Q2 2020 FBL Financial Group Inc Earnings Call
Second quarter 2020 earnings conference call.
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I would now let's turn the conference over to Kathleen till staying please go ahead.
Thank you and welcome to FPL financial group's second quarter 2020 earnings Conference call.
I think on today's call or Dan pitcher Chief Executive Officer, and Don Seibel, Chief Financial Officer also present, an available to answer your questions are Kelly, Eddie Chief operating officer life companies.
Dan Koster, Vice President marketing and agency services.
Right need Vice President sales and distribution and Jeff <unk> Chief investment Officer.
Yes, certainly.
Shipments 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 FPL was reports filed with the FCC and are based on assumptions, which actually out believes to be reasonable.
However, no assurance can be given that the assumptions will prove to be correct.
FPL disclaims any obligation to update forward looking statements after the state.
Comments. During this call include certain non-GAAP financial measures, where applicable. These items are reconciled the gap in our second quarter earnings release and financial supplement both of which may be found on our website at <unk> financial Dot com.
Today's call is being simulcast on SBLF website, an 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 CEO Dan pitcher Dan.
Thanks, Kathleen welcome to everyone on the call I Hope you are well.
I'm pleased that youre with its today and this year about people for the global or national communities for businesses and individuals. We appreciate the opportunity to connect with FPL shareholders analysts I guess.
While the challenges of the pandemic and low interest rate environment persist FPL financial group and our industry kept that you were negative impacts than many other sectors I'm grateful for their hard work into dedication of our agents advisors and employees. During these unique challenges.
Earlier in the year, we transitioned to the mostly work from home environment. Our employees have made very adaptable [laughter] I've been very adaptable and operations are running smoothly.
More recently some employees have chosen to return to work in their offices with new social business seemed measures in place.
Process is working very well regardless of their locations. Our employees continue to go the extra mile for agents advisors I quite members.
Joining us on the call today is our new Chief investment Officer, Jeff why that Jeff built the role previously held by Charlie Hobbled retired in June after 36 years, what the company I'm pleased that we were able to add such a strong leader to our team Jeff brings extensive investment management experience in insurance industry for the path.
It's 19 years, he was with Aegon U.S. investment management, where he led a team responsible for managing Transamerican's General account portfolio, Yes, proven leadership and deep insurance investment experience, what will enable them to successfully lead up yells investment team and manage our high quality portfolio.
I feel very confident executive management team, we have today, we have strategies in place I keep our company's financially strong and stable, allowing us to fulfill our purpose to protect the livelihoods and futures up our client numbers.
Turning now to earnings for the second quarter up 20.8, FPL Financial Group reported solid earnings results net in the come up one Dollarssix Centsper share an adjusted operating income of one dollar two cents per share results banded, but then again from our focus on expense management as well the broad market recovery.
Since March Dom will discuss these results in more detail.
From a sales perspective total life insurance premiums collected decreased 1% well annuity premiums collected decreased 40% compared to the same period last year.
A decline in annuity premiums reflects the lower up the impact of lower market interest rates in our financial discipline and to terminate appropriate crediting rates.
Even though sales are lower this quarter. Our book of business continues to grow life insurance imports totaled 66.3 billion at June Thirtyth twentytwenty genuine that consistently steady increase in each quarter from an annuity perspective annuity segment total interest sensitive product reserves continued increases well well do.
Annuity sales are down surrenders in withdrawals have also decline.
As of June 30, 2020, we've got 1770 exclusive agents and agency managers. This has declined during the second quarter, reflecting deliver it changes we made what some of our lowest producing agent generally these are less tenured agents, who had minimal life production.
The total number of agents is still an important number but I'm more focused on metric the productivity per agent.
Agents have 1148 license sales associates to help them served their client members and grow their business. We have recently enhanced tools to help agents to be the most productive they can be.
I recently met with a 100 up our top agents in a rare in person yet socially distance about I always appreciate the opportunity connect with agents. While 2020 has been a year I'm like any other I'm pleased that the age of production activity beginning to return to normal levels as we approach sales and service in the second half the year or.
Agents are excited about the opportunities they see had and I am too.
Yep Yep wealth management business continues to grow, albeit at a slower pace than we had originally anticipated coping Nike and all that all wealth management adviser Onboarding activities for March April and May as of June 30, We have had 30 Farm Bureau wealth management advisors I'm optimistic as we have.
Several good hires recently recent appointments include our first wealth management adviser in Wisconsin, and our first in Utah now more than ever our client members need experienced the professional wealth management advice.
To conclude with a comment on our financial strength. There were two reached an external announcements with recognize our company's strong position in June Ambassador from Farm Bureau life financial strength rating of a excellent.
And best noted that Farm Bureau life health risk adjusted capitalization that is that am best strongest level, good liquidity metrics as well as an investment for portfolio that is a good overall quality.
In July Wardrip named Farm Bureau life. The 2020, Ward's 50 group of top performing companies. This marks the 21st time that Farm Bureau life. That's been named for the life Health Ward's 50 list. Our managed property casualty companies with also named to the Ward's 50 for the six year in a row. This makes farm Bureau financial services wonderful.
<unk> eight organizations with affiliated companies named the both lists.
Or to analyze is more than 700 life insurance companies and 3000 property and casualty insurers. So we're honored to be recognized for its strong operating performance and consistent financial strike.
FPL financial group entered the pandemic from a physician that strike and we remain well positioned to handle adversity and consumer and market trends.
Now I'll turn the call over to CFO, Don Seibel to cover our financial results Don.
Hey, Thanks, Dan.
I also want to welcome everyone on the call I also hope you are well.
Scott's our financial results for the second quarter, and then comment on investments capital and liquidity.
As Dan mentioned earnings results for the second quarter of 2020 were solid reflecting an improvement in equity markets.
Pricing actions focus on managing expenses.
FPL reported net income of one dollar and six cents per share and adjusted operating income over the dollar and two cents per share.
These results are especially notable given the challenging environment of a global pandemic, all the markets and low market interest rates.
I would characterize our results.
As in line with our expectations.
I mentioned, a few items, which impacted results this quarter, both positively and negatively.
Positively we experienced lower DAC amortization on our variable business due to the favorable impact of equity markets on separate account performance.
This favorable market performance also decreased reserves associated with guaranteed living withdrawal benefits on our index annuity products.
In total this positive market performance total nine cents per share.
Given the persistent challenge of the low interest rate environment and its impact on sales.
Focused on controlling expenses.
Naturally during those time expenses that are travel related have declined but we're also challenging project costs and seeing a decline in personnel expense due to limiting new positions and not filling positions one individuals' leave the company.
On the negative side, we experienced an equity loss from alternative investments.
The investments are generally we reported a quarter in arrears. So they reflect the decline in markets during the first quarter of this year.
We expect to improve results from these investments in the third quarter, given the strength of the market and the second quarter.
However, we cannot quantify the level of improvement at this time.
Mortality experience for the quarter was within our range of expectations and was not as significant driver of results.
We did experience some pandemic related claims but to date the financial impact has not been significant.
In total during the second quarter 2020, we had claims on 19 individuals with Cobot 19 listed as a cause of death.
Many of these individuals were of advanced age or had you have to get underlying medical conditions with several <unk> being residents of long term care facilities.
The total financial impact net of reserves release was $1.4 million.
Providing this coverage allows us to deliver on our promise and fulfill our purpose protecting livelihoods and futures.
Next I'll discuss our results by segment.
I know the segment results for the second quarter 2020 reflect the impact of favorable market performance reserves associated with guaranteed living withdrawal benefits decreased $1 million and the second quarter 2020 due to this market performance.
In addition, amortization of deferred acquisition costs was lower in the quarter due to better persistency.
Results for our annuity business continues to be pressured by low market interest rates point in time spreads our individual annuities decreased five basis points during the second quarter.
In response to the headwinds caused by the low market interest rates. During the first half of 2020, we've decreased interest creating rates on certain portfolio annuity products and reduced caps and roll up rates are indexed annuity products. In addition, we have reduced agent commissions on certain annuity deposits.
Life insurance segment results for the second quarter 2020, reflective steadily growing book of business and lower expenses, partially offset by lower equity income and higher death benefits.
Point in time spreads for our Universal life business also declined during the quarter, primarily due to the impact.
The low market interest rates on our portfolio yield.
Corporate other segment results were impacted by several items on the quarter first as previously stated this segment experienced lower amortization of deferred acquisition costs due to the impact of the positive equity market performance in the second quarter this decreased amortization by $1.9 million.
Second this segment experienced lower death benefits in our close block of variable Universal life insurance business.
Third this segment.
At lower than expected equity income.
We also continue to invest in our developing wealth management business.
Segment includes an incremental after tax net loss totaling $1.1 million or four cents per share.
Related to this investment we expect to continue a similar level of investment in the wealth management business throughout 2020.
Next I'll discuss how feels investment portfolio. It is of high quality and as well diversified by individual issue industry had asset class.
As of June three.
Total investments of $9.5 billion, plus $83 million of alternative investments included in the securities and indebtedness are related parties line on the balance sheet.
[noise], given our underweight position in high yield investments and the dislocation in the financial markets. The first half of the year was great timing for us to invest in high yield bonds.
Hi yield acquisitions were spread across a number of sectors. Recent purchases were also focused on high grade corporate bonds.
As well as structured product and municipal securities.
And we were active in originating commercial mortgage loans.
The tax adjusted yield on new investment acquisitions backing our long term business was 4.11 per cent for the first half of 2020.
Our investment portfolio continues to be of high quality with 96.4% of the fixed maturity securities being investment grade.
Our commercial mortgage loan portfolio also continues to perform well it is of high quality and totaled $991 million at June 32020, all commercial mortgage loans are currently performing.
Next I'll comment on our capital levels at June 32020, our subsidiary Farm Bureau life at an estimated company action level risk based capital ratio of 527%.
This is an increase of two points from March quarter end.
This is notable as our increase in capital more than offset the impact of an increase in asset risk charges due to rating downgrades.
Using 425% RBC as the base Farm Bureau life that excess capital of approximately $134 million at June 32020.
In addition, we estimate that we have roughly $10 million of excess capital at quarter end at the holding company level.
Even in these challenging times, we continue to return capital to shareholders. During the second quarter, we repurchased FPL stock totaling $3.6 million.
And we paid our regular quarterly common stock dividend, which totaled $12.3 million.
Based on Yesterdays closing stock price are indicated annual dividend yield was 5.7%.
In addition, we paid a special dividend earlier this year.
Our liquidity position remains strong with cash being generated by operations that financing activities at quarter end, our investment portfolio included $16 million, a short term investments $16 million of cash and cash equivalents and $607 million in carrying value of U.S. government and U.S. government agency back.
Securities that could be readily converted to cash at or near carrying value.
To conclude we are well prepared for this challenging environment.
We have strong capital liquidity positions and we continue to adapt to the low market interest rate environment with expense savings actions and product pricing changes.
We continue to execute our fundamentals and maintain the financial strength of the company.
These actions position FPL financial group well for the balance of 2020.
Ill now turn the call over to the operator and opened up to any questions you may have.
We will now begin the question and answer session.
Who asked the question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
The first question is from Greg Peters with Raymond James. Please go ahead.
Well good morning, everyone.
I just.
Just going to focus on a couple of areas and I know you spoke about the crediting rates in your prepared remarks, and I was looking at your supplement.
On page eight where do you talk about the crediting rates in the annuity business.
And we see it.
Climbing ever so.
Little bit on a year over year basis and then.
On page 10 of yourself format, where are you give us the crediting rate and the life business, it's gone up a little bit.
And I guess in the context of the lower interest rate environment I just.
How how would you think about the crediting rates going forward.
Is it.
Is it going to compress is the total yield going to compress because the lower interest rate environment or.
Do you have opportunities to expand the margin by lowering your crediting rates.
Thank you Greg This is Don I will address that question.
We do have limited ability to further decrease our crediting rates the portfolio.
Product change that we made and late mid March of this year actually took that that block down to the minimum guarantee which is 1%.
In total our annuity contracts 92% of the.
Contracts our patent guarantee.
In the Universal life insurance side, approximately 85% of those products are at guarantee and the.
15%, that's not as business that we've written more recently so it is a challenge that's why we're focusing on.
The expenses certainly too.
Offset that a bit from a bottom line perspective.
Longer term.
Strategy of building out the wealth management business.
To have a source of revenue and profitability that is not spread depend.
Got it and then you know on the new business that you're selling in both of these areas I assume with pricing you are helping to offset the lower interest rate environment with a lower crediting rate has set a fair assumption.
Yes, and that's reflected in the.
Decreases that we made and our caps and roll up rates on our.
On our index annuities and then of the we've also help tied on on the Mike for product that we have the four year multiyear guarantee annuity.
Got it.
I thought it step back.
You know maybe at a big picture level.
The economic disruption as a result of this pandemic has been profound.
And I'm curious you know as you survey your customers.
What kind of sense are you getting from them about their views on their ability to buy discretionary items from life insurance et cetera.
And then secondly.
You know you're trying to build out the wealth business. It seems like the opportunity to find people that might be willing to consider that as a profession.
You might happen over.
Or prospects considering the the widespread unemployment, but maybe just talk about the big macro issues and how it's affecting your business.
Those particular areas as well.
Yeah. Good morning, Greg This band pitcher all started and there might be one or more that want to make a couple additional comments, but from the macro level. When you think about our customers and potential customers.
We have but we think long term or stop and I imagine that's in the last call that there's probably some opportunity for life insurance sales due to this pandemic.
In the short term, obviously with a lot of the shelter in place and and the many restrictions the ability to.
To do some of the underwriting medical underwriting that we we needed to do as more complicated and so the processes outselling life insurance definitely be became more complex due to call but idled.
I don't feel I didnt hear from the agent that you know were.
Work, where we were getting a feel of overall general consumer sentiment that was you know what work against our industry.
So you know we all want to get this behind us, but you know I think we're really well position to come out of this from a from a position that strikes and.
And.
Don't have a lot of concerns about long term impact from the bad debt.
The second kind of area what into as far as that.
The jobs and the impact to the.
Unemployment in the economy.
That that probably isn't a.
A big benefit on the wealth management side I think generally we're trying to.
To higher.
Yes.
Look at our press releases that notes.
Variance wealth managers, and but it may benefit us in the area of girl and agency for some of my comments earlier, we think that we can be more selective.
And and hiring agents for the company given the level of unemployment.
Mark our best agents are entrepreneurs and as you know this this economy as.
Driven a lot of entrepreneurial folks into an imply that so we do think.
The data will be some benefit from that.
Don if you had any additional comments.
Yeah with respect to the wealth management question, one of the value propositions that we provide a wealth manager joining us is access to a hot lead. If you will so we have agents that have long term relationships with.
Very wealthy individuals provide we provide life insurance and property casualty.
Services to them, but sat show that weve not done and good job of medical meeting their investment needs. While we sold mutual funds in years past, our penetration into that that aspect of their wallet.
Now is not that significant in total so wealth management advisors.
I'd like to have customers brought to them as opposed to prospecting and we see that as a real value proposition and lower to get some of these experienced advisors to come over to us.
Yes.
Got it thanks for that color I guess the final questions around capital. Obviously, you you commented on your capital ratios and.
The strength of the organization and I know in the past.
When you are in excess capital positions you periodically would consider special dividends.
Should I presume at least for the near term as we sort of works through the pandemic in the economic crisis that though things like that are on hold or.
Is there is there are different view.
Yeah. This is Don I'll tackle that question, Dan you could provide some additional color if you'd like but.
Certainly we have not grown our capital ratio.
First half of the year as much as we have in the over the last several years and we have headwinds that are stronger than.
What we have faced over the last several years as well so.
It is prudent to see how the economy rebounds, see what creating credit rating agencies do with respect to ratings of.
The issuers of the securities that we own and see this play out a bit.
But the timing and amount of special dividend is driven by the board and.
Anything can happen.
Got it thanks for the answers.
Again, if you have a question. Please press Star then one.
The next question is from Marla backer with Sidoti. Please go ahead.
Thank you so I.
I'm wondering what could get a little bit more color.
Wealth management initiative and specifically in terms of.
Some of the new advisors can you just provide a little bit of walk us through the process.
What's the cost to occur before new advisors able to move over to.
To get a better feel for you know how this process has been swallowed well, how well you know more work its way out going forward.
Hey, this is Dan good morning, more like a can start a little bit at the high level.
As far as the slowing of the process and.
And I think you've been Oh.
Appreciate that after the pandemic, yet and all that.
Strict soon themselves are in place so orders were out there I mean, two things happened to existing.
Wealth management advisors first off there was quite a quite a market turmoil.
And in the first quarter and so they were obviously busy.
Answering a lot of questions building a lot of calls from their current clients.
The other thing of course, then we were impacted by what the you know that really the ability to enter view and betraying and and develop into many components of that process that we have a.
Moving wealth management advisors.
Into our model and that was in my comments, where we basically had three months in there were no that recruiting process.
You know all the way from from licensing to interviewing to.
Rainy and was basically shut down because it's beginning to pick up again now and so.
Feel good about.
Some of the loosening of restrictions obviously, there's been another reason spike in in the number of cases, we've been able to continue to work through it up to this point.
And I don't think were I had I wouldn't say we're back.
To normal yet, but we are we are getting closer and of course it all depends on.
No what the.
Great.
Location of the virus spread in the near future and what its impact might be out on our recruiting.
Thank you that was helpful and.
So given that.
Your your sort of as you said sort of been delayed by.
Oh, the coal bed 19 impact on activity.
Is there anyway that you can help us.
Got a feel for how the benchmark you know your progress on the an issue that even even in terms of just you know telling us.
What your internal target not.
Not telling us what your internal targets or but.
Given that some sort of understand.
Yeah.
Yeah, a couple of general comments and then Don.
Maybe it will add to it but you know as Don commented that.
The slower than what we had anticipated but.
Also worth noting in our expenses going investment and a wealth management worse at slowing down also so.
We kind of had those who do components offsetting each other a bit on a go forward basis, we really we don't share our our internal targets that Don I don't know up any you have anything else you ought to add on that.
Thank you just clarify was the question directed towards the wealth management aspect of the business or this question broader.
No. It was directed towards wealth management aspect.
I understood that you weren't going to like disclosed the targets, but how to think about what you're targeting you now in terms of the numbers on deposits to bring over the assets under management, just a general sense, though.
What you're thinking.
Without providing specific numbers do bad so clearly the economic model, that's driven by assets under management and and then fees.
The result from managing those assets so its growth on that asset base that.
It is key to turning the corner and adding to the bottom line for for FPL and to date.
In the startup nature, we have not disclose the U.M. balances, but certainly that will be in our future.
Okay. Thank you no switching topic, you mentioned before that one thing you had done to.
Offset some of the impact of the low interest rate environment by reduced agent commissions.
The interest sensitive products I think that way.
But my understanding is quick I think that's what you said so it is flat.
Intended to be.
What duration is that all is not intended to be a permanent reduction and agent commissions.
Yeah. The actions that we've taken to date are really limited towards.
Around those contracts that contract holders have the.
Right to make renewal deposits into contracts there were certain years and years, perhaps decades ago and they have minimum guarantees. So for those contracts that have a have a 2% or higher minimum guarantee.
We have eliminated the commissions that we pay on those deposits, where historically, we wanted those assets because we could still make a spread on on that money. So so the extent of any commission reduction has been limited, but it has its one of those things one of those many things that we've done too.
To help both bolster our bottom line and.
Commissions consumer continues to be challenged because that's one of the levers that we can pull.
Okay and are you seeing any change.
Well first filmed default.
As a result.
What's going on and the economy.
For product pricing purposes, we really take a long term view on default assumptions one we're setting.
Crediting rates and other parameters around our products and.
So that's not something that will.
Just significantly in a particular year and in a particular economic cycle.
But it rather it's something that debt more so over time based upon long term industry data.
Okay, and then in terms of just real World changes right now are you actually need any change in default.
In 2020 versus what you had expected that that squad to be.
Downturn.
Clearly, we had a second quarter, we didn't see much in the way of impairments or or defaults.
So.
So to speak of Oh, we had add more significant.
In the first quarter and it certainly as much much elevated from.
The level of defaults or impairment charges that we took over the last several years, where the credit cycle was.
It was more than it was on a good spot.
So.
Just based on six months were more reverting to the meaning of what we would expect given the size of our portfolio and the level of impairment activity.
Thank you.
Once again, if you have a question. Please press Star then one please standby as we pull for questions.
[noise] [noise] showing no further questions. This concludes our question and answer session.
Let's turn the conference back over to Kathleen till staying for any closing remarks.
Thank you, everyone, who joined us on the call today.
Please feel free to give us the call.
Any follow up question.
Thanks and have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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