FBL Financial's (FFG) CEO James Brannen on Q4 2015 Results - Earnings Call Transcript

| About: FBL Financial (FFG)

FBL Financial Group Inc. (NYSE:FFG)

Q4 2015 Results Earnings Conference Call

February 12, 2016, 11:00 AM ET

Executives

Kathleen Till Stange - Vice President, Corporate and Investor Relations

James Brannen - Chief Executive Officer

Don Seibel - Chief Financial Officer

Charlie Happel - Chief Investment Officer

Scott Stice - Chief Marketing Officer

Ray Wasilewski - Chief Operating Officer

Analysts

Steven Schwartz - Raymond James and Associates

Bob Glasspiegel - Janney

Operator

Good morning, and welcome to the FBL Financial Group Inc. Fourth Quarter 2015 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

Please note, this event is being recorded. I would now like to turn the conference over to Kathleen Till Stange, Vice President, Corporate and Investor Relations. Please go ahead Ma'am.

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 Seibel, 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 in our fourth quarter earnings release and 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 and thank you to everyone who have joined us on the call today. Before I get started today, I wanted to thank Florence Hunt, our most loyal conference call attendee. I want to give her a birthday shout-out as she will turn 98 years old on March 24. She is the mother of former FBL Executive JoAnn Rumelhart. Both Florence and JoAnn have been shareholders since our initial public offering. So happy birthday, Florence and thanks for being with us today.

I'm pleased to report that FBL Financial Group once again posted strong earnings results. Net income for the fourth quarter came in at $1.23 per share and operating income was $1.04 per share.

These results cap up a record high year of net income per share while maintaining a very strong capital position. We also enhanced shareholder returns with significant dividends. Sales for the fourth quarter were very strong with premiums collected up 23% over the prior year quarter.

Annuity premiums collected were up 51% and life insurance premiums collected were up 4% compared to the fourth quarter of 2014.

During the fourth quarter of 2015, we offered a four-year guaranteed annuity in the November and December. This is similar to a limited product offering we did in the third quarter of 2015. The new limited offering was well received by agents and customers and resulted in $26 million of additional annuity premiums collected in the fourth quarter.

Other than these limited offerings our shorter term annuity products have been suspended. Given the success of these offerings and the demand from our agents we are introducing a four year guarantee annuity product on an ongoing basis. This product will meet our pricing objectives as it will have the lower commission rate and lower interest crediting rate.

In addition, the strong fixed rate annuity sales premiums collected on our indexed annuity product continue to grow. We saw an increase of 25% in the fourth quarter over the fourth quarter of 2014.

Life sales were also strong in the fourth quarter with premiums collected up 4% compared to the fourth 2014 led by sales of our whole life. Sales of our index universal life product which we introduced in mid year 2015 continue to grow as agents and customers embraced the product.

Turning now to our agency force. During 2015 we added a net 54 agents, bringing us to a total of 1,849 agents and agency managers as of the year end. We also have been able to improve agent retention. Our first year agent retention increased from 78% in 2014 to 92% in 2015. At year end, we also have 88 active reserve agents working to complete the steps necessary to become a full time Farm Bureau agent.

As I look back on 2015, one of the things I’m most proud of is the growth in our agency force. A strong and growing agency force is critical to our success. I believe our multi line exclusive agents are one of our most significant competitive advantages and it represent a strong brand and have a meaningful relationship with our clients.

Growing the agents force is hard work, but it continues to be a priority for us. Moving forward in 2016, we are awaiting the department of labor’s pending fiduciary rule, one of the planning stages now but we’ll need to see and examine the final rule once published. That’s to determine how it will impact our industry and our company.

I am confident we will be able to adapt to the changes that come from the rule. I believe, our exclusive agency force, which focuses on trusted relationships and needs based selling will give us an advantage as the implement changes as a result of this additional regulation.

2016 has already been a tumultuous share for the markets, and looking ahead, I see many challenges facing us including continued low interest rates, a more active regulatory environment, slowing global and domestic growth, increased information technology and cyber security cost and many others.

I also feel confident about where FBL Financial Group stands. We have a very strong capital position and maintain the industry leading cross-sell rate. We have a profitable book of business that’s balanced between life and annuity business, as well as the diversified high quality investment portfolio. I believe we have best in class distribution with our exclusive Farm Bureau agency force and a very loyal niche customer base.

I am cautiously optimistic as we move forward in 2016. Now I’ll turn the call over to Don Seibel to review our financial results. Don?

Don Seibel

Thank you Jim and good morning everyone. I am pleased to share with you today some insights regarding our financial results and financial position. The fourth quarter of 2015 capped off a strong year for FBL Financial Group. As Jim indicated, the operating income for the quarter was $1.04 per share and net income was $1.23 per share.

During the quarter, our operating income adjustments totaled $0.19 per share and consisted primarily of realized gains on investments.

Our fourth quarter operating income is in line with our expectations with overall spreads coming in at our target levels. In addition, we had some offsetting items impacting our results.

These included investment fee income from bond calls and prepayments totaling $0.05 per share, a negative impact from unlocking of $0.02 per share and an increase in death benefits.

During the fourth quarter we had an unscheduled true ups to the DAC unlocking we performed in the third quarter. In short, we further refined our mortality assumptions by product. While this had a relatively small negative impact of $700,000 to our pretax income the unlocking decreased pretax income on our life segment by $1.6 million and increased pretax income and the corporate segment by $900,000.

I’ll focus the remainder of my comments around our operating results by segments. Annuity segment results were strong in this quarter with spreads exceeding our targets, however during the quarter our point in time spread on our annuity business decreased by 3 basis points to 205 basis points.

The decrease is due to a decline in investment yields as we did not make any crediting rate changes during the quarter. The spread remains above our target of 202 basis points for this business. It will be difficult to earn the target spread going forward given the current interest rate environment. While we have 33% of our annuity business currently receiving a crediting rate above the guarantees, there are competitive pressures that will make it difficult to be aggressive in taking further rate actions.

The annuity segment benefited from $1.4 million of investment fee income for the quarter. Results for our life insurance segment were not as strong as we had expected for the quarter. As previously mentioned, unlocking resulted in a $1.6 million charge of pretax results and death benefits were higher. Although I would characterise the death benefits as still being within our range of expectations.

The number of claims was in line with our recent experience; however the average claim size was elevated. With respect to mortality experience and also looking forward to next quarter, I’ll note that we have seasonality with our mortality experience and typically have higher death benefits in the first quarter of the year.

Spreads on our universal life business are pressured and are not currently meeting our targets as much of this business is at the minimum guarantee. Point in time spreads on our universal life business totaled 140 basis points at year end, which is below our target for this business of 154 basis points.

Like the annuity segment, it will be difficult to maintain the current universal life spreads going forward given the current interest rate environment. While we have 19% of our universal life business currently receiving a crediting rate above the guarantees there are competitive pressures that will make it difficult to be aggressive and taking further rate actions on the enforce block of business.

The life segment benefitted from $900,000 of investment fee income for the quarter. Results for our corporate and other segment exceeded expectations this quarter due primarily to the benefit from the impact of unlocking.

Next, I’ll turn to the balance sheet and our capital position. With this deep decline in oil prices, energy investments have garnered a lot of attention, so I’d like to spend a moment discussing our energy exposure. We have provided detail on this exposure and our investor supplement on page 17.

Our energy portfolio had a carrying value of $484 million as of yearend 2015, and was trading at 91% of amortized cost with $48 million of net unrealized losses. This exposure represents 6.3% of our total investments. These holdings are well diversified across sub sectors including midstream, oil field services, independent exploration and production, integrated energy and refiners.

These securities were 90% investment grade at December 31. The area of most concern is with the drillers, of which we have $38 million of carrying value exposure or 8% of our energy holdings. Gross unrealized losses on our driller exposure is $13 million. While we currently do not see a need to take any impairment losses on our energy exposure we are watching this sector very closely.

Moody’s has indicated their intent to broadly recalibrate energy company ratings given the lower price environment. The level of future impairments if any, will depend on the performance of the individual companies and our assessment of whether or not we have an attempt to sell on issue prior to maturity.

Next, I will comment on our capital levels. At December 31, the capital position of our wholly owned subsidiary Farm Bureau Life remained excellent with company action level risk based capital ratio of 570%, an increase from 545% at year end 2014.

Using 425% RBC as the base, Farm Bureau Life had excess capital of approximately $170 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 $55 million at year end. On top of that going forward, I expect Farm Bureau Life to generate approximately $60 million of excess capital each year.

As we review our options for deploying this capital we consider stock repurchases, our regularly quarterly dividend, and the payment of special dividends. We have not been active repurchasing shares recently and did not repurchase any FBL stock during the fourth quarter.

Our Board of Directors reviews the dividend rate regularly and is committed to having attractive dividend yield given our strong and consistent operating results. We also view the payment of special dividends on occasion as a viable option for distributing a portion of our excess capital. Our board will next review the payment of dividends when it meets in March.

From a financial perspective I look back on 2015 as a year of success for FBL Financial Group. We grew our business actively managed spreads and expenses and delivered strong financial results.

At the same time we returned almost $93 million to shareholders through dividends and common stock repurchases. We move forward in 2016 with discipline to profitably grow our business in these challenging times.

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

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question and answer session. [Operator Instructions] The first question will come from Steven Schwartz of Raymond James and Associates. Please go ahead.

Steven Schwartz

Thank you, operator and happy birthday to Flo.

JamesBrannen

I know.

Steven Schwartz

That was pretty cool. Two questions, first question is Don, you did mentioned the elevated mortality. It sounded like it was severity not frequency, two questions on that. When looking at it was there anything to be seen or was it just one of those things, would be the first question. And the second question on that would be – if you were in the mid point where do you think that mortality cost would have been?

Don Seibel

Yes. With respect to the first part of that question, we do take a look at the underlying data in great detail and analyze where the debts are coming from, when we issued the policy, looking for any common trader threat because we have had mortality in excess what our expectations for the year going in. And we really aren’t seeing anything in that data that would point to an issue or necessarily even a trend in one area of our business.

And particularly with respect to this, last quarter we had one year universal life claim for $1 million which was the size of our business that does move the average. And while the total claim count was in line with our expectations, a greater portion of those claims were in the term line of business which has a higher net benefit with lower reserves release, so that’s really causing the increase.

And with respect to the death benefit level and where the mid point would be. I don’t have an exact midpoint to share with you compared to maybe our modeling we did a year ago, it was maybe $0.04 higher, $0.04 to $0.05 higher, but as we look going forward and the updated modeling that we have more around $0.02 or $0.03 higher than maybe what we’d expecting that gives you some color.

Steven Schwartz

Okay. I appreciate that Don. And then the comments on lowering renewal rates, kind of that there was room to go but competition or other factors were limiting your ability or even capping your ability to do anything on that front. Can you dive deeper into that? What are your referring to, what’s going on there?

James Brannen

Well, I certainly won’t say it’s capping our ability, clearly we have room to change our crediting rates, but with respect to our portfolio products, our Portfolio 6, that has a six years surrender charge period, the range of rates [ph] we have on that for 1.30% and 1.90%, so under 2% is our rates on that particular product. And while we credit that to existing contract holders, we also credit that to new contract holders and who are interested in bringing in new business.

So, we’re sensitive to making crediting rate changes, but we’re open to it. We’ve demonstrated a willingness to take crediting rate actions. It just as we march on, we are closer and closer to the guaranteed rates and it becomes more difficult.

Steven Schwartz

Jim, did you – this is going back now years ago, but didn’t you introduce a new money product?

James Brannen

We’ve had our new money product basically suspended for quite a few quarters. And in my comments you heard about that, the four-year guarantee that was basically a mega type product that we put back on the shelf going forward now. But you know it’s pretty hard when I talk about the three legs of a stool where there is enough in a product for the customer and an agent to get it sold in the company to make a profit. It’s a difficult environment on the new money products, without them being pretty long term in nature. So the short term annuity products are very difficult.

Steven Schwartz

Okay. All right. Thanks guys. Appreciate it.

Operator

[Operator Instructions] The next question will from Bob Glasspiegel of Janney. Please go ahead.

Bob Glasspiegel

Good morning, FBL Financial.

Don Seibel

Hi, Bob. Good morning.

Bob Glasspiegel

Quick question on investment strategy, obviously this is tricky time to be a Chief Investment Officer. And given your strong capital position, you could look at spreads widening as an opportunity to really get some attractive things you like and crank the risk up. Or you could be saying, well, we don’t know where we’re going and Moody’s just looming with downgrades. This isn’t a time to be a hero; maybe we should become more conservative. Or you can do, state the core strategy. What are you thinking there is opportunities versus thinking you need to be more conservative here?

Charlie Happel

Yes. Bob, this is Charlie Happel. I think your question is spot on and the answer is probably to a degree all of the above. I mean, we’re looking hard at whether we want to make any tactical moves to readjust and obviously the market has singled out energy and they’ve singled out recently with negative interest rate policy on the horizon. Some of the financials are suffering, so year-to-date you just looking at the market.

We’ve seen obviously a substantial decline in treasury yields, that’s really been largely offset by spread widening, so to the extend that you’re buying corporate bonds, the yield environment hasn’t change, but we don’t have any macro strategy at a high level to describe right now, but its case up by case by block and tackle work that’s going on and certainly we’re willing to make some readjustment.

I’m not going to suggest we view this is a time to ramp up risk on a wholesale level. I mean, we’ve had a pretty steady Eddie strategy. We have not increase our allocation to BBBs over the last couple of years as perhaps some half, we’ve try to just maintain a pretty solid risk profile and we’ve been able to achieve some decent yields nonetheless and I think that in general that’s going to be our steady as she goes type strategy.

Bob Glasspiegel

Okay. That’s a thoughtful answer. Hopefully a year from now Steve and I aren’t asking your exposure to life insurance fixed investment in your portfolio?

Charlie Happel

[Indiscernible]

Operator

Mr. Glasspiegel, do you have any follow-up question?

Bob Glasspiegel

No, no, that was my question. Thank you.

Operator

You’re welcome sir. [Operator Instructions] Showing no additional questions, we will conclude the question and answer session. I would like to turn the conference back over to Kathleen Till Stange for her 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

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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