Q4 2019 Earnings Call
As of year-end 2019 we have 1858 exclusive Farm Bureau Financial Services agents in agency managers. This is an increase in nineteen over the past month. We continue to focus on growing our total agent count. But even more important is the productivity of each agent years ago. It was common to be a standalone agent without any staff today most successful agents have their own teams of sales and service Associates to help them serve their client members and grow their business. They are truly entrepreneurial small business owners to enable this offer best-in-class Distribution Systems and support going forward will work to both grow the total number of Agents as well as support our current agents as they grow their businesses came to our Farm Bureau Agency for us. We are adding Farm Bureau wealth management advisors as of year-end 2019. We had twenty-three Farm Bureau wealth managers and advisors appointed wage.
we're actively recruiting and
They've experienced advisors in our territory while I'm new in the CEO role. This is a strategy that I wholeheartedly support these wealth management advisors have the unique opportunity to partner with our phone number on Financial Services agents for referrals to serve our existing client members with financial advisory services. This allows our agents to truly be the One-Stop shop for their client members by authors wide range of property Casualty Insurance projects products life insurance and annuity products and now mutual funds and fee-based financial planning services. This service has been needed wage has been welcomed by our agents and their client members. We are currently investing in our wealth management business, but ultimately expected to add a diversified earnings stream to fpl Financial Group given the feedback nature of this business.
To conclude. I'm optimistic about the future of Financial Group. We're addressing the challenges of low Market interest rates investing in Innovation and automation the client member experience and our wealth management business coupled with our strong brand value commitment to the Farm Bureau niche market place in our multi line exclusive agents. We are well-positioned for the future. I'll turn the call over to. Seibel to cover our financial results done. Thanks Dan. I also want to welcome everyone on the call earnings for the fourth quarter 2013. We're very strong and greater than our expectations. Net income with a dollar and forty cents per share and adjusted operating income was a record $1.41 per share off. There are four key drivers for why our earnings different from our expectations.
first we
And unlocking related to participating whole life insurance persistency. We had noticed a trend with increased persistency of this business after an in-depth review in the fourth quarter 2019. We extended the DAC amortization. For this block of business this unlocking positively impacted earnings for the fourth quarter of 2019 by 36 cents per share after tax second favorable Equity market performance during the fourth quarter 2019 decreased DAC amortization on our variable business office and lower the reserve increase on our index annuity guaranteed living benefit Rider third certain reinsurance balances were true. Up in the quarter benefiting results three cents per share back-and-fourth investment prepayment fee income exceeded our expectations.
Partially offsetting these positive items we experience worse than expected mortality results in the corporate and other segments. I'll review these items in more detail as I discuss our segment results off-duty segment results for the fourth quarter of 2019 increased compared compared to the fourth quarter of 2018 and the third quarter of 2019 wage earnings and the historical quarters were negatively impacted by an early retirement program offered to employees and 2018 and the impact of unlocking certain Actuarial assumptions Thursday, the 3rd quarter of 2019 this block of business continues to steadily grow but results are pressured by low Market interest rates point in time spreads and our individual and not decrease to basis points during the fourth quarter of 2018 primarily primarily due to a decline in the investment yield from the maturity of higher-yielding assets and the phone number
vestimenta proceeds and lower-yielding assets
Life insurance segment results for the fourth quarter of 2019 reflect the steadily growing book of business and the unlocking and reinsurance truck benefits. I mentioned spreads for our universal life insurance business are also pressured due to the impact of lower reinvestment yields point in time universal life spreads decrease 7 basis points during the quarter.
Corporate other segment results were lower during the quarter for several reasons first this segment experienced higher death benefits due primarily due to an increased number of Life large claims on 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 office.
Second the corporate other segments for the fourth quarter of 2019 includes an after-tax net loss, totaling $1 or $0.04 per share related to the investment in our wealth management business.
Items were partially offset by the impact of the strong Equity market performance in the fourth quarter on the amortization that spurred acquisition costs this decrease amortization by one point 1 million dollars off $0.04 per share after tax as we look forward in 2020. We expect the wealth management business to continue to require a net investment as well. Take some time before that business office as a scale to deliver positive bottom-line results.
The investment environment remains challenging the 10-year treasury rate declined 77 basis points in 2019 and has declined even further so far in two thousand and twenty thousand are maintaining Financial discipline and are not reaching for yield with lower-quality Investments. We are focused on adding high-quality longer-duration Investments. Mostly any I see one thousand and two corporate bonds. We're also investing in high-quality commercial mortgage loans when possible the tax adjusted yield on new investment Acquisitions backing our long-term business office was 3.57% for the fourth quarter of 2019. This is lower than our 2019 portfolio yield of 4.95%
I move on to a discussion of our Capital. I'd like to add some perspective regarding our fourth-quarter results as they were impacted by many items that we can't expect to regularly reoccur these items include the favorable unlocking impact a higher-than-expected level of investment prepayment fee. Income the life reinsurance, true up the impact of favorable markets on Deck amortization and reserves and worse than expected mortality experience.
The net earnings impact of these items in the fourth quarter was a positive thirty-seven cents per share this coupled with our expected investment in wealth management and headwinds with a low mortgage interest rate environment should be taken into account. When you consider our earnings run rate for 2020 next door, in our Capital levels at December Thirty One 2016 our subsidiary Farm Bureau life had an estimated company Action level risk-based Capital ratio of a 562%
this is a
Increase from your end 2018 even with the significant dividends paid from Farm Bureau life to the to the holding company to fund the regular and special dividends paid to shareholders money during the year.
We continue to have an excellent Capital position with significant financial flexibility. We have multiple options for deploying our excess Capital. They include stock repurchases our regular quarterly dividend and the payment a special dividends given our limited public float. We had minimal stock repurchases in the open market in 2018.
Our board of directors reviews the dividend rate regularly and is committed to having an attractive dividend yield given are strong and consistent operating results. We also May on occasion pay a special dividend as a way to distribute a portion of our excess Capital our board will next review the payment of dividends when it meets later this month in closing 2019 was a very strong financial group. We move forward in 2020 with financial disciplines it continue to profitably grow our business. I'm pleased been able to provide these or share of these results with it will now turn the call over to the operator and open up any questions you may have
Thank you. We will now begin.
The question and answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at anytime your question has been addressed or you would like to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
The first question today comes from Greg Peters of Raymond James, please go ahead.
Hi, good morning. This is Marcus calling in for Greg and and then congratulations on your new role. Thank you.
My first question and I guess you mentioned in your opening remarks. You wouldn't change the Strategic direction of of the business and where you guys are heading. But you said you mind make some adjustments and wage. I guess this would give you the opportunity to maybe give us some more color on on what those might be.
yeah, I think it would be some refinements to the current strategy Marcus and I can't say at this point in time that I had a clear view and to what that maybe obviously the interest rate environment is is a headwind for the companies and and so, you know, I'm looking for opportunities to to maintain our performance in that environment will definitely be high on the list of of refinements off that way would look for
Got it. And I guess this is my second question. I if I got it right the portfolio yield went down a hundred twenty basis points this year. And and that's you know, that's just seems like if you look out I think of what the market might be even pricing is an additional two cuts this year. So I'm just trying to understand how much lower can Credit in your rates go. How is the strategy might be changing in the context of of arrays possibly going even much lower than there are today.
Yeah Marcos, how all take that question regarding the decrease in our Investment Portfolio yield. As I said in the call today our portfolio yield for all of 2019 was 4.95% and leave our portfolio yield for all 2018 was 5.13% So it didn't go down as much as you know, but it's still down.
It it did go down year-over-year. And we do take a look at our crediting rates that we have in our portfolio of products and we actually did make a 15 basis-point palm reading right decrease on our portfolio products effective January 1, but that's subject to contracts with guarantees. So the overall impact on the the total portfolio was 122 basis points. So we really are limited with respect to the portfolio products with respect to a new sales of our of our index products. We are taking a look at those those cap rates and setting those such that we hit our our pricing Targets on on the new business.
Thank you for that clarification. That was a big difference. I guess double telling her that and and and and the fifteen basis points cut you had gen one maybe maybe talk to us about I mean, how is that impacting sales in in the house? I guess maybe give us an update on the competitor of the sales advisor, especially for annuities.
Yeah, I can talk a bit about annuities. I mean the environment I think is similar now is it was in the the the latter half of 2019 and and we would expect continued head winds in with annuity sales Marcos as we as we as we move forward and with respect to the competition, there are some competitors out there that are offering more attractive rates. Certainly. There's those that are willing to go down lower and the quality Spectrum to be able to do that. We are looking to looking for the long-term and maintaining our investment quality and then another competing product out. There is just mutual fund Investments with Equity exposure and people are purchasing agent.
the stock market when
I had a very high level and that certainly impacting our sales.
Is there any particular channel that might be you know more challenging or that exceeded your expectations last year.
Could you clarify your question a bit? If if you know, it just says you go on the landscape if if there's any particular, you know distribution chain or a method that you think exceeded your expectations down where you see or product where competitions is is is more robust.
Well with respect to our products that are are more attractive in in the market is clearly. Our index products are indexed annuity as well as our indexed Universal Life Church, which are top selling products. And in this interest rate environment that probably continue to be as well.
Okay, great. Thank you. Thank you for that color. I guess my just my last question and you know, I'm thinking about 20 20 and and and in the context of the lower very environment competition. I'm just dead maybe just give us a sense. How how do you expect to grow earnings for the company? And I know you can do some buyback delimited flow might not might limit those there's also the wealth management business office, you know, what's their earnings generation capacity from that dish here, you know is is is this your earnings growth here? Just give them some more perspective of how you think about it and fifty twenty
well
As I was highlighting in my conference call comments clearly the bottom-line earnings that we've recorded in two thousand and the fourth quarter of this year are in excess of a run rate that we have. So it's going to be very tough to grow earnings in 2020 because of those those items that really benefit our bottom-line throughout the year. We're going to continue to maintain our discipline on the expense front maintain our discipline on the pricing front with respect to Age Management our net investment in in that business in 2019 was 16 cents per share. I'm not going to give them guidance on how that number is going to move but we are going to
End up investing in that business on a net basis throughout twenty-twenty as well.
God that's
Great color. Thank you guys wrestling a quarter then best of luck. Thank you. Thank you.
Again, if you have a question, please press * then 1 the next question today comes from Jamie England, please go ahead.
Hi, good morning, guys. Hi a couple of questions to sort of high-level than in the numbers if you think about how long you pointed out that your agency account is 1158 up $19 per year. How do you think about that in terms of is that better than you hoped, you know not as not as good as you hope and what do you think might happen going forward and for this environment? We had sir. You know full employment at it would seem to be relatively difficult time to be building your sales force.
Yeah, this is Dan. So that number was I mean we were obviously would want to grow up more but felt pretty good about that number and yeah, the the current strength of the economy and and the unemployment level does pose some challenges but as I mentioned in in my comments where we are also really dead on on growing that agents we have in place and we have programs in place to to motivate and assist them in expanding their business wage. And and we do expect a bit a lift out of that and at a time when when there is low employment and there may not be as many potential applicants to join our distribution Force. We do have that option to to shift incentives and to motivate the current agents to grow their businesses.
right
Right, and I said it's a balance because if if the economy is going well sales should be better than average anyway, but I got that that's sort of segue into the next question. Would you think about the wealth advisor that you've hired? Obviously there were twenty-three. How do you measure their success or or the the impact on a company for generally? And then how do you measure their success sort of individually specifically by advisor?
Jamie this is Don. I'll take that question. So when we recruited wealth management advisor, we're looking for an adviser with certain books size. So the first success message is what's the success rate in and converting that book over over to us and then ongoing certainly will have goals per advisor for growth and in terms of of new client in in new deposits going forward.
When you say convert to fpl, how does how does that occur? What products do you do you sort of go for for a second. You know what I mean? How does that work?
Well experienced advisors that come in have a book of business that they've been servicing overtime and we offer similar set of products offered to our affiliation with with with RBC full Suite of mutual fund. We have a full service broker-dealer so we can we can provide all of those services and and and be the provider or for the for the wealth management advisor. Okay. So kind of sense to me that in a way it's up to the to the new advisor what what they think they can move and where they think they can move it as yeah and history shows that there's a relationship there and clients will go where the
Right, right, okay.
And and probably for you, you mentioned that the I think the the quote there were thirty-seven cents of benefit from various unusual items in the fourth quarter was can you give me sort of a comprable, you know, uh impact on the fourth quarter of a year ago as unusual items then and and same page here.
Yeah, what's the Apples to Apples here?
Jamie I'll have to admit I didn't prepare for that question trying to think back to fourth quarter last year. We had a couple of transactions that really depressed earnings one was we had an adjustment to Old product. It was sold years and years ago interest-sensitive whole life and we had a five point five million dollars negative adjustment to earnings related to that that's on a pre-tax basis. And then in the fourth quarter last year, we offered our early retirement window and we took an upfront costs related to that which I don't recall the specific amount, but I think it was close to my better not say last month early retirement program was a negative impact of $0.24 per share in the fourth quarter was $0.24 if you had those two together, those were the big drivers of
the lower results in the 4th
Quarter last year and with respect to the full year of I would.
I'd say that one of the things that benefited the full year in addition to the fourth quarter just the performance of the equity markets. Yep, and off that impacts are variable business and as well as the reserves and are guaranteed living benefits.
investment income was
Pretty much as expected for the full year, but for the outperformance that we had in in the fourth quarter.
Mortality results for the full year. We're maybe nine ten cents worse than expected for the full year.
Okay. Yeah the one-time tax benefit for the full year of two and half million that we record in the third quarter. That would be another item. That wouldn't be recurring.
right
Sorry, I didn't wasn't prepared to have that kind of summarize but those are some of the key drivers.
Okay. Okay could could deal. That's all I needed. Thanks a lot guys. Good luck. Thank you. Thank you.
The next question today comes from Lewis Feldman of Wells Fargo, please go ahead. Good morning guys.
Morning, good morning. Could you repeat that wealth management number was that $0.16 positive to earnings or $0.16 in costs to earn it, you know to earnings for the home net cost of net cost. Okay, when we bring a wealth management advisor on we're early in that process. We've established our infrastructure for recruiting and off on boarding getting the systems up to speed which were advertising. So it it's a net cost in the start-up phase. Okay, and then month for both the wealth management and for General agents are their Geographic areas that you're more interested in than not or is that something that's going to suck give something to a competitor who might be listening?
I can talk at a high level around the agents. So I mean a couple things of course we have.
Retirements or agents that that that leave the company and so we have blocks of business that we want the service and grow and so we would Target in in those areas and then otherwise, you know, we as you know, our Market is is a more.
Suburban rural Target then then the major Urban Metro areas and that that's where we'll continue to focus. So, I mean as long as I I think I was looking more towards State, you know States at the state level as opposed to, you know, rural versus Suburban.
You know western eastern Northern or Southern areas and we don't we don't really have a state. I mean we have plans at the state level wage, but I would not say that we're we're over waiting our investments in in any given Geographic territory other than it does somewhat map to wage scale of business that we already have and existing geographies. Okay, but your statements in terms of looking to replace retiring agents, that would just that would just suck, you know, zpg situation zero population growth so to speak because you're replacing an agent that's retiring. It's not not acquiring a new agent to you know, further the sales or or as your inference that someone who's younger will push harder as opposed to as opposed to be satisfied with his sales level someone who's close to retirement being satisfied wage.
sales levels
I mean it's a they are motivated through our our commission and compensation structure to continue to grow blocks of business and and drive new sales. And and we would we would expect that. It's as far as the agent headcount. You're correct. It's it's it's a zero net growth. But I mean that's just one of the the two components as we as we target adding a jetpack.
Okay. Thank you very much. Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to miss Kathleen till staying for any closing remarks. 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.
A conference is now concluded. Thank you for attending today's presentation. You may now disconnect.