FBL Financial Group, Inc.
Q2 2013 Earnings Call Transcript

Published: 2 Aug 2013

[Operator:]

Good morning and welcome to the FBL Financial Group Second Quarter 2013 Earnings 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 second quarter 2013 earnings. If you don't already have a copy, our earnings release and financial supplement may be found on our website at fblfinancial.com. Presenting on today's call are Jim Brannen, Chief Executive Officer; and Don Siebel, 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. 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 and our second 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, and welcome to everybody on the call. I want to thank you for taking time to join us today and for your interest in FBL Financial Group. We had an outstanding performance in the second quarter of 2013. We continued to grow life insurance sales, manage our annuity sales and manage profitability in all lines. Net income was a strong $1.13 per share and operating income was $0.98 per share. Don's going to be covering the financial results in detail. During the quarter, we added 2 new excellent management team members, filling the 2 open positions and completing our management team. John Currier joined FBL as our Chief Actuary, filling the position of the late Russ Wiltgen. John brings his deep product knowledge and actuarial experience to FBL and joins us from Aviva USA, where he was Chief Actuary. He's a top-notch communicator, leader and manager. He's already a valuable contributing member to our team. I'm also pleased to welcome Scott Tice as FBL's Chief Marketing Officer. In this position, Scott is responsible for our multiline exclusive Farm Bureau agency force, sales, marketing and distribution. I'm confident his expertise will further strengthen one of our most important competitive advantages, our exclusive Farm Bureau agency force. Scott is ideally suited to this position, as he knows exclusive agency environment inside and out. He began his insurance career as an exclusive agent, has -- had served as an agency manager and many other sales management positions through the years. Scott comes to FBL from Farmers Insurance, where his most recent role was Senior Vice President and Head of Field Strategy and Execution. One of my top priorities is to ensure we have best-in-class distribution and Scott, as our new CMO, has taken leadership of the initiatives we have in place to improve our agent recruiting and retention, training and leadership. Our agency force continues to stabilize and we ended the quarter with 1,793 agents and agency managers in place. We are systematically replacing or consolidating our low-productivity agents. We recently implemented a new compensation plan for new agents and have revised our recruiting and enhanced our training programs. Over time, I expect these changes to result in an even stronger, more stable and productive and larger agency force with higher retention rates. Turning now to sales. Our emphasis on life insurance products continues to drive sales. During the second quarter, life insurance premium collected increased 36% for a year-to-date increase of 32%. Consumers are finding our life products to be attractive, particularly given the investment environment and the alternatives with fixed annuities. These life sales are positive as they lead to a long-term profit stream and allow us to continue to grow earnings from other sources than spread income. Annuity premium collected during the second quarter was down 29% and down 28% year-to-date, reflecting our emphasis on life sales. With $142 million of year-to-date annuity premium collected, long-term annuities remain a viable option for our agents and customers. As you might recall, several quarters ago, we suspended our short-term deferred and immediate annuity products due to the extremely low interest rate environment. These product suspensions remain in place and while the recent increase in rates is positive, we're not yet prepared to relaunch our short-term products, but will when it's appropriate and we're looking for opportunities to increase annuity sales where it makes sense. I'm very pleased with our progress and growth to date, 2013. I'm confident in our strategy, our management team and our relationships with primary organizations in our territory. All of these elements strengthen our business so we can carry out our mission to protect the livelihood and futures of our policyholders. I'm going to turn the call over to Don Seibel for a review of our financial results. Don?

[Donald Joseph Seibel:]

Thanks, Jim, and good morning, everyone. I'm pleased to share with you today the details of our very strong second quarter results. I'll discuss our financial results, spreads and capital position. As Jim indicated, for the second quarter, we had net income of $1.13 per share and operating income of $0.98 per share. During the quarter, our operating income adjustments, which consist primarily of net realized gains on investments, totaled $0.15 per share. Again this quarter, we had outstanding earnings results. In addition to being driven by an increase in the volume of business in force, earnings for the quarter were positively impacted by several items. During the quarter, we continued to experience an elevated level of investment fee income, particularly in the annuity segment, and to a lesser extent, in the life insurance segment. In total, investment fee income for the quarter amounted to $0.04 per share. This fee income relates to bond calls and prepayments and has been running at a higher level for the last several quarters. I expect this activity to slow at some point with the recent increase in market interest rates. Death benefits fluctuate on a quarterly basis, and this quarter, we experienced favorable mortality, primarily due to reinsurance recoveries for losses in excess of aggregate retention levels for accidental death claims. In total, mortality was approximately $0.04 better than we would expect for each of the remaining quarters of 2013. This quarter, for all of our blocks of business, we reviewed assumptions related to deferred acquisition cost, value of insurance in force acquired and unearned revenue reserves and unlocked assumptions where appropriate. This resulted in an increase to earnings of $0.01 per share. The annuity segment benefited by $0.04 per share but this was largely offset by small negative unlocking impacts in the life insurance in corporate and other segments. These unlocking impacts were driven by our annual review of various assumptions, including mortality and spreads. Equity income continues to perform well on an after-tax basis and was approximately $0.03 higher than we would expect over the near term. This quarter, we benefited from increased income from investment partnerships and from low income housing tax credit investments. Income from these sources can be volatile and is dependent upon market conditions and the timing of the receipt of tax credits. We booked income from these investments 1 month to 1 quarter in arrears. If you take these items that we can expect to recur into account, that would put normalized earnings for the quarter at approximately $0.85 per share. Towards the end of the second quarter is a 10-year treasure yield increase and has increased even more since quarter end. We took this opportunity to add some longer-term municipal bonds to our portfolio in June with yields exceeding 5%. Although the increase in rates is positive, rates remain at historically low levels. We're not seeing the benefit in our spreads as our investment portfolio yields continue to decline during the quarter. At June 30, due to declining investment yields, the point in time spread on our annuity business decreased from last quarter by 7 basis points to 219 basis points. However, this spread of 219 basis points is in excess of our targets for this business of 203 basis points. We've been proactive about decreasing our crediting rates for this business and still have room for additional crediting rate changes. 38% 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 also decreased during the quarter because of the decline in investment yields. Our UL spreads decreased by 3 basis points to 145 basis points at June 30, which is below our target of 166 basis points for this business. Approximately 39% of our UL business is crediting interest at rates above the minimum guarantee. The frequency that we can change crediting rates is limited for some for this business, including one block where it can only be done annually. The increase that we've seen in interest rates since the end of the quarter is positive and over time, should help stabilize our UL spreads. Next, I'll comment on capital. During the second quarter, we repurchased 201,499 shares of our common stock at a cost of $8.5 million for an average acquisition price of $42.27 per share. As of June 30, we have $20.4 million remaining in our stock repurchase authorization. Farm Bureau Life capital position remains very strong, with an estimated company action level risk base capital ratio of 526% at June 30, an increase from 519% at the end of the first quarter. This increase occurred even with a $20 million dividend during the quarter from Farm Bureau Life to the holding company. Using an RBC level of 425% as a base, Farm Bureau Life has an estimated $120 million in excess capital. In addition, there is more than adequate liquidity in capital at the holding company level with excess capital at the parent of approximately $105 million. This results in total estimated excess to capital of $225 million. Given our level of excess capital, we have a lot of flexibility. We're analyzing several capital deployment opportunities, including continuing to repurchase FBL stock, increasing the regular quarterly dividend, issuing a special onetime dividend, inorganic growth prospects and others. We don't expect to hold this level of excess capital for the long-term, but that -- at this time, are not ready to announce any actions. In closing, we are confident in our disciplined approach to managing the profitability of our business. It was a great quarter for FBL Financial Group with strong earnings growth. I'm pleased we've 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] And our first question comes from Randy Binner of FBR.

[Randy Binner:]

I guess, just picking up on the excess capital comments. And, Don, was that -- is that -- well, you were excess of 400% with the $120 million number? Is that right or was that 425%?

[Donald Joseph Seibel:]

425%.

[Randy Binner:]

Okay. So that's 425%. And so -- and that still is the right target, right? That's kind of how -- it seems high for your business. But I guess, can you talk about why you have that target? Is it for the -- is it for Best? What drives that relative to your business mix as a floor?

[Donald Joseph Seibel:]

Well, certainly, we're cognizant of the A.M. Best rating being at A-. But we really don't believe that capital is really the reason that we're still at an A-. We think with the current economic environment, that it is prudent to hold some excess capital. The financial crisis is still top of mind and we want to be well-positioned for any scenario that comes down the road.

[Randy Binner:]

Okay. And then on kind of the special dividend or maybe getting the payout ratio to a level that's more in line with peers, maybe 20% to 25%. I mean, is there anything you can share about how you're viewing that because -- especially with special dividends, I think, different -- there's kind of different schools of thought on those. I'd be interested in any thoughts you can provide on that, how you're thinking through special versus kind of ongoing divvy?

[James Patrick Brannen:]

Randy, it's Jim. As Don said, we're not ready to announce anything specific. Likely, as you indicated, our capital levels are somewhat -- our views are somewhat conservative. That fits in line with who we are and how we run our business. So we'll stay there. Likely, the amount of excess capital that we have will be a multiple strategy. In other words, we're not going to handle it all with one item or another. So my view is that we have several things in the works that we'll get out to you as soon as possible but it's probably along the lines of thinking about all the things possible and doing some of several things.

[Randy Binner:]

Okay. And I'll just follow -- I'll follow through on the capital thing and then drop back in the queue. But you mentioned multiple things and -- I mean, the buyback is tough just because of the float being low, but you mentioned inorganic and I guess -- I was thinking that inorganic kind of had to be something with another Farm Bureau. I mean, I know you're doing the initiative out in Colorado, but is there -- is that outlook better for inorganic opportunities maybe than it has been early in the year?

[James Patrick Brannen:]

I guess, I wouldn't comment specifically on any inorganic opportunities, of course. I'd just reiterate that if you're talking about the Farm Bureau opportunities, there's always opportunities in my view, I guess, to partner with some of the other Farm Bureaus. In terms of doing M&A with other Farm Bureaus, that's really -- there's a limited set of companies and that's really opportunistic and the stars have to line up quite a bit to have just a stated strategy that that's where your inorganic growth would come from would not prove to be real promising just based on the number of companies and number of opportunities. We've pulled it off probably 10x in the last 20 years, and we stand ready to be good partners whether it's product development or something more. And so, in the Farm Bureau world, I guess, that that's kind of the way that would be. Outside of the Farm Bureau world, you're well aware that most of the M&A has been really financial buyers as opposed to strategic players. And so until we see some sort of shift in that part of the market, I guess, inorganic has been a little bit tough for strategic buyers, I think.

[Operator:]

The next question comes from Steven Schwartz of Raymond James.

[Steven D. Schwartz:]

I want to ask a couple of numbers questions. But first, I want to ask Jim and maybe, I don't know, if Scott wants to chime in as well. Jim, you mentioned some changes in compensation, in that structure. I was hoping you could go deeply -- more deeply into that and talk about what's changed that you think will either get productivity up or simply the number of agents up?

[James Patrick Brannen:]

Yes. As -- we were really seeing a diverse set of outcomes based upon our market territory, where we were succeeding in keeping agents and growing agents in our -- smaller part of our marketplace to more rural parts of our marketplace and we were churning quite a bit of agents in what I would consider more of our urban marketplace, Steven. And so we've tried to address some of that. A lot of it -- a lot of that agent churn in that marketplace, in my view, has been around the compensation structure. But there's other business -- parts of the business model that we're addressing as well. Pretty simply, we look back at 2 things that really caused agent turnover and that's income sufficiency and income variability. And we look back at all of the agents that have made it over time with us and look at their income sufficiency and variability and said, this is what we need to achieve with new agents. And then we backed into, what do those new agents need to do for us to be able to achieve that? And so, basically, we've set the bar higher and we're investing more early. And what happens with that is we have to identify the people that are never going to make it in the business sooner and move on and invest a little more in the ones that are really going to grow something for us. And some of them are doing it from scratch and some of them are doing it with business that we're able to provide. From the life company perspective, there are, in the new agent contract, there's minimum life requirements and those have not been around for a while and they will be in the 8 states that we manage the field force out of the 14. Those life requirements will be added for the new agents. And so, I think that will be helpful for early life production. And actually developing long-term life agents as opposed -- multiline agents have -- that are strong in life. And what we've learned is if you start selling life early in your career, you're like likely to truly be a life agent as a multiline agent for your whole career. And if you don't get that developed early on, it probably never comes along. So those are kind of the basics. I don't know if you want to add anything or not, Scott? No? I think that's it.

[Steven D. Schwartz:]

Okay, all right. And then a couple of numbers questions for Don maybe. First, I'm looking at -- well, first, I mean -- I guess, you could say the UL sales or UL collected premiums, you don't really talk about sales, but you all collected premium, was up very, very strongly in the quarter. Is this stemming from introduction of the secondary guarantee policy? And are you benefiting as others maybe pull away?

[Richard J. Kypta:]

Steven, this is Rich. We're really benefiting from 2 products there. The first, which we introduced about 2 years ago, is a single pay UL. That's a wealth transfer focused product called Traditions UL and then even a greater part is the fact that about literally over a year ago, we enhanced our core UL product by adding the cash value accumulation test to it. We did not have that, almost everybody else in the industry did. And that made the product more competitive in situations where the client wants to put in, dump ins were a lot of excess premium. So those are really the 2 product things that have driven UL sales as supposed to the secondary guarantee product.

[Steven D. Schwartz:]

Okay. The dumping in excess, that's probably going to explain my next question, but the fact is that the amortization or the capitalization of the DAC in the life insurance really was -- actually declined from the first quarter despite the big increase in collected premium. Is that all related, Don?

[Donald Joseph Seibel:]

Yes, it is.

[Steven D. Schwartz:]

Okay. And then, if you could, maybe go back over the mortality that you saw in life and the reinsurance thing and what was that again? That went by very fast.

[Donald Joseph Seibel:]

Yes, yes. So we have reinsurance coverage for accidental deaths, whereby if death claims exceed a certain threshold in any one calendar year, we'll get recoveries above that threshold. And we typically do not hit that threshold. But in 2012, it was discovered in the second quarter due to some late reporting of some claims that we had some claim activity that was booked in IBNR but we found out were accidental deaths. And as a result, we received a $1.2 million recovery in the second quarter that really related to 2012 claims. That makes up the lion's share of the mortality beat.

[Steven D. Schwartz:]

Okay. And that would be where? That would be in traditional?

[Donald Joseph Seibel:]

That's actually spread throughout the segments, evenly throughout the segments.

[Steven D. Schwartz:]

Okay. And then one more, if I may. If you look at the universal numbers, I've lost them here, do you see that the benefits came down but IBNR or I guess, increasing future life benefits went up, probably about the same relative to the first quarter. That's just the natural offset, death benefits were low but -- plus, people are still going to die so you put it in life future policy benefits?

[Donald Joseph Seibel:]

You're looking at the life insurance segment, the increase in traditional?

[Steven D. Schwartz:]

Yes, yes, yes. You see an increase in future policy benefits? .

[Donald Joseph Seibel:]

Yes.

[Steven D. Schwartz:]

But a -- relative to the first quarter but a decrease in actual death benefits. That's just the natural offset between the 2?

[Donald Joseph Seibel:]

Yes, yes. Actually, death -- yes, that's related to traditional business only and it really relates also to the level of traditional life premiums that we're seeing. So we're seeing an increase in life premiums in second quarter relative to first, as well as relative to a year ago. So that's also driving part of that relationship.

[Operator:]

Our next question comes from Robert Glasspiegel of Janney Capital Markets.

[Robert Glasspiegel:]

The -- following up on Steven's question on -- I was going to ask on the secret sauce in UL. When I see companies growing a lot, it makes me a little nervous that I've got to recheck that you're not doing something wrong. I'm sure you maybe have that same philosophy? Or is this all systems go, we love it and no concerns if the sales are taking off like they are?

[James Patrick Brannen:]

It's Jim. In terms of product sales to take off, I think you're absolutely right. It's always a good thing to have an antenna go up. I would tell you that I asked for a look on our UL products and some of our other life products and we've done repricing. And we're very comfortable with repricing that we have out there in the market today. Rich, you got anything to add to that, I guess?

[Richard J. Kypta:]

No. I think, actually, last quarter, Bob, you asked about underwriting, were there any changes in standards there and we said, no. We -- I think by way of background, I would say that compared to the industry, we traditionally have been light in terms of the percentage of our life sales coming from excess and single pay versus recurring. And so, our strategy of making these product changes was deliberate because we felt we were under performing the industry on that part of our life sales. We feel the products are properly priced. We did a review as these sales took off, made a few tweaks by continuing to believe the products are properly priced.

[James Patrick Brannen:]

And also, I'll add, Bob. I guess, one of the things I'm going to ask you to believe in is the exclusive agency force that we deal with and the fact that these are the products that are more in favor with our customers today and if you look at our history, our production levels have remained relatively stable and with good performance in virtually all market conditions. And it really does relate to that agency force that's working exclusively with our set of products and those that we broker. And right now, we just have not -- we really emphasize life products to them and we have not been -- I think we reduced compensation on annuities and done some other things to really get them focused on these sales. And so, I attribute quite a bit of it to that.

[Robert Glasspiegel:]

Okay. And my one follow-up is it seems like you -- Jim, you gave the same speech this call you gave last call on the macro environment other than sort of a fleeting referenced that the 70 bps increase in loan rates as a positive. But I guess, the question is it's still like all systems go on universal life and we're in defense contract mode on annuities or is there a change in -- if rates went up another 70, you might sort of rethink the relative strategy of the 2 -- of the product mix?

[James Patrick Brannen:]

Yes. First of all, rate changes and other changes are somewhat a blunt instrument instead of dials. And if I had my preference, we wouldn't have slowed annuities quite so much and my interest is to percolate those a little bit more but we're going to do it smart. And so, it's not just cranking up the dial yet. The rates are getting to a point where we can start moving into some other medium-term type of products and eventually, short products. I don't want to jump into doing that and jump back out and jump back in with our agents. So I'd like to see this little more lift before we get too serious about that. But in terms incenting agents to write the annuities that we are writing, we have plenty of room in our pricing because we had previously reduced some of those components to disincent. So we've got some room to get the annuities flowing a little better at the current interest rate levels but probably not with the introduction of shorter products. And I'm not going to give a number on where we're going to jump back in but if we continue to see moves and we think that they're sustained, we'll be back in on the shorter annuities, too.

[Operator:]

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

[Steven D. Schwartz:]

The question with annuities, the short-term, you also, if I remember correctly, you did SPIAs, Jim, and that also was suspended. If I remember correctly, this is -- the suspension was, I mean, really the reinvestment risk, is that right? And if rates do move up again, then that kind of goes away and maybe you come back to that market as well?

[James Patrick Brannen:]

I would agree. I would agree with your premise. Certainly, there is reinvestment risk but I mean, by the time -- where rates were at, the SPIA is -- were essentially becoming an electronic mattress. And the customer demand for tying up their money long-term in such low interest rates was not very appealing. It wasn't not only good for the company, it wasn't very good for the customers either. And you're right, as the rates continue to lift here, certainly, we'll be happy to provide that product as well.

[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.

[Kathleen Till Stange:]

Thank you to everyone who joined us on the call today. Please mark your calendars for our third quarter 2013 earnings release on October 31 and conference call on November 1. 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 your attendance in today's presentation. You may now disconnect.