Q1 2020 Earnings Call
Good morning, and welcome to the F.B.L. Financial Group first quarter Twentytwenty earnings Conference call.
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Now like to turn the conference over two Kathleen till Stang. Please go ahead.
Thank you and welcome to F.B.L. financial Grips first quarter 2020 earnings conference call presenting on today's call, our Dan pitcher Chief Executive Officer, and Don <unk>, Chief Financial Officer.
Also present and available to answer your questions R., Kelly Eddy Chief operating Officer Mice Company, Charlie <unk>, Chief Investment Officer, Dan Koster, Vice President marketing and agency services, and Ron Meat, Vice President sales and distribution.
Certain statements made today may contain forward looking statements intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act.
Statements involve wrists and uncertainties that could cause actual results to defer materially from those expressed or implied.
These reston uncertainties are detailed an F.B. else reports filed with the S.C.C. and are based on assumptions, which F.B.L. believes to be reasonable.
However, no assurance can be given that the assumptions what proved to be correct.
F.B.L. disclaims any obligation to update forward looking statements. After this date.
Comments during this call include certain Noncat financial measures.
Applicable these items are reconciled to gap in our first quarter earnings release and financial supplements.
Both of which may be found on our website F.B.L. financial Dot com.
Today's call is being Simulcasts on F.B. else website, and audio replay and a transcript of the prepared comments maybe found on our website shortly after the call.
With that it is now my pleasure to turn the call over to see E.L.D.N. pitcher Dan.
Thanks, Kathleen and welcome to everyone on the call I'm pleased that you are with us today.
I Hope you and your families are dear well during this unprecedented time of covert 19 pandemic. The current situation has been difficult for everyone and much more difficult for workers on the front line up a central services are thoughts are with you and everyone impacted by this crisis.
<unk>, what I had envisioned for my first month, so C.O., but I've never been prouder of the people of this organization.
First discuss changes to our leadership team then briefly summarize our first quarter result.
Finally share my comments on the impact cope in 19 has had to our business that consists consist of U.S.
Since our last earnings conference call, we've had several changes to our executive management team.
<unk> has assumed my previous rolls Chief operating officer property casually companies.
Dan cost or was named Vice President marketing, an agency services and Rod made was named Vice President sales and distribution.
These three individuals are all proven leaders within our organization and have extensive experience in sales operation and marketing.
She internet that's been officer, Charlie Haapala serve this company with great dedication for the past 36 years and plans to retire around mid year 2020.
We therefore expect this will be Charlie's last earnings call with us on behalf of every one of the F.B. All financial group I think Charlie for the wisdom and wishing well when he departs our company later this year.
Currently conducting to search for Charlie's replacements.
Gearhart Chief administrative officer also plans to leave our company's into coming wakes. Thank you Nick for your contributions to our company's for the past three years and for your leadership in our community and state.
Turning out earnings for the first quarter of 2020, F.B.L. Financial group reported the net loss of 10 cents per share and adjusted operating income of 79 cents per share.
Results for negatively impacted by financial market for far it's related to cope with 19.
We'll discuss these results in more detail.
From a sales perspective total life insurance premiums collected increase 6% while on duty premiums collected decrease 16% compared to the same period last year.
This continues that trend of the last few years, where we experience growing universal life that entire life sales at the same time annuity premiums collected specifically fixed rate annuity sales have declined.
Continue to maintain our financial discipline as we determine appropriate credit union rates in this continued low interest rate environment.
Next the pandemic at its impact.
Severity of the pandemic became apparent we activated our business continuity plans informed incident management work grip.
This workgroup acting in conjunction with our executive management team monitors business development identifies issues.
Mm solutions and develops communications with employees agents advisers and a client members.
To provide for the health and safety of our employees, we transition to a mostly work from home environment in a matter of days I am So impressed with all of our team members. This transition was carried out with minimal interruption to supporting our agents advisers and client members.
It was allowed us to continue to deliver that first class service that our client members count on from Farm Bureau financial services.
Our agents are adapting to new worst styles and tools to interact with their clients and potential clients in place of face to face meetings. They rely on the phone calls emails and video conferencing.
Continue to work to secure a life insurance coverage and annuity contracts for their clients, which is more important now than ever in the short term efficiency. Some life insurance business has been delayed due to do that impediments to completely unnecessary medical tests.
Our ability to onboard new agents in wealth management advisers has also been temporarily slowed due to the closure up governmental offices that issued require licenses.
As of March 31st 2020, we had 1831 exclusive agents and 27 farm girl wealth management advisers.
Over the long term, we expect to see an increase in life insurance application as a result of the devastating impact of the covert 19 in our communities.
The need for life insurance grows ever more parrot. This provides an opportunity for us to engage our client members to ensure their needs are fully protected in cover.
Our organization and the territories in which we operate have been it impacted by social distant scene and shelter at home all orders.
But that's a company that operates predominantly in rural areas in small towns in the Midwest in West our customer base as often and less densely populated areas. As a result, we have not had as many cases of the virus as other geographic territories.
Our top tuesday's her life insurance sales are Iowa in Kansas, and they rank 19 and 34th for total cases of the virus.
Our Hearts go out to the people of New York, New Jersey, and other hard hit areas.
Why we expect to have additional claims due to the virus today the impact of mortality experience has been minimal in March we had to live claims related to cope with 19 that totaled $400000 in a name for all we had one call, but 19 related claim which was a 25.
Thousand dollar phase them out term policy.
Well you certainly expect more pandemic related claims that I do not expect this to be a significant mortality of that for us.
We also have random <unk> coverage in place by individual life, our current retention limit as 1 million for life and has varied historically and the range from 250000 to one male yet at the same time, providing cut at same time for writing coverage allows us to truly fulfill our purpose of protecting livelihoods and futures.
We entered as challenging time from a position of financial strength I'm confident that F.B.L. will navigate these difficult financial markets, given our high quality diversified investment for polio on strong capital position.
Barrel life insurance company as strong Anna has successfully chartered rough waters, and it's 75 year history.
Today, we are committed as ever to meeting the needs of our employees agent and advisers and protecting the livelihoods and futures of our client members.
Now I'll turn the call over to see if o'donald sible to cover our financial results Don.
Thanks, Dan also on a welcome everyone on call.
I'll discuss our financial results for the first quarter.
Our investment portfolio capital liquidity.
Financial results for the first quarter to 2020 were below our expectations and we're negatively impacted by financial market performance related to the coded 19 pandemic.
The all recorded that loss of 10 cents per share. This includes 89 cents per share and not realize losses on investments and the change in the fair value of derivatives.
This was primarily due to enact laws from equity securities held at quarter and $13.2 million.
In addition, we increased allowances for credit losses by $12.3 million.
Includes at 12.2 million dollar allowance for fixed maturity securities.
Energy bond and a retail reach as well as a 100000 dollar allowance for commercial mortgage loans.
These allowances were created under the new accounting guidance for estimating credit losses associated with certain financial instruments.
The accounting guidance is new the bonds would've been considered impaired under the previous accounting guys.
Excluding news items adjusted operating income for the quarter with 79 cents per share.
There are three key drivers why earnings differed from our expectations.
First we had higher amortization of acquisition costs in the corporate another segment.
The the negative impact of equity markets on separate account performance.
Impact total approximately 11 cents per share.
So I can we increased reserves associated with index annuity guaranteed living withdrawal benefits.
Also due to the unfavorable impact of market performance.
This impact total approximately seven cents per share.
Third these items were partially offset by better than I expected mortality experience during the quarter. This NPAC totaled approximately 11 cents per share.
These items, coupled with lower than expected prepayment fee inequity in com resulted in a 12% per share decrease the operating earnings for the corridor.
Next I'll discuss our results by segment.
Segment results for the first quarter of 2020 reflect the impact of unfavorable market performance reserves associated with guaranteed loving withdraw benefits increase $2.3 million in the first quarter of 2120.
Unfavorable AMPACT up market performance. This compares to a decrease in the reserve of $800000 in the first quarter of 2019 due to a favorable market performance.
Results for annuity business continue to be pressured by low market interest rates due to this pressure we took several creating rate actions in the first quarter as a result point in time spreads our individual annuities increase to basis points during the first quarter.
Life insurance segment results for the first quarter of 2020 reflect the steadily growing book, a business lower amortization and lower death benefits.
Spreads for you well business.
A new trend down due to the impact of low market interest rates are for follow yield and the impact of a shift in the mixer business to index Universal life insurance.
Our current index Universal life insurance product is structure to have a lower spreads in our traditional universal life business as more of the profitability comes from cost of insurance and other charges.
Corporate another segment results were impacted by several items in the corner.
First as previously stated the segment experience increased amortization for acquisition costs due to the impact of the negative equity market performance in the first quarter.
Increase amortization by $3.7 million.
So I can this segment experience lower death benefits due primarily to fewer claims and lower average phase them out in our clothes block verbal Universal life insurance business.
This is a normal quarterly fluctuation of mortality results in this relatively small block of business.
We also continue to invest in our developing wealth management business. This segment includes an after tax not lost totaling $1.3 million or five cents per share related to this investment.
This level of investment in the wealth management business is expected to continue throughout 2020.
Next I'll discuss F.B. all's investment portfolio.
The March 31, F.D.L. at total investments of $9 billion, plus $78 million an alternative investments included in the securities and indebtedness related parties line on the balance sheet.
Our investment portfolio is of high quality and as well diversified individual issue industry an asset class.
Already of our investments $7.6 billion are fixed maturity securities with blow investment grade bonds accounting for only 2.6% of the fix maturity total.
Over the past five years, we have upgraded the quality of are fixed income portfolio. Consequently, we entered the current situation with above industry average portfolio quality.
We took action because we felt uncomfortable with the risk reward across the fixed income market.
We have jolly taken on credit risk at the short end of the yield curve, including in any I see one rated structured securities.
Duration in government back and other high quality sectors.
I'll review, a few asset classes, where investors have had more questions.
R.C. Hello portfolio has a caring value of $173 million, which is 1.9 per cent of total investments. We are comparable with these holdings as a seal those are high quality with 100 per cent be any I see ones.
They consist of both floating and fixed rate securities backed by broadly syndicated and middle market loans are recent purchases I've been rated triple a. or double a.
<unk> commercial mortgage loan portfolio totals eight $989 million a March 31 2020.
The majority of our mortgage mortgage loans amortize principle with 2.2% that are interest on.
Headquarter end the average loan devalue ratio was 51.4% and the weighted average debt service coverage ratio was 1.7.
Additionally, we have a high quality portfolio with 82% carrying a C.M. one rating compared to 58% for the industry.
We have a long history of extremely low delinquency rates.
All commercial mortgage loans are currently performing with non past due.
Our commercial long mortgage loan portfolios diversified by property type location and loan size and it's collateralize by the related properties.
There are a mix of office retail and industrial or.
Or retail exposure is $334 million and it's primarily focused on grocery or drug store anchored shopping centers.
Not have any loans on him all properties, nor any hotel properties.
Oh, you all energy investments have a caring value of $345 million.
<unk> significant dropping the price of crude oil in the first quarter continue to have 75% of our energy portfolio rated investment grade.
40 per cent of our energy portfolios in the mid stream sector, which is driving a large portion of the unrealized losses in our energy book.
However at quarter, and our underlying midstream energy positions or an average market to book price of 85%.
Given that this location in the financial markets and the first quarter, we capitalized on the opportunity to invest in private credit and high yield bonds.
Also we're able to acquire relatively inexpensive long hey rated corporate bonds.
Box adjusted yield on new investment acquisitions backing our long term business was 4.53% for the first quarter 2020.
Next to comment on our capital levels.
Even in these challenging times, we are committed to return on capital to shareholders. In February we announce an increase in our regular quarterly dividend rate 50 cents per share based on yesterday's closing stock price. This gives us and indicated annual dividend yield a 5.5%.
On top of that we also paid a $1.50 cent per share special dividend in March.
We returned $50 million capital to shareholders in the first quarter with the regular quarterly dividend the special dividend unlimited class a common stock repurchases.
At March 31, 2020 are subsidiary Farm Bureau life at an estimated company action love or risk based capital ratio of 525%.
This is a decrease from your in 2019 and was expected due to the dividend paid from farm real life to the holding company to find the the dividends paid to shareholders.
Even what these seen nothing at shareholder dividends F.D.L. continues to have access capital using 425 per cent RBC as a base farm girl life at access capital of approximately $128 million at March 31020.
The only we estimate that we have $14 million of access capital a quarter at at the holding company level.
Or liquidity position remains strong with cash being generated by operations and financing activities. In addition at quarter and our investment portfolio included $30 million, a short term investments $18 million of cash in cash equivalents and $588 million and carrying value U.S. government and U.S. government agency.
Backed securities that could be readily converted to cash at or near carrying value.
The strong capital iniquity positions allow us.
To be prepared for many scenarios, we perform stress tests as a part of our annual or so report.
We have a variety of scenarios, including those that reflect a pandemic and economic disruption increase default and various combined scenarios.
Are modeling indicates we have adequate capital and liquidity and stress situations.
To conclude we are well prepared for these challenging times I expect current economic headwinds in the low market interest rate environment to continue to cause near term Hearns crusher, we have the financial strength to withstand these pressures and to maintain our strengths over the long term.
I will now turn the call over the operator and opened it up any questions you may have.
Yeah.
Well now begin a question and answer session to ask a question you May press start then one on your telephone keypad.
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This time, we will cause momentarily to assemble roster.
[laughter].
[noise] again, if there are any questions.
Please press start then one on your telephone keypad.
The first question comes from Becker with Saddam.
Please go ahead.
Thank you.
I Hope you can hear me alright.
In light of the current environment.
<unk> agent is there.
<unk> during the a scripted remarks that you do expect to increase demand for life insurance products, but are you hearing about any kind of new customers at the moment or pretty much everything is in a holding pattern with potential new customers until we oh wait that we opening up the economies.
Yeah. This is Dan so.
As I mentioned in our <unk>, our agents had to adjust.
More virtual sales process. Then then they had used historically, we're very relationship oriented company, but they have done a nice job and we are selling business every day. So we you know we like many businesses you know we have not shut down.
Down in in any way shape or form we changed a lot of processes in in with our workforce working primarily remotely.
Agents doing most selling via email or virtual tools that are available now but we.
No. We we are selling a every day.
And we we do it was bad.
And it'll be hard to pinpoint are difficult to measure that.
This pandemic wall drive increase alive sales in the future just because of the challenges that the pandemic has created.
<unk>, Okay. Thank you and what about wealth management side I.
I think I'm just a.
A few more.
<unk> and did say in the press release, it with some investment and.
New business initiative.
How do you see that moving southward depending upon you know what happens right.
Term with the economy.
Oh, you rethinking some of your investments for 2020.
Yeah. This ban all start maybe turn it over to die, but I I don't think were raised thinking I mean, obviously.
The volatility in the equity markets.
Limited our ability to.
<unk> well management advisers as they they became very busy Ah servicing their current client members. It also as wasn't mentioned made interviewing and licensing difficult and so we've continued to talk to wealth management advisers, but it.
We'll have to wait until after they some of these restrictions are lifted before the onboarding process.
Goes back to normal.
I don't know if you have any other comments on our investment continued investment question part of it.
Well with with respect to the impact in the quarter. It was it was five cents per share and as I said at my comments.
We expect to continue to make an investment the balance of of the year and it's because of the cost of bringing on a wealth management advisers and we just need more scale in the business too.
Generate revenue to offset that's the startup costs.
Right no that that makes sense. So if it shortly to stay in terms of the retention that you might be seen with the assets under management.
Oh well.
<unk>.
Had asked warmer firms and and.
Can you get your arms around that at this point or it's too early.
Yeah. This is done I I would say is pretty early to ask releases physically valid information on that that type of activity. We are monitoring at a very very closely.
We as aren't far enough down the road to know what retention rates will be.
Okay. Thank you.
The next question comes from Jamie English, but silo Smith.
Please go ahead.
Good morning, guys.
I'm wondering if you could.
A little bit more about.
What's your thoughts are about how.
Your recruiting agents in I didn't and I think you have to Wolf management codes for traditional agent.
Will fare yeah.
<unk>, if we have more be an extended slow down to the economy going forward.
Yeah. This is Dan.
You know if we if we think about this in the in the context of these restrictions being left it I mean that that's slow down.
Cut both ways obviously.
The significant spike in unemployment and we don't know what component of that is permitted unemployment, but that does improve our recruiting situation, which can be challenged and very low unemployment as.
As low as it was one we entered this crisis. So you know we we can potentially see some left for him that and I would expect that.
Would balance out any any challenges we might see in the overall economy slow down.
Okay. Good.
Little bit more about on your comment about.
The hurdle with respect to medical testing.
Yeah.
How does that work in in the current operating system works Heisinger current but the old system and how we might get back there.
Kelly would you like to take that.
Sure. Thank you.
Yeah.
The currently on the medical testing it is an agent amount requirement under life insurance at this point in time, the examiners, yeah, four different and bearing reasons, you know do not go out and do that testing right now so the underwriters.
<unk> in lieu of.
Information from you know the Doctor Records. So we're continuing to do that were also in touch with power.
Medical facilities and as state start to open up those examiners will be available and be able to go out and collect that information.
Okay. So so I guess is good yeah symbolizes the it's it's way too yeah.
Hello, My workout.
Okay, Okay fine thanks, a lot.
<unk>.
Yeah.
Again, if you have a question. Please press start then what.
Oh. The next question comes from Lewis salesman with miles Fargo.
Good morning.
Morning.
Just wondering.
Given the current situation have you looked at all at streamlining operations for applications moving part of it online yeah to make it easier for your agents to continue to recruit.
And you generate that way I mean granted you get stuck at the medical examination on life side, but.
What extent you have the application process on line would you look to move some of that further online.
Yeah, well this is Dan and thank you just maybe to clarify two on that on that medical.
Discussion and your statement.
Small percentage of applications that that are potentially being held up due to a certain.
Medical requirements that that as Kelly noted the age and the phase them out would would require so at this point in time, you know and and you know where we've historically continue to be a relationship company. We haven't had any discussion of moving to a.
You know an online or digital you know quiet member facing solution I mean, our age.
Has an electronic out that that they use in between but that's between the age and the company and you know there to still being successful in in in working virtually and through email and and being able to capture the information.
As they they did before across their desk or across the kitchen table. So.
You know Bahrain.
So some information we don't have about how long the impact of of this pandemic may be we're we're not looking today.
That being primary option.
Okay. Thank you.
[laughter] again or if you do have a question. Please press star then one.
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Further questions. Just concludes our question and answer session I would like to turn the conference back over to Kathleen till thing for any closing remarks.
Thank you to everyone, who joined us on the call today.
Feel free to give us the call. If you have any follow up question thing and have a good day.
This includes the conference for today. Thank you for attending today's presentation you may now disconnect.
Yeah.