FBL Financial Group, Inc. (FFG) Q3 2014 Earnings Conference Call November 7, 2014 11:00 AM ET
Executives
Kathleen Till Stange – Vice President of Investor Relations
James Brannen – Chief Executive Officer
Donald Seibel – Chief Financial Officer and Treasurer
Ray Wasilewski – Chief Operating Officer
Scott Stice – Chief Marketing Officer
Analysts
Robert Glasspiegel – Janney Capital
Steven Schwartz – Raymond James & Associates
Operator
Good morning and welcome to the FBL Financial Group third quarter 2014 conference call. All participants will be in a 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 third 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 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 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.
James Brannen
Thank you, Kathleen. Good morning and welcome to everybody on the call. Thank you for taking the time to join us today and your interest in FBL Financial Group. I am extremely pleased that we have reported outstanding third quarter financial results
Our Farm Bureau Life business is performing well, and capital levels are strong and growing. Net income for the quarter was $1.21 per share and operating income was $1.18 per share. This builds on the strong financial results in the first half of 2014 and reflects positive momentum from serving the needs of the Farm Bureau niche market.
Don will cover our financial results and capital position in detail. Sales for the third quarter again favored annuities. Annuity sales growth continues to be positive compared to the year-ago quarter, and while we saw good activity in life sales in the third quarter, production remains below our target levels.
Annuity premium collected in the third quarter increased 16% over last year’s third quarter and are up 19% year-to-date. The driver of this increase is sales of our indexed annuity product. We introduced this product in September of 2012 and now indexed annuities make up almost half of our new annuity sales.
For the third quarter, total life insurance premium collected decreased 12% compared to the third quarter of last year. Year-to-date life insurance premium collected is down 10%. Much of the decline is due to lower universal life sales, reflecting changes we made last year to our universal life product. Those sales began dropping off in August 2013, so we expect fourth quarter sales to compare more favorably to last year.
Sales of our term and whole life insurance products, on the other hand, were up for the quarter.
We are working hard to increase agent productivity through initiatives on several fronts including sales, marketing and products. We held a weeklong life sales blitz during the third quarter to drive life insurance appointment setting and application submissions. This was successful with nearly 5,000 appointments set and more than 1,400 life insurance applications submitted. Another campaign is in full swing through the end of the year.
We also have several cross-sell offers and mailings to Farm Bureau property casualty customers. These offers promote the sales of indexed annuities, universal life insurance and term life insurance. These cross-sell mail programs include agent goal setting to drive agent follow-up. The multi-line culture of our business and these initiatives allow us to maintain and grow our industry-leading cross-sell rate.
In August, we enhanced our whole life product portfolio with the addition of smaller face amounts. This has been well received by our agency force. Also in August we added a term rider to our whole life product.
In addition to these initiatives, we are seeing success from our strategies to grow the agency force which will drive increased sales. Within our core eight states where we manage the agency force, this year we have appointed 158 new full-time agents and 143 reserve agents through September 2014. That compares to 127 new full-time agents appointed last year through September 2013. These appointments have resulted in a year-over-year increase of 31 agents and agency managers in those 8 states. One of the goals of this program is to improve our agent retention and we are starting to see that occur as well.
We expect our distribution strategy efforts, numerous sales campaigns and product enhancements to drive increased sales going forward. This is despite the headwinds of the continued low interest rate environment, and an industry-wide decline in life insurance sales.
Before I hand it over to Don, I want to mention that we recently held our annual review meeting with A.M. Best. Our desire is to have Farm Bureau Life rated at least A (Excellent), and A.M. Best has had a positive outlook on our company for nearly two years now. During that time, we've continued to deliver excellent financial results, as well as maintain a very high level of capital. We are confident that Farm Bureau Life exceeds the requirements for an upgrade, and have made a strong case once again this year, and are eager to receive our rating.
In conclusion, we have much to be proud of. In addition to strong earnings and strong capital levels, we maintain the industry-leading cross-sell rate and have one of the highest dividend yields in the life insurance industry. We have a profitable book of business that is balanced between life 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.
I’m very pleased with FBL’s results to date in 2014 and am looking forward to a strong finish to the year. Now I’ll turn the call over to Don Seibel for a review of our financial results. Don?
Donald Seibel
Thanks, Jim, and good morning everyone. I’m pleased to share with you today the details of our third quarter financial results. I’ll discuss our operating results, spreads and capital position.
As Jim indicated, we had excellent third quarter earnings results with operating income of $1.18 per share. This is a 16% increase over the operating income of $1.02 per share in the third quarter of 2013. Net income per share for the quarter came in at $1.21.
Earnings for the quarter were very positive. As we focus on the Farm Bureau niche market and meeting the needs of our customers, our book of business continues to steadily and consistently grow. In addition, results for the quarter were impacted by a number of positive contributing factors.
During the quarter we benefited from $0.07 per share of investment fee income, which was predominantly in the Annuity and Life Insurance segments. This fee income is due to higher than expected bond prepayments. Mortality experience for the quarter was better than our projections, by about $0.06 per share, primarily due to a lower claim count. But as you – as we know, mortality experience by its nature can fluctuate on a quarterly basis.
Expenses came in lower than expected during the quarter due to expense savings initiatives and the timing at which certain expenses are incurred. Equity income continues to perform well on an after-tax basis, reflecting our investment partnerships and low income housing tax credit investments. In addition to these items, our per share results reflect the benefit of FBL share repurchases over the past year, with a 4% decrease in weighted average common shares outstanding on a year-over-year basis.
On the other hand, flat equity markets in the third quarter negatively impacted separate account performance, resulting in approximately $0.02 per share higher DAC amortization for our variable products. This is included in the Corporate & Other segment where we report our closed block of variable business.
Taking into account these various items, I would place normalized operating earnings for the third quarter at just north of $1 per share.
While I’m very pleased with our financial results so far in 2014, the challenges of the persistent low market interest rate environment remain. We have been diligent in proactively managing the profitability of our business and have lowered crediting rates when appropriate, given declining portfolio yields. I am glad to say that in total we are exceeding our target spreads at the end of the third quarter.
During the quarter, the point-in-time spread on our annuity business decreased 3 basis points to 209 basis points at September 30. This spread is above our target of 203 basis points for this business.
Looking at our universal life business, in the third quarter we reduced crediting rates on certain UL products by 50 basis points. As a result, point-in-time spreads on our universal life business increased 5 basis points during the quarter, totaling 154 basis points at September 30, but still remains below our target for this business of 158 basis points. Given that much of our business is at the guaranteed minimum rate, there is less opportunity to continue to lower crediting rates on certain products.
From an investment perspective, purchases during the quarter focused on long, BBB-rated corporate bonds. Early in the quarter we also saw good relative value in GNMA project loans. During the third quarter, the average tax-adjusted yield on investments acquired backing long-term business was 4.78%. Our portfolio quality remains high with 96% of fixed maturity securities being investment grade.
Next I’ll comment on our strong capital levels. At September 30, Farm Bureau Life’s capital position remains excellent with an estimated company action level risk-based capital ratio of 550%. This represents an increase from 531% at the end of the second quarter and is due to the strong earnings during the quarter.
During the third quarter of 2014 our stock repurchase activity was minimal; we repurchased 62,390 shares of stock at a cost of $2.8 million. As of September 30, we have $44.2 million remaining on our stock repurchase authorization. We will continue to repurchase FBL shares from time to time as we see opportunities.
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 company of approximately $50 million at September 30. In addition, using 425% RBC as a base, Farm Bureau Life also has excess capital of more than $140 million at September 30.
Our regular quarterly dividend remains among one of the highest dividend yields in the life insurance industry. FBL’s board of directors reviews the dividend rate regularly and will consider the payment of another special dividend as appropriate.
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
Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from Bob Glasspiegel of Janney Capital. Please go ahead.
Robert Glasspiegel – Janney Capital
Good morning, FBL. I am curious about your amazing ability to withstand the pressure of lower interest rates which I've been worried about for a long time and the pressure's only gotten worse and your spreads have held in magnificently to date. As you look at where rates are today, are there any products that you just can't offer your – you can't get to your targeted returns on capital today?
James Brannen
I'll start and I'll let anybody else jump in. Bob, this is Jim, thanks for the question.
Over the past couple of years, we have tabled, put back on the shelf many of our products, especially our annuity products. We always viewed it, you've got to have a value proposition like a three-legged stool; enough for the company, enough for the agent, enough for the customer. And the shorter-term annuities especially on new money rates have not been sold.
I don't know Don, do you know the dates? But we've not been selling those annuities for quite some time. And in terms of the stuff that we are selling it is our goal to sell product that will make it to target and continue to make it to target in the future.
Donald Seibel
Yes, I think that sums it up well. It's been well over a year since we've had a new money product in the marketplace. I guess there was one short window in the investment environment that created an opportunity where we could offer the product and we did just so for a couple of months and then we took it back off the shelf because the value proposition wasn't there for the company, the agent and the customer, as Jim indicated.
Robert Glasspiegel – Janney Capital
On your indexed annuity which is selling well, I assume this is a favorable environment for that type of product. Can you just run through what a typical feature in today's [235] (ph) interest rate world that you're offering?
James Brannen
You want to do that, Ray?
Ray Wasilewski – Chief Operating Officer
The question is what are the – what's the product Bob design, is that what you're getting it?
Robert Glasspiegel – Janney Capital
Yes.
James Brannen
Yes.
Robert Glasspiegel – Janney Capital
What's the customer getting today?
Ray Wasilewski – Chief Operating Officer
From – so that product is set up so that a customer can choose either a point-to-point feature on that indexed product or a monthly average so they have – depending on their view of how those might come out there is something to choose there as well as that fixed bucket. So it gives them an option of how they want to participate in that market.
A good share of the product is sold with the customer taking the roll-up feature on the cash withdrawal and in this environment that seems to be probably from a sales perspective the thing that allows us to move the product the best at this point.
Robert Glasspiegel – Janney Capital
Okay. And the fixed bucket, what sort of return are they getting on that?
Ray Wasilewski – Chief Operating Officer
I'd have to check to look at that. I can look at that and get back to you in a few minutes on that, I have that here with me but –
Robert Glasspiegel – Janney Capital
Great, thank you.
Operator
And our next question is from Steven Schwartz of Raymond James. Please go ahead.
Steven Schwartz – Raymond James & Associates
Hey, good morning everybody.
James Brannen
Hi Steve.
Steven Schwartz – Raymond James & Associates
Hey. Jim, maybe – you talk about the reserve agents and how successful that's been, the number of reserve agents has increased but I'm interested in how many have moved on to become actual agents.
James Brannen
Perfect. I've got Scott in the room so I'm actually going to let him answer it. I think we're both following it pretty close, so Scott?
Scott Stice
Yes, thanks for the question. We have, as you noted, significantly ramped up the number of reserve agents coming onboard. Those represent our agents of the future. As you may recall that program was designed to give the candidate an opportunity to be involved in our training. We asked them to market and actually sell product. All of it through joint work with one of our trainers, one of our managers, one of our regional financial consultant specialists. And thus far the program is working incredibly well.
Through September we have converted 55 agents from the reserve agent program to our fulltime agent program. Those numbers are continuing to grow and they now represent almost all of our new agent appointments going forward. The production levels of our reserve agents are actually exceeding our initial forecast on a per-reserve-agent basis and we are continuing however to monitor that program and tweak the dials as necessary through increased production requirements et cetera to become fulltime agents.
So the other incredibly bright spot is just what we are seeing those agents do once they become fulltime agents and they are actually significantly outperforming agents acquainted under the prior model in the early months.
Steven Schwartz – Raymond James & Associates
Okay, that's great. And then just on product introduction, anything out there that's coming that's new that might get things going particularly on the life side?
James Brannen
Well, clearly, we mentioned in the comments that we have made a couple of updates, want to get out there as soon as possible next year on indexed universal life, that would probably be our next biggest launch, Steven and that date is – that date will get firmed up probably by the next time that we chat. I don't have a solid date for you but in 2015 for sure. And we think that we need that product to round us out now that our field force – they take on to new different things a little slow but once it catches on it catches on and indexed annuities were that way and now that they are accustomed to the indexing mechanism, truly believe that we will have an opportunity with our Farm Bureau exclusive agents to move on into the indexed universal life.
We reintroduced small face amount life insurance in our marketplace; that has been very, very well-received and that is starting to pick up a little bit. We continue to explore as the market moves with the combo products around combo life and LTC and some of those products. And we will have offerings for agents, don't know what it will look like in terms of underwriting for us, whether we will be life partner and partner with an LTC and whether we'll outsource it all or in-source it all, those kinds of things are still under consideration. But those combo products and the indexed universal life is something you could probably look for on the life side.
Steven Schwartz – Raymond James & Associates
Are you talking to any reinsurers with regards to that combo life?
James Brannen
Yes.
Steven Schwartz – Raymond James & Associates
I have been talking to them; they seem to have mixed views, that's why I ask.
Ray Wasilewski
Yes, we have been working with reinsurers and that's a – what we're looking at is a product that will come out in the future that is a catastrophic long-term care that we can match this up with and so those products tend to behave a little differently and have a profile that's more comfortable from a risk perspective.
Steven Schwartz – Raymond James & Associates
All right, very good, guys, congratulations on a good quarter.
James Brannen
Thanks, Steven.
Operator
(Operator Instructions)
Ray Wasilewski
Yes, this is Ray again. I just want to – I looked up that current crediting rate is 2.0% on that fixed account.
Operator
We're showing no additional questions. This concludes our question-and-answer session. I'd 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 great day.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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