FBL Financial Group, Inc.
Q4 2013 Earnings Call Transcript

Published: 7 Feb 2014

[Operator:]

Hello, and welcome to the FBL Financial Group Inc. Fourth Quarter 2013 Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. Now I would like to turn the conference over to Ms. Kathleen Till Stange, Corporate Investor Relations Vice President. Ms. Till Stange, please go ahead.

[Kathleen Till Stange:]

Thank you. Good morning, and welcome to FBL Financial Group's Fourth Quarter Earnings Conference Call. Presenting on today's call are Jim Brannen, Chief Executive Officer; and Don Siebel, Chief Financial Officer. Also present and available to answer your questions are John Currier, Chief Actuary; Charlie Happel, Chief Investment Officer; Rich Kypta, Chief Operating Officer; and Scott Stice, Chief Marketing 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 and our fourth quarter earnings release and our financial supplement, both of which may be found on our website, fblfinancials.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 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. First, let me thank Rich Kypta, who will be retiring at the end of this month after having served as FBL's Chief Operating Officer for the last 6 years. He's a true insurance pro, and we will certainly miss Rich, his strong leadership, his humor and his friendship. He's been an integral part of this team. We wish him and Ellen well in retirement. Our Chief Actuary, John Currier, is poised and ready to fill the open role left by Rich. John has great experience to bring to that position. As you might recall, John joined FBL last year after having served as the AVIVA USA's Chief Actuary. I'm very fortunate to have the team that I do leading FBL right now. The team in place has extensive experience and expertise. You can find our bios, of the management team members, on our website, fblfinancial.com. Turning now to results for the fourth quarter. Net income was very strong at $1.07 per share and operating income was $1 per share. These results cap off a great year where we achieved new all time highs and full year operating income and net income per share. Don's going to be covering the strong financial results and capital position in detail. Sales in the fourth quarter saw a reversal of the trend we experienced during the first 9 months of the year. For the fourth quarter, life insurance premium collected decreased 3%, but for the year, increased more than 20%. Our term life and whole life product sales continued to increase in the fourth quarter. The sales of our universal life products declined after increasing significantly in the first 9 months of the year. This decrease reflects UL product changes we've made in the fall, as well as our agents' focus turning a bit more towards annuity sales. The trend in annuity premium also reversed in the fourth quarter with annuity premiums collected up 3% for the quarter but down 18% for the full year. In the fourth quarter, we took several actions to modestly increase annuity sales. These included partially restoring agent commissions that were previously lowered, adding a direct mail campaign focused on cross-selling annuities to existing customers and supporting this with a special incentive campaign on increasing annuity and life applications. While we have selectively taken actions in the annuity space, we have not yet reintroduced many of our new annuity products. We're prepared to relaunch these products when interest rates are consistently higher. As we move forward in 2014, we're focused on growing our total agent count as well as increasing existing agent productivity and have deployed several tactics to achieve those goals. Our exclusive Farm Bureau agents are one of our most important competitive advantages, and we continue to invest and develop agents for the future in order to grow our total agent count and improve retention. In the fourth quarter, we grew our agent and agency manager count and further grew our agency force remains our primary importance. We began a new agent financing program in mid-2013 and so far have seen a marked improvement in the agent retention for those agents. We've also started a new reserve agent program where the agent completes a training program that can take up to 3 months and achieve certain production minimums on a part-time basis before being appointed as a full-time agent. This gives us the opportunity to assess if this individual is expected to be successful for a long-term career with us. It also gives the new agent the opportunity to assess their desire for this career before changing jobs or moving, et cetera. If we both agree, then the individual's contracted on a full-time basis as an exclusive Farm Bureau agent. We're excited about the potential of the new program and expect it to ultimately increase our total agent count as well as improve retention. I want to point out that these reserve agent candidates will not be included in our agent count until they complete this training. Therefore, agent counts maybe temporarily impacted as we transition to the new LinkedIn onboarding process. Despite the potential for a short term dip in new agents appointed, we believe this is the right strategy to develop agents for the future. So before I hand it over to Don, I want to mention that in December, A.M. Best affirmed Farm Bureau Life's A- (Excellent) financial strength rating and maintained its positive outlook. I'm very disappointed with this action as we had expected an upgrade long before this. This is the second year in a row that Farm Bureau Life has had a positive outlook. A.M. Best has communicated that in order to achieve an upgrade, we need to just keep doing what we've been doing. As we discussed today, FBL has had record 2013, achieving new highs in operating income per share and net income per share. Furthermore, capital levels remain high, as Don will discuss, with more than $50 million of excess capital added this quarter. In conclusion, I'm very pleased with 2013's results, and I'm very, very optimistic about 2014. Now I'll turn the call over to Don Siebel 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 excellent fourth quarter results. I'll discuss our financial results, spreads and capital position. As Jim indicated for the fourth quarter, we had net income of $1.07 per share, an operating income of $1 per share. During the quarter, our operating income adjustments, which consist primarily of net realized gains on investments, totaled $0.07 per share. Earnings results were outstanding again this quarter, benefiting from continued growth in our volume of business and force, capital management actions we've taken over the last few years and management of the profitability of our products. In addition, earnings for the quarter were positively impacted by a couple of items that we can't expect to reoccur. During the quarter, we continue to experience an elevated level of investment fee income, mostly in the annuity segment. In total, investment fee income, which is primarily due to bond prepayments, was $0.04 per share for the quarter. This prepayment fee income has been elevated for several quarters and should slow at some point with rising interest rates. Higher equity markets in the fourth quarter 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 report our closed block of variable business. While this is positive, the opposite can occur with the decline equity markets as we are experiencing now in early 2014. Results for the quarter also reflect slightly elevated mortality experience but still within our range of expectations. Death benefits on our corporate and other segment were higher due primarily to a few large variable universal life claims. Taking into account the elevated prepayment fee income and favorable impact of market performance on our variable business, I would put normalized operating earnings for the fourth quarter at approximately $0.94 per share. With that said, I will call out that death benefits tend to fluctuate from quarter-to-quarter and are somewhat seasonal and that we often see an increase in death claims in the first quarter of each year. Turning now to spreads. At December 31, the point in time spread of 212 basis points on our annuity business remains above our target for this business of 204 basis points. 20x spreads on our universal life business increased by 10 basis points to 155 basis points at December 31. This positive movement narrows the deficiency to 7 basis points below our target of 162 basis points for this business. We're able to make these gains due to crediting rate actions taken on a block of UL business that has an annual reset feature. In order to manage our profitability of our business, we've been very proactive over the last several years in decreasing our crediting rates given declining portfolio yields. On the one hand, this is increasingly difficult as 62% of our annuity business and 87% of our UL business is now crediting interest at the minimum guarantee. On the other hand, we still have some room for additional crediting rate actions and as a block of business at guarantee levels, much is achieving or exceeding target spreads. Also from an investment perspective, we were able to take advantage of market volatility during the second half of 2013 to acquire assets at better-than-anticipated yield levels, with achieving desired yields remain the challenge given the recent decrease in interest rates. Next, I'll comment on our strong capital position and capital management actions. At year end 2013, Farm Bureau Life's capital position remains excellent with an estimated company action level risk-based capital ratio of 499%. This is a nearly 50-point increase from September 30. About half of the increase is due to growth in total adjustment capital from earnings for quarter and the other half of the increase is due primarily to regulatory changes. We experienced a 20-point increase in the RBC ratio due to our regulatory change in our capital charges or assessed on commercial mortgage loans. This large increase reflects our high-quality mortgage loan portfolio, where we have 67% of our loans falling into the highest quality rating bucket and another 29% falling into the second highest bucket. During 2013, we were very active in deploying excess capital, and in the first 9 months of the year, paid a special dividend of $51 million, repurchased 1.4 million shares of FBL common stock and increased our regular quarterly dividend by 36%. However, we did not repurchase any shares in the fourth quarter as we are evaluating our capital management options. During the past 2 quarters -- past 2 years, we repurchased 6.9 million FBL common shares, which represents 23% of our shares outstanding at the beginning of 2012. These repurchases have been accretive to both earnings per share and book value per share but have decreased our public float. Our board will be meeting in a few weeks, and we will discuss our capital management strategies, including the balance between repurchasing common shares and increasing the dividend rate. We have flexibility with our capital management plans as there's more than adequate liquidity and capital at the holding company level with excess capital at the parent of approximately $80 million. In addition, using 425% RBC as a base, Farm Bureau Life has excess capital of approximately $80 million and generates approximately $50 million of excess capital annually. In closing, as I look back on 2013, it was a year of success and growth for FBL Financial Group. We delivered strong financial results, we'd achieve new highs in operating income per share and net income per share. We accomplished this by growing our business, actively managing spreads and executing our capital management plans. As we move forward in 2014, we continue to address the challenges of a low interest rate environment to further build on FBL's strong financial foundation. I'm pleased to have been able to share these results with you. That concludes our prepared comments. We'll now turn the call over to the operator and open it up to any questions you may have.

[Operator:]

[Operator Instructions] And the first question comes from Randy Binner from FBR Capital Markets.

[Randy Binner:]

I will ask a couple of numbers questions. I -- the whole -- I'm sure we can play 20 questions on this A.M. Best thing but maybe I'll leave that for the other guys. I guess on the -- can you repeat, please, the impact from the mortgage experience adjustment factor or the change away from that on the CMBS? Because I did not catch that on the RBC impact.

[Donald Joseph Seibel:]

Yes. It was about a 20 point increase in our RBC ratio. So the increase in total is about 50. 25 of that came from just increasing our total adjusted capital, and 20 of the increase came from the change in the mortgage rules.

[Randy Binner:]

Okay. And did you have anything from the RMBS changes with the PIMCO and I think it's BlackRock marks? Did that impact you or was it more on the commercial real estate?

[Donald Joseph Seibel:]

Very minimal on the RMBS. It's really just a little bit of noise.

[Randy Binner:]

Okay. And then on -- could you be able to -- just for the model, could you break out the -- so the fee income was higher by the $0.04. Is it -- can you roughly kind of break that out between the annuity and life area?

[James Patrick Brannen:]

Yes. Fee income was up about $1.6 million to put it in a dollar perspective and about $1 million of that fell to the annuity segment, and the balance fell to the life segment with a small amount to incorporate other.

[Randy Binner:]

Okay. That's perfect. And then just to clarify, the $0.03 on the DAC was all on the corporate area?

[James Patrick Brannen:]

That's correct.

[Randy Binner:]

And then, I guess, on -- and just one more. I'll drop after. The annuities, I thought it was interesting that you've been pretty, kind of conservative there, and it sounds like you're maybe sticking your toe back a little bit in the water with these commission, incentive and marketing activities. I guess, what would consistently higher rates mean for you to more fully commit to that market? And can you remind us if that's an area where you're going to run in into competition from all the private equity folks who seem quite interested in that area this year.

[James Patrick Brannen:]

Yes. Good question, Randy. I think where rates have to go is product specific. So -- and along the curve, we've got MYGA products that are 8 years, 4 years, 2 years. And so where rates go and stay along the curve matters. When we saw rates, or call it a spike, spiked up around the 10-year, around 3%, we were pretty interested if they can hold there to get back, introducing a lot of our annuity products. In terms of where we compete on those annuities, our main competitor in our marketplace is truly the bank CDs and small and midtown markets -- mid-sized town markets. And I would say that our core Farm Bureau customer base is accustomed to using annuities and bank CDs and similar fashions. Of course, we'll have other competition with other carriers as well but our main competition is really be that core product for that Farm Bureau customer.

[Randy Binner:]

So I'd take it then, if that core Farm Bureau customer's relationship is with their Farm Bureau agent, does that mean they're not going to kind of get the look from an independent insurance agent on Allianz, or American Equity or Guggenheim back to index annuity? Just to be clear. I mean, because in my mind, the market you just described actually overlaps quite a bit with that kind of NMO market? Or is that not the case?

[James Patrick Brannen:]

So I can only give you an anecdotal evidence, but what we see generally is that the sales happen around the kitchen table, and they're usually in the setting of total needs assessments, including property-casualty needs, crop insurance needs, health, savings and protection needs. And it's not normally in a competitive setting. When it comes to some of these annuities, I won't say that there's never a competitive setting. But you'll remember, we operated the model that you're talking about for quite some time and overlapping in our own territories, and we really didn't run into each other at all.

[Operator:]

And the next question comes from Steven Schwartz with Raymond James and Associates.

[Steven D. Schwartz:]

Just on the topic, just as a one-off before I get into it, Jim, do I remember you, at some point, maybe not last quarter but maybe a quarterly earlier, talking about possibly going back to the independent market? Or am I completely off base on that?

[James Patrick Brannen:]

It was not mentioned by us.

[Steven D. Schwartz:]

Okay, all right. I'm just thinking about somebody else. All right. Maybe on the topic of distribution, you can talk about the growth that you did see in the Farm Bureau agents that did turn around. I'm wondering if something was going on there?

[James Patrick Brannen:]

Okay. So just to widen the lens a little bit more than just this year, over the last 2 or 3 years, we have seen a little bit of a shrinkage in agencies, you'll see in the investors supplement, and it was just time to get back to the basics, turn up the heat and focus on the distribution. And so I wouldn't call any of the initiatives particularly dramatic but it's the serious focus for me and our team and raising accountability every day and getting back out there, on-boarding Scott Stice as Chief Marketing Officer. He's definitely got out and about. We implemented a new agent financing plan and what we were finding was our turnover ratios had dropped over the past few years, much like all of the MLEA agents. But when you analyze it, it was 2 reasons

[Steven D. Schwartz:]

Okay, good. The agent financing that you mentioned, this is a commission advance, is that we were talking about here?

[James Patrick Brannen:]

Yes. So really if you think about, we use multiline agents through several companies. So when I speak about our agent financing program, it's really where FBL manages the property-casualty company in 8 of its states that we do business. And so it's really about -- that's where we can have the most impact. We can partner with our other Farm Bureau property-casualty companies in the other states but we really manage the contracts in 8 of the states. And so that's where I'm speaking about. And it's a contract that has enhanced commission rates for both delivering property-casualty results and life results. So there's requirements on both sides, but it's basically an enhanced commission rate on the property casualty side with life requirements.

[Steven D. Schwartz:]

Okay. And then one more. The -- maybe you could talk about UL? In the third quarter, you are pretty positive on that. You stated you made some changes. It sounds -- since the last conference call, maybe you could talk on that and what you did and what you're thinking about?

[James Patrick Brannen:]

Yes. Here's how I characterize that. UL is strong for us. It's one of our core life products and it's going to continue to be. I'm confident of that. We did make some changes. I would say that anytime you make changes in an exclusive agency, for us, there's a pause. It's not quite as competitive as it was, and so I think that there's a feeling that maybe it's a harder sell for a time period. But once the agents understand that the UL is still a very competitive product against other products, my view is that we get right back on track and get moving again.

[Steven D. Schwartz:]

Okay. What were the changes that you made?

[James Patrick Brannen:]

Do you want to go on with the product changes?

[Donald Joseph Seibel:]

Yes. We increased the premium load on a product that was contributing nicely to our first year of sales, put a 3% load on that was the primary change there.

[Operator:]

[Operator Instructions] All right. There is nothing more at present time. So we'd like to turn the call back over to Ms. 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 first quarter 2014 earnings release on May 1 and conference call on May 2. 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 all disconnect your lines. Have a nice day.