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FBL Financial Group, Inc. (NYSE:FFG)

Q2 2014 Results Earnings Conference Call

August 1, 2014 11:00 a.m. ET

Executives

Kathleen Till Stange - Vice President of Investor Relations

James Brannen - Chief Executive Officer

Donald Seibel - Chief Financial Officer and Treasurer

Scott Stice - Chief Marketing Officer

Analysts

Randy Binner - FBR Capital Markets

Bob Glasspiegel - Janney Capital

Steve Schwartz - Raymond James & Associates

Operator

Good morning and welcome to the FBL Financial Group's Second Quarter 2014 Conference Call. All participants will be in listen only mode. (Operator Instructions) 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 second 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; Scott Stice, Chief Marketing Officer; and Ray Wasilewski, Chief Operating Officer.

Certain statements made today may contain forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied. These risks and uncertainties are detailed in FBL's reports filed with the SEC and are based on assumptions which FBL believes to be reasonable. However, no assurance can be given that the assumptions will prove to be correct. FBL disclaims any obligation to update forward-looking statements after this date.

Comments during this call include certain non-GAAP financial measures. These items are reconciled to GAAP and our second 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.

James Brannen

Thanks, Kathleen. Good morning, everyone and welcome to the call. I want to thank you for taking the time to join us today and your interest in FBL Financial Group.

I want to take a moment to welcome Ray Wasilewski to the call and introduce him to you. Ray was named our Chief Operating Officer for the Life Companies just a week and a half ago. He has served on FBL’s Management Team since 2011 as Vice President of Information Technology and most recently as Chief Administrative Officer. Ray has been with FBL since 1997 as an innovative and productive technology and team leader. I am really confident in his abilities to lead Farm Bureau Life’s operations. So welcome, Ray.

Results for the second quarter were outstanding with net income at $1.14 per share and operating income at $1.05 per share. These results build on the strong financial results in the first quarter and reflect positive momentum from serving the needs of our Farm Bureau niche market. Don's going to cover our financial results and our capital position in detail.

Sales for the second quarter were mixed. Annuity sales were positive, but life sales are lagging a bit. Annuity premium collected in the second quarter increased 36% over last year’s second quarter and are up 21% year-to-date. The primary driver of this increase in sales our index annuity product, which remains an attractive annuity option for our agents and customers. Life insurance sales in the industry are down from last year and our life sales are down as well.

For the second quarter, total life insurance premium collected decreased 13% compared to the second quarter of last year. Year-to-date, our life insurance premium collected is down 9%. The decrease has been driven by our lower universal life sales, which reflect some UL product changes we made late last year. I am confident we’re taking the necessary actions to reverse the trend. We’re about to wrap up a week long sales blitz focusing on agent activity with incentives for appointment setting and application submissions. We also have a cross-sell mailing in flight.

In addition to increasing existing agent productivity, we are focused on increasing our distribution footprint as well. Within our core eight states where we manage the agency force, this year we have appointed 113 new full-time agents and 64 reserve agents through June 2014. That compares to only 91 new full-time agents appointed last year through June 2013.

As a reminder, our new reserve agent program is where an agent candidate completes a training program that can take up to three months. The candidate is required to achieve certain production minimums on a part-time basis before being contracted as a full-time agent. This program gives us and the agent an opportunity to assess if the candidate is expected to have a successful long-term career with us. We’re pleased with the results of this program so far and expect it to ultimately increase our total agent count as well as improve retention.

I’d like to spend a moment highlighting our cross-sell success. Despite already being an industry leader, our cross-sell rate has been steadily increasing. At the end of 2009, our cross-sell rate was at 22.7% and today it's 23.7%. According to LIMRA statistics, this is double the industry average. Cross-selling is a very important part of our culture and is part of our training, compensation, incentives, marketing and more.

We see room for further growth from cross-sell as some of our territories have a much higher rate than others. We continue to work to make sure cross-sell best practices are in place in all regions. Most importantly, we have developed the type of agency force where our agents have relationships and personal connections with their customers. This cross-sell success reflects that we are focused on the entire customer relationship. When our customers think of insurance, we want them to think of our Farm Bureau agent.

For the remainder of 2014, we are directing our efforts in several areas. As I mentioned, we have several initiatives underway to improve life sales. We are proactively addressing the challenges of the low interest rate environment, which is increasingly difficult given what interest rates have done this year. However, I’m pleased that in total we are making our target spreads. We are leveraging technology. Most notably, at the beginning of the third quarter we launched a new enterprise financial system and agents are embracing usage of our e-app for application submissions. We are working to ensure we have best-in-class distribution because our exclusive Farm Bureau agency force is one of our most important competitive advantages. We are implementing transformational changes in the way we recruit and train our agents.

In conclusion, I’m very pleased with FBL’s results to date in 2014 and have I have got confidence in the management team and the strategies we have in place. I am going to turn the call over to Don Seibel for a review of our financial statements now. Don?

Donald Seibel

Thanks, Jim, and good morning everyone. I’m pleased to share with you today the details of our second quarter financial results. I’ll discuss our operating results, spreads and capital position.

As Jim indicated, we had excellent second quarter earnings results with operating income of $1.05 per share. This is a 7% increase over the operating income of $0.98 per share in the second quarter of 2013. Net income per share for the quarter came in at $1.14.

Earnings results for the quarter were pretty straightforward with the volume of business in force continuing to grow. Mortality experience for the quarter was a couple of pennies per share better than projected but was still within our range of expectations. Both the claim count and the average claim size were roughly in line with what we would normally expect. With that said, mortality experience by its nature can fluctuate on a quarterly basis.

During the quarter we benefitted from $0.03 per share of investment fee income, which was primarily in the corporate & other segment. In the second quarter, we performed our annual review of assumptions used in the calculation of deferred acquisition costs, value of insurance in force acquired and unearned revenue reserves for all of our blocks of business. We unlocked assumptions relating to projected earned spreads, withdrawals, mortality and premium persistency. This resulted in minor adjustments to these balances.

The net income statement impact of the change in assumptions including adjustments to related reserves was to increase pre-tax income by $43,000. Equity income continues to perform well on an after-tax basis, reflecting our investment partnerships and low-income housing tax credit investments. Higher equity markets in the second quarter positively impacted separate account performance, resulting in lower DAC amortization for our variable products. This is included in our corporate & other segment where we report our closed block of variable business.

In addition to these items, our per share results reflect the benefit of FBL share repurchases over the past year. Taking into account the pre-payment fee income, mortality results and the favorable impact of market performance on our variable business, I would put our normalized operating earnings for the second quarter at just under $1 per share.

Looking at the results by segment. Both the life and corporate & other segments had higher pre-tax operating income compared to the year ago quarter, while the annuity segment experienced a decrease. The annuity segment declined primarily due to the impact of unlocking and lower investment fee income.

While I am pleased with our financial results so far in 2014, I remain concerned about the impact of the persistent low market interest rate environment. The 10-year treasury yield has declined approximately 50 basis points since the beginning of the year, which is making it increasingly difficult to achieve our desired investment yields and meet spread targets. We’ve been proactive in managing the profitability of our business and have been decreasing crediting rates as appropriate given declining portfolio yields.

In the second quarter we reduced crediting rates on certain annuity products and effective today we have decreased rates on certain universal life products. As a result, the point-in-time spread on our annuity business increased 2 basis points during the quarter to 212 basis points at June 30. This spread is above our target of 203 basis points for this business. Point-in-time spreads on our universal life business, however, decreased during the quarter, totaling 149 basis points at June 30, which is under our target for this business of 159 basis points. The crediting rate actions taking effect today will help narrow this gap.

While we still have room to lower crediting rates on certain products, the blocks on which we can do so are relatively small, making up only 36% of our annuity business and 15% of our universal life business. From an investment perspective, purchases during the quarter focused on BBB-rated corporate bonds and Ginnie Mae project loans where we have seen value. Another area where we’re seeing good relative value is our commercial mortgage lending.

During the second quarter, the average tax adjusted yield on investments acquired backing our long-term business was 4.71%. Our portfolio quality remains high with 96% of fixed maturity securities being investment grade. Next I’ll comment on our strong capital levels.

At June 30, Farm Bureau Life’s capital position remains excellent with an estimated company action level risk-based capital ratio of 531%. This increase from 504% at the end of the first quarter reflects the outstanding earnings during the quarter as well as a reduction in asset risk charges due to the sale or maturity of several lower rated securities. During the second quarter of 2014 our stock repurchase activity was minimal as we watched our stock price reach all-time highs.

During the quarter, we repurchased 70,481 shares of stock at a cost of $3 million. As of June 30, we have $47 million remaining on our stock repurchase authorization. We will continue to repurchase FBL's shares from time to time as we see opportunities.

In addition to stock repurchases we are deploying capital via our regular quarterly dividend. Our indicated annual dividend of $1.40 per share results in a dividend yield of 3.3%, which makes us the highest dividend yielding stock among publicly traded U.S. life insurance companies. This level of dividend reflects our confidence in our business. We have flexibility with our capital management plans. We have more than adequate liquidity and capital at the holding company level with excess capital at the parent of approximately $55 million at June 30. In addition, using 425% risk-based capital as a base, Farm Bureau Life also has excess capital of approximately $120 million at June 30.

To recap, FBL had an excellent quarter and is managing the profitability of its business despite the challenges of low market interest rates. I’m pleased to have been able to share these results and our plans with you.

That concludes our prepared comments. We will now turn the call over to the operator and open it up to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Randy Binner of FBR. Please go ahead sir.

Randy Binner - FBR Capital Markets

So, I'd like to start just from a modeling perspective on the one timers. Don, you said, equity market's prepays and mortality at kind of $0.06, we are calling it. Is that right? Kind of $1.05 to $0.99?

Donald Seibel

Yes. Thereabouts. Our investment fee income was $0.02 to $0.03 higher than what we can rely on quarter in quarter out. Our debt benefits were a couple of cents better than what we had projected but again still in line with our expectations. The separate account impact on DAC was about a penny per share so that navigates you from our $1.05 down to just below $1.

Randy Binner - FBR Capital Markets

And just for geography, so the fee is the $0.03 you are putting all in the corporate item. Is that correct?

Donald Seibel

Yes.

Randy Binner - FBR Capital Markets

Okay. So it's not like, it's not pre-pays in the segment spreads?

Donald Seibel

Well, there is about $172,000 of fee income that fell to the annuity segment. There was essentially nothing in life and the balance, about $930,000, was in the corporate.

Randy Binner - FBR Capital Markets

All right. That's not going to make a huge difference. Obviously, the $0.02 of the [DAC] (ph) is in the life, and then the DACs in the runoff, entirely. Right?

Donald Seibel

Yes. The DAC was split between variable which is in our corporate segment and traditional. So it's about an even split, I believe.

Randy Binner - FBR Capital Markets

Okay. And then was the DAC in some of the UL in the life segment or was it all in corporate?

Donald Seibel

The separate account impact on DAC that’s all in the corporate and other.

Randy Binner - FBR Capital Markets

Okay, got you. I guess, I'll try one more on the buyback. You said $47 million is the authorization remaining. Is that right?

Donald Seibel

That’s what's currently remaining. Yes.

Randy Binner - FBR Capital Markets

So it's hard for us when $3 million is lower and, obviously, there's a lot of capital and I guess you don't feel as opportunistic about the stock. So I guess what does it take to kind of move that lever more from your perspective, the buyback lever?

Donald Seibel

Well, certainly the price of our stock is something we closely and we would like to buy our stock when it's not at the all time high. Not that we don’t think that there's still a good value at that price. And we do want to occasionally step out of the market and see how the stock behaves without the support of the company being there on a daily basis because of the limited flow that we have and the limited liquidity that we have with the trading of our stock. So it just helps us gauge how and if we are impacting the markets being in.

James Brannen

I will also say, Randy, hi, it's Jim. I'd also say, you know we have been in the market for quite a while now and at the low float stock I think we have done a lot of what we can do in terms of the big pieces. It's really one leg on a stool, that’s why our dividend yield is high, that’s why we have looked at specials in the past. We will continue to look at dividend and specials. And then any opportunistic things that might come along in terms of blocks or something that might be synergistic to Farm Bureau. But at the end of the day, I think the buybacks have to just be considered one leg of a stool.

Randy Binner - FBR Capital Markets

Are you all frustrated by the kind of lack of market reaction to a very high dividend yield you've delivered now?

James Brannen

So I am not going to ask the market how to respond to anything specific. We are just going to keep our head down and deliver in results and putting out good yields for investors. I think in the long run Randy, that just is going to work out.

Randy Binner - FBR Capital Markets

Right. Fair enough. I'll stop asking questions because I don't want to make Glasspiegel angry at me, so I'll drop back in the queue. Thank you very much.

James Brannen

I have never seen him angry.

Randy Binner - FBR Capital Markets

Only for me, only for me.

Operator

And our next question comes from Bob Glasspiegel of Janney Capital. Please go ahead sir.

Bob Glasspiegel - Janney Capital

Randy, you were asking great questions today. I would have been happy to have you keep going today. On the life production side, I think you were saying you're trying to get some things to get it going again. Is there a specific segment of the product? I mean, universal life is down for three quarters from what had been much faster rates, but that seems like a prudent reaction to lower rates. Which of the three product lines in life are you most interested in getting reinvigorated and how do you do that in a low interest rate world?

James Brannen

I will start and then I will turn it over to Scott Stice, our Chief Marketing Officer. But in terms of -- I am a little agnostic on the product. I mean we really want to have a wide product portfolio that fits the needs of all life spans and all economics scenarios. And, frankly, that’s kind of our product strategy. And we have similar kinds of return hurdles in most of those product lines. In terms of the UL, I would consider it a hot product for us a year ago and so the comparisons are pretty tough. And it is our top agents that have probably taken a little bit of a pause on one of our universal life products that has been very hot for some period of time.

We did cool it off with a product change. It was a product change that was absolutely necessary. In terms of getting going again, really, I would describe it a little bit a blocking and tackling, and adding emphasis and letting our partners, i.e. our exclusive agents know kind of what part of the business it is that we are focused on and they tend to generally respond and help and Scott has been doing quite a few things to get that done. The momentum is going well. I mean the deficit at the end of the second quarter is better than the deficit at the end of the first quarter and the momentum continues to build in my opinion but, Scott, you want to add anything to that.

Scott Stice

Yes. The only thing I would add is, that from a product perspective, it's less about focusing on a product per say and more about solving the problems and the needs of our member clients. And so our focus is where it has always been. It's on cross-sell. We have recently launched some additional products around whole life that we think will be well received in the market. And as Jim mentioned, we have a number of sales campaigns up and running right now. So momentum feels pretty good.

Bob Glasspiegel - Janney Capital

Okay. And if I could just backtrack to some numbers you were throwing out, by the way I got it to be about 20 seconds behind you after you were giving spreads. I think you were giving the percentage of UL and annuities that had more room to lower rates, 32 and 15, but I probably got those numbers wrong. Could you repeat those two numbers?

Donald Seibel

Yes. Universal life is 15% of the block. It's currently crediting above the guarantee and with the annuity business it's 36%, is above the guarantee.

Bob Glasspiegel - Janney Capital

Okay. So over time, those numbers are going to go down and we're going to run out of room. When would that be, if we [reach there] (ph)?

James Brannen

Well, over time if we didn’t sell anything new, that that is true and if the interest stay the same, we would eventually run all of our business to the guarantee. But a lot of that business that we put on the last few years is at a very low guarantee, so there is some room there. And we continue to write new business with the lower guarantee. So we will be able to make crediting rate adjustments going forward, it's just the ability to make a meaningful impact on the entire block when only just a portion is (indiscernible).

Bob Glasspiegel - Janney Capital

Right. I think what you've been saying for four years is spreads are going to go down, and they haven't gone down as much as you would think given what rates have done because of the actions you're taking. So at some point--

James Brannen

That’s clearly true. But you are right, at some point the decrease in rates this year, I think truly was a blow to most of us in terms of where we were headed. If we had rates that we had at the beginning of the year and may be a little bit of lift off of that, we probably could have built off of where we were at as opposed to continue to fight the fight. And so that fight has been extended and it really does present the spread compression that we have talked about sometime in the future. It's not another four years at this pace, we need some interest rate relief.

Bob Glasspiegel - Janney Capital

Well, I'll give you guys credit for honesty. Few of your competitors are as open about this issue as you guys are, so kudos. I'll cede the floor to Steve or Randy.

Operator

(Operator Instructions) Our next question comes from Steve Schwartz of Raymond James & Associates.

Steve Schwartz - Raymond James & Associates

Where I wanted to go, just on a question that Bob -- well, first, on the buyback. I realize you don't want to buy your stock at a high. I've been trying not to buy your stock back at a high for the last three years and that hasn't really worked, I just wanted to point that out. At any rate, on the part about the blocks of business that can be re-rated, there is can be, theoretically and I guess can be realistically, realizing that these are enforced blocks. I guess my question is competition, surrender charges, I mean can these actually be lowered given the competitive environment?

James Brannen

I would say, yes. And the interesting thing about the low-interest rate environment is, the competition to move a product is significantly reduced. The new money rates are much lower than most things that people have on the books already, whether it be a portfolio or a new money product that was put on in a previous interest rate environment. So your risk of flight really doesn’t show up immediately, it shows up more as the interest rates are rising. So the ability and likelihood to continue to make moves is real for us.

Steve Schwartz - Raymond James & Associates

Okay. And the, Don, you gave the spread numbers. You said the spread in UL was 149 bps and that was lower than your 159 target. You didn't say where that came from. What did that -- I can go back and look at the notes, I guess, but do you know off of the top of your head where that number was either last quarter or a year ago?

Donald Seibel

The last quarter we were 7 basis points deficient, so this quarter we are 10 basis deficient. Off 3 basis points.

Steve Schwartz - Raymond James & Associates

Okay. That's an interesting way to look at it. Okay, great. And then the number of new agents that you appointed, you pointed to the fact that that was a good strong number. Where do these people come from?

Scott Stice

So they are coming from the same place they always have. We have, as I think you know, 50 agency managers out in the footprint that we operate in. We have 12 assistant agency managers out in the footprint that we operate in. And there job is to source, recruit and develop new agents. The only significant change, and it is a significant change that we have made to recruiting, was the introduction of the reserve agent philosophy. Where now a candidate instead of going through our whetting and selection process and being appointed full time, goes through that same whetting selection process but now has to qualify via some production, via completing some training, via demonstrating an ability to market before they can go full time. And when you add those 64 on top of the 113 that we have appointed full time, it's a really impressive number on a year-over-year comparison. All of this is designed to improve the success rate.

Steve Schwartz - Raymond James & Associates

Okay. Actually, that was going to be my next question. So this 113 went through that program? Is that correct?

Scott Stice

Some of the 113. We were making the transition from the old way to the new way throughout the year.

James Brannen

If we would have somebody come over from another carrier, we wouldn’t put him through that program (indiscernible).

Steve Schwartz - Raymond James & Associates

That's why I was wondering, if they came over from another carrier, because I thought they had to go through the reserve program. So that's where I was confused. Jim, were you going to say something?

James Brannen

I said there is clear exceptions and that would be one of them.

Steve Schwartz - Raymond James & Associates

Okay. All right. And it sounds like that you're happy, this will be my last question, it sounds like you are happy with the reserve program and it's doing what you thought it would do? Obviously, early days.

James Brannen

It is early, but the early results are better than what we would have expected at this point.

Operator

And 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 2014 earnings release on Thursday, November 6 and conference call on Friday, November 7. 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 your lines.

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