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FBL Financial Group Inc (NYSE:FFG)
Q4 2019 Earnings Call
Feb 7, 2020, 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, Inc. Fourth Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions]

I would now like to turn the conference over to Ms. Kathleen Till Stange, Vice President Corporate and Investor Relations. Please go ahead.

Kathleen Till Stange -- Vice President Corporate & Investor Relations

Thank you, and welcome to FBL Financial Group's fourth quarter 2019 earnings conference call. Presenting on today's call are Dan Pitcher, Chief Executive Officer; and Don Seibel, Chief Financial Officer. Also present and available to answer your questions are Kelli Eddy, Chief Operating Officer, Life Companies; and Mark Sandbulte, Vice President, Investment Strategy. Mark is filling in for Chief Investment Officer, Charlie Happel, who is away for today's call.

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, Dan Pitcher. Dan?

Daniel D. Pitcher -- Chief Executive Officer

Thanks, Kathleen. Welcome to everyone on the call. I'm pleased to be with you today as part of my first earnings call as CEO. Before we review results, I'll share a brief introduction. I joined FBL 22 years ago and have been a member of the executive management team since 2012. I joined FBL as Information Technology Director and transitioned from IT to roles in the managed Farm Bureau property and casualty companies. I served as Chief Operating Officer for the property-casualty companies for the past eight years. My most recent experience has been on the property-casualty side, but I also have deep life insurance experience as they began my career with the life insurer.

Additionally, as a management team member for the last eight years, I've had the opportunity to participate in various enterprise activities, such as strategy, innovation the investment committee and more. I'm honored to be leading FBL Financial Group and I'm excited for its future. We have dedicated employees, and more than 1,800 exclusive Farm Bureau agents who are passionate about living our purpose, to protect livelihoods and futures of our client members. Under my leadership, you should not expect a major shift in strategic direction. However, I may make some refinements as we move forward.

It is crucial to have the right team in place to execute our strategies. We have a skilled management team and I plan to add to it soon. I expect to fill my prior role as Chief Operating Officer for the property-casualty companies as well as add to the team from a marketing and distribution perspective. Team is laser-focused on financial strength, our agency force, growing sales through our Farm Bureau niche market and new initiatives like wealth management. We're mindful of all who depend on us from client members to agents to employees. This focus allows us to continue to be positioned for long-term growth.

Now I'll turn to results for the quarter. FBL Financial Group reported net income of $1.40 per share, and record adjusted operating income of $1.41 per share for the fourth quarter of 2019. Results reflect a steadily growing block of business and the benefit from an unlocking adjustment. Don will review the financial results in detail.

Next, I'll discuss sales, our agents and wealth management advisors. Life sales continue their positive momentum. Life premium collected for the fourth quarter of 2019 totaled $78 million, up 2.7% from the fourth quarter of 2018. This growth was driven by strong increases in universal life and term life sales. UL premium collected increased 7% for the quarter, while term life premium collected increased 2.3%. Our exclusive agents developed long-term relationships with our client members and have a deep understanding of their needs.

Sales often began with the property-casualty insurance products and over time, life insurance sales follow as we meet the needs of our client members. This approach has led to our industry-leading cross-sell rate, allowing us to truly fulfill our purpose of protecting livelihoods and futures.

Annuity premiums collected for the fourth quarter of 2019 totaled $67 million. This is the 19% increase from third quarter of 2019, when sales have stabilized after several quarters of declining. Indexed annuity sales increased while fixed rate annuity sales decline. We continue to maintain our financial discipline as we determine appropriate crediting rates in this low interest rate environment.

As of year-end 2019, we have 1,858 exclusive Farm Bureau Financial Services agents and agency managers. This is an increase of 19 over the past year. We continue to focus on growing our total agent count, but even more important is the productivity of each agent. Years ago, it was common to be a stand-alone agent without any staff, today our most successful agents have their own teams of sales and service associates to help them serve their client members and grow their business. They are truly entrepreneurial small business owners. To enable this, we offer best-in-class distribution systems and support. Going forward, we will work to both grow the total number of agents as well as support our current agents as they grow their businesses.

In addition to our Farm Bureau agency force, we are adding Farm Bureau wealth management advisors. As of year-end 2019, we had 23 Farm Bureau wealth managers and advisors appointed. We are actively recruiting and adding experienced advisors in our territory. While I'm new in the CEO role, this is a strategy that I wholeheartedly support. These wealth management advisors have the unique opportunity to partner with our Farm Bureau Financial Services agents for referrals to serve our existing client members with financial advisory services.

This allows our agents to truly be the one-stop shop for their client members by offering a wide range of property-casualty insurance products, life insurance and annuity products, and now mutual funds and fee-based financial planning services. This service has been needed and has been welcomed by our agents and their client members. We are currently investing in our wealth management business. But ultimately expect it to add a diversified earnings stream to FBL Financial Group, given the fee-based nature of this business.

To conclude, I'm optimistic about the future of FBL Financial Group. We are addressing the challenges of low market interest rates, investing in innovation and automation, the client member experience and our wealth management business, coupled with our strong brand value, commitment to the Farm Bureau niche marketplace and our multiline exclusive agents, we are well positioned for the future.

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

Donald J. Seibel -- Chief Financial Officer and Treasurer

Thanks, Dan. I also want to welcome everyone on the call. Earnings for the fourth quarter of 2019 were very strong and greater than our expectations. Net income was $1.40 per share and adjusted operating income was a record $1.41 per share.

There are four key drivers for why our earnings differed from our expectations. First, we performed an unlocking related to participating whole life insurance persistency. We had noticed a trend with increased persistency of this business. After an end depth review in the fourth quarter of 2019, we extended the DAC amortization period for this block of business. This unlocking positively impacted earnings for the fourth quarter of 2019 by $0.32 per share after-tax.

Second, favorable equity market performance during the fourth quarter of 2019 decreased DAC amortization on our variable business and lowered the reserve increase on our index annuity guaranteed living benefit rider. Third, certain reinsurance balances were trued up in the quarter benefiting results $0.03 per share. And fourth, investment prepayment fee income exceeded our expectations. Partially offsetting these positive items, we experienced worse than expected mortality results in the Corporate and Other segment. I'll review these items in more detail as I discuss our segment results.

Annuity segment results for the fourth quarter of 2019 increased compared to the fourth quarter of 2018 and the third quarter of 2019. Earnings in the historical quarters were negatively impacted by an early retirement program offered to employees in 2018 and the impact of unlocking certain actuarial assumptions in the third quarter of 2019. This block of business continues to steadily grow, but results are pressured by low market interest rates. Point-in-time spreads on our individual annuities decreased 2 basis points during the fourth quarter of 2019, primarily due to a decline in the investment yield from the maturity of higher yielding assets and the reinvestment of proceeds in lower yielding assets.

Life Insurance segment results for the fourth quarter of 2019 reflect a steadily growing book of business and the unlocking and reinsurance true-up benefits I mentioned. Spreads for our universal life insurance business are also pressured due to the impact of lower reinvestment yields. Point-in-time universal life spreads decreased 7 basis points during the quarter.

Corporate and Other segment results were lower during the quarter for several reasons. First, this segment experienced higher death benefits due primarily due to an increased number of life -- large claims in our closed blocks of variable insurance universal life insurance business. This is a normal quarterly fluctuation in mortality results in this relatively small block of business. Second, the Corporate and Other segment for the fourth quarter of 2019 includes an after-tax net loss totaling $1 million, or $0.04 per share related to the investment in our wealth management business. These items were partially offset by the impact of the strong equity market performance in the fourth quarter on the amortization of deferred acquisition costs. This decreased amortization by $1.1 million, or $0.04 per share after-tax. As we look forward in 2020, we expect the wealth management business to continue to require a net investment as it will take some time before that business as a scale to deliver positive bottom line results.

The investment environment remains challenging. The 10-year treasury rate declined 77 basis points in 2019 and has declined even further so far in 2020. We are maintaining financial discipline and are not reaching for yield with lower quality investments. We are focused on adding high-quality longer duration investments, mostly NAIC 1 and 2 corporate bonds. We are also investing in high-quality commercial mortgage loans when possible. The tax adjusted yield on new investment acquisitions backing our long-term business was 3.57% for the fourth quarter of 2019. This is lower than our 2019 portfolio yield of 4.95%.

Before I move on to a discussion of our capital, I'd like to add some perspective regarding our fourth quarter results as they were impacted by many items that we can't expect to regularly reoccur. These items include the favorable unlocking impact, a higher than expected level of investment prepayment fee income, the life reinsurance true-up, the impact of favorable markets on DAC amortization and reserves and worse than expected mortality experience. The net earnings impact of these items in the fourth quarter was a positive $0.37 per share. This coupled with our expected investment in wealth management and headwinds with a low market interest rate environment should be taken into account when you consider our earnings run rate for 2020.

Next, I'll comment on our capital levels. At December 31, 2019, our subsidiary Farm Bureau Life had an estimated company action level risk-based capital ratio of 562%. This is a 10 point 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 during the year. We continue to have an excellent capital position with significant financial flexibility. We have multiple options for deploying our excess capital. They include stock repurchases, our regular quarterly dividend and the payment of special dividends.

Given our limited public float, we had minimal stock repurchases in the open market in 2019. 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. We also may on occasion pay a special dividend as a way to distribute a portion of our excess capital. Our board will next review the payment of dividends when it meets later this month.

In closing, 2019 was a very strong year for FBL Financial Group. We move forward in 2020 with financial discipline to continue to profitably grow our business. I'm pleased to have been able to provide these -- 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

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

The first question today comes from Greg Peters of Raymond James. Please go ahead.

Marcos Costa Holanda -- Raymond James. -- Analyst

Hi, good morning. This is Marcos calling in for Greg. And Dan, congratulations on your new role.

Daniel D. Pitcher -- Chief Executive Officer

Thank you.

Marcos Costa Holanda -- Raymond James. -- Analyst

My first question. And I guess you mentioned in your opening remarks, you wouldn't change the strategic direction of the business and where you guys are heading, but you said you might make some adjustments, Dan. And I guess this would give you the opportunity to maybe give us some more color on what those might be.

Daniel D. Pitcher -- Chief Executive Officer

Yes, I think it would be some refinements to the current strategy, Marcus. And I can't say at this point in time that I have a clear view into what that may be. Obviously, the interest rate environment is a headwind for the companies and so looking for opportunities to maintain our performance in that environment. We'll definitely be high on the list of refinements that we would look for.

Marcos Costa Holanda -- Raymond James. -- Analyst

Got it. And I guess this my second question, if I got it right, the portfolio yield went down 120 basis points this year. And that's just seems like if you look out, I think what the market might be even pricing, is it an additional two cuts this year. So I'm just trying to understand, how much lower can crediting rates go? How is the strategy might be changing in the context of rates possibly go even much lower than they are today?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Yes, Marcos, I'll take that question. Regarding the decrease in our investment portfolio yield, as I said in the call today, our portfolio yield for all of 2019 was 4.95% and believe our portfolio yield for all of 2018 was 5.13%. So it didn't go down as much as you had indicated, but it did still go down. It did go down year-over-year. And we do take a look at our crediting rates that we have in our portfolio of products and we actually did make a 15 basis point crediting rate decrease on our portfolio of products effective January 1, but that's subject to contracts with guarantees. So the overall impact on the total portfolio was 1 to 2 basis points. So, we really are limited with respect to the portfolio of products. With respect to new sales of our index products, we are taking a look at those cap rates and setting those such that we hit our pricing targets on the new business.

Marcos Costa Holanda -- Raymond James. -- Analyst

Thank you for that clarification. That was a big difference. And I guess, dovetailing on that and that 15 basis points cut you had Jan 1. Maybe talk to us about, I mean how does that impacting sales? And how it's -- I guess maybe give us an update on the competitive, the sales environment, especially for annuities.

Donald J. Seibel -- Chief Financial Officer and Treasurer

Yes, I can talk a bit about annuities. I mean, the environment, I think is similar now as it was in the latter half of 2019. And we expect continued headwinds in -- with annuity sales, Marcos, as we move forward.

Daniel D. Pitcher -- Chief Executive Officer

And with respect to the competition, there are some competitors out there that are offering more attractive rates. Certainly, there is -- those that are willing to go down lower in the quality spectrum to be able to do that. We are looking to -- looking for the long term and maintaining our investment quality. And then another competing product out there is just mutual fund investments with equity exposure and people are purchasing the stock market when it's at a very high level, and that's certainly impacting our sales.

Marcos Costa Holanda -- Raymond James. -- Analyst

Is there any particular channel that might be more challenging or that exceeded your expectations last year?

Daniel D. Pitcher -- Chief Executive Officer

Could you clarify your question a bit?

Marcos Costa Holanda -- Raymond James. -- Analyst

If -- just so you go on the landscape, if there's any particular distribution channel or method that you think exceeded your expectations or where you see or product where competition is more robust.

Daniel D. Pitcher -- Chief Executive Officer

Well with respect to our products that are more attractive in the market is clearly our indexed products, our indexed annuity as well as our indexed universal life, which are our top selling products in this interest rate environment. They'll probably continue to be as well.

Marcos Costa Holanda -- Raymond James. -- Analyst

Okay. Great. Thank you for that color. I guess just my last question. As I'm thinking about 2020, and in the confidence of a lower rate environment competition. I'm just -- maybe just give us a sense how do you expect to grow earnings for the Company. I know you can do some buyback, the limited float might not -- might limit those, there is also the wealth management business. What's the earnings generation capacity from that this year? Is this year flat earnings growth here? Just give us some perspective of how you are you thinking about it and for 2020?

Daniel D. Pitcher -- Chief Executive Officer

Well, as I was highlighting in my conference call comments, clearly the bottom line earnings that we recorded in fourth fourth this year are in excess of run rate that we have. So it's going to be very tough to grow earnings in 2020 because of those items that really benefited our bottom line throughout the year. We're going to continue to maintain our discipline on the expense front, maintain our discipline on the pricing front. With respect to wealth management, our net investment in that business in 2019 was $0.16 per share. I'm not going to give earnings guidance on how that number is going to move. But we are going to end up investing in that business on net basis throughout 2020 as well.

Marcos Costa Holanda -- Raymond James. -- Analyst

Got it. That's great color. Thank you, guys. Congrats on the quarter then best of luck. Thank you.

Daniel D. Pitcher -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] The next question today comes from Jamie Inglis of Philo Smith. Please go ahead.

Jamie Inglis -- Philo Smith -- Analyst

Hi, good morning, guys.

Daniel D. Pitcher -- Chief Executive Officer

Hi, Jamie.

Jamie Inglis -- Philo Smith -- Analyst

Hi. A couple of questions. Two sort of high level, and then one in the numbers. If you think about -- you being pointed out that your agency count is 1,158 up 19 for the year. How do you think about that in terms of -- is that better new hope and not as good as you hope? And what do you think might happen going forward? In service environment, we had sort of full economic -- full employment. It would seem to be a relatively difficult time to be building your sales force.

Daniel D. Pitcher -- Chief Executive Officer

Yes. This is Dan. So, that number was. I mean we were, obviously, would want to grow it more but felt pretty good about that number. And, yes, the current strength of the economy and the unemployment level does poss some challenges. But as I mentioned in my comments, we are also really focused on on growing the agents we have in place and we have programs in place to motivate and assist them in expanding their business. And we do expect a better lift out of that. And at a time when there is low employment there may not be as many potential applicants to join our distribution force. We do have that option to shift incentives and to motivate the current agents to grow their businesses.

Jamie Inglis -- Philo Smith -- Analyst

Right, right. And I guess, it's a balance, because if the economy going well, the sales should be better than average anyway.

Daniel D. Pitcher -- Chief Executive Officer

Yes.

Jamie Inglis -- Philo Smith -- Analyst

I got that. And it's sort of segue to the next question. Would you think about the wealth advisor that you've hired. I think you said, there were 23. How do you measure their success or their impact on the company sort of generally, and then how do you measure their success sort of individually, specifically by advisor?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Yes, Jamie, this is Don. I'll take that question. So when we recruit wealth management advisor, we're looking for an advisor with certain book size. So the first success measure is what's the success rate in converting that book over to us. And then ongoing, certainly will have goals per advisor for growth in terms of new client and new deposits going forward.

Jamie Inglis -- Philo Smith -- Analyst

When you say convert to FBL, how does that occur, what products do you sort of go for, for a second, third? And how does that work?

Daniel D. Pitcher -- Chief Executive Officer

Well experienced advisors that come in have a book of business that they've been servicing over time. And we offer similar set of products through our affiliation with RBC, full suite of mutual fund, we have a full service broker dealer. So we can provide all of those services and be the provider or for the wealth management advisor.

Jamie Inglis -- Philo Smith -- Analyst

Okay. So kind of take that to mean that, in a way, it's up to the new advisor what they think they can move and where they think they can move it?

Daniel D. Pitcher -- Chief Executive Officer

Yes. And history shows that there is a relationship there, and clients will go where the advisors goes.

Jamie Inglis -- Philo Smith -- Analyst

Right. Right. Okay. And finally, Don, probably for you. You mentioned that -- I think the you quoted there were $0.37 of benefit from various unusual items in the fourth quarter. Was there -- can you give me sort of a comparable impact on the fourth quarter of a year ago as unusual items then and same for the year. What's the apples-to-apples here?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Jamie, I have to admit, I didn't prepared for that question. Trying to think back to fourth quarter last year, we had a couple of transactions that really depressed earnings. One was we had an adjustment to old product that was sold years and years ago, intersensitive sensitive whole life and we had a $5.5 million negative adjustment to earnings related to that as on a pre-tax basis. And then in the fourth quarter last year, we offered our early retirement window and we had an upfront costs related to that, which I don't recall the specific amount, but I think it was close to -- I'm better not say.

Kelli A. Eddy -- Chief Operating Officer, Life companies

Last year, the early retirement program was a negative impact of $0.24 per share in the fourth quarter.

Donald J. Seibel -- Chief Financial Officer and Treasurer

So that was $0.24. If you add those two together, those were the big drivers of the lower results in the fourth quarter last year. And with respect to the full year, I would -- I'd say that one of the things that benefited the full year in addition to the fourth quarter, just the performance of the equity markets. And how that impacts our variable business and as well as the reserves on our guaranteed living benefits. Investment fee income was pretty much as expected for the full year, but for the outperformance that we had in the fourth quarter. Mortality results for the full year were maybe $0.09, $0.10 cents worse than expected for the full year.

Jamie Inglis -- Philo Smith -- Analyst

Okay.

Donald J. Seibel -- Chief Financial Officer and Treasurer

We had a one-time tax benefit for the full year of $2.5 million that we recorded in the third quarter that would be another item that wouldn't be recurring.

Jamie Inglis -- Philo Smith -- Analyst

Right.

Donald J. Seibel -- Chief Financial Officer and Treasurer

Sorry, I didn't -- wasn't prepared to have that kind of summarize, but those are some of the key drivers.

Jamie Inglis -- Philo Smith -- Analyst

Okay. Good to hear. That's all I had. [Phonetic] Thanks a lot guys. Good luck.

Daniel D. Pitcher -- Chief Executive Officer

Thank you.

Donald J. Seibel -- Chief Financial Officer and Treasurer

Thank you.

Operator

The next question today comes from Louis Feldman of Wells Fargo. Please go ahead.

Louis Feldman -- Wells Fargo -- Analyst

Good morning, guys.

Kelli A. Eddy -- Chief Operating Officer, Life companies

Morning.

Daniel D. Pitcher -- Chief Executive Officer

Good morning.

Louis Feldman -- Wells Fargo -- Analyst

Quickly -- Don, could you repeat that wealth management number was that $0.16 positive to earnings or $0.16 in costs to earning for the year?

Donald J. Seibel -- Chief Financial Officer and Treasurer

That was the net cost.

Louis Feldman -- Wells Fargo -- Analyst

That was net cost. Okay.

Donald J. Seibel -- Chief Financial Officer and Treasurer

When we bring a wealth management advisor on we're early in that process we've established our infrastructure for recruiting and onboarding getting the systems up to speed, which were amortizing. So it is the net cost in the start-up base.

Louis Feldman -- Wells Fargo -- Analyst

Okay. And then for both the wealth management and for general agents are there geographic areas that you're more interested in than not? Or is that something that's going to give something to a competitor, who might be listening?

Donald J. Seibel -- Chief Financial Officer and Treasurer

I can talk at a high level around agents. So I mean a couple of things. Of course, we have retirements or agents that leave the company. And so we have blocks of business that we want to service and grow, and so we would target in those areas. And then, otherwise, we as you know, our market is a more suburban rural target than the major urban metro areas. And that's where we will continue to focus.

Louis Feldman -- Wells Fargo -- Analyst

So, I mean, as I think I was looking more toward states at the state level as opposed to rural versus suburban. Western, Eastern, Northern or Southern areas?

Donald J. Seibel -- Chief Financial Officer and Treasurer

We don't really have a state. I mean we have plans at the state level, but I would not say that we're overweighting our investments in any given geographic territory, other than it does somewhat map to the scale of business that we already have in the existing geographies.

Louis Feldman -- Wells Fargo -- Analyst

Okay. But you're statements in terms of looking to replace retiring agents that would just simply be ZPG situation, zero population growth, so to speak, because you're replacing an agent that's retiring, it's not acquiring a new agent to further the sales. Or is your inference that someone who's younger will push harder as opposed to be satisfied with his sales level, someone who is close to retirement being satisfied with their sales levels?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Yes, I mean it's a -- they are motivated through our commission and compensation structure to continue to grow blocks of business and drive new sales and we would expect that. As far as the agent headcount, you're correct, it's a zero net growth. But I mean that's just one of the two components as we target adding agents.

Louis Feldman -- Wells Fargo -- Analyst

Okay. Thank you very much.

Kathleen Till Stange -- Vice President Corporate & Investor Relations

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Kathleen Till Stange 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: 34 minutes

Call participants:

Kathleen Till Stange -- Vice President Corporate & Investor Relations

Daniel D. Pitcher -- Chief Executive Officer

Donald J. Seibel -- Chief Financial Officer and Treasurer

Kelli A. Eddy -- Chief Operating Officer, Life companies

Marcos Costa Holanda -- Raymond James. -- Analyst

Jamie Inglis -- Philo Smith -- Analyst

Louis Feldman -- Wells Fargo -- Analyst

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