Q3 2020 FBL Financial Group Inc Earnings Call

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Good morning, and welcome to the F.C.L. Financial Group Inc. third quarter 2020 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal copper specialists are pressing the star key followed by zero.

Please note. This event is being recorded I would now like turn the conference over to Kathleen till saying. Please go ahead.

Thank you and welcome.

All financial groups third quarter 2020 earnings conference call presenting on today's call are Dan pitcher.

Pitcher Chief Executive Officer, and Don Seibel, Chief Financial Officer.

Certain statements made today may contain forward looking statements intended to qualify for the safe Harbor from liability established by the private Securities Litigation Reform Act.

Statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied these.

These risks and uncertainties are detailed and feels reports filed with the FCC and are based on assumptions, which FPL believes to be reasonable.

However, no assurance can be given that these assumptions will prove to be correct.

FPL disclaims any obligation to update forward looking statements. After this date.

Comments. During this call include certain non-GAAP financial measures, where applicable these items are reconciled to GAAP in our third quarter earnings release and financial supplement both.

Both of which may be found on our web site at <unk>.

Ill financial Dot com.

Today's call is being simulcast on <unk> website, an audio replay and a transcript of the prepared comments may be found on our website shortly after the call.

Please note that there will be no question and answer session. Following our prepared remarks today.

With that it is now my pleasure to turn the call over to CEO Dan pitcher Dan.

Thanks, Kathleen and welcome to everyone on the call I hope, you're well I'm pleased that you are with us today.

As you are aware on September 4th FPL Financial Group received a nonbinding proposal from Farm Bureau property and casualty insurance company to acquire all the outstanding shares of FPL class, a common stock stock and class B common stock that are not currently on file Farm Bureau property and casualty or.

The Iowa Farm Bureau Federation at a purchase price of $47 per share.

Since that time the board has established a special committee to consider this proposal and that committee has retained its own legal counsel and financial advisor.

<unk> Board of directors has not made any decision with respect to its response to this proposal.

I continue to be impressed with the ability of our agents advisors and employees to adapt and remain focused despite many distractions brought on by the pandemic Mpls agent and advisors continue to find innovative ways to grow their businesses. In addition productivity and service levels are high for our employees, whether they are in or.

Corporate offices are for the majority that remain in rebar work mode.

We have adjusted practices in our offices following CDC guidelines to provide for the well being of all of our constituents.

In a year, where we have faced countless new and different challenges our promise to protect livelihoods and futures is more important than ever.

Turning now to earnings for the third quarter of 20, 20-F, B All financial group reported mix financial results net income of 85 cents per share and adjusted EBITDA income up 80 cents per share.

Positive include growing life insurance sales lower expenses than it has dissipated due to our focus on expense control and an excellent capital position.

Negatives include the unfavorable impact of unlocking an actuarial assumptions higher death benefits and continued pressure on spread income from the decline in investment yields Don will discuss these results in more detail.

From a sales perspective total life insurance premiums collected increased 3% compared to the prior year quarter with an increase in new whole life and term life insurance sales annuity.

Annuity premiums collected on the other hand decreased 19% compared to the same period last year due primarily to a decline in index annuity sales.

Decline in annuity sales reflects the impact of lower market interest rates and our financial discipline and determining an appropriate credit game in cap rates.

On a positive note surrenders and withdrawals have also declined.

Our product offering is robust and competitive with products suitable for all life stages late in the third quarter. We added an additional index annuity to our product suite. The product is agility six index annuity and features that to your point to point strategy with a six year surrender charge period.

Product complements our flexible premium index annuity, which offers annual point to point and monthly average strategies with a nine year surrender charge period.

We also recently launched an accelerated underwriting process, which allows for an exam free and fluid free underwriting process are eligible client members accelerated underwriting achieved several purposes.

It enhances the client member and age and experience for the purchase of life insurance. It incorporates the new tools and techniques and the risk selection process at.

It allows eligible client members a less invasive risk selection process and its streamline the application process to be primarily electronic.

The recent launch of this process led to some processing delays with a third party provider. So we are working through those issues. Once resolved, we expect accelerated underwriting to serve us well in the long term.

In addition to enhancing our product offering them purchase experience, we are working to make our operations more efficient since.

Since Kelly Eddie joined as Chief Operating Officer last year Farm Bureau life has been intense it about creating a continuously improving culture of efficiency, we dedicated effort and resources to value stream mapping and lean six Sigma projects. The result is more efficient operations and lower expenses, which allows us to better serve at Green Bay.

Al you for our client members.

Turning now to distribution as of September 32020, we had 1703 exclusive agents and agency managers. This total reflects a decline in the third quarter as we continue to make changes with some of the lowest producing agents.

We are focused on increasing the productivity per agent and have enhanced marketing tools to help agents be as productive as they can be.

Our intention is to have agents in place they have the potential for long term success.

As part of this process, we will have a new contract in place for a new agents as of January one.

Our Farm Bureau financial Services Agency Force is complemented by our Farm Bureau wealth management advisors as of September 30, We had 29 wealth management advisors. This advisor count as more than double the number we had a year ago with advisors, joining us from large bags wire houses and a variety of protocol and non.

Protocol for art, we continue to build out this business, but the pace of adding advisors has been slower than originally anticipated as the pandemic has put pressure on recruiting experienced advisors.

As we move forward to finish 2020, our constant focus is to protect the livelihoods and futures of our client members, we adhere to strategies that keep our company is financially strong and stable, allowing us to fulfill our purpose.

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

Thanks, Dan I also want to welcome everyone on the call and thank you for your interest in LTL.

I'll discuss our financial results for the third quarter, and then comment on investments in capital.

Earnings results for the third quarter of 2020 came in below our expectations FPL reported net income of 85 cents per share and adjusted operating income of 80 cents per share.

I'll highlight the notable items for the quarter, which impacted results both positively and negatively I'll begin with the negatives first.

First we performed a review or unlocking of the key assumptions used in the calculation of the amortization of deferred acquisition cost on revenue reserves and certain reserves on interest sensitive products. We perform this exercise annually or more frequently if needed to better align our projections for future expectations.

Assumptions include persistency surrenders withdrawals writer utilization economic environment and other factors.

Notably this quarter, we had a negative unlocking impact from decreasing our long term treasury yield assumptions by 25 basis points. We now project. The 10 year treasury rate to grade up to 3.50% over a 10 year period.

We had a positive unlocking impact from updating the expected policyholder behavior assumptions for those individuals who have activated the guaranteed living withdrawal benefit rider are.

Index annuity policies.

In total this unlocking exercise negatively impacted earnings for the third quarter of 2020 by 22 cents per share after tax.

Please see page 14 of our third quarter Investor supplement, where we have included segment level detail on the unlocking impact.

Second mortality results were approximately 14 cents per share worse than expected primarily in the life insurance segment.

We experienced some pandemic related claims, but that was not a significant driver of the increase in death benefits overall, we had a higher than average number of claims in the third quarter as well as a higher than average claim size by its nature mortality experience can fluctuate from quarter to quarter.

Regarding COVID-19 to date, the pandemic has not proven to be a significant mortality event for us and total during the third quarter of 2020, we had claims on 27 individuals with COVID-19 listed as a cause of death.

Majority of these individuals were of advanced age or had significant underlying medical conditions.

The total financial impact net of reserves release was less than $1 million.

Given the trajectory of COVID-19, we expect more pandemic related claims providing this coverage is vital and allows us to deliver on our promise to our client members.

Third while we had equity income for the third quarter it was lower than expected.

Notably one of our alternative investments reports earnings two quarters in arrears as it is a fund of funds, which increases the reporting timeline.

Finally, we continued to invest in our growing wealth management unit as we build out that business.

On the positive side of earnings we experienced lower DAC amortization on our variable business due to the favorable impact of equity markets on separate account performance.

This favorable market performance also decreased reserves associated with guaranteed living withdrawal benefits on our index annuity products and total this positive market performance totaled seven cents per share for the quarter.

Another positive is our success in controlling expenses.

As Dan mentioned, we devoted resources to streamline operations and become more efficient.

Given the decline in sales, we challenged project costs and reduced personnel expense by limiting new positions and not filling positions when individuals leave the company also.

Also given the current environment travel related expenses have declined.

Next I'll discuss our results by segment.

Annuity segment results for the third quarter of 2020 were strong and reflect a benefit from unlocking actuarial assumptions driven by changes to the expected policyholder utilization of the guaranteed living withdrawal benefit rider and the impact of favorable market performance reserves associated with guaranteed living withdrawal benefits decreased 600.

Sales in dollars in the third quarter of 2020 due to this market performance.

This segment also had lower expenses.

Results for our annuity business, however continued to be pressured by low market interest rates point in time spreads on our individual annuities decreased seven basis points during the third quarter, reflecting lower investment rates.

Life insurance segment results for the third quarter 2020 reflects several negative items. The segment had a negative impact from unlocking actuarial assumptions driven by spread compression and lower persistency.

It also had higher death benefits and lower equity income.

Partially offset by lower expenses coin.

Point in time spreads for our Universal life business also declined during the quarter, primarily due to the impact of low market interest rates on our portfolio yield.

In response to the headwinds caused by the low market interest rates in the third quarter, we decrease the cap rates on our index Universal life products.

Corporate and other segment results were impacted by several items in the quarter first as previously stated this segment experienced lower amortization of deferred acquisition costs due to the impact of the positive equity market performance in the third quarter.

This decreased amortization by $1.5 million.

Second the segment had higher death benefits in our closed block of variable Universal life insurance business.

Third it experienced a negative impact from unlocking actuarial assumptions due to spread compression.

We also continue to invest in our developing wealth management business and incremental after tax net loss for the quarter totaling $1.5 million or six cents per share.

Related to this investment.

Next I'll discuss FPL is investment portfolio, which is well diversified by individual issue industry and asset class our investment portfolios of high quality with 96.4% of the fixed maturity securities being investment grade.

Commercial mortgage loan portfolio is also a high quality with all loans performing.

Quarter end.

We have added high quality long duration securities with recent investment purchases of corporate bonds municipal bonds and non agency mortgage backed securities the tax adjusted yield on new investment acquisitions backing our long term business was 3.34% for the first nine.

Nine months of 2020.

Next I'll comment on our capital levels that's.

At September 32020, our subsidiary Farm Bureau life had an estimated company action level risk based capital ratio of 525%. This.

This is a decrease of two points from June quarter end and reflects $23.5 million in dividends paid by Farm Bureau life during the third quarter.

A portion of these dividends were used to fund our growing wealth management business.

Using 425% RBC as a base Farm Bureau life had excess capital of approximately $133 million at September Thirtyth 2020 in.

In addition, we estimate that we have roughly $9 million of excess capital at quarter end, the holding company level.

We continue to return capital to shareholders during the third quarter, we paid our regular quarterly dividend on our common stock which totaled $12.2 million.

And we repurchased FPL common stock totaling $5.6 million.

To conclude while our bottom line results for the quarter were below our expectations, we exercise financial discipline to grow our business, we have strong capital and liquidity positions and we continue to execute on our fundamentals and maintain the financial strength of the company.

These actions position FPL financial group well for the future.

That concludes my comments I will now turn the call over to Kathleen.

Thank you Don and Dan for those comments and thank you to everyone who joined us on the call today.

This concludes our call thanks and have a good day.