FBL Financial Group, Inc.
Q4 2014 Earnings Call Transcript

Published: 6 Feb 2015

[Operator:]

Good morning and welcome to the FBL Financial Group fourth quarter 2014 earnings conference call. All participants will be in listen-only mode. [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 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 Charlie Happel, Chief Investment 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 and our third quarter earnings release and our 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 everybody on the call. Thank you for taking time to join us today and especially for your interest in FBL Financial Group. I am so very pleased to report that FBL Financial Group delivered another excellent quarter of earnings. Fourth quarter net income and operating income were both $1.13 per share. These results cap off a year of record highs in full-year net income and operating income per share. At the same time we maintained a very strong capital position and enhanced shareholder returns with significant dividends. Sales for the fourth quarter were flat for annuities and a little down for life insurance. While annuity premium collected was flat in the fourth quarter compared to the fourth quarter of 2013, it was up 15% for the full year. The driver of this increase is sales of our indexed annuity product. This product was introduced in September of 2012. It’s been well received by our agents and customers. For the fourth quarter, total life insurance premium collected decreased 2% compared to the fourth quarter of 2013. Full year life insurance premium collected is down 8%. As we’ve previously mentioned, much of the decline is due to lower UL sales, reflecting changes we made late in 2013 to our UL product. There’s no question the sales environment is somewhat challenging as we face headwinds of the continued low interest rate environment and an industrywide decline in life insurance sales. We do have a number of marketing and sales campaigns planned for 2015, along with the mid-year introduction of an indexed universal life product that will help to spur additional sales. We continue to invest in and develop agents for the future, with a goal to grow our total agent count each and every year and improve our retention of those agents. We have a number of strategies in place to accomplish this. In 2014, we introduced a new recruiting and onboarding approach, developed a new centralized training approach for new agents, and reintroduced our assistant manager program, which provides additional recruiting and agent development capabilities. Also, in mid-2013 we introduced a new agent financing program, which provides higher income for new agents who are able to meet increased production standards. To date we’ve seen a marked improvement in the agent experience and increased retention because of these programs. These strategies are beginning to result in growth in our agent count and more effective and engaged producers driving increased sales going forward. Within our core eight states where we manage the agency force, in 2014 we appointed 213 new full-time agents and 226 reserve agents. This compares to 197 new full-time agents appointed in 2013. These appointments resulted in a year-over-year increase of 20 agents and agency managers in those eight states. This growth is notable as it compares to a loss of six in 2013 and a loss of 59 in 2012. We have the right distribution strategies in place. We’ve built momentum and are well positioned for further growth in our agency force in 2015. One thing I’d like to mention before I hand it over to Don, is that A.M. Best upgraded the financial strength rating of Farm Bureau Life to A (Excellent) in December. I’m of course very pleased with this action. As you know we’ve been looking for this to occur for a very long time. Prior to this upgrade, A.M. Best had a Positive outlook on our company for nearly two years. The upgrade validates Farm Bureau Life’s excellent financial results and strong capital position. The ratings are important and we take them seriously. Having said that, given our niche marketplace and exclusive distribution, the rating is more of a matter of pride and validation than it is a driver of new sales. In closing, I look back on 2014 with much pride in our company and our people. In addition to record earnings, we have a very strong capital position. We maintain the industry-leading cross-sell rate. We have a profitable book of business that’s balanced between life insurance and annuity business, as well as a diversified, high quality investment portfolio. We also have best-in-class distribution with our exclusive Farm Bureau agency force, and a very loyal niche customer base. The challenges of the persistent low market interest rate environment remain, but we’ve been diligent in proactively managing the profitability of our business, allowing us to achieve our target spreads in total. Now I’ll turn the call over to Don Seibel for a review of our financial results. Don?

[Don Seibel:]

Thanks, Jim, and good morning everyone. I’m pleased to share with you today the details of our fourth quarter financial results. I’ll discuss our operating results, spreads and capital position. As Jim indicated, we had excellent fourth quarter earnings results with operating income and net income of $1.13 per share. This is a 13% increase over the operating income of $1.00 per share in the fourth quarter of 2013 and a 6% increase over the net income of $1.07 per share in the prior year fourth quarter. Our book of business continues to steadily and consistently grow as we work to serve the Farm Bureau niche market and address their needs. In addition, results for the quarter were impacted by a number of factors. During the quarter, we benefited from $0.10 per share of investment fee income, which was predominantly in the Annuity segment. This fee income was due to higher than expected bond prepayments. This is good in the short run as it positively impacts investment income, but is less desirable in the long run as the securities being called are higher yielding investments. Mortality experience for the quarter was better than our projections by about $0.04 per share. This is positive, but mortality experience by its nature can fluctuate on a quarterly basis. Looking forward, I’ll note that we have seasonality in our mortality experience and typically have higher death benefits in the first quarter of each year. Expenses for the quarter also came in lower than expected due to our focus on expense control. Equity income continues to perform well on an after-tax basis, reflecting our investment partnerships and low income housing tax credit investments. Detail on this is found on page 17 of our financial supplement. Also impacting earnings is the updating of the interest related assumptions used in the calculation of deferred acquisition costs, value of insurance in force acquired and unearned revenue reserves to better reflect the current low interest rate environment. This unlocking during the quarter negatively impacted earnings by $0.07 per share. Taking into account these various items, our normalized operating earnings for the quarter are slightly above $1.00 per share. As Jim mentioned, we are successfully managing spreads, despite the continuing challenges of the low interest rate environment. As of year-end, in total we are exceeding our target spreads. During the quarter, the point-in-time spread on our annuity business decreased 2 basis points to 207 basis points at December 31. This spread remains above our target of 203 basis points for this business. Spreads on our universal life business are a bit more pressured. Point-in-time spreads on our universal life business decreased 5 basis points during the quarter, totaling 149 basis points at December 31. This is below our target for this business of 157 basis points. From an investment perspective, purchases during the quarter focused on long NAIC1-rated corporate bonds. We also added some fixed rate collateralized loan obligations to our portfolio. During the fourth quarter, the average tax-adjusted yield on investments acquired backing our long-term business was 4.64%. Our portfolio quality remains high with 96% of fixed maturity securities being investment grade. Next I’ll comment on our capital levels. At December 31, Farm Bureau Life’s capital position remains excellent with an estimated company action level risk based capital ratio of 545%. This represents a slight decrease from 550% at September 30 and is due to a $45 million dividend paid during the fourth quarter from Farm Bureau Life to the holding company. We continue to have ample excess capital. Using 425% RBC as a base, Farm Bureau Life has excess capital of approximately $135 million at December 31. At the holding company level, we also have more than adequate liquidity and capital, with excess capital at the parent company of approximately $90 million at December 31. On top of that, going forward, I expect Farm Bureau Life to conservatively generate $50 million to $60 million of excess capital each year. As we review our options for deploying this capital, we consider stock repurchases, our regular quarterly dividend and the payment of special dividends. We have repurchased $275 million of our stock over the last several years. This is significant as today we have almost 20% fewer shares outstanding than we did just three years ago. We will continue to repurchase shares as we see opportunities, but the value proposition is not as attractive as it was when we were buying our shares below book value. During the fourth quarter our repurchase activity was minimal, with 33,930 shares repurchased at a cost of $1.5 million. At a minimum, I would expect our share repurchases to offset any potential dilution from stock option exercises. As of December 31, we have $42.7 million remaining on our stock repurchase authorization. In the first quarter of 2014 we increased our quarterly dividend to $0.35 per share. At that time, it was one of the highest dividend yields in the life insurance industry. With our stock price increasing 30% in 2014, the yield has declined. Our board of directors’ reviews the dividend rate regularly and is committed to having an attractive dividend yield, given our strong and consistent operating results. Our board will next review the dividend rate when it meets in March. Given our excess capital levels, we are asked regularly about paying a special dividend. We last paid a special dividend in 2013, and view the payment of special dividends, on occasion, as a viable option for distributing a portion of our excess capital. In closing, as I look back on 2014, it was a year of success for FBL Financial Group. We delivered strong financial results and achieved new highs in operating income per share and net income per share. We accomplished this by growing our business and actively managing spreads and expenses. At the same time we returned more than $50 million to shareholders through dividends and repurchases. As we move forward in 2015, we continue to address the challenges of the low interest rate environment and 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 and we’ll turn the call over to the operator to open it up to any questions you may have.

[Operator:]

[Operator Instructions] And our first question is from Colin Devine at Jefferies.

[Colin Devine:]

Good morning folks. Just a couple of quick questions. I think I was writing everything down, but just to make sure I got this. The next board meeting is going to be March when the dividend may be discussed. Was that correct?

[Jim Brannen:]

That’s correct. It’s the first week of March.

[Colin Devine:]

Okay, thank you. Secondly, with respect to investment yields, clearly an issue for all of us although I heard about the 10-year coming up this morning, maybe a little less so. If I take out the prepayment income, how much does that take off the yield for the quarter? Was it about 15 basis points? I’m just trying to set up what’s the run rate because at some point everybody has benefited from this. But at some point I assume this is going to run out.

[Don Seibel:]

Colin, this is Don Seibel. I don’t have the roaming number available, but if you take a look at full year in 2014, our portfolio yield was 5.61%. If you exclude the prepayment fees, it was 5.7%. So 14 basis points.

[Colin Devine:]

Okay, that’s what I was thinking about. And then a bigger question with respect to sales. Can you talk a little bit about your sales outlook for this year? I thought sales came in maybe a little lower than I might have expected. I know you’ve got a lot of things going on, but perhaps you can just lay out what your thinking is for sales targets for this year across the products.

[Jim Brannen:]

Good morning, Colin. This is Jim Brannen. I’ll take the first shot at that. Maybe Ray will want to chime in as well. My outlook is a mixed bag. There are some things going on that are exciting. The sales coming from the newest added agents with much higher production requirements than we’ve had in the past for them to stay on financing is starting to show. And stopping the drain or the loss of agents and improving that agent retention is something that I think is going to start leaving its mark a little more in 2015, which I am excited about. In this environment, on the annuity side especially, I always like say you have to have a value proposition for like a three legged stool. You’ve got to have a value proposition for a policy holder, an agent and the company and by the time you split that value proposition three ways, it gets tougher and tougher in this environment. Having said that, there’s a lot of cash out there needing to go somewhere. But we keep trying to bring products to the front that are going to work in this environment. The release -- we’re slow on the uptake I think on introducing universal life insurance, index universal life insurance to our agency force. Part of that was we were in the middle of a conversion and didn’t want to do a lot of that development and have really switched strategies to go ahead and get that index universal life out there. Sometimes new products take a while to be embraced by an exclusive agency force, but I would say they’re already used to the index and feature and have fully embraced the index annuity. And I think there’s probably a little more clamoring on the index universal life side. When you look at sales compared to last year, I’d say a couple of things. 2014 fourth quarter was [indiscernible] quarter that we’ve ever had for the company. And so the bar is pretty high on a comparison basis. Also I would say that one of our territories has been our best seller and that’s Iowa and Iowa was a big enough portion of the company. When they’re down, which they were this year due to those universal life sales, we just had some major producers who were writing a lot of that back off a little bit. And when they’re down, it’s tough to not have the whole company down a little bit and we’re certainly trying to get the Iowa folks recharged up and they seem to be having a great start to 2015. So overall I think it’s a challenging environment, but I think we’re pushing enough buttons that I am hopeful that we’re going to see growth again in 2015.

[Ray Wasilewski:]

Yeah, I’ll add a little bit to that. Colin, it’s Ray Wasilewski. My focus really on that index universal life product that Jim mentioned. If you look at the industry forecast for 2015, they’re forecast to be flat overall. And when you go back over the last few years and look at it, sales have been relatively flat and the index universal life has been the star that has been growing. In fact at something about 15% a year. So we won’t have that product full year. We will add it mid-year. The other part of that that bodes well for us we design products in a simple way. Middle market, Middle America is known to be very underserved by life insurance and a lot of that is because of the product complexity. Our agents serve Middle America. Our products march that need. And so even if we have customers that have had that opportunity in the past where they might have been exposed to an index universal life, I think ours will hold up well and our agency force is well positioned to sell that.

[Colin Devine:]

Okay, thank you. One last one. I’d be remiss if I didn’t ask on the investment portfolio with respect to exposure to the energy sector or if anything has come up that’s causing you to put it on the watch list for any concerns.

[Jim Brannen:]

You’ve got that, Charlie?

[Charlie Happel:]

Yeah. Hi Colin. This is Charlie Happel. We have not had any names migrate to the watch list as yet. We’ve got some detail on our energy allocation if you’d like to see it. But we haven’t had any issues develop so far.

[Colin Devine:]

Okay, great. Thank you.

[Operator:]

The next question comes from Carl-Harry Doirin from Raymond James & Associates.

[Carl-Harry Doirin:]

Good morning everyone. My question has to do with the low income housing tax credit accounting change recently. Most insurers have adopted the change, with the exception of one other company. You guys didn’t make any mention of it and so my question was, did you guys have any thoughts or will you be making these changes?

[Jim Brannen:]

We have studied that. We’re choosing not to adopt the new methodology. It is elective. A couple of reasons for that. One is, with the new methodology, the return from the low income housing tax credit gets buried in the tax line where we consider it an investment and we currently record that through equity income. We think that’s a pure presentation of the results from our investment portfolio which we have it in the equity income line and then it doesn’t confuse the analysis of the tax line. So that’s one reason. But another reason is we take a look at the projection of income under the new method versus our existing method. And assuming that you continue to have some allocation to this type of investment, things balance out over time because it just changes the timing of the recognition of investments. So we didn’t feel a compelling need to make the change.

[Carl-Harry Doirin:]

All right, fair enough. I know you guys also talked about capital deployment and allocation. Any views on interest rates so far? They came down from 217 from year end and bounced up today. Most stocks are up today. Just any -- I know you guys didn’t make any mention of it. Just wanted to know your thoughts on it.

[Charlie Happel:]

This is Charlie Happel. Yeah, we’ve had a little bit of a perfect storm year to date in terms of just some sovereign yields globally. Obviously if you look around the world, even at the low level our teams are currently trading, they look very attractive relative to negative yields you see on even five year paper in Germany and a lot of other places. Having said that, we're still optimistic about the core strength of the domestic economy and in spite of what’s going on with Greece and so forth, the ECB’s actions will probably stabilize things somewhat in Europe. And so we’re at least hopeful that we’re going to -- when we’re seeing it today like you say, a little bit of relief on where tens are trading. So we’re not in panic mode by any means, but yeah it’s pressure for us and everybody in the industry. There’s no question.

[Carl-Harry Doirin:]

And one last one if I may. Did you guys disclose how much the favorable mortality was?

[Jim Brannen:]

We estimated the favorable mortality at about $0.04 per share for the quarter.

[Carl-Harry Doirin:]

$0.04 per share for the quarter. All right, that’s it for me. Thank you.

[Operator:]

[Operator Instructions] And our next question comes from Bob Glasspiegel with Janney Capital.

[Robert Glasspiegel:]

Good morning West Des Moines and on behalf of Randy and Steve and Colin we welcome you into our exclusive FBL club on the conference call. On the interest rate scenario, if the interest rates stay at below 2, I guess or a $1.94 so now trading up a little bit as Colin said, is there further DAC locking that would happen or did you market to the February interest rate versus year end?

[Ray Wasilewski:]

The unlocking exercise used information as of December 31, which is actually the GAAP requirement to use the existing information as of December 31, but that was with the view that interest rates were going to continue to stay low. Didn’t necessarily anticipate the dip in interest rates that we saw out of the gate this year. To the extent that that’s going to drive unlocking in the future, that’s really uncertain because we don’t know where interest rates are going to head from this point forward. It is something that we will challenge on a quarterly basis. We normally unlock once a year, typically in the second quarter, but we took a look at the environment and decided that it made sense to make the interest rate changes at December 31. So we’ll challenge ourselves quarterly but do a fuller deep dive into the assumptions on an annual basis later in 2015.

[Robert Glasspiegel:]

Thoughtful answer. I just I couldn’t quite follow though. If the 10-year did stay at $1.94 where it is today, you said you can’t’ calculate whether there would be unlocking based on freezing that interest rate for the year?

[Ray Wasilewski:]

Yes. We can go through that mathematical exercise and borrowing no other changes that would have a negative impact. But when you have even lower interest rates, you also tend to have the business stick around longer and you may need to change your lapse assumption in the model as well, which drives profitability which offsets the low interest rates. That’s not a one for one exchange there between those assumptions. So it’s not something that’s real intuitive.

[Robert Glasspiegel:]

Thank you. Just pushing Colin’s question a little bit further. Are there more things on your watch list in energy than there were a year ago? When you do your capital management budgeting for credit, what that might take out this year, where are you on the -- credit I assume has been incredibly positive versus your budget for the last four, five years and we haven’t had to worry about it for a while as analysts. Any color on how your watch list looks and how your budgeting might be correlated today? Would be appreciated.

[Ray Wasilewski:]

As of yearend, we didn’t have any of our energy names trading below 85, which is the threshold to even look at for our watch list. We had, I’m trying to remember if these are four or six names that were even trading between 85 and par. So we just really haven’t had a market deterioration. We don’t have high yield energy names in the allocation. It’s all investment grade. So we just haven’t had any reason to be particularly concerned as of now.

[Robert Glasspiegel:]

Outside energy?

[Jim Brannen:]

Beyond energy I think was your question as well. As I look at our watch list, it has continued to slowly shrink each and every quarter throughout the last four, five years as you’ve talked about. And I don’t know if I can be bold enough to say it’s as small as it’s been, but I believe it is as small as it’s been and new names just for the most part aren’t’ getting on there..

[Robert Glasspiegel:]

So you’re telling me, find other things to worry about?

[Jim Brannen:]

No.

[Don Seibel:]

Bob, this is Don Seibel. When I threw out the estimate of conservatively generating $50 million to $60 million of excess capital, the Farm Bureau Life does that. That was assuming that the impairment levels would increase and hence the comment about being conservative.

[Robert Glasspiegel:]

You bet. Do you have a target dividend rate or payout rate that your board looks at, say you want to be -- you wanted a year ago to be the top of your peers. So that sounds like that may be one benchmark, but is there a payout ratio that you think is appropriate?

[Jim Brannen:]

Not a stated payout ratio, Bob. And again in a few weeks we’ll have that meeting and that discussion and get right out to you with details right after that.

[Robert Glasspiegel:]

I will wait with great interest. Thank you.

[Operator:]

Our next question is from Colin Devine at Jefferies.

[Colin Devine:]

Just two quick follow ups. One, with respect to the reserve review and the DAC unlocking, will you be doing it again in the second quarter or did you move it up and now we’re done for the year?

[Jim Brannen:]

No. we will certainly be unlocking in 2015. There is an open question whether or not it will be during, in connection with the second quarter results or our third quarter results. We may push it out to be closer to yearend which is more than the mainstream, how companies do the unlocking. But we will do a formal unlocking process in 2015.

[Colin Devine:]

Okay. And then when you’re pricing new products, are you doing that off the portfolio investment yield or new money yield?

[Jim Brannen:]

Based on the nature of the design of the product, we do have a portfolio annuity product that has a certain set of tag assets that are available to that product and all policy holders would share in a portfolio rate. If it’s new a money annuity type product, which many of those are suspended, it would be new money.

[Colin Devine:]

And on life insurance?

[Jim Brannen:]

There’s a portfolio assumption on life insurance and again it depends on the product design, whether there’s some interest sensitive components to it or whether it’s fixed type product. But Don, you want to add?

[Don Seibel:]

That’s right. It is based on the portfolio yield.

[Colin Devine:]

Okay, great. Thank you.

[Operator:]

At this time I 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 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 presentation. You may now disconnect.