Globe Life - Earnings Call - Q1 2019

Transcript

Speaker 0

Good day, and welcome to the Torchmark Corporation First Quarter twenty nineteen Earnings Release Conference Call. Today's conference is being recorded. For opening remarks and introductions, I would like to turn the conference over to Mike Majors, Executive Vice President, Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning, everyone. Joining the call today are Gary Coleman and Larry Hutchison, our Co Chief Executive Officers Frank Svoboda, our Chief Financial Officer and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward looking statements that are provided for general guidance purposes only. Accordingly, please refer to our twenty eighteen ten ks on file with the SEC.

Some of our comments may also contain non GAAP measures. Please see our earnings release and website for a discussion of these terms and reconciliations to GAAP measures. I'll now turn the call over to Gary Coleman.

Speaker 2

Thank you, Mike, and good morning, everyone. In the first quarter, income was $185,000,000 or $1.65 per share compared to $174,000,000 or $1.49 per share a year ago. Net operating income for the quarter was $185,000,000 or $1.64 per share, a per share increase of 12% from a year ago. On a GAAP reported basis, return on equity as of March 31 was 12.9% and book value per share was $54.13 Excluding unrealized gains and losses on fixed maturities, return on equity was 14.7% and book value per share grew 11% to $45.45 In our life insurance operations, premium revenue increased 4% to $624,000,000 and life underwriting margin was $170,000,000 up 10% from a year ago. Growth in underwriting margin exceeded premium growth due to higher margins in all distribution channels.

For the year, we expect life underwriting income to grow around four to 6%. On the health side, premium revenue increased 6% to $267,000,000 and health underwriting margin also grew 6% to $62,000,000 For the year, we expect health underwriting income to grow around three to 5%. Administrative expenses were $59,000,000 for the quarter, up 7% from a year ago and in line with our expectations. As a percentage of premium, administrative expenses were 6.6% compared to 6.5% a year ago. For the year, we expect administrative expenses to grow approximately 5% to 6% and be around 6.6% of premium.

I will now turn the call over to Larry for his comments on the marketing operations.

Speaker 3

Thank you, Gary. At American Income, life premiums were up 7% to $282,000,000 and life underwriting margin was up 10% to $93,000,000 Net life sales were $58,000,000 up 4%. The average producing agent count for the first quarter was 6,865, up 1% from the year ago quarter, but down 1% from the fourth quarter. However, the producing agent count at the end of the first quarter was 7,233. At Liberty National, life premiums were up 2% to $71,000,000 while life underwriting margin was up 10% to $18,000,000 Net life sales increased 8% to $12,000,000 and net health sales were $6,000,000 up 12% from the year ago quarter.

The sales growth was driven by increases in both agent count and productivity. The average producing agent count for the first quarter was 2,179, up 4% from the year ago quarter, but approximately the same as the fourth quarter. The producing agent count at Liberty National ended the quarter at 2,297. In our direct response operation at Globe Life, life premiums were up 3% to $218,000,000 and life underwriting margin increased 11% to $37,000,000 Net life sales were $32,000,000 up 1% from the year ago quarter. In recent years, we have focused primarily on maximizing profit dollars while adjusting our marketing efforts to stabilize margins.

As we go forward, we expect to grow both sales and profits. At Family Heritage, health premiums increased 8% to $71,000,000 The health underwriting margin increased 14% to $18,000,000 Net health sales were down 3% to $13,000,000 The average producing agent count for the first quarter was 1,002, up 1% from the year ago quarter, but down 11% from the fourth quarter. The producing agent count at the end of the quarter was ten twenty. At United American General Agency, health premiums increased 9% to $103,000,000 Net health sales were $15,000,000 up 5% compared to the year ago quarter. To complete my discussion of the marketing operations, I will now provide some projections.

Approximate net life sales for the full year 2019 are expected to be as follows: American Income, five to 9% growth. Liberty National, seven to 11% growth. Direct Response, flat to 2% growth. Approximate net health sales for the full year 2019 are expected to be as follows. Liberty National, 6% to 10% growth.

Family Heritage, 2% to 6% growth. United American Individual Medicare Supplement, 4% to 8% growth. I will now turn the call back to Gary.

Speaker 2

I want to spend a few minutes discussing our investment operations. First, excess investment income. Excess investment income, which we define as net investment income, thus required interest on net policy liabilities and debt, was $66,000,000 a 6% increase over the year ago quarter. On a per share basis, reflecting the impact of our share repurchase program, excess investment income increased 9%. For the full year, we expect excess investment income to grow by about 5%, which would result in a per share increase of around 9%.

Regarding the investment portfolio, invested assets were $16,900,000,000 including $16,000,000,000 of fixed maturities at amortized cost. Of the fixed maturities, dollars 15,300,000,000.0 are investment grade with an average rating of A-. And below investment grade bonds are $671,000,000 compared to $688,000,000 a year ago. The percentage of below investment grade bonds to fixed maturities is 4.2% compared to 4.5% a year ago. Overall, the total portfolio is rated BBB plus same as a year ago.

Bonds rated BBB are 57% of the fixed maturity portfolio, which is high relative to our peers. However, we have no exposure to higher risk assets such as derivatives or equities and little exposure to commercial mortgages and asset backed securities. Finally, we have net unrealized gains in the fixed maturity portfolio of $1,200,000,000 $691,000,000 higher than the previous quarter due primarily to changes in market interest rates. As to investment yield, in the first quarter, we invested $451,000,000 in investment grade fixed maturities, primarily in the municipal and financial sectors. We invested at an average yield of 4.88%, an average rating of A plus and an average life of twenty eight years.

For the entire portfolio, the first quarter yield was 5.53%, down five basis points from the 5.58% yield in the first quarter of twenty eighteen. As of March 31, the portfolio yield was approximately 5.51%. For 2019, the average new money yield assumed at the midpoint of our guidance is 4.9% for the full year. While we would like to see higher interest rates going forward, Tortchmar can thrive in a lower for longer interest rate environment. A continued low interest rate environment will impact our income statement, but not the GAAP or statutory balance sheets, since we primarily sell non interest sensitive protection products accounted for under FAS 60.

While we would benefit from higher interest rates, Torchmark will continue to earn substantial excess investment income in an extended low interest rate environment. Now I'll turn the call over to Frank.

Speaker 4

Thanks, Gary. First, I want to spend a few minutes discussing our share repurchases and capital position. The parent ended the year with liquid assets of $41,000,000 In addition to these liquid assets, the parent will generate excess cash flow in 2019. The parent company's excess cash flow, as we define it, results primarily from the dividends received by the parent from its subsidiaries, less the interest paid on debt and the dividends paid to Torchmark shareholders. We anticipate our excess cash flow in 2019 will be in the range of $365,000,000 to $375,000,000 Thus, including the assets on hand at the beginning of the year, we currently expect to have around $4.00 $5,000,000 to $415,000,000 available to the parent during the year.

As discussed on the prior call, we accelerated $25,000,000 of 2019 repurchases of Torchmark stock into December 2018 with commercial paper and parent cash. We plan to utilize $15,000,000 of the 2019 excess cash flow to reduce the commercial paper for those repurchases. As such, we expect to have approximately $390,000,000 to $400,000,000 to be available to the parent for other uses, including the $50,000,000 of liquid assets we normally retain at the parent. In the first quarter, we spent $89,000,000 to buy 1,100,000.0 Torchmark shares at an average price of $81.32 So far in April, we have spent $11,000,000 to purchase 131,000 shares at an average price of $84.61 Thus, for the full year through today, we have spent $100,000,000 of parent company cash to acquire more than 1,000,000 shares at an average price of $81.68 Excluding the $100,000,000 spent on repurchases so far this year and the $50,000,000 we plan on retaining at the parent, we will have approximately $240,000,000 to $250,000,000 of excess cash flow available to the parent for the remainder of the year. As noted on previous calls, we will use our cash as efficiently as possible.

If market conditions are favorable and absent alternatives with higher value to our shareholders, we expect that share repurchases will continue to be a primary use of those funds. Now regarding capital levels at our insurance subsidiaries. Our goal is to maintain capital at levels necessary to support our current ratings. As discussed on our previous call, Torchmark intends to target a consolidated company action level RBC ratio in the range of 300% to 320%. At December 3138, our consolidated RBC ratio was 326%, slightly greater than the high point of our range.

The increased RBC ratio was primarily attributable to slightly lower required capital and higher statutory earnings than anticipated. At this RBC ratio, we have approximately $129,000,000 of capital at the insurance subsidiary over the amount required at the low end of our consolidated RBC target of 300%. This excess capital, along with the $50,000,000 of assets held at the parent, provide approximately $179,000,000 that are available to fund possible needs in the insurance companies should they arise. In addition, due to the fact that deferred tax assets were replaced in 2018 with marketable securities purchased with capital contributions, the quality of our capital has substantially improved. Finally, with respect to our earnings guidance for 2019, we are projecting the net operating income per share will be in the range of $6.61 to $6.75 for the year ended December 3139.

The $6.68 midpoint of this guidance reflects an $08 increase over the prior quarter midpoint of $6.6 primarily attributable to an improved outlook on our underwriting results due to lower policy obligations than anticipated in the first quarter, largely attributable to our life insurance operations. Those are my comments. I will now turn the call back to Larry.

Speaker 3

Thank you, Frank. Those are our comments. We will now open the call up for questions.

Speaker 0

Our first question comes from Jamie Buller with JPMorgan.

Speaker 5

Hi, good morning. So I had a few questions. First, on your EPS guidance, the midpoint going up by $08 how much of that is just the fact that you had good results in 1Q versus maybe a more optimistic view of the rest of the year as well?

Speaker 4

Jamie, I think most of the increase is due to the better than expected first quarter. If you look at the second quarters through fourth quarters, I think what we anticipate is largely going to be in line with what we've seen there last year. So I think there may be some a little slight improvement in a couple of those lines, but I think the vast majority of it is really lower claims and the better expected results that we had in the first quarter.

Speaker 5

Okay. And then in direct response, you've had two quarters now where sales have been positive, pretty modest but positive. And I think you're expecting a flat to 2% increase. I would have thought that with expected increases in circulation volumes, you'd actually see a little bit of more of a pickup. But maybe you could just give us give some color on why you're expecting some such a modest increase?

Are you being conservative in your outlook?

Speaker 3

I don't think we're being conservative in our outlook. When we look at our inquiries for 02/2019, we think insert media inquiries will be down about two to 3%. Electronic inquiries will be up about 5%. Circulation itself will be up about 2%. And mail volumes will be down about 5%.

Given constant response rates, I think the flat to 2% increase is a a good prediction of what we think sales will be for the full year 02/2019.

Speaker 5

And then just lastly, have you seen any impact on your business from either the Supreme Court ruling on unions and and its effect on American income or just the strong labor market and it it affecting your ability to recruit or retain agents?

Speaker 3

We've not seen an impact on American income of lead production, recruiting, or sales as a result of the Supreme Court decision.

Speaker 5

Okay. Thank you.

Speaker 0

Thank you. Our next question comes from Eric Bass with Autonomous Research.

Speaker 6

Hi. Thank you. First, a follow-up on the agent side. Can you talk about any changes in agent retention rates at American Income following the recent changes you made to compensation?

Speaker 3

In the first quarter, agent retention has stayed relatively unchanged. We measured third month, six month, and thirteen month retention. However, that retention is historical. We look at the first quarter. We did see a decrease in terminations, particularly in the second half of the quarter.

And so we will have retention, particularly for three month retention at the time of our earnings call. The reduction in terminations is a good indicator that we think retention will be better as we go through 2019.

Speaker 6

Thank you. And then I was hoping, maybe switching gears to the investment portfolio, that you could provide more details on your BBB exposures. And specifically, can you talk about how much is rated BBB minus and maybe comment on the sector allocations?

Speaker 2

Well, far as the sector allocations, think they're pretty well spread among all the sectors that we have. As far as how many are BBB minus, out of the total BBB's less than 20% are BBB-. The other 80 something percent is BBB or BBB plus.

Speaker 6

Okay. Thank you. And that's of the 20% of the BBB's,

Speaker 1

not of the overall portfolio, right?

Speaker 2

No, not the portfolio, 20% of the BBBs.

Speaker 6

Got it. Okay. Thank you.

Speaker 0

Thank you. Our next question comes from John Nadel with UBS.

Speaker 7

Hey, good morning, and congrats on a good quarter. I guess two questions from me. One is agent counts at Family Heritage. Last couple of quarters have declined. I was just wondering if you could just characterize what's happening there.

Is that more of a culling of low end performers? Or is that recruiting driven? Just and what's your outlook there?

Speaker 3

Trying to look at Family Heritage, we saw that recruiting activity was particularly slow during the holiday season and the month of January. We didn't see recruiting activity really recover at Family Heritage until early February. I think that the part of the cause of that, think we're really focused on production in the third and fourth quarter of last year. And so we saw that recruiting start to drop off in in November. We're back to normal recruiting levels now, and I think we'll see an increase in the agent count in the second quarter of this year.

Speaker 7

Thank you. And then the the second question, this is very hypothetical, and I don't know how to think about the probability of some significant change here. But clearly, there's been an awful lot of political posturing recently as it relates to Medicare for all. You know, it's had some impact on, I think, the health care providers. You know, I'm just wondering if you if you laid out a scenario where a Bernie Sanders kind of Medicare for all, you know, were to go through, how how might you expect that to impact Medicare Supplement business?

Speaker 3

Sean, this is Larry. I think it's really too early to tell. You know, we really have to wait and see how that program would be structured. On one hand, it could be an opportunity. If we have Medicare for all and and we have a Medicare system where co pays and deductibles are covered by a Medigap type insurance, that could be an opportunity.

On the other hand, are the proposals if they eliminate all private insurance, certainly they have a negative effect. Let's remember that Medicare is a fairly small part of our operation now. It it occurs it it's a fairly small part of our overall earnings.

Speaker 7

What what proportion of the health segment premiums comes from the Medicare supplement business?

Speaker 2

John, this is break you in.

Speaker 4

It's about 50% of of our total health of our total health premium is

Speaker 3

is about $500,000,000.

Speaker 4

Yeah. About 500,000,000.

Speaker 7

Okay. That's helpful. Thank you so much.

Speaker 0

Thank you. Our next question comes from Alex Scott with Goldman Sachs.

Speaker 8

Hi, good morning. Just a question on the admin expenses. They were a little elevated this quarter. It didn't look like you guided to significantly higher growth. Is there anything that was sort of one timer in nature there or anything note on sort of investment in systems, accounting, that sort of thing?

Speaker 2

No. There was a onetime type item that's in our employee benefits area that made the expenses a little bit higher this quarter. As I mentioned, the expenses were up 6.7%. But for the year, we're expecting that expense will be up 5% to 6%. So that was more of an unusual item that occurred in

Speaker 3

the first quarter but won't carry forward.

Speaker 8

Got it.

Speaker 7

Then just

Speaker 8

kind of high level, could you talk about sort of the comp structure changes you've made and sort of the impact that you're seeing on recruiting? And and how much, you know, how much of that is is sort of in your go forward guide on on sales and and sort of the growth in agent counts? You know, anything you could provide there would would be helpful.

Speaker 3

I'll address that. At American Income, the compensation change, and we didn't increase the total compensation. We restructured the compensation. And so that the more of the agent commission is towards the front end to encourage new agents to stay in the business. The other is bonuses that for middle managers that encourage retention of new agents so they're better they'll spend more time with training and trying to retain those agents.

So at a high level, that's the compensation change. At at Family Heritage, you address the recruiting. We we also have a new bonus for agents that's that's based on the meeting re recruiting objectives. Of Liberty National, the conversation is largely unchanged.

Speaker 2

But Alex, we've seen some positive results at American Income. I think Larry mentioned it. We've added new agents to our terminations are down. It's too early to make a definitive conclusion, but the results so far look promising.

Speaker 8

Okay. And maybe if I could sneak one last one in. Just on the favorable mortality that you experienced during the quarter, is there anywhere you saw that more concentrated? Was it older age policies, specifically some of the older blocks? Or anything else that you kind of gleaned as you look through

Speaker 2

No. We didn't. It was really throughout the the blocks, and we not only did we not see any difference really among ages, but also as far as medical reasons and those kind of things. It was just it was really just low across across the board for, really, American Income, Direct Response, and Liberty National.

Speaker 8

Okay. Thank you.

Speaker 0

Thank you. There are no additional questioners at this time.

Speaker 1

All right. Well, thank you for joining us this morning. Those are

Speaker 4

our comments, and we'll talk

Speaker 1

to you again next quarter.

Speaker 0

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.