Kathleen Till Stange
Investor Relations Vice President
Thank you, good morning and welcome to FBL Financial Group's conference call to discuss first quarter 2009 earnings. If you don't already have a copy, our earnings release and financial supplement may be found on our website at www.fblfinancial.com. Presenting on today's call are Jim Hohmann, Chief Executive Officer; and Jim Brannen, Chief Financial Officer. Also present and available to answer any questions you may have are Charlie Happel, Vice President - Investments; Rich Kypta, Executive Vice President of Farm Bureau Life; John Paule, Executive Vice President of EquiTrust Life, Don Seibel, Vice President - Finance and Brian Mamola - Corporate Actuarial Vice President.
Certain statements made today concerning FBL's prospects for the future are forward-looking statements intended to qualify for the "safe harbor" from liability established by the Private Securities Litigation Reform Act. These statements involve certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statement. These risks and uncertainties are detailed in FBL's reports filed with the SEC and are based on assumptions which FBL Financial Group believes to be reasonable; however, no assurance can be given that the assumptions will prove to be correct. You should not place undue reliance upon any forward-looking statements. FBL disclaims any obligation to update forward-looking statements after this date.
Comments during this call include certain non-GAAP financial measures. These items are reconciled to GAAP in our first quarter earnings release and our financial supplement, both of which may be found on our website.
Today's call is being simulcast on FBL's website. Shortly after today's call, you will find a transcript of today's prepared comments and an audio replay of the call on our site.
As I'm sure you are well aware, last week we announced that Jim Hohmann was named FBL's interim Chief Executive Officer.
Jim Hohmann succeeds Jim Noyce, who has left FBL after 24 years of service. Jim Noyce served as FBL's CEO for the past two years and prior to that was FBL's Chief Financial Officer for 12 years. During Jim Noyce's tenure as CFO and CEO, FBL underwent significant growth and change - becoming a publicly traded company and growing assets from $2.9 billion to $14 billion. It was a pleasure and an honor, for me and others, to work with Jim Noyce, and we wish him the best.
Jim Hohmann joins FBL with more than 30 years of experience in financial services. Most recently, he was President and CEO of Allstate Financial. Prior to that, he was President and Chief Operating Officer at Conseco; President and CEO of XL Life and Annuity; and President, Financial Institutions, for Zurich Kemper Life. He is a Fellow of the Society of Actuaries, and a Member of the American Academy of Actuaries.
This is a challenging time for FBL, as it is for all life insurance companies, and we're fortunate to have someone with Jim Hohmann's experience leading FBL at this critical time.
With that, it is now my pleasure to turn the call over to our new CEO, Jim Hohmann.
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Jim Hohmann
Chief Executive Officer
Thanks Kathleen, and good morning. I am excited to be the new CEO of FBL Financial Group and I'm pleased to be participating on this call with you here today.
As Kathleen indicated, I have experience with a variety of life insurance companies and with that perspective, I see FBL as a special opportunity. It's a company with a strong heritage, the great Farm Bureau niche, and a solid track record, all of which create a unique position in the market. However, like virtually all financial services companies in the current environment, FBL has its challenges. But within most challenges, there is opportunity and I'm confident in our ability to meet those challenges and capitalize on the opportunities before us.
Having joined the organization just last week, I am in the initial stages of examining FBL's markets and strategies. I can tell you that FBL's high level strategic objectives are sound; however, I will focus my attention on selecting the best way to achieve our aspirations.
In today's business environment, capital management is more critical than ever. So in the short term, we'll work to conserve and strengthen our capital position. We'll also focus heavily on our investment portfolio and improving our asset/liability position.
As I begin leading FBL in these volatile and recessionary markets, I assure you that FBL continues to operate with the integrity that is its hallmark. We'll examine our companies and move forward with actions to build a strong future for all of FBL's constituents - shareholders, customers, agents and employees.
With that I will turn it over to Jim Brannen.
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Jim Brannen
Chief Financial Officer
Thanks Jim, and good morning everyone. There's a lot to cover this morning, but before I do that, I would also like to thank Jim Noyce for his leadership at FBL and say how much I value our years of service together.
At the same time I am also pleased to now be working with Jim Hohmann as we address the challenges before us. His experience and accomplishments speak well for how he can add leadership at FBL.
The topic I'll start with this morning is the surrender issue we reported earlier this year. As we discussed in last quarter's call, surrenders at EquiTrust Life increased in late 2008 and early 2009. This is due to a decline in U.S. Treasury rates, which allowed contract holders to surrender with lower net surrender charges due to calculation of the market value adjustment - or MVA - feature.
Surrenders peaked in January and have been declining steadily since that time. We now have better data with some actual experience for the quarter and are much more confident about returning this block to profitability at this time. To illustrate the decline, total surrender and transfer requests were $253 million of account value in January, $184 million in February, $154 million in March and $96 million in April. This decline is due in part to the increase in Treasury rates. The 10-year Treasury rate closed yesterday at 3.30% compared to 2.24% at year end. With a 10-year Treasury rate above 3.00%, we feel much more comfortable that surrender charges provide much more appropriate protection. We've also been successful in our conservation efforts and maintained a very strong liquidity position throughout the quarter.
Next, I'll turn to Ratings. As you are likely aware, in late February A.M. Best downgraded the financial strength ratings of Farm Bureau Life and EquiTrust Life. Farm Bureau Life was lowered to B++ (Good) and EquiTrust Life was lowered to B+ (Good), both from A- (Excellent).
While we were not pleased with this rating action, the demand for our products has not diminished at either Farm Bureau Life or EquiTrust Life.
We continue to have the support of EquiTrust Life's independent agents and marketing organizations, and EquiTrust's first quarter sales demonstrate that we can be successful as a B+ rated company.
Despite this rating action by A.M. Best, we still manage our companies to hold capital to at a minimum "A" levels based on A.M. Best's capital adequacy model. Despite the assigned rating, we believe these levels are prudent in running our business. Continuing to target these levels will eventually allow us to have our "A" ratings restored as we meet the challenges of the current economic environment.
We have performed A.M. Best's capital adequacy calculations as of March 31, and our results show that Farm Bureau Life holds capital at an A.M. Best rating level of A++ and EquiTrust Life holds capital at an A.M. Best rating level of A+.
Based on these calculations, we estimate Farm Bureau Life has approximately $95 million of excess capital for an A level rating and EquiTrust Life has approximately $40 million of excess capital above what is needed for an A.M. Best A level rating. In addition, we have $20 million of cash and investments at the holding company.
We have performed stress analyses of our A.M. Best capital model results, assuming various levels of impairments as well as various securities downgrades. Even under these stress assumptions, our companies have significant excess capital under the A.M. Best capital models for 2009 and 2010 at "A" rating levels.
While the A.M. Best rating is still very important to us, the Standard & Poor's rating currently does not provide the same benefit. We initially obtained an S&P rating in 2003 in advance of issuing debt in 2004. The S&P rating is valuable in the capital markets and that is not an attractive alternative for our industry at this time. The S&P rating is not a focus of our customers and the ratings process is time consuming and expensive. For these reasons, we have made the decision to drop our S&P rating. We will devote management time to addressing the challenges of the current marketplace.
I'll make a few more comments on capital before I discuss first quarter earnings. At March 31 we estimate that Company action level RBC was 357 for Farm Bureau Life and 304 for EquiTrust Life. I am pleased to say that despite the surrender issues EquiTrust Life did see a slight increase in the first quarter.
In February we paid off our $60 million line of credit. This reduced our debt-to-total capitalization ratio, with equity credit for our trust preferreds, to 21.2% at March 31. We chose to pay off this line of credit because we had obtained $100 million in debt financing from affiliates in late 2008, and removing the line provides us access to liquidity through the Federal Home Loan Bank.
Farm Bureau Life is a longtime member of the Federal Home Loan Bank and EquiTrust Life became a member in February 2009. Farm Bureau Life has borrowing capacity with the Federal Home Loan Bank of approximately $900 million while EquiTrust Life has capacity of approximately $85 million.
We do not have any debt due until 2011, and that debt is the $100 million of senior notes we have with affiliates.
Because of the concern we had early in the year around the spike in surrenders at EquiTrust Life, combined with the lack of access to capital markets, we increased our cash and short-term investment levels, which as of March 31, 2009, totaled nearly $400 million. Because surrenders have declined, it is no longer necessary to carry this high level of cash and we are currently deploying into investments.
While many in the insurance industry have cut or eliminated their shareholder dividend, up until this point, FBL has not. With the drop in stock price, FBL's dividend yield is clearly high in comparison to the industry. To get our dividend more in line with the industry and to help preserve capital and parent company liquidity, the FBL board will be considering a dividend cut at its next meeting which lowers the annual rate from $0.50 per share to $0.25 per share. On a related note, in response to investor requests we've added a page in our financial supplement detailing parent company sources and uses of cash.
Now I'll turn to first quarter sales and financial results.
Farm Bureau Life's first quarter 2009 sales totaled $169.5 million, an increase of 34% over the first quarter of 2008. Traditional annuity sales continued to be strong and were up 113%. Traditional and universal life insurance premiums collected also increased by 6%, while variable sales continue to be under pressure and were down 31%.
Farm Bureau Life's business is strong and our Farm Bureau agents are assisting their customers during this time of market volatility and economic stress.
Premiums collected at EquiTrust Life were also strong and totaled $325 million, a slight decrease from the first quarter of 2008, but an increase from fourth quarter 2008 levels. By the fourth quarter of 2008 we had significantly slowed the pace of growth at EquiTrust Life to preserve capital. Despite making five rate changes since the beginning of the year, sales did pick up and we were able to utilize new premiums as an additional way to ensure liquidity. Given that the surrender issue is now better understood and manageable, our most recent rate action has again slowed the pace of growth at EquiTrust Life.
With capital efficiency and increased profitability in mind, on Monday May 11, we will be announcing a rework of our EquiTrust Life product portfolio. The changes will remove our high capital strain products and we will make changes to the rest of the products so that there will very little to no capital strain in selling these products. Of course, they will also benefit from significant increases in ROE's as well. The current environment and what other carriers have done around capacity allows us to implement this strategy now, preserve capital, retain interest from our sales force and improve profits.
Next, I'll turn to our first quarter results. We reported a net loss of $0.05 per share and operating income of $0.26 per share. I will get into the detail in a moment.
This quarter we did early adopt FASB's Staff Positions 115-2 and 124-2, which provide guidance for the recognition and presentation of other-than-temporary impairments. We had total other-than-temporary impairments this quarter of $31.1 million. These impairments were on a variety of names, including General Growth Properties and McClatchy Corp. as well as further write-downs to several previously impaired securities, including Abitibi. Under the new FASB guidelines, the credit related portion of these impairments, which is $21.6 million on a gross basis and $11.6 million after offsets, is reported in earnings. The non-credit related portion is reported as an unrealized loss in other comprehensive loss, and amounted to $9.5 million on a gross basis and $5.2 million after offsets.
Adoption of this guidance also resulted in the reclassification from retained earnings to accumulated other comprehensive loss of $15.6 million, net of offsets, for the non-credit portion of other-than-temporary impairments on securities held at January 1, 2009.
Operating income was $0.26 per share for the quarter, which is lower than our expectations. Results for the quarter were primarily impacted by increased DAC amortization, particularly at EquiTrust Life, higher than expected mortality and maintaining higher levels of cash.
Given the challenges of the current environment, we have taken a variety of actions to reduce expenses. As a result of implementing these expense savings initiatives, we incurred certain one-time charges of $0.04 per share.
Now let me turn to spreads. As of March 31, spreads on our exclusive annuity business remained steady and ended the quarter at 157 basis points on a statutory basis. The investment yield for this business was impacted by losses on interest rate swaps backing this business. Our target for this business is 167 basis points. We continue to monitor LIBOR and will make crediting rate changes as appropriate.
For our universal life business, our spread on a statutory basis increased by three basis points during the quarter to 192 basis points. This remains well above our target spread for this business of 181 basis points, for excess spread of 9 basis points. Spreads on this business have been stable.
Spreads earned during the quarter for our independent annuity business were negatively impacted by about 18 basis points for maintaining a higher cash position as a result of the increased surrender activity. As I mentioned, we are now deploying those funds into higher yielding securities.
Turning to our investment portfolio, as of March 31, 2009, FBL held fixed maturity securities with gross unrealized losses of $1.69 billion. When combined with securities with unrealized gains, this nets to $1.57 billion, which is not a significant change from year end. Pricing on our portfolio has improved in April in several sectors and I'm optimistic that valuations will be improving further going forward. As I have stated before, the bulk of this unrealized loss relates to investment grade debt securities where values have declined from the widening of credit spreads to unprecedented levels rather than specific credit deterioration. That's the reason these losses remain unrealized. These assets continue to perform and we expect to hold them until maturity. Our portfolio remains of high quality, with 95 percent of the fixed maturity securities being investment grade.
We plan to file our Form 10-Q on Monday. In it you'll find added investment disclosures due to the adoption of the FASB's guidance on impairments. In the meantime, for further investment detail, I invite you to visit our website under Financial Information, Quarterly Results, for a wealth of information on our investment portfolio.
In closing, 2009 remains challenging, but we are becoming more optimistic. Our Farm Bureau Life channel remains strong, surrenders at EquiTrust Life have declined, investment valuations are improving and our capital levels are solid. Led by our new CEO, we are focused on addressing the challenges before us and working to ensure the long term success of FBL Financial Group.
That concludes my prepared comments. We will now turn the call over to the operator and open it up to any questions you may have.
Kathleen Till Stange
Investor Relations Vice President
Hearing no more questions, let me turn it over to Jim Hohmann for some closing comments.
Jim Hohmann
Chief Executive Officer
Thank you Kathleen and I thank all of you who joined us today.
As I stated at the outset, I am very happy to be here and I’m anxious to move FBL forward. Like many others in financial services, it was clearly a challenging quarter for FBL, but we see encouraging signs. We a have a unique niche in the marketplace with Farm Bureau Life and its distribution force that has sustained its performance through this economic environment and as Jim reported, EquiTrust Life is experiencing some favorable trends as well.
We are addressing the challenges before us and expect to come out of this recessionary period as a stronger company.