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FBL Financial Group Inc (NYSE:FFG)
Q2 2020 Earnings Call
Aug 7, 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 Second 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 Second 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; Dan Koster, Vice President, Marketing and Agency Services; Ron Mead, Vice President, Sales and Distribution; and Jeff Whitehead, Chief Investment 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 second 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 hope you are well. I'm pleased that you are with us today. In this year of upheaval for the global and national communities, for businesses and individuals, we appreciate the opportunity to connect with FBL shareholders, analysts and guests. While the challenges of the pandemic and low interest rate environment persist, FBL Financial Group and our industry have had fewer negative impacts than many other sectors. I'm grateful for the hard work and the dedication of our agents, advisors and employees during these unique and challenging times. Earlier in the year, we transitioned to a mostly work-from-home environment. Our employees have made very adaptable have been very adaptable, and operations are running smoothly. More recently, some employees have chosen to return to work in their offices with new social distancing measures in place. The process is working very well. Regardless of their locations, our employees continue to go the extra mile for our agents, advisors and client members. Joining us on the call today is our new Chief Investment Officer, Jeff Whitehead. Jeff filled the role previously held by Charlie Happel, who retired in June after 36 years with the company. I am pleased that we were able to add such a strong leader to our team. Jeff brings extensive investment management experience in the insurance industry. For the past 19 years, he was with Aegon U.S. Investment Management, where he led a team responsible for managing TransAmerica's general account portfolio. Jeff's proven leadership and deep insurance investment experience will enable him to successfully lead FBL's investment team and manage our high-quality portfolio. I feel very confident in the executive management team we have today.

We have strategies in place that keep our companies financially strong and stable, allowing us to fulfill our purpose to protect the livelihoods and futures of our client members. Turning now to earnings. For the second quarter of 2020, FBL Financial Group reported solid earnings results, net income of $1.06 per share and adjusted operating income of $1.02 per share. Results benefited from our focus on expense management as well as the broad market recovery since March. Don will discuss these results in more detail. From a sales perspective, total life insurance premium collected decreased 1%, while annuity premiums collected decreased 40% compared to the same period last year. The decline in annuity premiums reflects the lower the impact of lower market interest rates and our financial discipline in determining appropriate crediting rates. Even though sales are lower this quarter, our book of business continues to grow. Life insurance in force totaled $66.3 billion at June 30, 2020, continuing a consistently steady increase in each quarter. From an annuity perspective, Annuity segment total interest-sensitive product reserves continue to increase as well. While new annuity sales are down, surrenders and withdrawals have also declined. As of June 30, 2020, we had 1,770 exclusive agents and agency managers. This has declined during the second quarter, reflecting deliberate changes we made with some of our lowest-producing agents. Generally, these were less tenured agents who had minimal life production. The total number of agents is still an important number, but I'm more focused on metrics of productivity per agent. Our agents have 1,148 licensed sales associates who help them serve their client members and grow their business. We have recently enhanced tools to help agents to be the most productive they can be. I recently met with 100 of our top agents in a rare in-person yet socially distant event.

I always appreciate the opportunity to connect with agents. While 2020 has been a year unlike any other, I'm pleased to see agent production activity beginning to return to normal levels. As we approach sales and service in the second half of the year, our agents are excited about the opportunities they see ahead, and I am, too. FBL's wealth management business continues to grow, albeit at a slower pace than we had originally anticipated. COVID-19 halted all wealth management advisor onboarding activities for March, April and May. As of June 30, we have had 30 Farm Bureau wealth management advisors. I'm optimistic as we have made several good hires recently. Recent appointments include our first wealth management advisor in Wisconsin and our first in Utah. Now more than ever, our client members need experience and professional wealth management advice. I want to conclude with a comment on our financial strength. There were two recent external announcements which recognize our company's strong position. In June, A.M. Best affirmed Farm Bureau Life's financial strength rating of A Excellent. A.M. Best noted that Farm Bureau Life has risk-adjusted capitalization that is at A.M. Best's strongest level, good liquidity metrics as well as an investment portfolio that is of good overall quality. In July, Ward Group named Farm Bureau Life to the 2020 Ward's 50 group of top-performing companies. This marks the 21st time that Farm Bureau Life has been named to the Life-Health Ward's 50 list. Our managed property casualty company was also named to the Ward's 50 for the sixth year in a row. This makes Farm Bureau Financial services one of only eight organizations with affiliated companies named to both lists. Ward analyzes more than 700 life insurance companies and 3,000 property and casualty insurers. So we are honored to be recognized for strong operating performance and consistent financial strength. FBL Financial Group entered the pandemic from a position of strength, and we remain well positioned to handle adversity in consumer and market trends.

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 also hope you are well. I'll discuss our financial results for the second quarter and then comment on investments, capital and liquidity. As Dan mentioned, earnings results for the second quarter of 2020 were solid, reflecting an improvement in equity markets, product pricing actions and a focus on managing expenses. FBL reported net income of $1.06 per share and adjusted operating income of $1.02 per share. These results are especially notable given the challenging environment of a global pandemic, volatile markets and low market interest rates. I would characterize our results as in line with our expectations. I'll mention a few items which impacted results this quarter, both positively and negatively. Positively, we experienced lower DAC amortization on our variable business due to the favorable impact of equity markets on separate account performance. This favorable market performance also decreased reserves associated with guaranteed living withdrawal benefits on our index annuity products. In total, this positive market performance totaled $0.09 per share. Given the persistent challenge of the low interest rate environment and its impact on sales, we have focused on controlling expenses. Naturally, during this time, expenses that are travel-related have declined. But we are also challenging project costs and seeing a decline in personnel expense due to limiting new positions and not filling positions when individuals leave the company. On the negative side, we experienced an equity loss from alternative investments. These investments are generally reported a quarter in arrears, so they reflect the decline in markets during the first quarter of this year.

We expect improved results from these investments in the third quarter given the strength of the market in the second quarter. However, we can't quantify the level of improvement at this time. Mortality experience for the quarter was within our range of expectations and was not a significant driver of results. We did experience some pandemic-related claims, but to date, the financial impact has not been significant. In total, during the second quarter of 2020, we had claims on 19 individuals with COVID-19 listed as a cause of death. Many of these individuals were of advanced age or had significant underlying medical conditions, with several being residents of long-term care facilities. The total financial impact, net of reserves released, was $1.4 million. Providing this coverage allows us to deliver on our promise and fulfill our purpose of protecting livelihoods and futures. Next, I'll discuss our results by segment. Annuity segment results for the second quarter of 2020 reflect the impact of favorable market performance. Reserves associated with guaranteed living withdrawal benefits decreased $1 million in the second quarter of 2020 due to this market performance. In addition, amortization of deferred acquisition costs was lower in the quarter due to better persistency. Results for our Annuity business continue to be pressured by low market interest rates. Point-in-time spreads in our individual annuities decreased five basis points during the second quarter. In response to the headwinds caused by the low market interest rates, during the first half of 2020, we've decreased interest crediting rates on certain portfolio annuity products and reduced caps and roll-up rates on our indexed annuity products. In addition, we have reduced agent commissions on certain annuity deposits.

Life Insurance segment results for the second quarter of 2020 reflect a steadily growing book of business and lower expenses, partially offset by lower equity income and higher debt benefits. Point-in-time spreads for our universal life business also declined during the quarter, primarily due to the impact of the low market interest rates on our portfolio yield. Corporate and Other segment results were impacted by several items in the quarter. First, as previously stated, the segment experienced lower amortization of deferred acquisition costs due to the impact of the positive equity market performance in the second quarter. This decreased amortization by $1.9 million. Second, this segment experienced lower death benefits in our closed block of variable universal life insurance business. Third, this segment had lower-than-expected equity income. We also continued to invest in our developing Wealth Management business. This segment includes an incremental after-tax net loss totaling $1.1 million or $0.04 per share related to this investment. We expect to continue a similar level of investment in the Wealth Management business throughout 2020. Next, I'll discuss FBL's investment portfolio. It is of high quality and is well diversified by individual issue, industry and asset class. As of June 30, FBLI total investments of $9.5 billion plus $83 million of alternative investments included in the securities and indebtedness of related parties line on the balance sheet.

Given our underweight position in high-yield investments and the dislocation in the financial markets, the first half of the year was great timing for us to invest in high-yield bonds. These high-yield acquisitions were spread across a number of sectors. Recent purchases were also focused on high-grade corporate bonds as well as structured product and municipal securities. And we were active in originating commercial mortgage loans. The tax-adjusted yield on new investment acquisitions backing our long-term business was 4.11% for the first half of 2020. Our investment portfolio continues to be of high quality, with 96.4% of the fixed maturity securities being investment grade. Our commercial mortgage loan portfolio also continues to perform well. It is of high quality and totaled $991 million at June 30, 2020. All commercial mortgage loans are currently performing. Next, I'll comment on our capital levels. At June 30, 2020, our subsidiary, Farm Bureau Life, had an estimated company action level risk-based capital ratio of 527%. This is an increase of two points from March quarter end. This is notable as our increase in capital more than offset the impact of an increase in asset risk charges due to rating downgrades. Using 425% RBC as a base, Farm Bureau Life had excess capital of approximately $134 million at June 30, 2020. In addition, we estimate that we have roughly $10 million of excess capital at quarter end at the holding company level. Even in these challenging times, we continue to return capital to shareholders. During the second quarter, we repurchased FBL stock totaling $3.6 million.

And we paid our regular quarterly common stock dividend, which totaled $12.3 million. Based on yesterday's closing stock price, our indicated annual dividend yield was 5.7%. In addition, we paid a special dividend earlier this year. Our liquidity position remains strong with cash being generated by operations and financing activities. At quarter end, our investment portfolio included $16 million of short-term investments, $16 million of cash and cash equivalents and $607 million in carrying value of U.S. government and U.S. government agency-backed securities that could be readily converted to cash at or near carrying value. To conclude, we are well prepared for this challenging environment. We have strong capital and liquidity positions, and we continue to adapt to the low market interest rate environment with expense savings actions and product pricing changes. We continue to execute on our fundamentals and maintain the financial strength of the company. These actions position FBL Financial Group well for the balance of 2020.

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

Questions and Answers:

Operator

[Operator Instructions] The first question is from Greg Peters with Raymond James. Please go ahead.

Greg Peters -- Raymond James -- Analyst

Well, good morning everyone. I'm just going to focus on a couple of areas. And I know you spoke about the crediting rates in your prepared remarks. And I was looking at your supplement, on page eight, where you talk about the crediting rate in the Annuity business, and we see it declining ever so a little bit on a year-over-year basis. And then on page 10 of your supplement, where you give us the crediting rate in the Life business, it's gone up a little bit. And I guess in the context of the lower interest rate environment, I just how would you think about the crediting rates going forward? Is it going to compress is the total yield going to compress because the lower interest rate environment? Or are you have opportunities to expand the margin by lowering your crediting rates?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Thank you, Greg. This is Don. I will address that question. We do have limited ability to further decrease our crediting rates. The portfolio product change that we made in late mid-March of this year actually took that block down to the minimum guarantee, which is 1%. In total, our annuity contracts, 92% of the contracts are at guaranty. And on the universal life insurance side, approximately 85% of those products are at guaranty, and the 15% that's not is business that we've written more recently. So it is a challenge. That's why we are focusing on the expenses, certainly, to offset that a bit from a bottom line perspective, and then longer term, the strategy of building out the Wealth Management business to have a source of revenue and profitability that is not spread dependent.

Greg Peters -- Raymond James -- Analyst

Got it. And then on the new business that you're selling in both of these areas, I assume with pricing, you're helping to offset the low interest rate environment with a lower crediting rate. Is that a fair assumption?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Yes. And that's reflected in the decreases that we made on our caps and roll-up rates, on our indexed annuities. And then we've also held tight on the MYGA four product that we have, the four-year multiyear guarantee annuity.

Greg Peters -- Raymond James -- Analyst

Got it. I thought I'd step back and maybe at a big picture level, the economic disruption as a result of this pandemic has been profound. And I'm curious, as you survey your customers, what kind of sense are you getting from them about their views on their ability to buy discretionary items around life insurance, etc.? And then secondly, you're trying to build out the wealth business. It seems like the opportunity to find people that might be willing to consider that as a profession, you might have a bigger pool of prospects considering the widespread unemployment. But maybe just talk about the big macro issues and how it's affecting your business in those particular areas as well.

Daniel D. Pitcher -- Chief Executive Officer

Yes. This is Dan Pitcher. I'll start, and there might be one or more that want to make a couple of additional comments. But from the macro level, when you think about our customers and potential customers, we think long term, first off, and I mentioned this in the last call, that there's probably some opportunity for life insurance sales due to this pandemic. In the short term, obviously, with a lot of the shelter-in-place and the many restrictions, the ability to do some of the underwriting medical underwriting that we needed to do was more complicated. And so the process of selling life insurance definitely became more complex due to COVID. I don't feel or I didn't hear from the agents that we're we were getting a feel of overall general consumer sentiment that was would work against our industry. So we all want to get this behind us, but I think we're really well positioned to come out of this from a position of strength and don't have a lot of concerns about long-term impact from the pandemic. The second kind of area you went into as far as the jobs and the impact to the unemployment and the economy, that probably isn't a big benefit on the wealth management side. I think, generally, we're trying to hire, if you look at our press releases and notes, experienced wealth managers. And but it may benefit us in the area of growing the agency for some of my comments earlier. We think that we can be more selective in hiring agents for the company given the level of unemployment. Our best agents are entrepreneurs. And as you know, this economy has driven a lot of entrepreneurial folks into unemployment. So we do think that there will be some benefit from that. I don't know, Don, if you had any additional comments.

Donald J. Seibel -- Chief Financial Officer and Treasurer

Yes. With respect to the wealth management question, one of the value propositions that we provide a wealth manager joining us is access to a hot lead, if you will. So we have agents that have long-term relationships with very wealthy individuals. We provide life insurance and property casualty services to them, but that show that we've not done a good job of meeting their investment needs. While we sold mutual funds in years past, our penetration into that aspect of their wallets is not that significant in total. So wealth management advisors like to have customers brought to them as opposed to prospecting. And we see that as a real value proposition and a lure to get some of these experienced advisors to come over to us.

Greg Peters -- Raymond James -- Analyst

Got it. I guess the final question is around capital. Obviously, you commented on your capital ratios and the strength of the organization. And I know in the past, when you were in excess capital positions, you periodically would consider special dividends. Should I presume at least for the near term as we sort of work through the pandemic and the economic crisis that things like that are on hold? Or is there a different view?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Yes. This is Don. I'll tackle that question. And Dan, you could provide some additional color if you'd like. But certainly, we have not grown our capital ratio in the first half of the year as much as we have over the last several years. And we have headwinds that are stronger than what we have faced over the last several years as well. So it is prudent to see how the economy rebounds, see what credit rating agencies do with respect to ratings of the issuers of the securities that we own and to see this play out a bit. But the timing and amount of special dividends is driven by the Board, and anything can happen.

Greg Peters -- Raymond James -- Analyst

Got it. Thanks for the answers.

Operator

[Operator Instructions] The next question is from Marla Backer with Sidoti. Please go ahead.

Marla Backer -- Sidoti -- Analyst

Thank you. So I'm wondering if we could get a little bit more color on the wealth management initiative and specifically in terms of onboarding some of the new advisors. Can you just provide a little bit of walk us through the process of what has to occur before a new advisor is able to move over to get a better feel for how this process has been slowed or how it will work its way out going forward?

Daniel D. Pitcher -- Chief Executive Officer

This is Dan. I can start a little bit at the high level as far as the slowing of the process. And I think you can appreciate that after the pandemic hit and all of the restriction and shelter-in-place orders were out there, I mean, two things happened to existing wealth management advisors. First off, there was quite a market turmoil in the first quarter. And so they were obviously busy answering a lot of questions, fielding a lot of calls from their current clients. The other thing, of course then, we were impacted by the really, the ability to interview and to train and to develop in the many components of that process that we have of moving wealth management advisors into our model. And that was in my comments where we basically had three months in there where that recruiting process, all the way from licensing to interviewing to training, was basically shut down, and it's beginning to pick up again now. And so I feel good about some of the loosening of restrictions. Obviously, there's been another recent spike in the number of cases. We've been able to continue to work through it up to this point. And I don't think we're I wouldn't say we're back to normal yet, but we are getting closer. And of course, it all depends on what the rate and location of the virus spread in the near future and what its impact might be on our recruiting.

Marla Backer -- Sidoti -- Analyst

That was helpful. And given that you're sort of as you've said, sort of have been delayed by the COVID-19 impact on activity, is there any way that you can help us get a feel for how to benchmark your progress on the initiative, even in terms of just telling us perhaps what your internal target not telling us what your internal targets are but giving us some sort of understanding of booking assets?

Daniel D. Pitcher -- Chief Executive Officer

Yes. I mean I'll make it yes, a couple of general comments, and then Don may be able to add to it. But as Don commented, it's slower than what we had anticipated. But also worth noting, our expenses and investment into wealth management were had slowed down also. So we kind of had those two components offsetting each other a bit. On a go-forward basis, we really we don't share our internal targets. But Don, I don't know if you have anything else you want to add on that.

Donald J. Seibel -- Chief Financial Officer and Treasurer

If I could just clarify, was the question directed toward the wealth management aspect of the business? Or was this question broader?

Marla Backer -- Sidoti -- Analyst

No, it was directed toward the wealth management aspect. And I understood that you weren't going to like disclose the targets, but how to think about what you're targeting in terms of the numbers of advisors to bring over the assets under management. Just a general sense of what you're thinking without providing specific numbers.

Donald J. Seibel -- Chief Financial Officer and Treasurer

You bet. So clearly, the economic model is driven by assets under management and then the fees that result from managing those assets. So it's growth in that asset base that is key to turning the corner and adding to the bottom line for FBL. And to date, given the start-up nature, we have not disclosed the AUM balances, but certainly, that will be in our future.

Marla Backer -- Sidoti -- Analyst

Okay. Now switching topics, you mentioned before that one thing you had done to offset some of the impact of the low interest rate environment was that you've reduced agent commissions on some of the interest-sensitive products. So I think that was if my understanding is correct, I think that's what you said. So is that intended to be what duration is that? Or is that intended to be a permanent reduction in agent commissions?

Donald J. Seibel -- Chief Financial Officer and Treasurer

The actions that we've taken to date are really limited toward around those contracts that contract holders have the right to make renewal deposits into contracts that were written years and years, perhaps decades ago, and they have minimum guarantees. So for those contracts that have a 2% or higher minimum guaranty, we have eliminated the commissions that we pay on those deposits, where, historically, we wanted those assets because we could still make a spread on that money. So the extent of any commission reduction has been limited, but it has it's one of those things one of those many things that we've done to help bolster our bottom line, and commissions continues to be challenged because that's one of the levers that we can pull.

Marla Backer -- Sidoti -- Analyst

Okay. And are you seeing any change in your assumed defaults as a result of what's going on in the economy?

Donald J. Seibel -- Chief Financial Officer and Treasurer

For product pricing purposes, we really take a long-term view on default assumptions when we're setting crediting rates and other parameters around our products. And so that's not something that will adjust significantly in a particular year, in a particular economic cycle, but rather it's something that morphs over time based upon long-term industry data.

Marla Backer -- Sidoti -- Analyst

Okay. And then in terms of just real-world changes right now, are you actually seeing any change in default in 2020 versus what you had expected that you have ascribed to the economic downturn?

Donald J. Seibel -- Chief Financial Officer and Treasurer

Clearly, we had second quarter, we didn't see much in the way of impairments or defaults to speak of. We had more significant in the first quarter. And certainly, it's much, much elevated from the level of defaults or impairment charges that we took over the last several years where the credit cycle was in a good spot. So just based on six months, we're more reverting to the mean of what we would expect given the size of our portfolio and the level of impairment activity.

Marla Backer -- Sidoti -- Analyst

Thank you.

Operator

[Operator Instructions] Showing 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: 36 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

Greg Peters -- Raymond James -- Analyst

Marla Backer -- Sidoti -- Analyst

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