FBL Financial Group, Inc.
Q1 2013 Earnings Call Transcript

Published: 3 May 2013

[Operator:]

Good morning, and welcome to the FBL Financial Group First Quarter 2013 Conference Call. [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. Good morning, and welcome to FBL Financial Group's conference call to discuss first quarter 2013 earnings. If you don't already have a copy, our earnings release and financial supplement may be found on our website at www.fblfinancial.com. Presenting on today's call are Jim Brannen, Chief Executive Officer; and Don Seibel, Chief Financial Officer. Also present and available to answer any questions you may have are Charlie Happel, Chief Investment Officer; and Rich Kypta, Chief Operating Officer -- I'm sorry. Certain statements made today concerning FBL Financial Group's prospects for the future are forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act. These statements involve certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties are detailed in FBL's reports filed with the SEC and are based on assumptions which FBL Financial Group believes to be reasonable. However, no assurance can be given that the assumptions will prove to be correct. You should not place undue reliance upon any forward-looking statements. FBL Financial Group 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 our financial supplement, both of which may be found on our website. Today's call is being simulcast on FBL Financial Group's website. Shortly after today's call, you will find a transcript of today's prepared comments and an audio replay of the call on our site. With that, it is now my pleasure to turn the call over to CEO, Jim Brannen.

[James Patrick Brannen:]

Thanks, Kathleen. Good morning, everybody, and welcome to the call. I want to thank you for taking time to join us today and, certainly, for your interest in FBL Financial Group. We're off to a great start in 2013 with a very strong first quarter. We experienced positive life insurance sales, deliberately decreased annuity sales and had continued steady and consistent earnings from Farm Bureau Life. Net income was $0.96 per share, and operating income was $0.89 per share. Don, of course, is going to be covering the financial results in detail. Our emphasis on life insurance products continues to drive sales. During the first quarter, life insurance premium collected increased 27%. Our largest increase came from our traditional universal life products. Those sales increased steadily throughout 2012, and that trend has continued in 2013. This reflects our emphasis on life insurance, as well as product changes that we implemented in late 2011. This is a very positive increase, but we wouldn't expect to see this rate of increase continue. Annuity premium collected during the first quarter was down 28%. This reflects our deliberate reduction of annuity sales through the suspension of short-term deferred and immediate annuity products, lower agent compensation on renewal premiums of selected products and limits on renewal premiums for certain products. In the first quarter, our premiums collected was split 50% life, 50% annuity. This compares to a split of 35% life and 65% annuity in the first quarter last year. I'm pleased with the shift in sales. It diversifies risk. Life sales also lead to a long-term profit stream for Farm Bureau Life and allows us to continue to grow earnings from sources other than spread income. Consumers are finding life products to be attractive as well, particularly given the investment environment and alternatives with fixed annuities. We participated in several investor meetings and conferences during the past quarter, so I was able to spend time with investors and hear directly from them. We continue to get consistent positive feedback about the strength of the Farm Bureau niche and our multiline agency force. We continue to benefit from our close ties to the unique needs of the agricultural market. Many areas within our marketing footprint are experiencing strong economies, fueled by the agricultural and energy industries. This wealth effect has sparked additional interest in life insurance through our business succession seminars. These continue to be a part of our life sales strategy, and so far this year, we've held 59 seminars. I recently spent time with a large group of our best Farm Bureau agents, and again, I came away from those meetings convinced that our multiline exclusive Farm Bureau agency force is one of our greatest assets. These individuals are entrepreneurs who have client relationships based on trust. Our agents live and work next to our customers and sit down across the kitchen table with them to assess and fulfill their insurance needs and offer solutions that help protect what matters most. When our customers think of insurance, they think of their Farm Bureau agents. We view it as a customer relationship, not a transaction. As I mentioned last quarter, we're implementing long-term initiatives geared towards better agent recruiting and retention, training and leadership support. With increased recruiting requirements, we would expect to recruit fewer people yet retain more of them. Our focus is to source and select only candidates that we believe will have long-term success with our companies. Part of the strategy is to identify successful agents as early as possible in their career and support them better. Converting to this strategy will likely cause a temporary dip in our agency numbers. Over time, however, we'll be building an even stronger and larger agency force with higher retention rates. We've had an excellent first quarter and are pleased with our progress to date in 2013. With that, I'm going to turn the call over to Don Seibel for a review of our financial statements. Don?

[Donald J. Seibel:]

Thanks, Jim, and good morning, everyone. I'm pleased to share with you the details of our strong first quarter results. I'll discuss our financial results, spreads and capital position. As Jim indicated, for the first quarter, we had net income of $0.96 per share and operating income of $0.89 per share. During the quarter, our operating income adjustments consisted primarily of net realized gains on investments totaling $0.07 per share. Earnings were very strong this quarter and were positively impacted by several items. During the quarter, we again experienced significant investment fee income, particularly in the Annuity segment. In total, investment fee income for the quarter amounted to $0.04 per share. The fee income relates to bond calls and prepayments and has been running at a higher level for the last several quarters and may continue at this higher level given the low interest rate environment. While it's nice to receive this additional investment income, the downside is that the securities being called are often our higher-yielding securities. This, of course, is putting pressure on our spreads. The improved equity markets positively impacted separate account performance, resulting in lower DAC amortization for our variable products. This was a benefit of $0.03 per share and is included in our Corporate and Other segment, where we have our closed block of variable business. Death benefits can fluctuate on a quarterly basis and are typically higher in the first quarter. However, this quarter, we experienced favorable mortality due to smaller variable universal life claims and fewer term life insurance claims. Mortality was approximately $0.05 per share better than we would expect for the first quarter and was about $0.02 per share better than what we expect for each of the remaining quarters in 2013. If I were to exclude these various positive items and take into account the seasonality of death claims, normalized earnings for the quarter would be $0.80 per share. Equity income, which is related to our securities and indebtedness of related parties line on our balance sheet, continues to perform well on an after-tax basis. Consistent with the fourth quarter of 2012, we are benefiting from increased income from investment partnerships and from low income housing tax credit investments. Turning now to spreads. At March 31, the point-in-time spread on our annuity business totaled 226 basis points, a decrease of 2 basis points from last quarter but still well in excess of the target for this business of 200 basis points. We still have some room for additional crediting rate changes as 37% of our annuity business is above the minimum guarantee, with a significant portion at more than 100 basis points above the minimum. Point-in-time spreads on our universal life business decreased during the quarter by 18 basis points to 148 basis points, which is below our target for this business of 170 basis points. The decrease is due to a decline in the investment yield during the quarter. The decrease in yield this quarter was larger than we have observed in recent quarters due in part to a few high-coupon securities that were called or matured during the quarter. For the UL business, yields on investment purchases made during the quarter were at an average of 4.47%, while the yield on securities disposed of during the quarter was 6.13%. The universal life block of business is much smaller than our annuity block. It has interest-sensitive reserves of $707 million, which compares to the annuity business with interest-sensitive reserves of $3.1 billion. Approximately 43% of this business is crediting interest at rates above the minimum guarantee. In May, we decreased the crediting rate on many of our products to narrow the gap between our actual and target spreads. For some of this business, we are limited in the frequency with which we can make crediting rate changes and have one block where it can only be done annually. From an investment perspective, we are addressing the low market interest rate environment by selectively increasing investment allocations to several non-core asset classes, such as CLOs, non-agency RMBS and tax exempt. We are making relatively small allocations to these sectors, where we see opportunities for some investment yield pickup. We have very talented in-house securities staff that makes the large majority of our investment decisions. But we do not have the resident expertise for some of these asset classes and are using outside investment managers when appropriate. This has helped to enhance our acquisition yields. We're very cognizant of the increased risk/return profile of these asset classes and are managing accordingly. Our portfolio quality continues to be very high with 95% of fixed maturity securities being investment grade. During the first quarter of 2013, the average yield on investments acquired backing our long-term business was 4.49%. We continue to scrutinize the investment portfolio's European exposure. Our long-term outlook for the Eurozone remains negative, so we have completed a review of all of our European credits. Overall, we own $349 million of bonds from companies headquartered in Europe, with about 40% in the United Kingdom. From a sector standpoint, 75% of these securities are issued by industrial or utility companies, with the balance being in the financial sector. We have no significant credit-related concerns with these securities since we have no exposure to sovereign issues and virtually no exposure to financials in the most distressed countries. Next, I'll comment on our capital strength. Farm Bureau Life's capital position is excellent, with an estimated company action-level risk-based capital ratio of 519% at March 31, an increase of 504% at year-end 2012. Using an RBC level of 425% as the base, Farm Bureau Life has an estimated $115 million in excess capital. In addition, there's more than adequate liquidity and capital at the holding company level, with excess capital at the parent of approximately $90 million. This results in total estimated excess capital of $205 million. During the first quarter, we repurchased 158,927 shares of our common stock at a cost of $5.5 million for an average acquisition price of $34.82 per share. We're pleased that we repurchased these shares at an attractive price well below book value. As of March 31, we have $29 million remaining in our stock repurchase authorization. Given our level of excess capital, we continue to evaluate a number of capital deployment opportunities, such as increasing the regular quarterly dividend, continuing to repurchase FBL stock and/or issuing a special onetime dividend. In addition, we're open to inorganic growth through mergers or acquisitions of blocks of business, but timing related to that is obviously harder to control. We don't expect to hold this level of excess capital in perpetuity but are not ready to announce any actions today. In closing, it was a great quarter for FBL Financial Group. I'm pleased to have been able to share these results and our plans 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] Our first question comes from Randy Binner with FBR Capital Markets.

[Randy Binner:]

It's been a longer end [ph] season, so I actually just have to ask for a clarification on a couple of numbers about the holdco liquidity and RBC at the insurance company that Don said. So Don, did you say you're $115 million in excess of a target of 400%, or was the target 425%.

[Donald J. Seibel:]

425% was the base in that calculation.

[Randy Binner:]

Okay, got you. And then the $90 million at the holdco, is that over a buffer of around $25 million, or is that total liquidity at the holdco?

[Donald J. Seibel:]

That is over a buffer at the holding company.

[Randy Binner:]

And -- but that buffer is about $25 million?

[Donald J. Seibel:]

About $20 million.

[Randy Binner:]

Okay. And so I appreciate the comments on the call there. Well, I guess, what would need to change if kind of the least spectacular, if you will, of the capital deployment options was to -- would be to kind of increase your dividend payout ratio to kind of more up into maybe the mid-teens and eventually maybe 20%. What would need -- what would kind of need to change before you might be able to make a decision like that? Because your results were awfully good, and you sound really confident about the business and all the economies where you do business.

[James Patrick Brannen:]

Thanks, Randy, for that question. I might turn around just -- on you just a little bit. So I'm not sure it's going to be totally satiating for you, but I will say about that is we clearly had a strategy while we were trading below book value to get as much of that stock back in and sort the shareholders that want to be here and the ones who did not. And clearly, that strategy is waning in terms of our ability to move enough capital. So it has to be on to the next steps in the capital plan. And as Don said, we're not going to talk about our strategy today because we're not ready to deploy. But at the end of the day, we'll still continue down the path of repurchases when we can, but that won't probably have the deployment rate that's necessary based on the capital that we're generating and internally holding.

[Randy Binner:]

Okay. Yes, on to the next steps. That's great. And then just one, if I could, on the agent count. Jim, you mentioned in your commentary that you're going for a higher-quality, more-stable agent base, which is consistent with the past calls. And -- but the numbers in the supplement, as far as agent strength go, they kind of look like they're bottoming out a little bit. And I'm just wondering, is that what's happening? Are you bottoming here? Or is this -- is it kind of too early to declare a bottom on -- I'm looking at Page 17 of the supplement where it is.

[James Patrick Brannen:]

No, there's a couple things going on. It is too early to declare a bottom, but we're also seeing a change in the supplement. Am I correct?

[Kathleen Till Stange:]

Yes.

[James Patrick Brannen:]

In the basis on which we were counting. We're moving to counting agents that are not just licensed and in our training programs, which is what it was in the previous quarters. But we've moved this quarter to counting only the ones that are through the training, even though they're licensed during the training, into the production level. So you're seeing a little bit of a change in the definition there in the supplement, Randy. But no, in terms of changing the recruiting pace, that's ongoing, and it's following several years of a faster recruiting pace with a higher turnover. So I would expect that the bottom is not for a bit yet.

[Randy Binner:]

Okay. I got you. I see that adjustment. So -- okay, so there could still be some downside on those numbers basically?

[James Patrick Brannen:]

There could. I mean, at the same time, we're not expecting to see a similar result in terms of productivity, new business levels, retention on the business side, just strictly agent count.

[Randy Binner:]

Is the good economy in these states hurting your ability to find people because they can get jobs elsewhere? Is that part of the dynamic?

[James Patrick Brannen:]

No, it's not that we can't get good people. I think that -- I would say, a few years ago, our strategy was to see how quickly we can try to ramp up. And what happened was the quality of the recruit, we were still getting good ones, but we were also getting other ones. And my view is that we need to identify the early ones, and this is a tough business to get started in. You need to identify the ones that we actually think will succeed and support them better. So we'll probably spend some money on them and try to spend less money on folks that we think are probably just going to cycle through the system.

[Operator:]

Our next question comes from Bob Glasspiegel at Langen McAlenney.

[Robert Glasspiegel:]

I'm just curious, it seems like -- am I right that you generated more capital than you gave back, so you're sort of getting further behind the 8 ball [ph]?

[James Patrick Brannen:]

For the quarter, that was true. This was probably the biggest slowdown in our opportunity to get stock back in the door. That's true.

[Robert Glasspiegel:]

Is the problem more on liquidity? Or is it the stock price is higher than it's less advantageous? Which is driving the slower buyback?

[James Patrick Brannen:]

Well, honestly, it was a good share of the quarter. It was outside of our limit price. And of course, the company gets to spend a lot of time during the quarter in a blackout, so you kind of live with your limit prices and your plans going into the blackout.

[Robert Glasspiegel:]

But as we model buyback, if the stock price stays where it is, it's not going to get much more robust, is that correct?

[James Patrick Brannen:]

We'll only continue to grow book value too, so our appetite continues to grow. But I'd also say that just the combination between stock price growth and liquidity, I see that as an ongoing but not to a great extent, Bob. I think, as I said to Randy, other strategies left to be blended in here now.

[Robert Glasspiegel:]

Okay. Switching gears. The good news is your life production has taken off. The bad news is, if I see too much sales growth, I get nervous that underwriting standards are getting reduced or less than the -- I mean, 7 -- $18 million versus $4 million a year ago, and it's a pretty big acceleration. How do we know that you're not sort of...

[James Patrick Brannen:]

That's a good question, I'll address that, Bob, and then see if Rich has anything to add. Literally, with the multiline exclusive agency force, we truly have the ability to point these folks and share with them our goals and desires, and they're very responsive partners. And there is big books of property and casualty customers from Farm Bureau Property & Casualty and our other property and casually partners that continue to grow. And we try to influence them to go mine those books for life sales. And at the end of the day, it was more about de-emphasizing the annuities than changing anything on the life side other than continuous enhancement of products, which we always do. But in terms of underwriting pricing, et cetera, I'll let Rich speak to whether he sees major declines, deteriorations or anything.

[Richard J. Kypta:]

Yes, this is Rich. We certainly haven't made any change in our underwriting standards or our pricing on the products. I think one of the things that's happening is that collected premium is influenced by single pay life insurance product. And we've introduced 2 new products accentuated our single pay on the UL side, and that's part of what is giving you that big of an increase. Our internal measure production credit, which is weighted premium, where we only give, I think, 4% credit on the excess premium or single pay, we were only up 9%. So still a great increase but not as big as it's showing up on the collected premium side. So there's a little bit of noise in that number. And again, certainly no change in our underwriting standards, and are very happy with where we are with that.

[Robert Glasspiegel:]

When I see 400% growth, bells and whistles go off in my brain. So I think you calmed me down a little bit. But I guess, I'm going to trust but verify the state in managing that kind of growth successfully?

[James Patrick Brannen:]

We're happy to go there with you.

[Robert Glasspiegel:]

Finally, just on the investment side, is it fair to say, as you look to alternatives, you're re-risking the portfolio? Or do you look at it differently than I do?

[Charles Theodore Happel:]

This is Charlie Happel. Yes, I mean, certainly, we're getting to our scheduled BA, but we don't think we're by any means sticking out relative to our peers. We're probably a little light there. But honestly, the alternatives we've looked at so far, I feel really good about. We've been very selective. So at the highest levels, certainly, we're bringing in some incremental risk, but we're doing it, I think, very, very thoughtfully and patiently. And I feel good about the opportunities. We're trying to step into the space that is still, I would say, somewhat dislocated relative to the financial crisis, and that there are some select opportunities there that I really think represent good risk/reward profile. So I just don't -- I'm not overly concerned with what we're doing.

[Robert Glasspiegel:]

Well, the more transparency on these investments would be great, how we should think about modeling returns, et cetera, I would really appreciate it.

[Charles Theodore Happel:]

Okay.

[Operator:]

[Operator Instructions] And our next question comes from Steven Schwartz of Raymond James.

[Steven D. Schwartz:]

I vote for a big onetime dividend, by the way. What is Greenfields?

[James Patrick Brannen:]

It's recorded.

[Steven D. Schwartz:]

What is Greenfields? There's a note on that in Page 17.

[James Patrick Brannen:]

Greenfields Life Insurance Company is a wholly-owned subsidiary of Farm Bureau Life that we formed in the State of Colorado. Probably about 3, 4 years ago, Colorado Farm Bureau Mutual, which is the P&C company there, decided to terminate their agreement with Farm Bureau Life. We did not want to get out of the Colorado market. And at the same time, another one of our partners, Mountain West, which is the Farm Bureau P&C company up in Wyoming and Montana, wanted to expand into Colorado. So we formed a new life company there and, essentially, in conjunction with Mountain West, are now selling same products, same type of distribution but non-Farm Bureau-branded in Colorado.

[Steven D. Schwartz:]

Okay. All right. And then a question on UL. As Don pointed out, the spread is below target. I noticed in the 10-Q that there was a reference to crediting rates on new business actually being higher than the average on existing, but existing was coming down. That was keeping the overall rate kind of in line with where it's been. Is that an accurate way of phrasing it? And what's going on here?

[Donald J. Seibel:]

Yes, we did have one product that's been recently introduced that did have a higher crediting rate. Since the end of the quarter, we have made crediting rate adjustments to bring that rate down, but that did cost a slight tick-up in the average crediting rate, and the point-in-time rate went from 4.08 to 4.10.

[Steven D. Schwartz:]

Okay. And what was the -- was there a strategy behind that? Was it a -- was it like a teaser type of deal or?

[Donald J. Seibel:]

I don't know if you'd describe it as that. It's the product that's structured where there is several sources of profits, there's a smaller spread on the business, a much smaller spread on the business, with profitability coming from loads and charges. So that has -- that played a large part.

[Operator:]

At this time, we show no further questions. I would 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 mark your calendars for our second quarter 2013 earnings release on August 1 and conference call on August 2. 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 event. You may now disconnect.