Q3 2019 Earnings Call
Good day and welcome to the F B.
Oh financial group's third quarter 2019 earnings conference call.
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I would now like turn the conference over to Kathleen till State. Please go ahead.
Thank you and welcome to FPL financial group's third.
Quarter 2019 earnings conference call.
Presenting on today's call or Jim Brannen, Chief Executive Officer, Kelly, Eddie Chief Operating Officer life companies, and Don Seibel, Chief Financial Officer.
The president and available to answer your questions are Charlie Happel, Chief investment Officer and Scott.
Chief Marketing officer.
Certain statements made today may contain forward looking statements intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act.
These statements involve risks and uncertainties that could cause actual results could differ.
Materially from those expressed or implied.
These risks and uncertainties are detailed and F.B.L. The reports filed with the FCC and based on assumptions, which FPL believed to be reasonable. However, no assurance can be given that the assumptions will prove to be correct.
That's.
We all disclaims any obligation to update forward looking statements after the big.
Comments. During this call include certain non-GAAP financial measures, where applicable these items are reconciled to GAAP and our third quarter earnings released financial supplement both of which may be found on our website SBLF.
Financial Dot com.
Today's call is being simulcast on FPL website, an audio replay and a transcript of the prepared comments maybe found on our website shortly after the call.
With that is it's now my pleasure to turn the call over to CEO , Jim Brannen.
[noise] Thanksgiving and they get everyone on the call I'm glad you're able to join us today.
I feel finance a group reported net income of a dollar one centsper share and adjusted operating income of $1 per share [laughter] third quarter 2019. These results were below our expectations earnings results were negatively impacted by the unlocking of actuarial assumptions are.
Mortality benefit the lower spread income don's going to cover those financial results in detail.
I'll begin by discussing sales our agents and our wealth management advisers, and then I'll ask aren't as Chief operating Officer, Kelly I didn't share a few comments.
Like sales continue their positive momentum life premium collected for the third quarter 2019 totaled 75 million.
<unk> up 1.6% from a third quarter 2018.
This growth was driven by strong increases in universal life and term life sales [laughter] Universal life premiums collected increased 6.8% for the quarter, well certainly praneeth uncollected increased 3.3%.
Life insurance in force totals more than 65 billion as though.
Third quarter of [noise].
[noise] life insurance sales allow us to meet the needs of our clients, while providing as long term profit stream with additional proper components that are not spread related [noise].
Nobody sells stabilized in the third quarter and were essentially flat compared to the third quarter 2018 falling declines in the first two quarters of this.
Yeah.
Nobody premiums collected totaled 56.1 million for third quarter of 2019 compared to 56.3 million in the third quarter 2018.
[laughter] fixed rate annuity sales decline well index annuity sales increased.
Hello interest rate environment continues to pose a challenge source Brexit referendum annuity business.
[noise] during the third quarter 2000, and I think we experienced great growth in our agency force and ended the quarter with 1855 exclusive agents and agency managers. This represents an increase of 45 agents or 2.5% from a year ago quarter.
We added agents in both are part of your property casualty states as well as their life partner States.
[noise] first your agent retention was 89% as of September 32019 above our goal.
In addition to our Farm Bureau Agency Force, we continue to grow our number of Farm Bureau wealth management advisors were actively recruiting and adding experienced advisors and our territories and had several notable appointments in the third quarter.
As of Sept.
Or third if we had 15 Barbie wealth management advises appointed these advisors have combined assets under management, a $1 billion and we're now in the process of converting those assets the farm Bureau wealth management.
These wealth management advisors have unique opportunity to partner with their farm Bureau agents for referrals to serve our existing client members with financial.
Free services.
We intend to continue to add farm Bureau, wealth management advisors, who fit our culture and service orientation and are a great fit with our agency force where referrals.
Really we're only accepting experienced advisors, who have a book of business.
Ultimately, we expect our wealth management initiative to add a diversified earnings framed up real financial.
Given the fee based nature of this business.
Before I ask Kelly to speak I Wanna mention the announcement, we made during the past quarter about my upcoming retirement. After 29 years with this organization I plan to retire in early 2020.
It has been an absolute honor and privilege to work for such a great organization for so many years.
I've been fortunate to work alongside the most talented team in the industry and the best distribution Force, Our Farm Bureau financial services agents and their teams.
I'm so proud of what we've accomplished together protecting the livelihoods and futures of our client members and partnering with the Farm Bureau help serves the needs the Rural America.
My time as CEO , we've been.
Actually strong with an excellent capital position my focus has been on supporting our Farm Bureau financial services agent developing leaders, creating an innovation program and building our wealth management strategy. We've also had a strong track record of returning significant capital to shareholders each year.
The board has stated that they anticipate naming a new chief.
Hey, Bob there prior to year end I'm confident that that bill financial is well positioned for the future.
We have a significant emphasis on leadership development and succession planning and we have great leaders in place here I know the best years for our organization lie ahead.
One of those leaders as Kelly, Eddie our new Chief operating officer for life companies.
Who joined US in mid August he succeeds ray wasn't Lieske, who will be retiring at the end of this year. We're thrilled to have Kelly here Kelly would you like make if you comment.
Well. Thank you Jim I'm, so pleased to be here and be part of this great organization I.
By way of background Ive been in their life industry.
Specifically operations for more than.
Than 20 years and most recently served as senior Vice President over new business underwriting risk and strategy at Voya financial.
Over the years I've been a frequent traveler stimuli and I've been observing FPL financial group for awhile.
I was drawn to the company for several reasons, most notably the.
Leadership, a people and culture.
Dedication passion and drive by everyone here is awesome, there's a commitment by the employees they definitely don't find any other organization.
The success or failure of an organization so closely related to the effort and motivation of its employees.
And I'm excited.
To be part of this culture.
Today marks my 50 Nice day here My early observation is that this organization as a whole and farm Bureau life operations, specifically are very well Brian .
I've been impressed by a number of things.
Farm Bureau life is wrapping up a multi year replacement of.
Its policy administration system with all new business now on that platform.
This is especially impressive as half of all admin system replacement projects fail.
There's also an extraordinary service to farm Bureau, niche markets, where ages truly propel the purpose to protect livelihoods and futures.
This has led to an industry, leading cross celebrate with farm Bureau life Cross celebrate more than twice the industry average.
The organization also has a robust innovation process in place.
There isn't innovation council with dedicated funds to test concepts within the organization.
The goal is to.
I meant solution set enhanced customer and agent experience and drive the test drive efficiency in the organization.
I was so impressed to see the robotic process automation with used as part of the had been system replacement.
Going forward the organization will continue to evolve we are making the Celtics.
Yes, more customer friendly increasing automation and becoming more fishing in our administration of life products.
We'll continue to grow our accelerated underwriting program and expand on that you have data driven underwriting decisions.
Again, I'm excited to be here and I look forward to a bright future Jim.
Thanks, Kelly I.
Restate your sharing her initial thoughts and observations I'm going to turn the call over to Don Seibel Doug.
Thanks, Jim I also want to welcome everybody on the call as Jim indicated earnings for the third quarter 2019 were below our expectation.
Net income was a dollar and one cents per share and adjusted operating income was a dollar and two cents per share.
We had four key drivers that led to our lower earnings for the third quarter.
First we performed to review our unlocking of the key assumptions used in the calculation of the amortization of deferred acquisition cost and revenue reserves in certain reserves on interest sensitive products. This unlocking negatively impacted earnings.
Through the third quarter 2019 by nine cents per share after tax. Please see page 14 of our third quarter Investor supplement where we have included segment level detail on the impact of this unlocking.
Second we continue to experience lower spread income in our annuity segment.
Third we experienced.
Worse than expected mortality results in the life insurance segment.
And fourth we incurred an expected net loss related to our wealth management operations as we build out that business.
I'll review these details these items in more detail as I discuss our segment results.
On a positive note we recorded a non.
Growing 10 cents per share benefit in the third quarter of 2019.
Execution of a tax planning strategy.
His strategy includes increasing prior year tax deductions work when the income tax rate was 35%.
Annuity segment results for the third quarter 2019 declined.
Impacted by unlocking and lower spread income.
Unlocking actuarial assumptions resulted at $4.9 million pretax charge for this segment.
This reflects updating several assumptions, including surrenders and withdrawals.
Point in time spreads our individual annuities decreased four basis.
It is points during third quarter of 2019 due to a decline in the investment yield bond maturity of higher yielding assets and the reinvestment of proceeds and lower yielding assets.
Life insurance segment results for the third quarter 2019 reflected steadily growing book of business and the benefit of.
Stocking actuarial assumptions of $2.4 million pretax.
The unlocking reflects updating several assumptions what they benefit from overall mortality improvement being partially offset by the impact of lower assumed investment yields.
Well overall mortality has trended favorably over the.
Long term mortality results for the third quarter of 2019 were worse than expected driven by an increasing the number of Universal life claims. This is a normal quarterly fluctuation in mortality results.
Like annuity spreads point in time spreads on our Universal life business also decreased during the quarter.
They declined due primarily to the impact of lower reinvestment yields.
Corporate another segment results were solid for the quarter, reflecting better than expected variable universal life mortality as well as a small charge from a lot unlocking actuarial assumptions of $200000 pre tax.
The corporate and other segment for the third quarter 2019 includes an after tax net loss totaling $1 million or four cents per share related to the build out over a wealth management business.
The investment environment remains challenging the tax adjusted yield on new investment acquisitions backing our long term.
Business was 3.52% for the third quarter 2019.
This is lower than acquisitions made in the first half of this year and lower than our portfolio yield.
We are focused on adding longer duration investments, mostly of ending I see one and two corporate bonds.
Next.
I'll comment on our capital we continue to have excellent gap have an excellent capital position with significant financial flexibility.
At September 32019, our subsidiary Farm Bureau life at an estimated company action level risk based capital ratio a 555%.
This is an increase from year end 2000.
An 18, even with the significant dividends paid from farm Bureau life to the holding company to fund the regular and special dividends paid to shareholders. This year.
To conclude our bottom line results for the quarter were below our expectations, we remain focused on financial discipline growing our business and.
Her suffocation of our earnings with the wealth management business.
He's been able to share. These results with you we will now turn the call or the operator and opened up any questions you may have.
[laughter] well now begin the question answer session to ask a question you May Press Star then one on your telephone keypad. If you are using.
Speakerphone, please pick up your handset before pressing mickey's.
She withdraw your question. Please press Star then too.
Our first question comes from Greg Peters with Raymond James.
Hi. Good morning. This is this is mark is called <unk>.
Good morning.
Because [noise].
Dr Congratulating, Jim in your retirement I.
I guess rate as well and Kelly in her new role.
Yeah.
Okay.
And I guess I guess my first question go see you Jim and it's a it's around sales and you mentioned a new.
This is stabilized this quarter I was hoping you can you know give us some more color there and also on onto new agent wins, any any update there and on the competitive landscape as well.
Alright, Thanks, Mark I guess, it's got station remember Chief marketing office somebody kick it over to him. After I just make a couple opening calm.
Yes.
Yep.
One of the Centerstate environment, where the tenure has been bouncing around pretty significantly anywhere between you know 190, and 150 and yet and so we've had opportunities and times when it's at the higher into that range to climb back in to the space and when it's been at those are very low.
Those it makes it much more difficult. We've also have index products and so that's allowed us to to have another offering thats actually working while the fix products or are very very tough at this time.
And when they decide it's just spend a focus we have we had about five years of a growth in a row and then.
We tapered off three or two and have really had a focus on getting that engine going again and Scott's been responsible for doing that so I will let him talk a little bit more about competitive landscape agents sales et cetera.
Thank you Jim strong sales for us, we're blessed by having the ability.
Two right both life insurance and annuities and of course now the wealth management business. Our focus on sales. This year has has really been driving more and more and more of our agency force them to the indexed annuity and the indexed Universal life product just to get them. They overall interest rate and.
Environment and.
[laughter], how we shape up competitive entrants have responded well to bat and post two products are really care already on the day for US right now with respect to the agency force I think Jim covered it well and it's been a focus over the last 678 years. We've generally had good results for the last.
Your your and a half have been challenging but we just continue to focus on really the fundamentals recruiting the right people, making sure we train them right and get them off to a fast start and some of those changes we put in about a year ago are beginning to bear fruit in our one year retention is well above goal our through your retention.
In terms above goal, so we feel like run pretty solid footing going forward.
Okay. So it so you would you characterize it gives a competition still being rational and as it relates to what their offering versus what you guys are doing.
Most of them.
Most of them are pretty rational.
As a handful of annuity products on the street that kinda make your scratch your head and certainly we've lost some sort of some business to that but by keeping our agents focused on.
Index products.
Which offer.
You know reasonable upside without the downside potential customers are responding well.
For those and I also say in our niche market, where we already have existing customers and relationships our expanded offerings in the wealth management space, we've seen more money flowing into there that might be annuity funds as well and so what we're getting assets under management that that might have been annuities, another and other times, but this interest rate.
But clearly have taken advantage of or a wealth management platform.
Okay. Thanks for the I guess, it pivoting to spreads and you guys have this.
Slide <unk> I don't know there's no I don't know the page number is but I just as you know maybe talk a little bit about.
You know crediting.
Yes and.
Those are those for you for you guys into competition and as I was.
Curious, there's a bullet point, you're saying that 42% of the business guaranteed as earn your exceeding targets and into life side.
So just curious what what does that mean for the for the other 50.
<unk> percent is that a a breakeven type of business or is it or is it losing money.
Well I would not this is Don I'll address this question with respect to the other other portion of the book of business wouldn't say it necessarily losing money it just necessarily isn't.
Exceeding the target spread that we have on that business. So we meet regularly.
As a group of cross functional group to look at our interest crediting rates, what our cap rates are on our products, what our new money yields are what the portfolio yields are that back.
Our portfolio products and we go through the entire portfolio the entire current new new business product mix and challenge the crediting rates that we can pay.
To meet our profit objectives, and what the cap rates that we can pay to meet our profit.
It is and we do have a line of sight on what the competitors, where the competitors are out in that influences those decisions.
But over time.
I think our history has shown that.
We've done a good job in pricing our products and that's reflective of our overall company our OE that we've consistently.
We generated.
Got it thanks, Don I guess my next question Charlie.
You know just looking at portfolio composition I was hoping you can.
Talk to us little bit about 90% that's below investment grade. There's also slide on the commercial loan.
Portfolio, which has been given you guys. Good returns I'm just curious what happens is what's the what's the history on the commercial loan portfolio around it we know when we have decelerating growth or even a recession will have this well have to see that book.
Well, we've had an outstanding track record with our weather.
Whole loan portfolio.
Even even then recessionary environments, which we've had really minimal going through the financial crisis. We had we had a very low level of Ah of distress.
I would attribute that just you know we underwrite to a high standard in general.
We are book is is.
Largely amortizing, which has has proven beneficial over time, because even if the market gets under stress before you know obviously, we're kind of running on an improving LTV overtime I think that's that's been been beneficial and just our selection of the type of properties. We have been involved with I mean, we.
Uh huh.
It's generally been conservative, but we don't feel like we left a lot of opportunity on the table.
We've had a a change in in staffing that group and really got to a team there that I I'm frankly, just very excited about I've got a.
New highly.
Hi, guys group over there very experienced and talented group and so I'm I'm excited about where we're going going forward. So we we during the transition we probably slowed our production down slightly.
But were four gearing back up a week over the last couple of years, we've expanded our our whole.
Allocation, which is really a consistent with the larger.
Peers that we observe and so we're we're still I would say in line to maybe a little light from what I'm, saying and in terms of pure data probably were for 12.5%.
At the at the end of 18, and probably slightly below that now looks like the peers are running closer to 14%. So we do you know we got a little room to run there if we choose to and we're not stopping on the gas, but but certainly not not holding back there either.
You asked about our non investment grade.
Credits as well I'm not sure.
Exactly what are your question was.
Well maybe clarify.
Yeah, dissect that a little bit what's in there.
To begin correct and will be updated right away, but the entirely can talk about.
Specialty exposure.
29.5% below investment grade at 2.2 per se.
Oh.
Yeah, we have not been acquisitive in high yield space.
We have been a actually working on a on an external mandate in the high yield space that we have not.
And it and don't intend to fund.
Just kind of an opportunistic thing I was actually we don't intend to fund or we don't intend to fund it until it's still we deem it to be attractive and we've we've got assessment benchmarks from from her for when we would step into that but we've actually run our even our triple B allocation has has come down.
Relative to our peers from from what I'm observing.
Just just the most recent data and so we feel like we got a little dry powder in a in the credit bucket.
When the moment comes but but we're not we're not active in high yield at this time minutes. It's a it's very small.
Got it great. Thank you. Thank you for that is just through my final question, just I guess dawn looking looking.
Going into next year and the capital position how is how's the set up looking in and how you guys really about another special dividend and the first quarter.
Yes, if you take a look at our capital positions into the third quarter and compare that back to where we were at the end of the third quarter last year were.
Spot on or actually in a little better position from an RBC standpoint so.
We acknowledge that we are very very well capitalized in the past how we've deployed our capital and the situation is through.
Dividends that are very competitive on a regular basis and we have a.
Record now paying special dividends for several years in a row now the whether or not we pay a special dividend will be.
Decided by the board.
At a board meeting and not sure what the timing would be.
But certainly.
Paying continuing to pay dividends.
Hi level is is going to be on the table for discussion.
Thank you for your assist congratulations Jim Congratulations Kelly.
Taking my guess.
Again, if you would like to ask your question. Please press Star then one.
Our next question.
Comes from Jamie, England Silo Smith.
Hi, good morning.
Jamie H. epilepsy, thanks for the a great work over all these years a comfortable on way, we appreciate it and you've done.
Very kind of your thank you.
I'm I look at your.
The agents the growth in the agents, which is nice and you guys mentioned that the retention.
It's one or two years, they're better than expected.
He has anything.
Did you do anything different from <unk>.
On our luck compensation in the training and.
Turning point of view or is it or is it just you know.
So do the grindstone kind of effort that touchy there.
So both but I'll, let Scott.
Yeah that was the exact answer I was going to give it was it's just it's been a little bit of Bose I think the most fundamental changes that we've made.
Have really been just.
Tightening down on on their requirements of.
Eligibility first.
Second we did launch a new work fruiting program aimed at our niche market for folks with an agricultural background or they just have a.
On a natural wake up given that communities that we serve and that initiative has paid really good dividends and we've landed I believe 20 or 21 agents from that program. Just this year, we made some very very.
Minor changes to our new agent compensation plan.
Okay that it into two different approaches one for more suburban markets one for more rural markets.
And that's paying dividends to us as well, so I'm really that I I would just say the.
Recruiting landscape and developing new scratch agent landscape remains.
Incredibly challenging and difficult.
And we really have to stay focused on it the basic blocking and tackling.
Right right.
Okay. Good yeah, I'm curious about your thoughts today about.
The wealth management initiative.
And how you think about that in terms of.
You know how hard to pursue you know the gas pedal to hire more folks versus get the those you've already recruited you know in the system productive sort of et cetera, how do you think about that.
Yeah, I think theres, a good balance to be struck their Jamie I know that we've.
Got to get enough folks in the door to ER and enough assets under management to make sure that we're adding to the bottom line in the instead of continuing to invest and I think we're going to cross over that point very soon and that type of and the type of value proposition that we have for the advisors is a good went in that many of them are.
Looking for new people to talk to and we already have a financial relationship with our club members and yet we haven't had a real good product in this in this arena to bring to him and now we do and so there is a all whole host of people to refer to it. So that's the value proposition and were attracting folks that have done a nice job of of getting their books.
We want to make sure that we're covering our territory, we want to make sure we learn along the way, but you know it will be it will be a growth engine, both from a top and bottom line perspective, and it will also be another line of business that we are cross sell our customers into and cross selling is one of our biggest strengths when we crossed.
So we see a lot a really good things for both our property casualty business outside of this company are.
But are sister property casualty business in terms of retention and retention within our on a life company.
To add anything of that Scott, Yeah, I think the only other thing I would add is.
As we.
We're crude advisors, which we've been very pleased with our value prop is being received out and that that market. We only recruited advisors, who have a fairly significant book of assets under management already one of the learnings that we've encountered is.
And getting that business converted and so it's one thing to recruit them is quite another to get that business can hurt it and then get them active in the new sale arena. So we've made some changes to how we onboard we've seen some positive developments over the last 30 to 60 days on that front.
And now it's just a matter of really.
Walking and chewing gum at the same time as we continue to build this out.
Okay, great. Thanks, a lot.
This concludes our question and answer session I would like to turn the conference back over to Kathleen for any closing remarks.
Thank you.
The one who joined us on the call today.
The operating give us call you have any follow up question.
Thank you have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.