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FBL Financial Group Inc  (NYSE:FFG)
Q4 2018 Earnings Conference Call
Feb. 08, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the FBL Financial Group Fourth Quarter 2018 Earnings Conference Call. 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 that this event is being recorded.

At this time, I would like to turn the conference over to Kathleen Till Stange, Vice President of Corporate and Investor Relations. Please go ahead, ma'am.

Kathleen Till Stange -- Vice President of Corporate and Investor Relations

Thank you, 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; 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. Where applicable, 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 P. Brannen -- Chief Executive Officer

Thanks, Kathleen. And thank you to everybody on the call. I'm glad you're able to join us today. While I am pleased FBL Financial Group reported record full year 2018 earnings with non-GAAP operating income of $4.36 per share, we did report lower than expected earnings for the fourth quarter of 2018. Net income totaled $0.26 per share and non-GAAP operating income was $0.75 per share. There were several items that negatively impacted the results for the quarter. We previously issued a Form 8-K on two non-recurring items; the correction of an immaterial error and a charge related to ongoing expense savings. We were also impacted by the volatile equity markets in the quarter. I am pleased to share that aside from the non-recurring items, it was a solid quarter. Don will review the financial results in detail. I'll focus my comments primarily on our sales and current initiatives.

Total premium collected for the fourth quarter of 2018 grew to $157 million, with increases in both life insurance and annuities. Annuity premium collected for the fourth quarter increased to $70.5 million. Indexed annuity sales were up 10.5% compared to the fourth quarter of 2017, while we experienced a decline in fixed rate annuity sales. Life sales were very strong throughout all of 2018, including the fourth quarter. Life premium collected for the fourth quarter of 2018 totaled $76.2 million, that's up 5.3% from the fourth quarter of 2017. Universal life sales were particularly strong with fourth quarter premium collected up 16%. Term life sales were also strong with fourth quarter premium collected up 4.2%.

As important, the number of life insurance and annuity applications increased significantly in the fourth quarter of 2018, with a year-over-year increase in total apps of 19%. I'm pleased that we're reaching more clients with products they need, and fulfilling our purpose to protect livelihoods and futures.

Turning now to our agency force, as of December 31st, 2018, we had 1,839 exclusive agents and agency managers. I am pleased with very strong performance in the fourth quarter with the addition of a net 29 agents. We had higher agent attrition in the first half of 2018, and made various modifications to our recruiting and compensation plans, introducing a new agent development program mid-year. We are now better positioned and continue to focus on increasing total agent count as it is crucial to our success.

Recently our agent training program received recognition. Our agent academy was presented the Excellence in Practice Award by the Association for Talent Development. This award is particularly notable as we were the only multi-line insurance company to be honored.

Next, I am pleased to give you an update on our wealth management initiative. We've been building and investing in this initiative over the past year. It's an exciting time for us, and we're now beginning to be active in the market recruiting experienced advisors in our territories. To date we've appointed four Farm Bureau wealth management advisors, and have many active recruiting discussions in progress. The value proposition that we offer incoming advisors is the ability to partner with our existing agency force. Through this partnership, they're able to provide local financial advisory services to our existing client/members. This is a unique opportunity for an investment advisor to team up with an insurance agent.

These wealth management advisors are in addition to our 51 exclusive agents who are agent financial advisors. They now have the tools and products to offer fee-based financial planning and investment management services for their client/members. As part of this initiative, in 2018, we introduced a new mutual fund platform for our exclusive agents. Since that time, we have seen growth in new accounts opened and increased mutual fund deposits. This initiative allows our agents to add more value, positioning them as the go-to person for all of their clients' insurance and financial needs. The costs associated with this initiative are included in our Corporate & Other segment. Ultimately, we expect it to add a diversified earnings stream to FBL Financial Group, given the fee-based nature of the business.

As I look back on 2018, I am very proud of our many activities and accomplishments. We launched an all-new advertising campaign, featuring TV ads in several of our core states. We continued our pilot of accelerated underwriting to incorporate new and expanded data-driven underwriting decisions while removing fluid testing or paramedical exams on certain business. This allowed us to attract additional middle market customers who need to protect their family's livelihood with life insurance. We introduced a new life insurance underwriting rating for smokeless tobacco users, making the purchase of life insurance more appealing to certain customer segments. We implemented additional automation in our life underwriting area to provide additional data to improve future risk selection. We introduced a new increasing term life insurance product. It allows our clients to automatically increase the face amounts to provide more protection over time. We are increasing our net promoter score through a multiyear customer experience initiative, and we're investing in more innovation and digital initiatives.

I have a positive outlook as we move forward in 2019. Next month we launch additional TV advertising and are expanding its reach in our territories. We'll continue to add Farm Bureau wealth management advisors. We remain focused on our core Farm Bureau niche customer, offering new farm succession planning seminars. So combined with our financial strength, exclusive Farm Bureau Financial Services agent force and dedicated employees, we are well positioned for the future.

Now I'll turn the call over to Don Seibel to review our financial results. Don.

Donald J. Seibel -- Chief Financial Officer and Treasurer

Thanks Jim. I also want to welcome everyone on the call. As Jim indicated, earnings for the fourth quarter of 2018 were below our expectations with net income of $0.26 per share. Net income includes net realized losses on investments and the change in fair value of derivatives. In the fourth quarter of 2018, we experienced net realized losses on investments due to a decrease in the fair value of equity securities of $3.6 million after tax as well as other-than-temporary impairments of investments totaling $3.8 million after tax. Also, due to the decline in the equity markets, we had a decrease in the fair value of derivatives.

Our non-GAAP operating income excludes these items, resulting in non-GAAP operating income for the fourth quarter of 2018 of $0.75 per share. Non-GAAP operating income for the fourth quarter of 2018 was below our expectations due to three key drivers. First, during the fourth quarter we offered a voluntary early retirement program to eligible employees. The program provided enhanced retirement benefits to these employees while also supporting our efforts for ongoing expense savings. This program resulted in a charge of $7.7 million in the fourth quarter. This includes a non-cash charge of $5.3 million for the acceleration of the amortization of an accumulated actuarial loss in the defined benefit plan. On a per share basis, this charge totaled $0.24 per share after tax. The program allows us to reduce operating expenses going forward, and we anticipate annual savings in 2019 of approximately $1.5 million, or $0.05 per share after tax.

Second, in the fourth quarter, we updated the estimate of the impact of an immaterial error related to a closed block of life insurance business along with accrued interest associated with remediating the error. This resulted in increased benefit expenses of $0.17 per share after tax.

Third, due to a decline in the equity markets in the fourth quarter, we had higher amortization of acquisition costs in the Corporate and Other segment. We estimate this increased amortization totaled $3.5 million, or $0.11 per share after tax. These negative items, which total $0.52 per share after tax, were partially offset by better than expected mortality experience. I'll review these items in more detail as I discuss our segment results.

Annuity segment results for the fourth quarter of 2018 were impacted by the early retirement program with a charge of $2.5 million. Investment prepayment fee income was lower in the fourth quarter and totaled $832,000 for this segment. Point-in-time spreads on our individual annuities increased 4 basis points during the fourth quarter of 2018, due primarily to a change in reporting our point-in-time portfolio yield on a tax adjusted basis. Under this basis, the yield on tax exempt securities in the point-in-time calculation is grossed up to take into account the benefit of the tax exemption. Without this tax adjustment, our point-in-time spreads would have decreased 1 basis point.

Life insurance segment results for the fourth quarter of 2018 reflect a growing book of business as well as several moving pieces. This segment incurred a charge of $4 million related to the early retirement program. Additionally, it included the update of the estimate of the immaterial error on a closed block of business. This segment also had lower than usual investment prepayment fee income, with less than $100,000 earned during the quarter. Partially offsetting these negative items was better than expected mortality experience for the quarter. We had fewer term life insurance claims and a lower than average claim size.

Point-in-time spreads on our universal life business increased 2 basis points during the fourth quarter due to the change in reporting the yield on tax-exempt securities noted in the Annuity Segment discussion. Without the tax adjustment, our point-in-time spreads during the fourth quarter would have decreased 3 basis points.

Corporate and Other Segment results were impacted by several items in the fourth quarter. This segment had a charge of $1.1 million related to the early retirement program. Costs related to our wealth management initiative totaled $1 million for the quarter and in the investor supplement are included in this segment in the other expense line. In addition, our closed block variable business experienced $3.5 million higher amortization of acquisition costs due to the negative impact of equity market returns on separate account performance.

Income taxes for the fourth quarter of 2018 include a one-time benefit of approximately $900,000 due to the execution of strategies to capture deductions at the historical 35% effective income tax rate. The investment environment remains challenging, but we were able to take advantage of higher market interest rates for a portion of the fourth quarter. The tax-adjusted yield on new investment acquisitions backing our long-term business was 4.56% for the fourth quarter of 2018. This is 64 basis points higher than acquisitions made in the fourth quarter of 2017. These rates remain less than our portfolio yield, and we continue to have pressure on spreads.

Next I'll comment on our capital level. At December 31, 2018, our subsidiary, Farm Bureau Life, had an estimated company action level risk based capital ratio of 552%. This is even with where we were at the end of 2017. This RBC ratio incorporates the impact of the NAIC's changes to the RBC factors to reflect the lower income tax rate due to the Tax Cuts and Jobs Act.

Our capital levels remained high in 2018 even with $99 million of capital returned to shareholders in the form of common stock repurchases, our regular quarterly dividend and a special dividend in the first quarter of 2018. We have significant financial flexibility. Options for deploying our excess capital include stock repurchases, our regular quarterly dividend and the payment of special dividends. However, given our limited public float, we currently plan to limit future stock repurchases.

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. As demonstrated in recent years, we also view the payment of special dividends, on occasion, as an attractive option for distributing a portion of our excess capital. Our board will next review the payment of dividends when it meets later this month.

In closing, 2018 was a strong year for FBL Financial Group. We were able to increase sales, grow our business and maintain our strong financial foundation. Even with lower fourth quarter earnings, FBL achieved record full year 2018 non-GAAP operating income. We move forward in 2019 with financial discipline to continue to profitably grow our business. I'm pleased to have been able to share these results with you.

We will now turn the call over to the operator and open it up to any questions you may have.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And your first question will be from Marcos Holanda of Raymond James. Please go ahead.

Marcos Holanda -- Raymond James -- Analyst

Hey, good morning guys. Thanks for taking my question.

James P. Brannen -- Chief Executive Officer

Good morning, Marcos.

Donald J. Seibel -- Chief Financial Officer and Treasurer

Good morning.

Marcos Holanda -- Raymond James -- Analyst

Hey. So my first question is on the sales results and they were pretty strong in the quarter and for the year. So I was hoping, maybe Jim, that you can give us sort of an update on how competition shaping up in your major channels? And what's the outlook for -- like for 2019?

James P. Brannen -- Chief Executive Officer

Yeah. So, we haven't given forward guidance on sales. So I won't get too specific about that, but the momentum going in the year-end Marcos has been strong. We have really tried to get our agents back at the kitchen table and doing, like we did building this company, midsized face amounts to families where we're covering all their insurance and financial needs versus some of the bigger face policies that we're able to sell just a few years ago. And so we're really focused on issued apps this year and it turned into significant nice premium. Now as that flows into the first quarter. I still see the momentum. But as you know, in this industry, it's kind of start all over when you hit January. And so I just -- I'll have to wait and see. We had great momentum going into the end of the year.

From a competition perspective, we absolutely compete with all the other carriers, but our business model, Marcos is really about that entire customer partnering with our property casualty products and trying to bring -- and then our third-party vendor products, trying to bring a whole insurance solution. So many times our sales are really a matter of getting to the kitchen table again and having those discussions versus being in a direct competitive position or competitive situation.

Having said that, we do have plenty of our sales that are softened with competitors. So what we try to do is make sure that we have products for all life cycles and in all economic environments. And so there's always something for our agents to provide our client members, and that in fact has been a good long-term strategy for us. We see some of the trends going on around InsurTech and some of the machine learning and other things that are going on and we're certainly tracking that and make sure that we meet those challenges as they come along.

Ray, do you want to add anything there?

Raymond W. Wasilewski -- Chief Operating Officer Life Companies

This is Ray. Marcos, the only thing I would add is part of the competition on the annuity side comes from Banks and CDs, and as we watched that, that yield curve come up on that short-end and stay lower on the long-end. There's some pressure there on the competition side. But as Jim said, and as you can see in our results, our agents are very good at shifting to what makes sense for the client member at that point, which is why you saw the strong life insurance sales last year.

Marcos Holanda -- Raymond James -- Analyst

Okay. Thanks for that color. So just sticking with this, so from a product perspective, had you guys have to offer more competitive products? How are your crediting rates -- how was the crediting rate offered relative to what you guys were offering last year?

James P. Brannen -- Chief Executive Officer

So, Don is following up the history of crediting rates, I think.

Raymond W. Wasilewski -- Chief Operating Officer Life Companies

Yeah, I had most of that, Ray. Again, I mean, if you look at our strongest selling product, which is on the annuity side, which is our index annuity, we were able to do some rate increases last year. And near the end of the year we had to bring those back down, but it's still a strong for our market, a strong cap rate on those products, which I can -- I'll pull that up for you.

Donald J. Seibel -- Chief Financial Officer and Treasurer

Well, with the indexed annuity at the end of the year, we were crediting 5.75% for the month, the average cap 5.25% on the annuity point-to-point cap. Subsequent to year-end, we've had to decrease of those 25 basis points with the decline in the market interest rates, but that gives you a perspective where we are on the Indexed Annuity. With Indexed Universal Life, our point-to-point cap is very attractive at 11.5%, and we're able to do that because of the other profit drivers we have embedded in that product related to the insurance coverage. The MYGA4 (ph), which is a -- at times popular product for us, four-year guarantee period during the portion. The fourth quarter, we're able to offer 2.75% on larger deposits. And again, subsequent to year-end, we've had to tick that down a little bit, which is really the movement that we're seeing with competitors and how they're crediting -- providing crediting rates on the products.

Marcos Holanda -- Raymond James -- Analyst

Okay. Thanks for that. And my second question is with the NII and how -- that's been affecting everybody's results. So I guess my question is, is it reasonable to assume we get a rebound in the first quarter of 2019? And then on the OTTI impairment, can you just give us some more color there? Where those PG&E securities? Anything you guys could add there?

Raymond W. Wasilewski -- Chief Operating Officer Life Companies

Yeah. I'll tackle those. So net investment income, which I think you're referring to is down really on a net income basis, largely due to the decrease in our derivative income. So if you take a look at the segments and the operating income results, which back that out, you don't see as dramatic of a decrease. Part of the driver, we will see a lift in Q1 of 2019, because during the fourth quarter, we mentioned the early retirement window and the cost of that program, well, part of that cost was allocated to investment personnel. So we had about $1.1 million of additional investment expense, as included in net investment income and that drove net-net investment income down in the quarter. So that was the big driver there.

With respect to the impairments, we had -- the largest impairment that we had was related to a mortgage loan that we've been watching for some time. It was $2.8 million of the total, and it's a situation where we're not overly concerned about the property. We've had some issues with the borrower. But that issue is coming close to a resolution hopefully. And we believe we have a very conservative estimate on allowance on that particular loan. The other impairments weren't that significant by individual security.

With respect to PG&E, we have two direct unsecured bonds with PG&E and then another with a third entity that has PG&E as a sole customer. So including those three securities, we had $1.2 million of unrealized loss at the end of the year. We chose not to write those down, which is consistent with a lot of companies' actions as we understand. We've taken a look -- hard look at the underlying securities and underlying issues, and while we have stopped accruing interest on those securities, I think we're money good as far as getting the principal back.

Marcos Holanda -- Raymond James -- Analyst

Got it. Thanks, Ray. And I guess just lastly, are you guys, spoke before that you've been increasing allocation to CLOs, and I was just wondering if you guys are also looking at leverage loans and if we could maybe give us some color if you have any leverage loan exposure in your portfolio?

Charles T. Happel -- Chief Investment Officer

Yes. Hi, this is Charlie Happel. Yes, we've stayed relatively up in quality in our CLO book, really it's been buying a) for better there. And our -- so our leveraged loan exposure is really largely confined to our asset back. We've got -- and I don't remember the numbers, very modest exposure to some lending in a couple of partnerships. So it's very, very small.

Marcos Holanda -- Raymond James -- Analyst

Okay. Thanks for the color. Thanks guys.

James P. Brannen -- Chief Executive Officer

Thank you, Marcos.

Operator

(Operator Instructions) And our next question will be from Jamie Inglis of Philo Smith. Please go ahead.

Jamie Inglis -- Philo Smith -- Analyst

Hi. Good morning, guys.

James P. Brannen -- Chief Executive Officer

Good morning, Jamie.

Donald J. Seibel -- Chief Financial Officer and Treasurer

Good morning, Jamie.

Jamie Inglis -- Philo Smith -- Analyst

Hey. I'm thinking about the distribution for us, I mean if you look over in your -- in a roadshow presentation, the agency force have been basically flat for whatever, three years, four years. Productivity has been up nicely over that period of time. But I mean the environment we're in today, sort of full employment, GMP -- and your solid GMP growth, how does -- how is recruiting going to -- how are we going to turn the corner on it and get the agency force to grow materially?

James P. Brannen -- Chief Executive Officer

So we were growing at about between 2% and 4% a year for three or four years. And then in the first half of 2017, we had kind of an agency blow up in South Dakota and we lost several folks and we kind of took back half of the year to rebuild on that. And then in the beginning of this year, we experienced a similar thing. This last year, we experienced a similar thing. And so we've got great momentum going into the second half and it is Jamie, one of the toughest challenges. It's a constant fight daily to continue to try to grow that. But the first half of 2017 and first half of 2018 did cause it to look pretty flat over that period. And three years prior to that, we grew it. I'm confident that we can continue to grow it. You're right, it's -- and within the industry growing an exclusive agency force is one of the bigger challenges. On the flip side, it's one of our biggest assets as well. And so we continue that and cherish that in good times and bad where we ask folks to move from product-to-product and when economic times change and the loyalty factor that you have, et cetera. So it's one of the hardest things that we work on every day and one of the most rewarding things that we have in our quiver. So we will continue to fight the good fight. I don't think that there's any magic, it just really is a matter of continual focus and never letting up and continuing to try to innovate on ways to help people become successful. We're finding a lot of interest in our value proposition. And again, in the back half of 2018 did a real nice job of growing the agency force.

Jamie Inglis -- Philo Smith -- Analyst

Could you give me some insight into the wealth management roll-out? You've got some advisors, partnering with your existing agency force. So what's the longer-term game plan and where are you in that sort of process of rolling that out?

James P. Brannen -- Chief Executive Officer

We're just beginning. I mean, we're at the very, very beginning stages. We're not giving forward guidance so we're not going to give too much out on the numbers, but this 2019, we really expect that we'll get some scale in the business. And then in the years after that we'll start adding to the bottom line. But we've got all the pieces in place and we've got recruiters out there talking to wealth advisors and several conversations going and people starting to make the move to our platform, and again, it's just in the past few weeks. So it's just right on the very beginning.

Jamie Inglis -- Philo Smith -- Analyst

Can you tell me what the advisor that you're trying to recruit and have recruited, where do they come from? Conceptually are they from sort of regional broker-dealer groups? Are they sort of previously bank broker-dealer folks? Where do they come from? And where will they come from?

James P. Brannen -- Chief Executive Officer

As long as they're registered and have a certain book size and fit in the footprint and so forth, they can come from all of those sources.

Jamie Inglis -- Philo Smith -- Analyst

Okay.

James P. Brannen -- Chief Executive Officer

So the value proposition, I mentioned a little bit in my comments, but when you think about the relationship that we have in our business model with the client members that we have is truly one where our agents have a position of trust in the household. And we've not done a very good job because we haven't had a very good investment platform in the past. We've got a very modern and full scale platform to offer now. You get your brokerage statements with Farm Bureau right on it, all consolidated up with many, many choices, almost all the choices you would have anywhere else. And an agent that maybe hasn't been in that business, but has the relationship, and then you marry that wealth management advisor with that agent. And there is quite a market to sell into. So that's very attractive to the wealth management advisors we've been talking to and they're very interested because wherever they've been doing business, they need people to talk to them and you can run out of people to talk to. And so that's what we have to offer. We've done it with our high-end life sales business. We've got a group of folks that partner with agents that maybe aren't as adept at high-end and complicated life sales and they partner. And so the agents have become very accustomed to increasing their income by partnering with experts. And I think this is going to go the same way.

Jamie Inglis -- Philo Smith -- Analyst

Yes. It's great. I think it's natural. Good luck with that.

James P. Brannen -- Chief Executive Officer

Yes. Thank you, Jamie.

Jamie Inglis -- Philo Smith -- Analyst

Thanks. Bye-bye.

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Kathleen Till Stange for her closing remarks.

Kathleen Till Stange -- Vice President of Corporate and Investor Relations

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

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

Duration: 32 minutes

Call participants:

Kathleen Till Stange -- Vice President of Corporate and Investor Relations

James P. Brannen -- Chief Executive Officer

Donald J. Seibel -- Chief Financial Officer and Treasurer

Marcos Holanda -- Raymond James -- Analyst

Raymond W. Wasilewski -- Chief Operating Officer Life Companies

Charles T. Happel -- Chief Investment Officer

Jamie Inglis -- Philo Smith -- Analyst

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