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FBL Financial Group Inc (NYSE:FFG)
Q1 2020 Earnings Call
May 8, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the FBL Financial Group First Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Kathleen Till Stange. Please go ahead.

Kathleen Till Stange -- Vice President Corporate and Investor Relations

Thank you, and welcome to FBL Financial Group's first quarter 2020 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; Charlie Happel, Chief Investment Officer; Dan Koster, Vice President, Marketing and Agency Services; and Ron Mead, Vice President, Sales and Distribution.

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 first 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, and welcome to everyone on the call. I'm pleased that you are with us today. I hope you and your families are doing well during this unprecedented time of COVID-19 pandemic. The current situation has been difficult for everyone and much more difficult for workers on the front lines of essential services. Our thoughts are with you and everyone impacted by this crisis. This wasn't what I had envisioned for my first months as CEO, but I have never been prouder of the people of this organization.

I'll first discuss changes to our leadership team, then briefly summarize our first quarter results and finally share my comments on the impact COVID-19 has had to our business and constituents.

Since our last earnings conference call, we have had several changes to our executive management team. Jay Seiboldt has assumed my previous role as Chief Operating Officer, Property Casualty Companies. Dan Koster was named Vice President, Marketing and Agency Services. And Ron Mead was named Vice President, Sales and Distribution. These three individuals are all proven leaders within our organization and have extensive experience in sales, operations and marketing.

Chief Investment Officer, Charlie Happel, has served this company with great dedication for the past 36 years and plans to retire around midyear 2020. We therefore expect this will be Charlie's last earnings call with us. On behalf of everyone at FBL Financial Group, I thank Charlie for his wisdom and wish him well when he departs our companies later this year. We are currently conducting a search for Charlie's replacement.

Nick Gerhart, Chief Administrative Officer, also plans to leave our companies in the coming weeks. Thank you, Nick, for your contributions to our companies for the past three years and for your leadership in our community and state.

Turning now to earnings, for the first quarter of 2020, FBL Financial Group reported a net loss of $0.10 per share and adjusted operating income of $0.79 per share. Results were negatively impacted by financial market performance related to COVID-19. Don will discuss these results in more detail.

From a sales perspective, total life insurance premiums collected increased 6%, while annuity premiums collected decreased 16% compared to the same period last year. This continues the trend of the last few years where we experienced growing universal life and term life sales. At the same time, annuity premiums collected, specifically fixed rate annuity sales, have declined. We continue to maintain our financial discipline as we determine appropriate crediting rates in this continued low interest rate environment.

Next, the pandemic and its impact. As the severity of the pandemic became apparent, we activated our business continuity plans and formed an incident management work group. This work group, acting in conjunction with our executive management team, monitors business developments, identifies issues, recommends solutions and develops communications with employees, agents, advisors and client/members.

To provide for the health and safety of our employees, we transitioned to a mostly work-from-home environment in a matter of days. I am so impressed with all of our team members. This transition was carried out with minimal interruption to supporting our agents, advisors and client/members. This has allowed us to continue to deliver the first-class service that our client/members count on from Farm Bureau Financial Services.

Our agents are adapting to new work styles and tools to interact with their clients and potential clients. In place of face-to-face meetings, they rely on phone calls, emails and video conferencing. They continue to work to secure life insurance coverage and annuity contracts for their clients, which is more important now than ever. In the short term, the issuance of some life insurance business has been delayed due to impediments to completing necessary medical tests.

Our ability to onboard new agents and wealth management advisors has also been temporarily slowed due to the closure of governmental offices that issue required licenses. As of March 31, 2020, we had 1,831 exclusive agents and 27 Farm Bureau wealth management advisors.

Over the long term, we expect to see an increase in life insurance applications as a result of the devastating impact of the COVID-19 in our communities. The need for life insurance grows ever more apparent. This provides an opportunity for us to engage our client/members to ensure their needs are fully protected and covered.

Our organization and the territories in which we operate have been impacted by social distancing and shelter-at-home orders. But as a company that operates predominantly in rural areas and small towns in the Midwest and West, our customer base is often in less densely populated areas. As a result, we have not had as many cases of the virus as other geographic territories. Our top two states for life insurance sales are Iowa and Kansas, and they rank 19th and 34th for total cases of the virus. Our hearts go out to the people of New York, New Jersey and other hard-hit areas.

While we expect to have additional claims due to the virus, to date, the impact to mortality experience has been minimal. In March, we had two life claims related to COVID-19 that totaled $400,000. And in April, we had one COVID-19-related claim, which was a $25,000 face amount term policy. We certainly expect more pandemic-related claims, but I do not expect this to be a significant mortality event for us. We also have reinsurance coverage in place by individual life. Our current retention limit is $1.0 million per life and has varied historically in the range from $250,000 to $1 million. At the same time, providing coverage allows us to truly fulfill our purpose of protecting livelihoods and futures.

We entered this challenging time from a position of financial strength. I am confident that FBL will navigate these difficult financial markets, given our high-quality, diversified investment portfolio and strong capital position. Farm Bureau Life Insurance Company is strong and has successfully charted rough waters in its 75-year history. Today, we are committed as ever to meeting the needs of our employees, agents and advisors, and protecting the livelihoods and futures of our client/members.

Now, I'll turn the call over to CFO, 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. I'll discuss our financial results for the first quarter, our investment portfolio, capital and liquidity.

Financial results for the first quarter of 2020 were below our expectations and were negatively impacted by financial market performance related to the COVID-19 pandemic. FBL reported a net loss of $0.10 per share. This includes $0.89 per share in net realized losses on investments and the change in the fair value of derivatives. This was primarily due to a net loss from equity securities held at quarter-end of $13.2 million. In addition, we increased allowances for credit losses by $12.3 million. This includes a $12.2 million allowance for fixed maturity securities, an energy bond and a retail REIT, as well as a $100,000 allowance for commercial mortgage loans. These allowances were created under the under new accounting guidance for estimating credit losses associated with certain financial instruments. While the accounting guidance is new, the bonds would have been considered impaired under the previous accounting guidance. Excluding these items, adjusted operating income for the quarter was $0.79 per share.

There are three key drivers why earnings differed from our expectations. First, we had higher amortization of acquisition costs in the Corporate and Other segment due to the negative impact of equity markets on separate account performance. This impact totaled approximately $0.11 per share. Second, we increased reserves associated with index annuity Guaranteed Living Withdrawal Benefits also due to the unfavorable impact of market performance. This impact totaled approximately $0.07 per share. Third, these items were partially offset by better-than-expected mortality experience during the quarter. This impact totaled approximately $0.11 per share. These items, coupled with lower-than-expected prepayment fee and equity income, resulted in a $0.12 per share decrease to operating earnings for the quarter.

Next, I'll discuss our results by segment. Annuity segment results for the first quarter of 2020 reflect the impact of unfavorable market performance. Reserves associated with Guaranteed Living Withdrawal Benefits increased $2.3 million in the first quarter of 2020 due to the unfavorable impact of market performance. This compares to a decrease in the reserve of $800,000 in the first quarter of 2019 due to favorable market performance. Results for our annuity business continue to be pressured by low market interest rates. Due to this pressure, we took several crediting rate actions in the first quarter. As a result, point-in-time spreads on our individual annuities increased 2 basis points during the first quarter.

Life insurance segment results for the first quarter of 2020 reflect a steadily growing book of business, lower amortization and lower death benefits. Spreads for our UL business continued to trend down due to the impact of low market interest rates on our portfolio yield and the impact of a shift in the mix of business to index universal life insurance. Our current index universal life insurance product is structured to have a lower spread than our traditional universal life business as more of the profitability comes from cost of insurance and other charges.

Corporate and Other segment results were impacted by several items in the quarter. First, as previously stated, this segment experienced increased amortization of deferred acquisition costs due to the impact of the negative equity market performance in the first quarter. This increased amortization by $3.7 million. Second, this segment experienced lower death benefits, due primarily to fewer claims and a lower average face amount in our closed block of variable universal life insurance business. This is a normal quarterly fluctuation in mortality results in this relatively small block of business.

We also continue to invest in our developing Wealth Management business. This segment includes an after-tax net loss totaling $1.3 million, or $0.05 per share, related to this investment. This level of investment in the Wealth Management business is expected to continue throughout 2020.

Next, I'll discuss FBL's investment portfolio. As of March 31, FBL had total investments of $9 billion, plus $78 million of alternative investments included in the securities and indebtedness of related parties line on the balance sheet. Our investment portfolio is of high quality and is well-diversified by individual issue, industry and asset class. The majority of our investments, $7.6 billion, are fixed maturity securities with below investment grade bonds accounting for only 2.6% of the fixed maturity total.

Over the past five years, we have upgraded the quality of our fixed income portfolio. Consequently, we entered the current situation with above-industry average portfolio quality. We took action because we felt uncomfortable with the risk-reward across the fixed income market. We have generally taken on credit risk at the short end of the yield curve, including in NAIC-1 rated structured securities, and duration in government-backed and other high-quality sectors.

I'll review a few asset classes where investors have had more questions. Our CLO portfolio has a carrying value of $173 million, which is 1.9% of our total investments. We are comfortable with these holdings as the CLOs are of high quality with 100% being NAIC-1s. They consist of both floating- and fixed-rate securities backed by broadly syndicated and middle market loans. Our recent purchases have been rated AAA or AA.

FBL's commercial mortgage loan portfolio totals $989 million at March 31, 2020. The majority of our mortgage loans amortize principal, with 2.2% that are interest-only. At quarter-end, the average loan-to-value ratio was 51.4% and the weighted average debt service coverage ratio was 1.7. Additionally, we have a high-quality portfolio, with 82% carrying a CM-1 rating, compared to 58% for the industry. We have a long history of extremely low delinquency rates. All commercial mortgage loans are currently performing with none past due.

Our commercial mortgage loan portfolio is diversified by property type, location and loan size, and is collateralized by the related properties. They are a mix of office, retail and industrial. Our retail exposure is $334 million and is primarily focused on grocery or drug store anchored shopping centers. We do not have any loans on mall properties, nor any hotel properties.

FBL's energy investments have a carrying value of $345 million. Despite a significant drop in the price of crude oil in the first quarter, we continue to have 75% of our energy portfolio rated investment grade. 40% of our energy portfolio is in the midstream sector, which is driving a large portion of the unrealized losses in our energy book. However, at quarter-end, our underlying midstream energy positions are at an average market-to-book price of 85%.

Given the dislocation in the financial markets, in the first quarter, we capitalized on the opportunity to invest in private credit and high-yield bonds. We also were able to acquire relatively inexpensive long A-rated corporate bonds. The tax-adjusted yield on new investment acquisitions backing our long-term business was 4.53% for the first quarter of 2020.

Next, I'll comment on our capital levels. Even in these challenging times, we are committed to returning capital to shareholders. In February, we announced an increase in our regular quarterly dividend rate to $0.50 per share. Based on yesterday's closing stock price, this gives us an indicated annual dividend yield of 5.5%. On top of that, we also paid a $1.50 per share special dividend in March. We returned $50 million of capital to shareholders in the first quarter with the regular quarterly dividend, the special dividend and limited Class A common stock repurchases.

At March 31, 2020, our subsidiary, Farm Bureau Life, had an estimated company action level risk-based capital ratio of 525%. This is a decrease from year-end 2019 and was expected due to the dividend paid from Farm Bureau Life to the holding company to fund the dividends paid to shareholders. Even with these significant shareholder dividends, FBL continues to have excess capital. Using 425% RBC as a base, Farm Bureau Life had excess capital of approximately $128 million at March 31, 2020. Additionally, we estimate that we have $14 million of excess capital at quarter end at the holding company level.

Our liquidity position remains strong with cash being generated by operations and financing activities. In addition, at quarter-end, our investment portfolio included $30 million of short-term investments, $18 million of cash and cash equivalents and $588 million in carrying value of US Government and US Government agency backed securities that could be readily converted to cash at or near carrying value. These strong capital and liquidity positions allow us to be prepared for many scenarios. We perform stress tests as part of our annual ORSA report. We have a variety of scenarios, including those that reflect a pandemic, an economic disruption, increased defaults and various combined scenarios. Our modeling indicates we have adequate capital and liquidity in stress situations.

To conclude, we are well prepared for these challenging times. I expect the current economic headwinds and the low market interest rate environment to continue to cause near-term earnings pressure. We have the financial strength to withstand these pressures and to maintain our strength over the long term.

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

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Marla Backer with Sidoti. Please go ahead.

Marla Backer -- Sidoti & Company -- Analyst

Thank you. Hope you can hear me all right. In light of the current environment, what are you hearing from your agents? Is there -- you did say during the scripted remarks that you do expect increased demand for life insurance products. But are you hearing about any kind of new customers at the moment? Or pretty much everything is in a holding pattern with potential new customers until we await the reopening of the economies?

Daniel D. Pitcher -- Chief Executive Officer

This is Dan. So, as I mentioned in our comments, our agents had to adjust to a more virtual sales process than they had used historically. We're a very relationship-oriented company. But they have done a nice job. We are selling business every day. So, we -- like many businesses, we have not shut down in any way, shape or form. We changed a lot of processes with our workforce working primarily remotely and agents doing most selling via email or virtual tools that are available now. But we are selling every day. And we do expect and it will be hard to pinpoint or difficult to measure that this pandemic will drive increased life sales in the future just because of the challenges that the pandemic has created.

Marla Backer -- Sidoti & Company -- Analyst

Okay. Thank you. And what about on the wealth management side? You, I think, ended the quarter with a few more wealth management advisors and did say in the press release, there was some investment in this new business initiative. How do you see that moving forward, depending upon what happens right now in the very near term with the economy? Are you rethinking some of your investments for 2020?

Daniel D. Pitcher -- Chief Executive Officer

Yes. This is Dan. I'll start and maybe turn it over to Don. But I don't think we're rethinking. Obviously, the volatility in the equity markets limited our ability to recruit wealth management advisors as they became very busy servicing their current client members. It also, as was mentioned, made interviewing and licensing difficult. And so, we've continued to talk to wealth management advisors, but we'll have to wait until after the -- some of these restrictions are lifted before the onboarding process goes back to normal.

And Don, I don't know if you have any other comments on our investment -- continued investment question part of it.

Donald J. Seibel -- Chief Financial Officer and Treasurer

Well, with respect to the impact in the quarter, it was $0.05 per share. And as I said in my comments, we expect to continue to make an investment in the balance of the year, and it's because of the cost of bringing on wealth management advisors and we need more scale in the business to generate the revenue to offset the start-up costs.

Marla Backer -- Sidoti & Company -- Analyst

Right. No, that makes sense. So, is it too early to say in terms of the retention that you might be seeing with the assets under management that the wealth management advisors had at some of our firms and thought would transfer over? Can you get your arms around that at this point? Or it's too early?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Yeah, this is Don. I would say it's pretty early to have really statistically valid information on that type of activity. We are monitoring it very, very closely, but we just aren't far enough down the road to know what retention rates will be.

Marla Backer -- Sidoti & Company -- Analyst

Okay, thank you.

Operator

The next question comes from Jamie Inglis with Philo Smith. Please go ahead.

James Inglis -- Philo Smith & Co. -- Analyst

Hey, good morning, guys. I'm wondering if you could tell me a little bit more about what your thoughts are about how your recruiting of agents, and I didn't -- I'm not thinking of the wealth management folks who are traditional agents -- will fare in sort of if we have more of an extended slowdown of the economy going forward?

Daniel D. Pitcher -- Chief Executive Officer

Yeah, this is Dan. If we think about this in the context of these restrictions being lifted, that slowdown can cut both ways. Obviously, the significant spike in unemployment, and we don't know what component of that is permitted unemployment, but that does improve our recruiting situation, which can be challenged in very low unemployment as low as it was when we entered this crisis. So, we can potentially see some lift from that. And I would expect that would balance out any challenges we might see in the overall economy slowdown.

James Inglis -- Philo Smith & Co. -- Analyst

Okay. So, could you elaborate a little bit more about on your comment about the hurdle with respect to medical testing for new policies? How does that work in your current operating system or -- I shouldn't say current, but the old system? And how we might get back there?

Daniel D. Pitcher -- Chief Executive Officer

Kelli, would you like to take that?

Kelli A. Eddy -- Chief Operating Officer-Life Companies

Sure. Thank you, Dan. So, currently on the medical testing, it is an age and amount requirement under life insurance. At this point in time, the examiners, for different and varying reasons, do not go out and do that testing right now. So, the underwriters are looking at in lieu of information from the doctor records. So, we're continuing to do that. We're also in touch with our paramedical facilities. And as states start to open up, those examiners will be available and able to go out and collect that information.

James Inglis -- Philo Smith & Co. -- Analyst

Okay. So, I guess it's a simple as this, it's wait and see how it might work out. Okay, fine. Thanks a lot. Good luck.

Operator

(Operator Instructions] Our next question comes from Louis Feldman with Wells Fargo [Phonetic].

Louis Feldman -- Wells Capital Management -- Analyst

Good morning.

Daniel D. Pitcher -- Chief Executive Officer

Good morning.

Louis Feldman -- Wells Capital Management -- Analyst

Dan, just wondering, given the current situation, have you looked at all at streamlining operations for applications moving part of it online to make it easier for your agents to continue to recruit and generate that way? Granted you get stuck at the medical examination on the life side, but to what extent do you have the application process online? Would you look to move some of that further online?

Daniel D. Pitcher -- Chief Executive Officer

Yeah. This is Dan. Thank you. Just maybe to clarify, too, on that medical discussion in your statement, that's a small percentage of applications that are potentially being held up due to certain medical requirements that, as Kelli noted, the age and the face amount would require. So, at this point in time -- and you know we've historically continued to be a relationship company. We haven't had any discussion of moving to an online or digital client/member facing solution. Our agent has an electronic app that they use between -- but that's between the agent and the company. And they're still being successful in working virtually and through email and being able to capture information as they did before across their desk or across the kitchen table. So, barring some information we don't have about how long the impact of this pandemic may be, we're not looking today as that being a primary option.

Louis Feldman -- Wells Capital Management -- Analyst

Okay, thank you.

Operator

[Operator Instructions] At this time, there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Kathleen Till Stange for any closing remarks.

Kathleen Till Stange -- Vice President 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

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Kathleen Till Stange -- Vice President Corporate and Investor Relations

Daniel D. Pitcher -- Chief Executive Officer

Donald J. Seibel -- Chief Financial Officer and Treasurer

Kelli A. Eddy -- Chief Operating Officer-Life Companies

Marla Backer -- Sidoti & Company -- Analyst

James Inglis -- Philo Smith & Co. -- Analyst

Louis Feldman -- Wells Capital Management -- Analyst

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