SOUTHERN FARM BUREAU LIFE INSURANCE COMPANY Jackson, Mississippi A+ SOUTHERN FARM BUREAU LIFE INSURANCE COMPANY Mail: P.O. Box 78, Jackson, MS 39205 Web: www.sfbli.com Tel: 601-981-7422 Fax: 601-981-9894 AMB#: 007053 NAIC#: 68896 FEIN#: 64-0283583 BEST S CREDIT RATING Best s Financial Strength Rating: A+ Best s Financial Size Category: XV Outlook: Stable RATING RATIONALE Rating Rationale: The ratings of Southern Farm Bureau Life Insurance Company (SFBL) reflect the company s extremely strong risk-adjusted capitalization, consistent levels of profitability and new business trends toward more creditworthy products with favorable risk characteristics. Offsetting these positive rating factors are the sizable exposure to reserves for products that have unfavorable risk characteristics from a product creditworthiness standpoint and relatively low profitability ratios as compared to its similarly rated peers. SFBL s risk-adjusted capitalization, as measured by Best s Capital Adequacy Ratio (BCAR), remains extremely strong and is supportive of its insurance, investment and business risks. A.M. Best notes that the quality of capital is above average, as the company self-funds all of its Regulation XXX term reserves. In general, the long-term trend in aggregate capital and surplus growth is positive and has been driven largely by the consistent level of profits that SFBL generates, as well as by generally favorable investment gains. New business annualized ordinary life premiums have shown positive growth trends as well. SFBL faces interest rate exposure as a significant amount of its reserves are comprised of universal life and annuity liabilities, of which a significant portion offer generous guaranteed minimum crediting rates. Annuity production has declined over recent years, which has Printed August 4, 2016 www.ambest.com Page 1 of 6
helped to lower the portion of interest-sensitive reserves on the company s books. Nevertheless, spread compression has challenged earnings and is likely to remain an issue going forward as low interest rates are expected to persist. A.M. Best believes that a positive rating action for SFBL is possible if a positive trend surfaces in the company s pre-tax net operating gains and profitability, which would concurrently result in a material improvement to the company s profitability ratios, particularly an improvement to the return on equity ratios. Factors that could result in a negative rating action include a significant and sustained deterioration in risk-adjusted capitalization as measured by BCAR or if net operating performance falls markedly short of historical trends. KEY FINANCIAL INDICATORS ($000) Total Capital Capital Asset Net Net Surplus Valuation Premiums Invest Net Year Assets Funds Reserve Written Income Income 2011 11,673,188 1,904,155 241,997 906,879 555,026 149,969 2012 12,254,459 2,082,258 248,988 852,203 559,101 148,761 2013 12,679,325 2,327,194 236,872 785,689 544,606 149,777 2014 12,995,542 2,436,439 246,816 799,768 550,854 167,861 2015 13,307,904 2,456,845 179,774 904,697 552,856 76,973 (*) Data reflected within all tables of this report has been compiled from the company-filed statutory statement. BUSINESS PROFILE Southern Farm Bureau Life Insurance Company (SFBL) is a stock insurance company incorporated October 30, 1946, under the laws of the state of Mississippi, with the mission of providing for the insurance and financial security needs of Farm Bureau members. The ownership structure of SFBL consists of Farm Bureau investment corporations in Arkansas, Kentucky, Mississippi, Texas, Louisiana, South Carolina, and North Carolina, and holding corporations in Virginia, Florida, and Georgia, which are controlled by the Farm Bureau Federations in each state respectively. The company is principally engaged in the sale of individual life (term and whole life) as well as annuity contracts. Previously the company s products were also marketed in Alabama, but only by a minimal number of agents and in a small number of markets. On December 30 2010, SFBL s wholly owned insurance subsidiary, Southern Capital Life Insurance Company (SCL), was merged into SFBL. The total Farm Bureau membership within SFBL s marketing territories is approximately 2.8 million families. The company s strong market position within Farm Bureau communities partially reflects the strong ties maintained with the agency forces shared with the Farm Bureau property/casualty (P/C) companies and the strong levels of satisfaction that Farm Bureau P/C clients have with the Farm Bureau insurers. The relationship with the P/C insurers provides a large niche market that has led to a stable and loyal policyholder base, as demonstrated by the persistency of the company s business. Marketing research data suggests that the group s Farm Bureau market offers considerably more opportunities to cross-sell existing P/C customers through the multi-line agency force. Full advantage of these opportunities has not been maximized, as the agency force derives the majority of its income from P/C products, and life sales appear to be subordinate in the agents interest to the P/C products. The number of agents as of year-end 2015 was 3,868, up slightly from 3,851 in 2014, and they distribute products throughout the ten states mentioned above and also in the state of Colorado. Sales and service are provided through career multi-line agents shared with the Farm Bureau property/casualty (P/C) companies. The multi-line agents focus most of their marketing efforts on P/C products, with the typical agent earning the majority of their income from P/C sales. The company s agent retention and recruiting are dependent upon P/C performance and may increase or decrease based on market conditions. The whole life product portfolio consists of Whole Life (WL), 15, 20 and 30 Pay Whole Life, Modified Premium Whole Life, and Single Premium Whole Life. The term life portfolio is comprised of Par Term, Term Premier, and Term Riders for 10 or 20 years. Annuity offerings include Flexible Premium, Fixed Annuities, Single Premium Non-Qualified Deferred Annuity, Joint Single Premium Immediate Annuity and Single Premium Immediate Annuity. SFBL also focuses on term policies that have expiring conversion options, which augments life premiums. In response to the low interest rate environment, SFBL has reduced the guaranteed minimum interest rate on its new annuity contracts, and will no longer accept unscheduled premium payments on existing annuities with interest guarantees of 2% or higher. Extension of maturity dates on existing annuities with guaranteed interest rates of 3.50% or greater have also been eliminated. SFBL has tailored its entire whole life and term portfolio to emphasize needs-based selling through the use of permanent insurance with inexpensive term riders. These policies and plans were designed to Printed August 4, 2016 www.ambest.com Page 2 of 6
satisfy the more complex financial needs of the marketplace. Further expansion of branch offices will continue to improve the company s visibility in communities and enhance marketing efforts. As a result, SFBL will participate financially in helping to establish these offices and financially assist them based on performance and production over a five-year period. A.M. Best views further efforts to update the company s product offerings and technology platforms positively and believes that these efforts may lead to further penetration of its P/C policyholder base. SFBL s level commission program helps SFBL to present a more competitive product portfolio, reward good persistency, and improve agent retention. The existing commission structure provides the agents with a vested interest in their renewal premium, increased customer service, and helps stabilize the agency force. Incentive programs have helped to increase sales of new life insurance and further improve P/C cross-selling ratios. SFBL has an agency website, which serves as the major provider of information to its agency force. The company also continues to place emphasis on the continuing education of its agency sales force. As of year-end 2015, SFBL s in-force individual life insurance volume totaled over $129 billion. Effective December 31, 2009, management made a strategic business decision to discontinue the sale of new variable insurance products due to lower than projected sales and increased regulation. Also effective December 31, 2009, the Securities and Exchange Commission and FINRA accepted Southern Farm Bureau Fund Distributor, Inc. s (SFBFD) request to terminate all its registered representatives and to withdraw its registration as a member broker/dealer. Affiliations: SFBL has one wholly-owned subsidiary, Southern Capital Brokerage Company, LLC (SCBC). SCBC offers long-term care, disability income, cancer and survivor life underwritten by unaffiliated insurance companies. The Farm Bureau P/C companies are personal lines writers specializing in insurance coverage for the farm, mercantile and homeowners markets in the states of Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Texas, Virginia and Colorado. The P/C group s primary business is private passenger auto and homeowners insurance. In 2011, the company reached an agreement with the Colorado Farm Bureau Federation and Colorado Farm Bureau Mutual Insurance Company to sell SFBL products in Colorado under the Farm Bureau name through the Colorado Farm Bureau agency force. With the execution of this agreement, the company now has the opportunity to further increase its geographic footprint. The affiliated P/C companies in the current 11 states in which SFBL operates individually control the agency force. Sales management of SFBL and the affiliated P/C companies are responsible for hiring new agents, while SFBL is only responsible for training agents on life and annuity products and sales. There are currently offices in most counties in the 11-state region, with most of the new offices being located in areas of greater population density, typically outside major cities. Scope of Operations: SFBL is licensed in the above mentioned states in addition to Alabama, Tennessee, and the Commonwealth of Puerto Rico. SFBL targets Farm Bureau members in 11 states, numbering close to three million families, typically in rural and suburban households. Territory: The company is licensed in Puerto Rico, AL, AR, CO, FL, GA, KY, LA, MS, NC, SC, TN, TX and VA. OPERATING PERFORMANCE Operating Results: Southern Farm Bureau continues to report profitability, as it experienced a pre-tax net operating gain of $110.8 million in 2015. Earnings were considerably lower in 2015, with pre-tax net operating gains falling nearly 16% from 2014, down to the lowest reported level since 2011; operating earnings have generally declined since 2011. In 2014, SFBL received a substantial one-time dividend from a private equity investment in its investment portfolio which drove net operating gains modestly higher for the year. With no dividend in 2015, combined with higher general expenses and greater policy benefits, earnings normalized and dropped during the year as a result. Partially offsetting the increase in general expenses and death benefits include a modest increase in net investment income. Over the near term, A.M. Best would expect net operating gains to continue to be challenged to grow, as spread compression on the annuity and UL book will pressure margins. However, A.M. Best anticipates that the company will continue to report solid operating gains. As a result of declining earnings, statutory operating returns on equity (ROE) were down year-over-year to 3.4% from 4.3% in 2014. The company s profitability ratios are below industry averages, which has been typical in the company s history as a result of the mutual structure of the company. However, the below industry average ROE is also attributable to Southern s extremely low leverage relative to the industry. On a leverage adjusted basis the company s ROEs look much more favorable. Net premiums were up significantly in 2015, by more than 13%, to $904.7 million from $799.8 million in 2014. While there was a Printed August 4, 2016 www.ambest.com Page 3 of 6
healthy, albeit modest 4.7% increase in the company s core ordinary life business, the overall net premium growth was primarily driven by the 69% increase in individual annuity business. This large increase in 2015 reflects the company intentionally increasing annuity production to return to a balance of ordinary life business to individual annuities comparable to what has been reported historically. After allowing annuity premiums to shrink in the previous three years to allow the company to control the high guaranteed rates on its annuity contracts in-force, the company is now marketing a revised annuity product with manageable guaranteed rates and expects the individual annuity block to grow back to historical levels. In addition, Ordinary Life premium continues to growth at a healthy pace driven by strong renewal premium, which was up 5.5% and 5.3% in 2015 and 2014 respectively. BALANCE SHEET STRENGTH Capitalization: SFBL s risk-adjusted capitalization, as measured by Best s Capital Adequacy Ratio (BCAR), continues to remain strong and more than adequate to cover its insurance, investment and business risks in addition to anticipated new business and asset growth. The riskadjusted capital position continues to be enhanced by the overall good credit quality of the fixed-income portfolio as well. Total capital has grown at a five-year compound annual growth rate of 6.6%, which has supported the company s risk-adjusted position. The company s capital adequacy position is monitored through a variety of sources, including risk-based capital modeling, cash flow testing, and the maintenance of reinsurance agreements. Aggregate capital and surplus levels have grown over the last five years primarily due to strong net operating gains during this time period. Finally, A.M. Best notes that the quality of capital is good as the company retains all Regulation XXX redundant term life reserves, rather than ceding them to a captive. Liquidity: Cash flow/liquidity management is designed so that the company will have adequate funds available to cover all current and future financial obligations. SFBL s investment policy, in coordination with its internal cash flow testing, provides for a level of liquidity that management determines to be adequate to meet anticipated benefits and expenses under differing economic scenarios. The company s management team anticipates that future cash flows from both operations and investment and financing activities will be generated in sufficient amounts to satisfy future needs. Another source of funding is through the company s membership with the Federal Home Loan Bank of Dallas, where it has access to the program as a source of funds. The company is currently authorized to borrow up to $385 million under this program. As of year-end 2015, SFBL had no outstanding borrowings against this line. Investments: SFBL s investment portfolio is composed of 74% bonds, 11% in mortgage loans, 5% in Schedule BA assets and about 5% in preferred and common stock holdings. The balance of invested assets is held in contract loans, cash and short-term investments, real estate and other invested assets. SFBL continuously monitors its portfolio and asset base to mitigate normal business risks and positions assets accordingly. The company improves its matching of assets and liabilities incrementally through an ongoing portfolio balancing process. SFBL has attempted to maintain the portfolio duration even though the liabilities have lengthened significantly. The portfolio credit quality remains strong even considering recent incremental efforts to add to below investment grade holdings during periods of market weakness. The company does not change its investment strategy materially year-to-year, as its investment mix has remained relatively consistent in recent years. A majority of SFBL s consolidated assets are managed by the company s internal securities management department. Outside specialty managers are used for investing in equities, mezzanine debt and real estate partnerships. Investments - Bond Portfolio: Fixed income holdings represent 74% of invested assets of which 97% are investment grade and are distributed mostly in publicly traded corporate, state government and special revenue, and utilities sectors. Just over one-quarter of bond holdings are represented by private placement investments. The exposure to private placements has been slightly increasing in recent years in an effort to achieve better yields and to protect new investments from event risk through protective covenants. The average maturity of the bond portfolio is 6.3 years, which is notably shorter than the industry average of almost 10.7 years and shorter than the duration of its liabilities. Investments - Equity Portfolio: Equities are managed as part of surplus and are not used to support product lines. The company holds common stock and a small amount of preferred stock as well; equity holdings are represented mostly by industrial and financial companies and have been declining over the past five years. Investments - Mortgage Loans and Real Estate: Mortgage loans represent about 11% of invested assets and just over half of capital and surplus, with the mortgage portfolio comprised almost entirely of commercial loans that are geographically diversified throughout the country. Property types are predominately warehouses, office buildings, retail centers and apartments. The largest percentage of commercial loans Printed August 4, 2016 www.ambest.com Page 4 of 6
(nearly one-quarter) is collateralized by properties in the South Atlantic region of the United States (Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia). Outstanding loan values range up to approximately $15 million in size, as the company seeks loans ranging from $2 million to approximately $20 million in size with maturities from 3 to 25 years. Loan fundings are limited to no more than 75% of the market value of the real estate at the origination date with debt service coverage ratios from 1.15% to 2.5%. Current loan-to-value ratios are conservative and have remained so historically. The mortgage portfolio is monitored on an individual loan basis by use of operating statement reviews, property inspection reports and debt service coverage reports. Investments - Other Invested Assets: Other invested assets comprise joint ventures, capital notes and low income housing tax credits; these holdings represent less than 5% of invested assets. MANAGEMENT Officers: Chairman of the Board and President, Harry R. Veach; Executive Vice President and Chief Executive Officer, Randy M. Johns; Senior Vice President and Chief Financial Officer, Robert E. Ward, Jr.; Senior Vice President and Chief Investment Officer, Lus Brown; Senior Vice President, Secretary and General Counsel, Joseph A. Purvis; Senior Vice President, Chief Actuary and Chief Risk Officer, Richard G. Fielding; Senior Vice Presidents, David B. Hurt (Marketing), Billy E. Sims (Policy Administration); First Vice President, Wayne F. Pryor. Directors: Ronald R. Anderson, Russell W. Boening, William K. Coleman, Robert Q. Fountain, Jr., Mark E. Haney, Jim T. Harper, Rich E. Hillman, John L. Hoblick, Sr., Gerald W. Long, Billy R. Magee, David M. McCormick, Eddie A. Melton, Gordon Metz, Jr., Harry L. Ott, Jr., Wayne F. Pryor, Joseph B. Schirard, Jr., Harry R. Veach, Michael W. White, Scott Whitford, Larry B. Wooten. Balance Sheet Assets ($000) YE 2015 Total bonds............................ $ 9,458,450 Total preferred stocks.................... 25,892 Total common stocks..................... 578,792 Mortgage loans......................... 1,436,860 Real estate............................. 14,395 Contract loans.......................... 519,091 Cash & short-term invest.................. 107,909 Other invested assets..................... 630,503 Prems and consids due................... 247,330 Accrued invest income.................... 115,418 Other assets............................ 157,250 Tot assets w/o sep accts............... 13,291,891 Separate account bus.................... 16,013 Assets.............................. $13,307,904 Liabilities ($000) Net policy reserves....................... $ 9,413,954 Policy claims........................... 33,438 Deposit type contracts.................... 1,010,603 Comm taxes expenses.................... 65,973 Asset val reserve........................ 179,774 Other liabilities.......................... 131,304 Tot liab w/o sep accts................. 10,835,046 Separate account bus.................... 16,013 Total Liabilities....................... $10,851,059 Common stock.......................... 1,500 Paid in & contrib surpl.................... 400 Unassigned surplus...................... 2,454,945 Total............................... $13,307,904 Printed August 4, 2016 www.ambest.com Page 5 of 6
Why is this Best s Rating Report important to you? The A.M. Best Company is the oldest, most experienced rating agency in the world and has been reporting on the financial condition of insurance companies since 1899. policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. A Best s Financial Strength Rating (FSR) is an independent opinion of an insurer s financial strength and ability to meet its ongoing insurance policy and contract obligations. An FSR is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. An FSR is not a recommendation to purchase, hold or terminate any insurance The company information appearing in this pamphlet is an extract from the complete AMB Credit Report. You may obtain the complete report by contacting Customer Service at +1(908)439-2200 or customer_service@ambest.com. Please reference the company s identification number (AMB#) listed on this rating report. For the latest Best s Financial Strength Ratings along with their definitions and A.M. Best s Terms of Use, please visit www.ambest.com. Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. All rights reserved. No part of this report may be reproduced, distributed, or stored in a database or retrieval system, or transmitted in any form or by any means without the prior written permission of the A.M. Best Company. While the data in this report was obtained from sources believed to be reliable, its accuracy is not guaranteed. Printed August 4, 2016 www.ambest.com Page 6 of 6