Logo of jester cap with thought bubble.

Image source: The Motley Fool.

FBL Financial Group Inc (NYSE:FFG)
Q3 2020 Earnings Call
Nov 6, 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 Inc. Third Quarter 2020 Earnings Conference Call. [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 of Corporate & Investor Relations

Thank you and welcome to FBL Financial Group's third quarter 2020 earnings conference call. Presenting on today's call are Dan Pitcher, Chief Executive Officer; and Don Seibel, Chief Financial 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 supplements, 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. Please note that there will be no question-and-answer session following our prepared remarks today.

With that, it is now my pleasure to turn the call over to CEO Dan Pitcher. Dan?

Daniel David Pitcher -- Chief Executive Officer

Thanks, Kathleen, and welcome to everyone on the call. I hope you're all well. I'm pleased that you are with us today. As you are aware, on September 4, FBL Financial Group received a nonbinding proposal from Farm Bureau Property & Casualty Insurance Company to acquire all the outstanding shares of FBL Class A common stock and Class B common stock that are not currently owned by Farm Bureau Property & Casualty or the Iowa Farm Bureau Federation at a purchase price of $47 per share.

Since that time, the board has established a special committee to consider this proposal and that committee has retained its own legal counsel and financial advisor. FBL's Board of Directors has not made any decision with respect to its response to this proposal. I continue to be impressed with the building of our agents, advisors, and employees to adapt and remain focused despite many distractions brought on by the pandemic. FPL's agents and advisors continue to find innovative ways to grow their businesses.

In addition, productivity and service levels are high for our employees, whether they are in our corporate offices or for the majority that remain in remote work mode. We have adjusted practices in our offices following CDC guidelines to provide for the well-being of all of our constituents. In a year where we have faced countless new and different challenges, our promise to protect livelihoods and futures is more important than ever. Turning now to earnings. For the third quarter of 2020, FBL Financial Group reported mixed financial results, net income of $0.85 per share and adjusted income of $0.80 per share. Positives include growing life insurance sales, lower expenses than anticipated due to our focus on expense control, and an excellent capital position.

Negatives include the unfavorable impact of unlocking actuarial assumptions, higher debt benefits, and continued pressure on spread income from the decline in investment yields. Don will discuss these results in more details. From a sales perspective, total life insurance premiums collected increased 3% compared to the prior year quarter, with an increase in new whole life and term life insurance sales. Annuity premiums collected, on the other hand, decreased 19% compared to the same period last year, due primarily to a decline in index annuity sales. The decline in annuity sales reflects the impact of lower market interest rates and our financial discipline in determining appropriate crediting and cap rates.

On a positive note, surrenders and withdrawals have also declined. Our product offering is robust and competitive with products suitable for all life stages. Late in the third quarter, we added an additional index annuity to our product suite. The product is Agility6 Indexed Annuity. It features a two-year point-to-point strategy with a six-year surrender charge period. This product complements our flexible premium index annuity, which offers annual point-to-point and monthly average strategies with a nine-year surrender charge period. We also recently launched an accelerated underwriting process, which allows for an exam free and fluid free underwriting process for eligible client members. Accelerating underwriting achieved several purposes. It enhances the client member and agent experience for the purchase of life insurance.

It incorporates new tools and techniques in the risk selection process. It allows eligible client members a less invasive risk selection process. And it streamlines the application process to be primarily electronic. The recent launch of this process led to some processing delays with a third party provider, but we are working through those issues. Once resolved, we expect accelerated underwriting to serve us well in the long term. In addition to enhancing our product offering and purchase experience, we are working to make our operations more efficient. Since Kelli Eddy joined as Chief Operating Officer last year, Farm Bureau Life has been intentional about creating a continuously improving culture of efficiency.

We dedicated effort and resources to value stream mapping and Lean Six Sigma projects. The result is more efficient operations and lower expenses, which allows us to better serve and create value for our client members. Turning now to distribution. As of September 30, 2020, we had 1,703 exclusive agents and agency managers. This total reflects a decline in the third quarter as we continue to make changes with some of the lowest producing agents. We are focused on increasing the productivity per agent and have enhanced marketing tools to help agents be as productive as they can be. Our intention is to have agents in place who have the potential for long-term success. As part of this process, we will have a new contract in place for new agents as of January 1.

Our Farm Bureau Financial Services agency force is complemented by our Farm Bureau Wealth management advisors. As of September 30, we had 29 wealth management advisors. This advisor count is more than double the number we had a year ago with advisors joining us from large banks, wirehouses and a variety of protocol and non-protocol firms. We continue to build out this business, but the pace of adding advisors has been slower than originally anticipated as the pandemic has put pressure on recruiting experienced advisors. As we move forward to finish 2020, our constant focus is to protect the livelihoods and futures of our client members. We adhere to strategies that keep our companies financially strong and stable, allowing us to fulfill our purpose.

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

Donald Joseph Seibel -- Chief Financial Officer And Treasurer

Thanks, Dan. I also want to welcome everyone on the call and thank you for your interest in FBL. I'll discuss our financial results for the third quarter and then comment on investments in capital. Earnings results for the third quarter of 2020 came in below our expectations. FBL reported net income of $0.85 per share and adjusted operating income of $0.80 per share. I'll highlight the notable items for the quarter which impacted results, both positively and negatively. I'll begin with the negatives.

First, we performed a review or 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. We performed this exercise annually or more frequently if needed to better align our projections with future expectations. Assumptions include persistency, surrenders, withdrawals, rider utilization, economic environment, and other factors. Notably this quarter, we had a negative unlocking impact from decreasing our long-term treasury yield assumptions by 25 basis points.

We now project the 10-year treasury rate to grade up to 3.5% over a 10-year period. We had a positive unlocking impact from updating the expected policyholder behavior assumptions for those individuals who have activated the guaranteed living withdrawal benefit rider on our indexed annuity policies. In total, this unlocking exercise negatively impacted earnings for the third quarter of 2020 by $0.22 per share after tax. Please see page 14 of our third quarter investor supplement where we have included segment-level detail on the unlocking impact. Second, mortality results were approximately $0.14 per share, worse than expected, primarily in the life insurance segment. We experienced some pandemic related claims, but that was not a significant driver of the increase in debt benefits.

Overall, we had a higher-than-average number of claims in the third quarter as well as a higher-than-average claim size. By its nature, mortality experience can fluctuate from quarter-to-quarter. Regarding COVID-19, to date the pandemic has not proven to be a significant mortality event for us. In total, during the third quarter of 2020, we had claims on 27 individuals with COVID-19 listed as a cause of death. The majority of these individuals were of advanced age or had significant underlying medical conditions.

The total financial impact, net of reserves released, was less than $1 million. Given the trajectory of COVID-19, we expect more pandemic related claims, providing this coverage is vital and allows us to deliver on our promise to our client members. Third, while we had equity income for the third quarter, it was lower than expected. Notably, one of our alternative investments reports earnings two quarters in arrears as it is a fund-of-funds, which increases the reporting timeline. Finally, we continued to invest in our growing wealth management unit as we build out that business.

On the positive side of earnings, 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 $0.07 per share for the quarter. Another positive is our success in controlling expenses. As Dan mentioned, we devoted resources to streamline operations and become more efficient.

Given the decline in sales, we challenged project costs and reduced personnel expense by limiting new positions and not filling positions when individuals leave the company. Also, given the current environment, travel-related expenses have declined. Next I'll discuss our results by segment. Annuity segment results for the third quarter of 2020 were strong and reflect a benefit from unlocking actuarial assumptions, driven by changes to the expected policyholder utilization of the guaranteed living withdrawal benefit rider and the impact of favorable market performance. Reserves associated with guaranteed living withdrawal benefits decreased $600,000 in the third quarter of 2020 due to this market performance. This segment also had lower expenses. Results for our annuity business, however, continued to be pressured by low market interest rates.

Point-in-time spreads on our individual annuities decreased seven basis points during the third quarter, reflecting lower investment rates. Life Insurance segment results for the third quarter of 2020 reflect several negative items. This segment had a negative impact from unlocking actuarial assumptions driven by spread compression and lower persistency. It also had higher death benefits and lower equity income, partially offset by lower expenses. Point-in-time spreads for our universal life business also declined during the quarter, primarily due to the impact of low market interest rates on our portfolio yield. In response to the headwinds caused by the low market interest rates, in the third quarter, we decreased the cap rates on our indexed universal life products.

Corporate and other segment results were impacted by several items in the quarter. First, as previously stated, this segment experienced lower amortization of deferred acquisition cost due to the impact of the positive equity market performance in the third quarter. This decreased amortization by $1.5 million. Second, this segment had higher debt benefits in our closed block of variable universal life insurance business. Third, it experienced a negative impact from unlocking actuarial assumptions due to spread compression.

We also continue to invest in our developing wealth management business. An incremental after-tax net loss for the quarter totaling $1.5 million or $0.06 per share is related to this investment. Next I'll discuss FBL's investment portfolio, which is well diversified by individual issue, industry, and asset class. Our investment portfolio is of high quality with 96.4% of the fixed maturity securities being investment grade. Our commercial mortgage loan portfolio is also of high quality with all loans performing at quarter end. We have added high quality long duration securities with recent investment purchases of corporate bonds, municipal bonds, and non-agency mortgage-backed securities. The tax adjusted yield on new investment acquisitions backing our long-term business was 3.34% for the first nine months of 2020. Next I'll comment on our capital levels.

At September 30, 2020, our subsidiary, Farm Bureau Life, had an estimated company action level risk-based capital ratio of 525%. This is a decrease of two points from June quarter end and reflects $23.5 million in dividends paid by Farm Bureau Life during the third quarter. A portion of these dividends were used to fund our growing wealth management business. Using 425% RBC as a base, Farm Bureau Life had excess capital of approximately $133 million at September 30, 2020. In addition, we estimate that we have roughly $9 million of excess capital at quarter end at the holding company level.

We continue to return capital to shareholders. During the third quarter, we paid our regular quarterly dividend on our common stock, which totaled $12.2 million, and we repurchased FBL common stock totaling $5.6 million. To conclude, while our bottom line results for the quarter were below our expectations, we exercised financial discipline to grow our business. We have strong capital and liquidity positions, and we continue to execute on our fundamentals and maintain the financial strength of the company. These actions position FBL Financial Group well for the future. That concludes my comments.

I will now turn the call over to Kathleen.

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

Thank you, Don and Dan, for those comments. And thank you to everyone who joined us on the call today. This concludes our call. Thanks and have a good day.

Questions and Answers:

Duration: 17 minutes

Call participants:

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

Daniel David Pitcher -- Chief Executive Officer

Donald Joseph Seibel -- Chief Financial Officer And Treasurer

More FFG analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.