Globe Life - Earnings Call - Q2 2019

Transcript

Speaker 0

Good day, and welcome to the Torchmark Corporation Second 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 and any subsequent Forms 10 Q on file with the SEC.

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

Speaker 2

Thank you, Mike, and good morning, everyone. In the second quarter, net income was $187,000,000 or $1.67 per share compared to $184,000,000 or $1.59 per share a year ago. Net operating income for the quarter was $187,000,000 or $1.67 per share, a per share increase of 11% from a year ago. On a GAAP reported basis, return on equity as of June 30 was 12.3% and book value per share was $60.22 Excluding unrealized gains and losses of fixed maturities, return on equity was 14.6% and book value per share grew 10% to $46.43 In our life insurance operations, premium revenue increased 5% to $631,000,000 and life underwriting margin was $175,000,000 up 9% from a year ago. Growth in underwriting margin exceeded premium growth due to a higher percentage of premium margins in all distribution channels.

For the year, we expect life underwriting income to grow around 6% to 7%. On the health side, premium revenue grew 6% to $266,000,000 and health underwriting margin was up 1% to $60,000,000 Growth in premium exceeded underwriting margin growth primarily due to lower margins at United American. For the year, we expect Health underwriting income to grow around 3% to 4%. 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 full year, we expect administrative expenses to grow approximately 6% and to remain around 6.6% of premium compared to 6.5% in 2018. I will now turn the

Speaker 3

call over to Larry for his comments on the marketing operations. Thank you, Gary. At American Income, life premiums were up 7% to $288,000,000 and life underwriting margin was up 9% to $97,000,000 Net life sales were $61,000,000 up 2%. The average producing agent count for the second quarter was 7,364, up 4% from the year ago quarter and up 7% from the first quarter. The producing agent count at the end of the second quarter was 7,477.

At Liberty National, life premiums were up 3% to $71,000,000 and life underwriting margin was up 6% to $18,000,000 Health premiums were down 1% to $47,000,000 and the health underwriting margin was down 4% to $12,000,000 Net life sales increased 4% to $13,000,000 and net health sales were $6,000,000 up 11% from the year ago quarter. The sales growth was driven primarily by agent count growth. The average producing agent count for the second quarter was 2,290, up 5% from the year ago quarter and up 5% from the first quarter. The producing agent count at Liberty National ended the quarter at 2,390. In our direct response operation at Globe Life, life premiums were up 4% to $217,000,000 and life underwriting margin increased 9% to $39,000,000 Net life sales were $34,000,000 down 2% from the year ago quarter.

Year to date, sales are flat. As we go forward, we expect to grow both sales and profits. At Family Heritage, health premiums increased 8% to $73,000,000 and health underwriting margin increased 14% to $18,000,000 Net health sales were up 9% to $17,000,000 due primarily to increased agent productivity. The average producing agent count in the second quarter was ten eighty one, up 3% from the year ago quarter and up 8% from the first quarter. The producing agent count at the end of the quarter was ten eighty nine.

At United American General Agency, health premiums increased 9% to $102,000,000 while margins declined 8% to $14,000,000 Net health sales were $17,000,000 up 24% compared to the year ago quarter. To complete my discussion of the marketing operations, I will now provide some projections. We expect the producing agent count for each agency at the 2019 to be in the following ranges. American Income, 7,200 to 7,500. Liberty National, 2,300 to 2,500.

Family Heritage, 1,175 to 1,225. Approximate net life sales for the full year 2019 are expected to be as follows. American Income, 5% to 9% growth Liberty National, 9% to 13% growth Direct Response, flat to 2% growth. Approximate net health sales for the full year 2019 are expected to be as follows. Liberty National, seven to 11% growth.

Family Heritage, three to 7% growth. United American Individual Medicare Supplement, 7% to 13% growth. I'll 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, less required interest on net policy liabilities and debt, was $65,000,000 an 8% increase over the year ago quarter. On a per share basis, reflecting the impact of our share repurchase program, excess investment income increased 12%. Year to date, excess investment income is up 7% in dollars and 10% per share.

For the full year 2019, we expect excess investment income to grow about 5%, which would result in a per share increase of around 8% to 9%. Invested assets are $16,900,000,000 including $16,000,000,000 of fixed maturities and amortized cost. Of the fixed maturities, 15,300,000,000.0 are investment grade with an average rating of A minus and below investment grade bonds are $646,000,000 compared to $688,000,000 a year ago. The percentage of below investment grade bonds to fixed maturities is 4% compared to 4.5% a year ago. This is the lowest this ratio has been in the last twenty years.

Overall, the total portfolio is rated BBB plus, the same as the year ago quarter. Bonds rated BBB are 56% of the fixed maturity portfolio as compared to 58% at the end of twenty eighteen. While this ratio is high relative to our peers, we have no exposure to higher risk assets such as derivatives or equities and little exposure to commercial mortgages and asset backed securities. We believe that BBB securities provide us the best risk adjusted, capital adjusted returns due in large part to our unique ability to hold the securities to maturity regardless of fluctuations in interest rates or equity markets. Finally, we have net unrealized gains in the fixed maturity portfolio of $2,000,000,000 $715,000,000 higher than the previous quarter due primarily to changes in market interest rates.

Regarding investment yield, in the second quarter, we invested $253,000,000 in investment grade fixed maturities, primarily in the financial and industrial sectors. We invested at an average yield of 4.95%, an average rating of A minus and an average life of twenty nine years. For the entire portfolio, the second quarter yield was 5.5%, down seven basis points from the 5.57% yield in the second quarter of twenty eighteen. As of June 30, the portfolio yield was approximately 5.5%. At the midpoint of our guidance, we're assuming an average new money rate of around 4.5% for the remainder of 2019.

While we would like to see higher interest rates going forward, we can thrive in a lower for longer interest rate environment. Extended low interest rates will not impact the GAAP or statutory balance sheets under current accounting rules since we sell noninterest sensitive protection products. While our net investment income will be impacted in the continuing low interest rate environment, our excess investment income will still grow. It just won't grow at the same rate as the invested assets. 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 began the year with liquid assets of $41,000,000 In addition to these liquid assets, the parent is generating 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 to 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 prior calls, we accelerated the repurchases of $25,000,000 of Torchmark stock into December 2018 with commercial paper and parent cash. We have utilized $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 second quarter, we spent $85,400,000 to buy 979,000 Torchmark shares at an average price of $87.18 including the $88,600,000 spent for repurchases in the first quarter and the $16,000,000 spent so far in July. We have spent $190,000,000 of parent company cash thus far in 2019 to acquire more than 2,200,000.0 shares at an average price of $84.67 Taking into account the $190,000,000 spent on year to date repurchases and the $50,000,000 we plan on retaining at the parent, we will have approximately $150,000,000 to $160,000,000 of excess cash flows 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 add some 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% for 2019.

Finally, with respect to our earnings guidance, we are projecting the net operating income per share will be in the range of $6.67 to $6.77 for the year ended December 3139. The $6.72 midpoint of this guidance reflects a $04 increase over the prior quarter midpoint of $6.68 primarily attributable to the favorable underwriting results in the second quarter and an improved outlook on life underwriting income for the second half of the year. These positive adjustments are offset somewhat by slightly lower expectations of excess investment income and health underwriting income for the remaining part of the year. Those are my comments. I will now turn the call back to Larry.

Thank you, Frank.

Speaker 3

We have two more topics to discuss before taking questions. We announced yesterday that Torchmark will be renamed Globe Life Inc. On August 8. We will be listed on New York Stock Exchange as GL. The name change reflects the company's commitment to an enterprise wide brand alignment to enhance sales and recruiting through improved name recognition.

We chose the Globe Life name to capitalize on the branding investments we've made in recent years at Globe Life and Accident Insurance Company. These investments have increased Globe's name recognition and improved sales in Texas and the surrounding states. While the individual insurance subsidiaries will continue to exist as legal entities and retain their unique cultures and market niches, they will all eventually use and take advantage of the Globe Life brand. Our operating companies have been successful using their own brands despite a lack of name recognition among agent recruits and prospective customers. We expect unified branding and the resulting name recognition to expand that success.

Over time, branding will significantly enhance our ability to recruit agents and reach new customers. We expect this initiative to evolve over a number of years and create a strong, unified brand. As we go forward, we will maintain our usual disciplined approach to expense management to ensure branding has a positive effect on recruiting, sales, and underwriting income. Lastly, we announced earlier today that Globe Life is now the official life insurance of the Dallas Cowboys. We are excited about this new relationship.

It provides a great opportunity to strengthen Globe Life's brand recognition in a cost effective manner. Those are our comments. We will now open the call up for questions.

Speaker 0

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll take our first question from Jamie Bohler of JPMorgan.

Speaker 5

Hi. Good morning. I had a couple of questions. First, on the direct response business. I think you're guiding to flat to up 2% sales growth in for the year.

First half, you're down almost 1%, and I think that this quarter obviously was down after two positive quarters in the last couple of quarters. So what gives you the confidence that things or the insight or that things are going to get better in the second half? And then secondly, on American Income, there are a lot of concerns last year on how the strong economy was gonna affect your ability to recruit and also just how your sales were gonna be affected by the Supreme Court decision related to unions. And wondering if you can comment on if you've seen any impact on your close rates or any on on the sales side or on recruiting just from the tight labor market.

Speaker 3

We comment on Globe first. The first quarter, as you stated, was up slightly at 1%. As expected, the second quarter was down 2%. That decline was due primarily to a decrease in mailing volumes. We are expecting to have 2% to 3% sales growth for the second half of the year, thus our guidance is flat to up 2%.

With respect to American Income, the Supreme Court decision has had no effect on our sales or recruiting or persistency. To me, I think the third question had to do with agent retention. And what we've seen with agent retention is that in the first and second quarter, the increase in agent count seems to reflect an increase in our year over year recruiting. The short term's positive since terminations has slowed down compared to new agent appointments. For the year, our guidance for the ending agent count is between seven thousand two hundred and seven thousand five hundred, and we expect that that will be the case.

But the sales growth didn't equal the agent growth in the second quarter, and that's because new agents are generally less productive in the first several months as compared to veteran agents.

Speaker 5

Okay. And maybe if I could just ask one more on the name change. Any financial impact you expect from it, like, in the form of increased spending initially, maybe to build the brand further or maybe expense efficiencies or something, like, positive or negative financial impacts from the name change over the next year?

Speaker 3

Well, Jimmy, additional advertiser spending is going to be coordinated with the brand alignment timeline for our various distribution channels. We plan on increased advertising spend, but in a measured way to coincide with increases in our sales and recruiting, we do not believe there will be a significant impact on our underwriting income.

Speaker 6

Okay. Thank you.

Speaker 0

Thank you. We'll take our next question from Erik Bass of Autonomous Research.

Speaker 6

Hi, good morning. Thank you. Based on your strong life underwriting margins in the first half of the year, are you making any changes to your full year expectations and or the longer term targets for margins by business?

Speaker 4

Yes. I would say, Eric, that we are you know, increasing our expectation with respect to our overall life for the second half of the year. You know, if you look at last year, we probably a on a total life basis, you know, we were just a little bit under 28% margin for the second half of the year. This year, we probably, you know, given the favorable experience that we've seen so far in the first half of the year, we're thinking that's probably going to be closer to 28%, you know, for the remainder of the year. Just a little bit of an uptick greater than what we saw last year and and a little bit better than what we had, you know, anticipated as of our last call.

I think most of this, you know, probably really relates to American Income, but we're also just seeing a, you know, a slightly better expectation with respect to direct response as well.

Speaker 2

Eric, I I would add that it is mostly margin improvement. The growth in premium in the second half of the year will be very close to what the growth in the first half of the year is. The growth in the income is coming from the increased margins that Frank mentioned. Got

Speaker 6

it. And I mean, would that margin be something that you would expect to continue into 2020, a little bit above 28%?

Speaker 4

Well, we'll obviously be taking a look at those projections again here in the next quarter, we'll be able to get some better guidance on that next quarter where we kind of see 2020 you know, coming out.

Speaker 2

But I I would add, I don't think we'll we expect to see much variability. For example, we're 27.7 this year. We were 27.1 last year. It you know, It's not going to vary too much from a few of those numbers.

Speaker 6

Got it. And then on just Life sales, I think you're trending year to date a little bit lower than your full year target. So can you talk about some of the dynamics behind that and your expectations for the second half of the year where it seems from your guidance that you expect activity to pick up a bit?

Speaker 3

Eric, your question again was life sales the second half of the year?

Speaker 6

Yes.

Speaker 3

The the life sales, I think the guidance I gave for the second half of the year is we're gonna see positive life sales out of each distribution. You know, market income for the full year, five to 9%. We had, I believe, 42% in the first and second quarters. So we see a little stronger life sales in the second and the third and fourth quarter. If you think about it, those are fairly easy comparables.

We had weaker third and fourth quarter sales last year. Liberty National net life sales for the remainder of the year should be strong. Again, the guidance for the full year is nine to 13%. And direct response, to answer Jimmy's question, our guidance is still flat, so 2%.

Speaker 6

Got it. Thank you.

Speaker 4

Thank you.

Speaker 0

We'll take our next question from Alex Scott of Goldman Sachs.

Speaker 7

Good morning. First question I have is just a bit of a housekeeping question. As we think about the decline in rates, actuarial reviews and so forth, would you expect to have any impact? I mean, I think a lot of your business is FAS60, and so I would think there's probably plenty of margin and no risk from cash flow testing. Is that the case?

What do you use for long term rate assumptions when you do that work?

Speaker 2

Well, you're right. There's almost all our businesses say a 60 basis. And as far as the rates that we use, we for each year of issue, we select an interest rate based on what current rates are. But in doing the cash flow testing that we do each year, we we have never had an issue where we're a change in rates could cause us to to write off DHC or affect our liabilities. It's just for one thing, we don't sell interest as the business.

The other thing, we have such strong margins in the business that we

Speaker 4

would

Speaker 2

I I can't ever foresee us getting to the point where have to make any kind of adjustment.

Speaker 7

Got it. And then second question I had was just on expenses. And I guess, you know, there's some headwinds that I think are facing the industry in general, which is, you know, system upgrades, improving tech, and, you know, dealing with the new accounting standards and and all of the time and effort that it's probably going into converting, you know, even though I know they got pushed back a year. You know, the with all these things going on and just, like, you know, the scale of Torchmark, I would think that maybe some of those expenses might impact you guys a bit more than some of the bigger life insurers. Are are you feeling any of that?

Is that already in numbers in the run rate that you're kinda showing us today? You know, any anticipation of of any of those expenses increasing over the next year or two?

Speaker 2

The answer is yes and yes. So we are feeling it, and it it is in our numbers and and in our guidance. So the the 7% increase this year in administrative expenses, most of that is related to IT and information security expenses. And you're right. I think all companies and industries are are are being hit by that.

And this is a trend over the last few years that we've ramped up these expenses. You know, we expect to continue to increase expenses, maybe not the rate we have in the last year or so. But in our guidance, we say, you know, we expect administrative expenses to be 6.6% for the year, that that includes all the the IT and the information security costs that I just mentioned.

Speaker 7

Thanks very much.

Speaker 0

Thank you. Once again, ladies and gentlemen, if you would like to ask a question, please press star one now. At this time, there are no further questions in the queue.

Speaker 1

All right. Thank you for joining us this morning. Those are our comments, and we'll talk to you again next quarter.

Speaker 0

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.