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FBL Financial Group Inc (NYSE:FFG)
Q3 2019 Earnings Call
Nov 1, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the FBL Financial Group Third Quarter 2019 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 this event is being recorded.

I would now like to turn the conference over to Kathleen Till Stange. Please go ahead.

Kathleen Till Stange -- Vice President Corporate & Investor Relations

Thank you, and welcome to FBL Financial Group's third quarter 2019 earnings conference call. Presenting on today's call are Jim Brannen, Chief Executive Officer; Kelli Eddy, Chief Operating Officer, Life Companies; and Don Seibel , Chief Financial Officer. Also present and available to answer your questions are Charlie Happel, Chief Investment Officer and Scott Stice, Chief Marketing 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 third 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 everyone on the call. I'm glad you're able to join us today. FBL Financial Group reported net income of $1.01 per share and adjusted operating income of $1.02 per share for the third quarter of 2019. These results were below our expectations. Earnings results were negatively impacted by the unlocking of actuarial assumptions, higher mortality benefits and lower spread income. Don's going to cover those financial results in detail. I'll begin by discussing sales, our agents and our wealth management advisors and then I'll ask our new Chief Operating Officer Kelli Eddy to share a few comments.

Life sales continued their positive momentum. Life premium collected for the third quarter 2019 totaled $75 million, up 1.6% from the third quarter of 2018. This growth was driven by strong increases in universal life and term life sales. Universal life premium collected increased 6.8% for the quarter, while term life premium collected increased 3.3%. Life insurance in force totaled than $65 billion as of third quarter end. Life insurance sales allow us to meet the needs of our clients, while providing us long-term profit stream with additional profit components that are not spread related.

Annuity sales stabilized in the third quarter and were essentially flat compared to the third quarter 2018 following declines in the first two quarters of this year. Annuity premiums collected totaled $56.1 million for the third quarter of 2019, compared to $56.3 million in the third quarter of 2018. Fixed rate annuity sales declined, while indexed annuity sales increased.The low interest rate environment continues to pose a challenge to our spread rates annuity business.

During the third quarter 2019, we experienced great growth in our agency force and ended the quarter with 1,855 exclusive agents and agency managers. This represents an increase of 45 agents or 2.5% from the year ago quarter.

We added agents in both our Farm Bureau property casualty states as well as our life partner states. First year agent retention was 89% as of September 30, 2019, above our goal. In addition to our Farm Bureau agency force, we continue to grow our number of Farm Bureau Wealth Management Advisors. We're actively recruiting and adding experienced advisors in our territories and had several notable appointments in the third quarter.

As a September 30, we had 15 Farm Bureau Wealth Management Advisors appointed. These advisors have combined assets under management of $1 billion and we're now in the process of converting those assets to Farm Bureau Wealth Management.

These Wealth Management Advisors have the unique opportunity to partner with our Farm Bureau agents for referrals to serve our existing client members with financial advisory services. We intend to continue to add Farm Bureau Wealth Management Advisers who fit our culture and service orientation and are a great fit with our agency force for referrals.

Currently, we're only accepting experienced advisors who have a book of business. Ultimately, we expect our wealth management initiative to add a diversified earnings stream to FBL Financial Group given the fee-based nature of this business.

Before I ask Kelli to speak, I want to mention the announcement we made during the past quarter about my upcoming retirement. After 29 years with this organization, I plan to retire in early 2020. It has been an absolute honor and privilege to work for such a great organization for so many years. I've been fortunate to work alongside the most talented team in the industry and the best distribution force, our Farm Bureau Financial Services agents and their teams. I am so proud of what we have accomplished together protecting the livelihoods and features of our client members and partnering with the Farm Bureau to help serve the needs of rural America.

During my time as CEO, we've been financially strong with an excellent capital position. My focus has been on supporting our Farm Bureau Financial Services agents, developing leaders, creating an innovation program and building our wealth management strategy. We've also had a strong track record of returning significant capital to shareholders each year. The Board has stated that they anticipate naming a new Chief Executive Officer prior to year end. I'm confident that FBL Financial is well positioned for the future. We have a significant emphasis on leadership development and succession planning and we have great leaders in place here. I know the best years for our organization lie ahead. One of those leaders is Kelli Eddy, our new Chief Operating Officer for our Life Companies who joined us in mid-August. He succeeds Ray Wasilewski who will be retiring at the end of this year.

We're thrilled to have Kelli here. Kelli, would you like to make a few comments?

Kelli A. Eddy -- Chief Operating Officer

Well, thank you, Jim. I am so pleased to be here and be part of this great organization. By way of background, I've been in the life industry, specifically operations, for more than 20 years and most recently served as Senior Vice President over new business underwriting, risk and strategy at Voya Financial.

Over the years, I've been a frequent traveler to Des Moines and I've been observing FBL Financial Group for a while. I was drawn to the company for several reasons, most notably the leadership, our people and culture. The dedication, passion and drive by everyone here is awesome. There is a commitment by the employees that you definitely don't find in any other organization.The success or failure of an organization is so closely related to the effort and motivation of its employees and I'm excited to be part of this culture.

Today marks my 59th day here. My early observations is that this organization, as a whole, and Farm Bureau Life operations specifically are very well run.

I've been impressed by a number of things. Farm Bureau Life is wrapping up a multi-year replacement of its policy administration system with all new business now on that platform. This is especially impressive as half of all admin system replacement projects fail. There's also an extraordinary service to Farm Bureau niche markets where agents truly propel the purpose to protect livelihoods and futures.

This has led to an industry-leading cross-sell rate with Farm Bureau's Life cross-sell rate more than twice the industry average. The organization also has a robust innovation process in place. There is an innovation Council with dedicated funds to test concepts within the organization. The goal is to implement solutions that enhance customer and agent experience and drive efficiency in the organization. I was so impressed to see the robotics process automation with used as part of the admin system replacement.

Going forward, the organization will continue to evolve. We are making the sales experience more customer-friendly, increasing automation and becoming more efficient in our administration of life products. We'll continue to grow our accelerated underwriting program and expand on the use of data driven underwriting decisions.

Again, I'm excited to be here and I look forward to a bright future. Jim?

James P. Brannen -- Chief Executive Officer

Thanks, Kelli. I appreciate you sharing your initial thoughts and observations and I'm going to turn the call over to Don Seibel. Don?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Thanks, Jim. I also want to welcome everybody on the call. As Jim indicated, earnings for the third quarter of 2019 were below our expectations. Net income was $1.01 per share and adjusted operating income was $1.02 per share. We had four key drivers that led to our lower earnings for the third quarter.

First, we performed a review on unlocking of the key assumptions used in the calculation of the amortization of deferred acquisition costs, unearned revenue reserves and certain reserves on interest-sensitive products. This unlocking negatively impacted earnings for the third quarter of 2019 by $0.09 per share after tax. Please see page 14 of our third quarter investor supplement, where we have included segment level detail on the impact of this unlocking.

Second, we continue to experience lower spread income in our annuity segment.

Third, we experienced worse-than-expected mortality results in the life insurance segment.

And fourth, we incurred an expected net loss related to our wealth management operations as we build out that business. I will review these details -- these items in more detail as I discuss our segment results.

On a positive note, we recorded a non-recurring $0.10 per share benefit in the third quarter of 2019 from the execution of a tax planning strategy. This strategy includes increasing prior-year tax deductions when the income tax rate was 35%.

Annuity segment results for the third quarter of 2019 declined, impacted by unlocking and lower spread income. Unlocking actuarial assumptions resulted in a $4.9 million pre-tax charge for this segment. This reflects updating several assumptions, including surrenders and withdrawals. Point-in-time spreads in our individual annuities decreased 4 basis points during the third quarter of 2019, due to a decline in the investment yield from maturity of higher yielding assets and the reinvestment of proceeds and lower yielding assets.

Life insurance segment results for the third quarter 2019 reflected steadily growing book of business and the benefit of unlocking actuarial assumptions of $2.4 million pre-tax. The unlocking reflects updating several assumptions with a benefit from overall mortality improvement being partially offset by the impact of lower assumed investment yields.

While overall mortality has trended favorably over the long-term, mortality results for the third quarter of 2019 were worse than expected, driven by an increase in the number of universal life claims. This is a normal quarterly fluctuation in mortality results. Like annuity spreads, point-in-time Spreads on our universal life business also decreased during the quarter. They declined due primarily to the impact of lower reinvestment yields.

Corporate and other segment results were solid for the quarter reflecting better-than-expected variable universal life mortality as well as a small charge from unlocking actuarial assumptions of $200,000 pre-tax .

The corporate and other segment for the third quarter of 2019 includes an after-tax net loss totaling $1 million or $0.04 per share related to the build-out of our wealth management business. The investment environment remains challenging. The tax adjusted yield on new investment acquisitions backing our long-term business was 3.52% for the third quarter of 2019. This is lower than acquisitions made in the first half of this year and lower than our portfolio yield. We are focused on adding longer duration investments, mostly investments, mostly of NAIC 1 and 2 corporate bonds.

Next, I'll comment on our capital. We continue to have excellent cap -- have an excellent capital position with significant financial flexibility.

At September 30, 2019, our subsidiary Farm Bureau Life had an estimated company action level risk-based capital ratio of 555%. This is an increase from year-end 2018 even with the significant dividends paid from Farm Bureau Life to the holding company to fund the regular and special dividends paid to shareholders this year.

To conclude, while our bottom line results for the quarter were below our expectations, we remain focused on financial discipline, growing our business and diversification of our earnings with the wealth management 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 up any questions you may have.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Greg Peters with Raymond James.

Marcos Holanda -- Raymond James -- Analyst

Hi, good morning. This is Marcos calling in for Greg.

James P. Brannen -- Chief Executive Officer

Good morning, Marcos.

Donald J. Seibel -- Chief Financial Officer and Treasurer

Good morning, Marcos.

Marcos Holanda -- Raymond James -- Analyst

I'd start off congratulating Jim and your retirement. And I guess Ray as well and Kelli in her new role.

James P. Brannen -- Chief Executive Officer

Yeah. Thanks.

Marcos Holanda -- Raymond James -- Analyst

And I guess my first question goes to you, Jim, and it's around sales and you mentioned the new sales have stabilized this quarter. I was hoping you can give us some more color there and also on the new agent wins, any update there and on the competitive landscape as well?

James P. Brannen -- Chief Executive Officer

Yeah, all right. Thanks, Marcos. I got Scott Stice in the room, our Chief Marketing Officer. So I am going to kick it over to him after I just make a couple of opening comments. We're in this interesting environment where the 10-year has been bouncing around pretty significantly anywhere between 1.90% and 1.50% and so we've had opportunities in times when it's at the higher end of that range to climb back into the space and when it's been at those very low lows, it makes it much more difficult. We've also -- have index products. And so, that's allowed us to have another offering that's actually working while the fixed products are very, very tough at this time.

And on the agents side, it's just been a focus. We have -- we had about five years of growth in a row and then we tapered off for a year or two and have really had a focus on getting that engine going again and Scott's been responsible for doing that. So, I am going to let him talk a little bit more about competitive landscape, agents, sales et cetera.

D. Scott Stice -- Chief Marketing Officer

Thank you, Jim. So on the sales front, we're blessed by having the ability to write both life insurance and annuities and of course, now the wealth management business. Our focus on sales this year has really been driving more and more and more of our agency force into the indexed annuity and the indexed universal life product just given the overall interest rate environment and how we shape up competitively and agents have responded well to that. And those two products are really carrying the day for us right now.

With respect to the agency force, I think, Jim covered it well. It's been a focus over the last six, seven, eight year. We've generally had good results the last year, year and a half have been challenging, but we just continue to focus on, really, the fundamentals, recruiting the right people, making sure we train them right and get them off to a fast start and some of those changes we put in about a year ago are beginning to bear fruit and our one-year retention's well above goal, our two-year retention's above goal. So, we feel like we're on pretty solid footing going forward.

Marcos Holanda -- Raymond James -- Analyst

Okay. So you would -- you characterize, I guess, the competition still being rational and as it relates to what they're offering versus what you guys are doing?

D. Scott Stice -- Chief Marketing Officer

Most of them -- most of them are pretty rational. There is a handful of annuity products on the street that kind of make you scratch your head and certainly we've lost some business to that, but by keeping our agents focused on the index products which offer a reasonable upside without the downside potential, customers are responding well to those.

James P. Brannen -- Chief Executive Officer

And I'll also say in our niche market where we already have existing customers and relationships, our expanded offerings in the wealth management space, we've seen more money flowing into there that might be annuity funds as well. And so, we're getting assets under management that might have been annuities in other times, but in this interest rate environment clearly have taken advantage of our wealth management platform.

Marcos Holanda -- Raymond James -- Analyst

Okay. Thanks for that, I guess. Pivoting to spreads and you guys have this slide, I don't know, there is no -- I don't know what the page number is, but as -- maybe we can talk a little bit about crediting rates and how those developed for you guys and the competition. And I was curious, there is a bullet point here saying that 42% of the business guaranteed is earning or exceeding targets on the life side.

So I'm just curious, what does that mean for the other 58%. Is that a breakeven type of business or is it losing money?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Well, I would not -- this is Don. I'll address this question. With respect to the other portion of the book of business, I wouldn't say it's necessarily losing money. It just necessarily isn't exceeding the target spread that we have on that business. So, we meet regularly as a group -- cross-functional group to look at our interest crediting rates, what our cap rates are on our products, what our new money yields are, what the portfolio yields are, that back our portfolio products. And we go through the entire portfolio, the entire current new business product mix and challenge the crediting rates that we can pay to meet our profit objectives and what the cap rates that we can pay to meet our profit objectives.

And we do have a line of sight on what the competitors -- where the competitors are at and that influences those decisions, but over time, I think our history has shown that we've done a good job in pricing our products and that's reflective of our overall company ROE that we've consistently generated.

Marcos Holanda -- Raymond James -- Analyst

Got it. Thanks, Don. I guess my next question is to Charlie. I am just looking at the portfolio composition, I was hoping you can talk to us a little bit about the 90% [Phonetic] that's below investment grade and there's also a slide on the commercial loan portfolio which has been giving you guys good returns. I'm just curious what happens -- what's the history on that commercial loan portfolio around when we have decelerating growth or even a recession, what happens -- what happen to that book?

Charles T. Happel -- Chief Investment Officer

Well, we've had an outstanding track record with our home loan portfolio. Even in recessionary environments, we've had really minimal -- going through the financial crisis, we had a very low level of of distress. I would attribute that just -- we underwrite to a high standard in general. Our book is largely amortizing which has proven beneficial over time because even if the market gets in distress before, obviously, we're kind of running on improving LTV over time and I think that's been beneficial. And just our selection of the type of properties we've been involved with. I mean, we -- it's generally been conservative, but we don't feel like we've left a lot of opportunity on the table. We've had a change in staff in that group and really got a team there that I'm frankly just very excited about. We got a new highly energized group over there, very experienced and talented group. So I'm excited about where we're going going forward. So we -- during the transition, we've already slowed our production down slightly, but we're gearing back up. Over the last couple of years, we've expanded our whole loan allocation, which is really consistent with the larger peers that we observe and so we're still, I would say, in line to maybe a little light from what I'm seeing in terms of pure data, probably we're 12.5% at the end of 2018 and probably slightly below that now. Looks like the peers are running closer to 14%. So, we've got a little room to run there if we choose to and we're not stomping on the gas, but certainly not holding back there either. Now, you asked about our non-investment grade credits as well. I'm not sure exactly what your question was.

Kelli A. Eddy -- Chief Operating Officer

Maybe to clarify...

Marcos Holanda -- Raymond James -- Analyst

Just if you dissect that a little bit, what's in there?

Kathleen Till Stange -- Vice President Corporate & Investor Relations

It appears to be incorrect and will be updated right away, but the -- and Charlie can talk about. The BBB exposure is 29.5%, below investment grade is 2.2%.

Marcos Holanda -- Raymond James -- Analyst

Okay.

Kelli A. Eddy -- Chief Operating Officer

If you wan to...

Charles T. Happel -- Chief Investment Officer

Yeah. We have not been acquisitive in the high yield space. We have been actually working on an external mandate in the high yield space that we have not funded and don't intend to fund. It's just kind of an opportunistic thing. I shouldn't say we don't intend to fund it. We don't intend to fund it until it's -- until we deem it to be attractive and we've got to set some benchmarks from -- when we would step into that.

But we've actually run our -- even our BBB allocation has come down relative to our peers from what I'm observing just in the most recent data, and so, we feel like we've got a little dry powder in the credit bucket when the moment comes, but we're not active in high yield at this time and it's very small.

Marcos Holanda -- Raymond James -- Analyst

Got it. Great, thank you. Thank you for that. And just my final question, just -- I guess, Don, looking into next year and the capital position, how is the set up looking and how you guys feeling about another special dividend in the first quarter?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Yeah. If you take a look at our capital position at the end of the third quarter and you compare that back to where we were at the end of the third quarter last year, we're spot on or actually in a little better position from an RBC standpoint.

So, we acknowledge that we are very well capitalized, in the past how we've deployed our capital and the situation is through, dividends that are very competitive on a regular basis and we have a track record now of paying special dividends for several years in a row now. Though whether or not we pay a special dividend will be decided by the Board at a Board meeting and not sure what the timing would be, but certainly continuing to pay dividends at a high level is going to be on the table for discussion.

Marcos Holanda -- Raymond James -- Analyst

Thank you for your answers. Congratulations, Jim and congratulations, Kelli.

James P. Brannen -- Chief Executive Officer

Thank you, Marcos.

Operator

[Operator Instructions] Our next question comes from Jamie Inglis with Philo Smith.

Jamie Inglis -- Philo Smith -- Analyst

Hi, good morning.

Good morning, Jamie.

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, Jim. Want to say thanks for the great work over all these years. The Company's come a long way and we appreciate everything you've done.

James P. Brannen -- Chief Executive Officer

Very kind of you. Thank you.

Jamie Inglis -- Philo Smith -- Analyst

I'm -- I looked at your, the agents -- the growth in the agents which was nice and you guys mentioned that the retention is one or two years have been better than expected. Has anything -- did you do anything different from, I don't know what, compensation and training and recruiting point of view or is it just [Indecipherable] grindstone kind of effort that touch you there.

James P. Brannen -- Chief Executive Officer

Some of both, but I'll let Scott go at that.

D. Scott Stice -- Chief Marketing Officer

Yeah, that was the exact answer I was going to give. It's been a little bit of both. I think the most fundamental changes that we've made have really been just tightening down on the requirements of eligibility, first. Second, we did launch a new recruiting program aimed at our niche market for folks with an agricultural background. They just have a sort of a natural leg up given them the communities that we serve and that initiative has paid really good dividends and we've landed, I believe, 20 agents or 21 agents from that program just this year. We made some very, very minor changes to our new agent compensation plan. We've really bifurcated it into different approaches, one for more suburban markets, one for more rural markets and that's paying dividends to us as well.

So, really that -- I would just say the recruiting landscape and developing new scratch agent landscape remains incredibly challenging and difficult. And we really have to stay focused into basic block and attack one.

Jamie Inglis -- Philo Smith -- Analyst

All right, all right. Okay, good. I'm curious about your thoughts today about the wealth management initiative and how you think about that in terms of -- how hard to press the gas pedal to hire more folks versus -- those you've already recruited in the system, productive sort of et cetera. How do you think about that?

James P. Brannen -- Chief Executive Officer

Yeah, I think there is a good balance to be struck there, Jamie. I know that we've got to get enough folks in the door to -- and enough assets under management to make sure that we're adding to the bottom line and instead of continuing to invest. And I think we're going to crossover that point very soon. And the type of value proposition that we have for the advisors is a good one in that many of them are looking for new people to talk to and we already have a financial relationship with our client members and yet, we haven't had a real good product in this arena to bring to them and now we do. And so, there is a whole host of people to refer to. And so, that's the value proposition and we're attracting folks that have done a nice job of getting their books.

We want to make sure that we're covering our territory. We want to make sure we learn along the way, but it will be a growth engine, both from a top and bottom line perspective and it will also be another line of business that we cross-sell our customers into and cross-selling is one of our biggest strengths. When we cross-sell, we see a lot of really good things for both our property casualty business outside of this company, but our sister property casualty business in terms of retention and retention within our own life company. You want to add anything to that Scott?

D. Scott Stice -- Chief Marketing Officer

Yeah, I think, the only other thing I would add is, as we recruit advisors which we've been very pleased with how our value prop is being received out in that market. We only recruit advisors who have a fairly significant book of assets under management already. One of the learnings that we've encountered is -- and getting that business converted. And so, it's one thing to recruit them. It's quite another to get that business converted and then get them active in the new sale arena. So, we've made some changes to how we onboard. We've seen some positive developments over the last 30 days to 60 days on that front and now it's just a matter of really walking and chewing gum at the same time as we continue to build this out.

Jamie Inglis -- Philo Smith -- Analyst

Okay. All right, great. Thanks a lot.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Kathleen for any closing remarks.

Kathleen Till Stange -- Vice President Corporate & 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

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Kathleen Till Stange -- Vice President Corporate & Investor Relations

James P. Brannen -- Chief Executive Officer

Kelli A. Eddy -- Chief Operating Officer

Donald J. Seibel -- Chief Financial Officer and Treasurer

D. Scott Stice -- Chief Marketing Officer

Charles T. Happel -- Chief Investment Officer

Marcos Holanda -- Raymond James -- Analyst

Jamie Inglis -- Philo Smith -- Analyst

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