquire investments which met our annuity criteria. This allows sales of our four year guaranteed annuity for a limited period of time. Agents and customers welcome the opportunity. This offering resulted in $42 million of annuity premiums collected in 601 new contracts during the quarter. As a result, our year-to-date premium collected now surpasses the 2014 year-to-date levels. It's our desire to permanently reintroduce a competitive rate new money annuity while achieving our profitability targets. The market allows for this at times, but not consistently. So, we'll likely continue to pursue limited windows of time for sales of new money annuities such as this. They offer us the most flexibility while still providing windows of opportunity for our agents and customers. Sales of our indexed annuity product continue to grow with an increase of 14% in the third quarter over third quarter of 2014. We recently had a direct mail campaign which highlighted the benefits of indexed annuities in a volatile market. In the third quarter, we launched and updated our universal life product and our new indexed universal life product. Agents are pleased to have the IUL as part of the product portfolio. It is attractive with a point-to-point cap currently at 10%. I expect sales of the IUL product to build as our agents become more comfortable with it. Speaking of our agents, I have told you before, a top priority for me is ensuring that we have the very best agent business model in place with the goal of increasing agent count over time. Our multiline exclusive agents are one of our most significant competitive advantages and they represent a strong brand and have meaningful relationships with our clients. Since 2012, we've made significant changes across the spectrum of distribution. This includes agent hiring and retention practices, training programs and compensation. This is a long-term initiative, but I'm very pleased with the progress we've made to-date. At September 30, we had 1,838 total agents and agency managers plus 77 active reserve agents in the pipeline. This is an increase of 28 agents under contract during the third quarter and an increase of 52 agents under contract from September 30, 2014. Over time, we're building a stronger and larger agency force with higher retention rates. First year agent retention has climbed to 88%, up from 75% in the third quarter of 2014. Achieving these results is hard work, but I'm very pleased with the outcome. A strong and growing agency force is critical to our success. This will be an ongoing focus and our strategy calls for continuous ongoing progress, but I do pause to reflect on and appreciate the significant progress we've made over the past three years. I'm excited about our future as we continue to add to our agency force. We are committed to supporting our agents and equipping them with all the tools they need to be successful. An example is our annual sales seminar, which we held in September. I'm always inspired after spending time with these agents who are passionate about protecting their livelihoods and futures of our customers. Nearly 500 agents and sales associates gained new insights and heard from renowned industry speakers with the focus on marketing activities, prospecting and lead development that ties into our corporate marketing and sales initiatives. This event was a great opportunity for our agents to gather, to share sales ideas and to meet with management. Another area we're focused on is expanding our digital capabilities. Our exclusive Farm Bureau agents are front and center with our customers, but we're also working to understand and assess their digital preferences. I'm very pleased with FBL's results to date in 2015 and I'm looking forward to a strong finish to the year. Now I'll turn the call over to Don Seibel to review our financial results. Don?

[Don Seibel:]

Thanks, Jim and good morning everyone. As Jim indicated, we had solid third quarter financial results with operating income of $1.09 per share and net income of $1.06 per share. During the quarter, our operating income adjustments totaled $0.03 per share and consisted of other than temporary impairments on investments and the change in unrealized gains and losses on derivatives. 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. We benefited from investment fee income again this quarter. But this positive was offset by the negatives of increased debt benefits and higher amortization due to the impact of equity markets on separate account performance. In the third quarter, we performed our periodic review of assumptions used in the calculation of deferred acquisition costs, value of insurance in force acquired, unearned revenue reserves and certain reserves on interest sensitive products for all of our blocks of business. We unlocked assumptions relating to projected mortality, persistency, annuitizations, expenses and interest rates. The net impact of the change in assumptions was to increase pre-tax income by $300,000. Given the continued low interest rate environment, we have been proactive in updating our assumptions. We do a formal review at least annually but also perform unscheduled reviews as necessary. I'd like to remind everybody that during the fourth quarter of 2014, we performed an unscheduled unlocking to reflect the low interest rate environment. That unlocking nine months ago resulted in $0.07 per share decrease to operating income. While the overall unlocking results were negligible this quarter, they did vary by segment. As such, this quarter, I'd like to focus further discussion around our results by segment. Annuity segment results were very strong in this quarter. Annuity spread earned excluding the impact of prepayment fee income were in line with our expectations. Annuity results for the quarter also reflect investment fee income of $2.4 million and a benefit of $600,000 from unlocking. During the quarter, the point-in-time spread on our annuity business decreased by two basis points to 208 basis points. This spread remains above our target of 202 basis points for this business. Results for our life insurance segment were also very strong this quarter. Life insurance results benefited from unlocking as well by $4.5 million, primarily due to updated mortality and persistency assumptions. This unlocking benefit was partially offset by higher death benefits reflecting an increased number of claims and a higher average claim size net of reinsurance. By its nature, mortality experience fluctuates on a quarterly basis. The life segment also benefited from a one-time reserve release, which resulted in $1.3 million increase in its pre-tax income. Spreads on our universal life business are more pressured than on our annuity business, reflecting the fact that more of this business is at the minimum guarantee. As a result, we have less flexibility in making crediting rate changes. As of September 30, 82% of this business is at the minimum guarantee compared to 66% of the annuity business at the minimum guarantee. Point-in-time spreads on our universal life business totaled 141 basis points at September 30, which is below our target for this business of 155 basis points. I am pleased to report in total we are achieving our target spreads. Given the extended low interest rate environment, we have been actively managing our spread, has been proactively lowering crediting rates where appropriate. The opportunity to lower rates continues to diminish due to minimum guarantees. New sales helped to alleviate this as new business is written with a lower minimum guarantee. While the life and annuity segment results were strong, results for our corporate and other segment did not meet our expectations this quarter. This segment includes our closed block of variable business, various support businesses and the excess capital. Results were negatively impacted by $4.8 million for unlocking, primarily due to updated mortality assumptions. In addition to the impact of unlocking, there was $2 million of additional DAC amortization due to the impact of negative separate account performance during the quarter. Another drag on earnings this quarter was an increase in death benefits on our variable universal life business. Stepping back and looking at our overall results, there were several items that we do not expect to reoccur over the long term. These include increases to operating income from investment prepayment fee income, a one-time reserve release in the life segment, unlocking and miscellaneous smaller items. Partially offsetting the impact of these items were decreases to operating income from mortality being greater than expected and the impact of negative separate account performance on DAC amortization. This all nets to an approximately $0.04 per share addition to operating income for the quarter. While earnings have been very strong year-to-date, growing operating earnings going forward will be a challenge considering the significant level of prepayment fee income received so far in 2015. In addition, we are facing continued headwinds with the low interest rate environment and we operate in a mature low growth industry. Next, I'll comment on our capital levels. At September 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 564%, an increase from 545% at year-end 2014. Using 425% risk based capital as a base, Farm Bureau Life had excess capital of approximately $160 million at September 30. At the holding company level, we also have more than adequate liquidity in capital, with excess capital at the parent of approximately $50 million at September 30. During the third quarter, we repurchased a minimal number of shares, 66,904 shares for a cost of $3.7 million. At this point, our primary mechanism for returning capital to shareholders is through dividends. Our dividend yield remains high at 2.5% albeit not as high as it was given the increase in our stock price this year. We will also consider the payment of special dividends periodically as we did in the first quarter of this year. Thanks for your attention as we reported another good quarter of solid earnings for FBL Financial Group. We move forward with a focus on great products, excellent agents and disciplined management to grow our business in challenging times. I'm 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]. And the first question comes from Steven Schwartz with Raymond James.

[Steven Schwartz:]

Good morning everybody. Got a few here, first I want to ask about the assumption changes. Don, could you go through maybe where the long-term interest rate assumption was and where it is now?

[Don Seibel:]

Yeah sure, I can handle that. So, when we take a look at the interest rates and the assumptions used in the DAC models, we primarily look at the forward curve that's in place over the next three years and then we have a long-term assumption that we grade to during a period after that. And the long-term assumption has a 10-year treasury at about 475 as a base.

[Steven Schwartz:]

Okay, and that was down from what, do you know?

[Don Seibel:]

We last did the unlocking at the end of 2014, so I'm not sure exactly where the forward curve was there relative to June 30 but it would have changed. Based on the forward curve, we did not change the long-term assumption as far as --

[Steven Schwartz:]

Okay, that's what I was asking. Okay, and then, let me think about this. It sounded to me like for life that the change in assumption for mortality was positive. Is that correct?

[Don Seibel:]

That's correct.

[Steven Schwartz:]

So kind of poor mortality this quarter, very poor mortality this quarter. And if I remember correctly, there was poor mortality in the first quarter. So how do we wrap -- and I don't think the second quarter was very noticeable, I don't remember one way or another. How do you wrap thoughts about mortality is kind of been worse than expected, but you're thinking that your assumption should be less than it was?

[Don Seibel:]

Sure, so when we look at mortality, we look over a long period, and you're right. In the first quarter, it was worse than we had expected. Actually, in the second quarter, it was worse and then clearly worse here in the third, but if you look back to 2014, our mortality experience was actually better in each quarter during 2014 and some of the adjustments that have been made by segment is really a refinement in our process for calculating the impact of mortality in that prior to this unlocking we applied a factor to a standard mortality table which in that factor varied by line of business. We refined that to align with our pricing structure. So we now take a look at the various underwriting classes, base amount bands and types of insurance and apply factors at that detailed level. And that reset to that more refined model cause some of the change that you're seeing in the unlocking for mortality this quarter.

[Steven Schwartz:]

And then, just one more on the new indexed annuity. I'm assuming with a 10% point-to-point cap, this isn't your typical S&P 500, 100% participation type of deal up to a cap. So, what does the new annuity look like?

[Don Seibel:]

That product is a indexed universal life, that new product, which -- I think that's going to get to the point of your question. If you think about an indexed annuity, our source of profits on that is just the investment spread but when you -- so you can't compare those caps to say like the IUL where we have different sources of profitability with mortality, we still have investment in there, there is various expenses and then of course, there is some interest spread based on how some of that money is held. So it's not a one-to-one comparison like that.

[Steven Schwartz:]

Okay, now I understood. I'm sorry, I thought you were referencing an indexed annuity, not an IUL policy.

[Don Seibel:]

No problem.

[Kathleen Till Stange:]

Operator, if you want go to the next question.

[Operator:]

Thank you. [Operator Instructions] Bob Glasspiegel, Janney.

[Bob Glasspiegel:]

The first thing some unsolicited advice, if agent count is going to be sort of an important part of your strategy, it would be great if you could on your press release, investor supplement, include that number on a quarterly basis so we can track how it is over time.

[Kathleen Till Stange:]

It is in the investor supplement towards the back.

[Bob Glasspiegel:]

You are one step ahead of me, that's great. On the stars being lined to have a two month sort of sale on fixed annuities, short fixed annuities as you said.

[Jim Brannen:]

Yes, they were four year.

[Bob Glasspiegel:]

Four year. Maybe give us a little bit more color on what the profitability returns are and what happened to just allow this to be a good opportunistic time.

[Jim Brannen:]

So I think we're balancing along at a time, Bob, where yields are not quite where we would want to say we're going to light up our short-term new money annuities permanently because I think we would struggle at times month-to-month to have the appropriate pricing to take care of everybody which means the Company, the policyholder and the agent. But, we haven't been far off and at time, at moments in times, there's been yields that have popped up throughout the quarter and we have bought a few things and set them aside and accumulated them for this purpose. And so, they're going to meet our return targets the same as any other annuity sales that we do. We've got a multiline exclusive agency force, we've a wide product portfolio, we would like to have the annuities in their hand, we like to have the business in the door, but at the end of the day, we're not going to do it unless we're meeting our return targets. These same agents can turn their focus and attention to everything from other life products, other savings products, all the way to property casualty products, crop insurance, health insurance, other broker products. So, they have the versatility to rotate out, we'll be patient and given that opportunity and take that opportunity ourselves whenever we can hit our targets and when we can't, we won't do it.

[Bob Glasspiegel:]

What kind of yield are you offering or were you offering rough order of magnitude?

[Don Seibel:]

It was a four-year product. The first year had a slightly elevated at 3.5% and then years two through four were at 2%. I was going to say that's at the top end of the band, which required $100,000 contribution. The rates were a little lower at the lower bands. I don't have those exact figures.

[Bob Glasspiegel:]

And you could invest four year out and get 180 basis points spreads off that, after expenses.

[Don Seibel:]

At that scale, the market over the last several years as you know has been risk-on, risk-off and every time we go risk-off, we tend to find better value on the shorter part of the market, which is not our natural domain and so sometimes we can warehouse a few of those deals as we see them go by. Again, it's about scale. So if you tell me we're going to do [indiscernible] we can -- just a few select pieces will make the difference and if we're going to open it up on an ongoing basis and certainly that becomes more challenging.

[Don Seibel:]

One thing I will add is we do have a renewal assumption that in some of this business, you're going to rollover for an additional four years. So the assets are longer than four.

[Bob Glasspiegel:]

So you can invest longer than four to match your expected liability duration.

[Don Seibel:]

Right.

[Bob Glasspiegel:]

Got you. Last question, indexed annuities, you've been sort of in defense mode on sales in cutting back and now it looks like we've got a quarter of sequential growth and year-over-year growth. Are we in the mode or we think that's going to build from here and show steady growth or is this also subject to opportunism of markets?

[Don Seibel:]

I think, let's be clear, we have had that annuity available throughout and the indexed annuity as you know offers a different opportunity with a different crediting mechanism and so we have been in that game during the period of time that we suspended the new money products that are fixed annuity, fixed interest rate annuity, new money mega type products. So I would say if you've tracked along, most of our increase has been around adoption of the index. We did not have an indexed product not that long ago and so that whole concept for agency force took a little while to adopt, but after adoption, it's been kind of probably getting to be the most popular annuity that we have available now. So I don't think that, that's a reintroduction or opportunistic. I think that we're in that market and we'll stay there.

[Bob Glasspiegel:]

And you think you can steadily grow from the current levels or is it going to bounce around again subject to where --

[Don Seibel:]

To your defensive comment, I think on annuities overall, you've seen that sort of defensive posture, but the indexed segment itself this year has posted double-digit increases every quarter on prior. So we would expect that sort of growth in that indexed segment to continue. I think, as Jim mentioned, agents are getting more comfortable with that indexed product and adoption continues to steadily increase.

[Operator:]

Thank you. And as there are no more questions at the present time, I would like to turn the call back over to management for any closing comments.

[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:]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect