Globe Life Inc (GL) 2002 Q1 法說會逐字稿

Good day, everyone. And welcome to the Torchmark Corporation first quarter, 2002, earnings release conference call. Please note that today's conference is being recorded and is also being simultaneously Webcast. At this time, for opening remarks and introductions, I would like to turn the conference over to the chairman of the board and chief executive officer, Mr. C.B. Hudson. Please go ahead, sir.

Thank you, . Good morning, everyone, and welcome. Joining us from our operating companies are , chief executive officer of Global Life United American and American Income; [sp], chief executive officer of Liberty National and United Investors. Also joining us this morning are Gary Coleman, chief financial officer; Larry Hutchison, General Counsel; and vice president, investor relations.

Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, you are referred to the company's cautionary comment regarding forward-looking statements contained in the SEC Form 10K for the quarter ended 12/31/01 which is on file with the SEC and a matter of public record.

Our operating income for the quarter was $104.8 million or 85 cents per share, an increase of 9 percent over 78 cents in the first quarter of last year. In order to keep things on an apples-to-apples basis, we've adjusted last year's first quarter earnings to exclude amortization of good will. Return on equity was 16.6 percent and we ended the quarter with a book value of $20.90. Treating our trust preferreds as debt, our debt to capital ratio was just under 27 percent.

I'll talk briefly this morning about the various operations and then give you some guidance as to where we think we're going for the full calendar year. First of all, with respect to our life insurance operations. Sales for the quarter were $77.5 million, about $2 million more than we expected. American Income sales were just over $19 million, up 32 percent over the first quarter of last year. American Income ended the quarter with 1,740 producing agents, almost 350 more than at this time last year.

Our direct response sales were a little over $29 million, down 5 percent from a year ago but over $2 million more than we expected for the quarter. Direct response acquisition costs which were $17 million in the quarter declined to 58 cents per dollar of annualized premium issued compared to 74 cents per dollar of premium issued a year ago.

With respect to the remaining life distribution systems, sales were almost $29 million, down 7 percent from a year ago and about $2 million less than we expected due to softer sales at United Investors and at United American General Agency. Our total life premium increased 6 percent to over $298 million. Life underwriting margins were $72.4 million, up 4 percent over year ago. Although the margins didn't increase at the same rate as premiums, the gap is closing. Excluding our military business, underwriting margins were in line with expectations. Due to the accelerated military activity as a result of the war on terrorism, our military claims have been and will continue to be at a higher level than in the past.

In the past, we averaged somewhat in excess of 24 percent of premium income as an underwriting margin. For the time being, we're establishing that the margins will average somewhere between 21 and 23 percent of premium income.

Turning to health insurance, although the sales for the quarter declined 22 percent from last year and were $50 million, the sales are almost $2 million more than we expected. United American General Agency sales increased 6 percent to almost 23 million, due to strong sales in the non market. Although sales declined 27 percent to be just under $12 million, other health insurance sales increased 107 percent or $11 million.

With respect to the branch office operation at United American, sales declined 46 percent to just under $20 million. In the branch office, we started the year with 1,644 producing agents and we ended the quarter just one short of 1,500 agents. The good news is that we maintained around 1,500 producing agents for the last six weeks of the quarter. We earlier stated that we might continue to see a decline in agents during the first six months of the year, the rate increase season, but now we think we have bottomed out at about 1,500 agents and we expect in agent count going forward.

During the last conference call, we indicated that 2002 federal health sales would likely decline about 10 percent for the year off the 2001 level. We now believe that decline may be no more than 5 percent.

Total health premiums increased 4 percent to $263 million. Our health underwriting margins declined 3 percent to $43.7 million. The decline was due to a lower percentage of premium margins in our branch office operation and to our continuing problem with respect to our cancer class action business at . With respect to the United American branch office operations, the decline was expected and was due to increased amortization of acquisition expenses. In the past, we increased our expenses in the branch office operation to support a larger sales force than we currently had. Furthermore, the rate increases and the loss of agents have adversely impacted persistency at the business. We are reducing costs, though we intend to resume growing our sales force. Nonetheless, we expect, as we expected three months ago, that our margins will remain at the 15 percent level as we go forward.

With respect to the cancer business, we continue to implement rate increases but we're looking at what we believe is a better long range solution to that problem. I'd rather not go into the details of the plan, but we should be able to report progress on this in our second quarter conference call.

Now, turning to our annuity margins, the underwriting margin in our annuity business declined 42 percent to $3.7 million. We estimate that 80 percent of the decline was due to replacement activity and 20 percent due to market conditions. With respect to the replacement activity we requested relief from the judge who presided over our recent successful litigation against . his ruling will impact our future annuity margins and/or our future litigation against .

Turning to administrative expenses, excluding litigation expenses, our administrative costs were $29.7 million, 1 percent higher than last year. Litigation expenses for the quarter were $1.6 million compared to $743,000 last year. Our litigation expenses were $1 million. We've established reserves for future legal fees involving and therefore we expect our litigation costs for the balance of the year to return to normal levels.

Turning to the institution operations, excess investment income increased 23 percent to almost $73 million. It was roughly $3.5 million more than we were projecting only three months ago. On a per-share basis, excess investment income increased 26 percent or 59 cents. There are several reasons for the strong results in the investment operations. Number one, the cash that we're generating in our underwriting operations continues to grow. In 2001, the underwriting cash generated for investment purposes was $357 million. In the first quarter of this year, our underwriting cash was $99 million and we expect this number to grow throughout the year.

Secondly, we're doing a much better job of putting the cash to work. You might note on the balance sheet that at the end of the first quarter last year we had over $200 million of short term investments. At the of the first quarter this year we had roughly $30 million of short term investments.

Thirdly, interest rates on our investments are about 40 basis points higher than we expected three months ago. And lastly, we continue to benefit from the refinancing of our debt in 2001. Going forward, our investment operations for the remainder of the year should continue to exceed our earlier expectations.

In summary, we had a good quarter with operating earnings growing 9 percent to 85 cents per share. During the last quarter conference call I indicated that we believed that our 2002 earnings per share would likely fall in the range of $3.47 to $3.50 cents, assuming no stock repurchases. Obviously we did purchase stock during the quarter. We acquired one million shares and that repurchase will benefit per-share operating earnings for the remainder of the year.

Outside of updating our expected sales for the year, we haven't revised our internal projections on earnings. We'll do that in the second quarter. With respect to life sales, we're still looking for the growth in the 10 percent range, however now we think more of the growth will come from American Income, our highest margin life distribution system. With respect to the health sales, we're looking at a 5 percent decline for the year instead of an earlier projection of 10 percent.

With respect to our underwriting margins, the percentage of premium margins we experienced in the first quarter were in line with our expectations, and we expect these margins to hold for the year. Therefore, given that the sales outlook is better today than three months ago, we have reason to believe that the life and health underwriting results for the year will be no less than what we earlier expected.

On the other hand, there is the question of the annuity business and the margins within that business. Our administrative expenses are under control and should decline as a percentage of premium income as the year progresses, just as they have in the past years. Our investment operations will clearly outperform as we earlier expected.

So what our updated guidance for the year is, assuming again no continued stock repurchase. We're estimating that the earnings will fall somewhere between $3.49 to $3.52. We'll have a better handle on this when we present our second quarter results three months from now.

Those are my comments this morning. , I'll turn it back to you for questions.

Thank you. The question-and-answer session will be conducted electronically today. If you'd like to ask a question, you can do so by pressing star one on your touchtone telephone. We will proceed in the order that you signal us and take as many questions as time permits. Once again, that is star one if you do have a question. And we'll pause for just a moment to give everyone the opportunity to signal for questions.

Our first question will come from with .

Good morning. Congratulations on a good quarter.

Thank you, .

I guess if you could clarify for me-make sure I'm looking at the same numbers-you indicated at one point in your presentation that life margins for the balance of the year would range in the 21 to 23 percent. Is that compared to the first quarter's 24 percent?

No, . It was specifically addressing the military operation.

OK. Just military. So-

We've historically run 24 there. We ran 20 in this quarter and 22 percent a year ago. But because of the increased military activity we're looking for that to be somewhere between 21 and 23. As far as overall life margins are concerned, because of the increased volume at American Income and because we're going to have higher sales in the direct response than we earlier thought and we're getting higher margins on that business, I expect 25 percent of premium margins in life insurance the rest of the year.

OK. And how about the same on the health? There was a comment about 15 percent margins?

In the branch office. [crosstalk] Just branch. I expect us to maintain 17 percent overall.

OK. And can you give us any guidance on the military side? How many claims have there been? I assume it's still a minimal number, but since it's small business is it having some impact?

Well, as far as claims that we specifically identified to the war and September 11th, it's been about $600,000 for the last two quarters. I don't have in front of me what the total cash claims are for the military. I can certainly get that. We're basically saying that because of this increased activity, the preparation that we're going to run, we can expect to run higher claims than in the past.

OK. And final question. Can you give us any guidance on what you might think the timing of the ruling would be for the courts?

we're returning before the judge on April the 26th to finalize that judgment. I would anticipate that may appeal that judgment and it will take eight to 12 months for the Alabama Supreme Court to review this decision.

Thank you very much.

In answer to your earlier question, the cash claims in the military were $4 million for the quarter, 11 percent of premium. They were $12 million last year or 9 percent of premium.

Great, thank you.

Up next we'll hear from with Morgan Stanley.

Great, thank you. A couple of questions. First in regards to the market. You said back in the comments and also in the press release that some competitors continue to sell at . Can you just give us an update as to whether that pricing pressure got worse in the quarter or maybe some of that pricing pressure seems to be easing.

And also-second question, just in regard to your military operations. From what I understand, the federal government expanded its health coverage to ex-military personnel. I'm wondering if that has any impact on your sales in the military unit.

OK. Two things. I don't think we saw the competitive pressure get any worse in the quarter. We're starting to see some increases by competitors. I still believe it will be first quarter of next year before we see the type of increases that we believe are needed by some of the competitors. As far as the retired military, yes, I did have-in certain locations where there's a high concentration of military it had an impact on our sales, but it's hard to quantify exactly how much. But it definitely did.

But it would be fair to say that it's relatively small given your -

Relatively small, yes.

OK. That's great. Thanks.

Moving on, we'll hear from with Platinum Investments.

Thanks. , . In your health insurance sales guidance I think if I back into what you need to do in the last nine months of the year it looks like your sales have to be up about 2 percent. In giving your comments that, you know, maybe the pricing environment has stabilized but maybe not improved, what is it that gives you comfort in going from a 22 percent decline? I know you had a tough comp year though, but going from that sort of decline to, you know, slightly positive sales momentum?

C.B., I'll be happy to take that. As C.B. mentioned, I think in the last six weeks or so we have seen our agent count stabilize and we do expect-we're seeing increased recruiting activity and we-I do expect to see a 10 percent increase between now and the end of the year in our agent count and also production, just from going to agency . And it is-we are seeing some easing. We are seeing some competitors increase their rates in particular states. We are seeing some relief there.

OK. That's helpful. Thanks.

And as a reminder, if you'd like to ask a question, you can do so by pressing star one on your touchtone telephone. That is star one if you do have a question.

Up next, DKW Financial. We'll hear from .

Good morning. First a question on the excess investment income segment. Can you just comment on for the quarter? Can you just comment on what the expectation there is since short term rates have come up a bit?

Well, first of all let me say we've got roughly $700 million of variable rate debt and all of that is subject to short term interest rates. The cash that we generated last year within Torchmark was about $630 million for investment. That's after dividends, interest on debt, everything. Plus we had another $200 million of maturing assets. So that was $830 million.

We haven't really projected it out for this year, but from what I've seen, our auditors said it would be $900 million we would have for reinvestment and now I think it's going to be around $950 million that we're going to be investing at longer-term, higher interest rates or buying back our stock. So if interest rates go up I'm not concerned about how much short term interest rates go up on the $700 million because I think we'll do much better with the $900 million or $950 million that we have to invest . Gary, any other comments?

No, I agree with that.

So, C.B., in other words we'll president see a decline in interest rates swap income and increase in net investment income.

I would think so. We've already-as I said in my comments, we invested money in the first quarter at about an annual effective yield of 7-3/4. That's 40 basis points more than we projected three months ago.

OK. Let's see. I guess moving to the annuity segment, is that sort of a base rate? Should we expect it to probably move down from there or is there anything unusual in the quarter?

Well, as I said, 80 percent of the decline, what we expected, was due to the replacement. And we've asked for a ruling from the judge to help us in that regard. Depending on what the outcome of that ruling is will affect our future litigation. The award-Larry, would you like to comment on that?

Yeah, just-first of all, let's talk about this replacement. This isn't like replacement of a business because these customers really are not moving from one mutual fund to another. They're staying in the same mutual fund. And we're going to take steps to protect the company and our policyholders. And so we're going to ask for a judgment of relief and if necessary we'll file another lawsuit to stop this replacement. It's improper.

The damages that we receive, the compensatory damages of $50 million was for activity up to the date of the trial. And I'll be honest with you. I'm just amazed that other plaintiff attorneys haven't jumped in on this on behalf of the customers, because our customers are incurring surrender charges and being subjected to new surrender charges with the new company and the money is never leaving the right hand pocket of . This is an unusual replacement activity.

OK. The last question-can you just make a comment on what the expectations are this year for HMO Medicare and is that factored into your down 5 percent sales projection?

I'll take that. Basically, in our sales projection, not assuming any HMO , we really haven't received any guidance. I'm sure there will be some, but as far as our projections they're not anticipating any HMO .

OK, thanks.

And as a final reminder, if you'd like to ask a question, you can do so by pressing star one on your touchtone telephone. Moving on, we'll hear from with Prudential Securities.

Good morning.

Good morning, .

C.B., I was wondering if you could tell us where you're going to get that 7-3/4 percent on the investments? Where are you finding it and how far are you going out?

We're going out-where we're finding it, I'd have to get in, our chief investment officer, but we are going out on longer maturities, 20 years and further. We're staying in high investment grade securities. I'm not concerned, about rising interest rates and the effect it would have on the market value of the bonds, quite frankly. If you re-evaluate those bonds based on higher interest rates, the fair thing to do is also adjust the investment income for those lower valued bonds in our operations.

So, yes. We're going out longer. It is investment grade. I will comment that we terminated our relationship with an outside party and are managing about $550 million of assets, $350 million of which was high-risk bonds. We're leaving that and going 100 percent investment grade. Going out longer, but maintaining high quality.

Where is the average quality?

About A3.

A3. OK. Thank you very much.

Up next we'll hear from . It's a follow-up question from Sun Trust Robinson.

A couple of follow ups. C.B., excess cash flow? You seem a little more optimistic about the outlook. How about the excess cash flow that you could utilize for a stock repurchase in 2002? Has that bumped up a little as well?

Gary?

, the excess cash flow will be at least $190 million. It could be, you know, a little bit higher than that. And that's compared to-I mean we had $180 million last year, but that $180 million included an extraordinary dividend from the insurance companies of $40 million that we don't have this year. But, yeah. It will be at least $190 million and that number should continue to grow also.

And before you see that flow in, do you feel that you still have $150 million or $200 million of excess capital on the books today?

Gary?

In terms of the insurance companies or-

You know, that you could flow to the holding company and utilize for repurchase, assuming no additional cash flows were brought in to the holding company?

We have additional borrowing power. We're at $10 million or $40 million now of short-term debt but that could-we could-we've got $220 million of borrowability there, to borrow. And we have some additional funds at the insurance companies. But, you know, if we need to draw on that. But again, just going with the normal dividends, we should generate around $200 million.

OK. And can you give me any guidance on where the dividend on the quarterly run rate will be? Is it likely to be in that $918,000 as we move throughout the year?

Gary?

I'm sorry, . I didn't understand the question.

The dividend recorded in the quarter was $918,000. Is that a good assumption, give or take a little on the remainder of the year?

, I'm not sure where you're getting your $918,000.

I think that came off the income statement. Well, I'll follow up later.

Well, it was $2.9 million, Gary, and-

Yeah, the . We have a new issue that we issued in the fourth quarter and the dividend requirement on that was $2.913 million for the first quarter.

OK. Well, that's all I had. Thank you.

Next up from we'll hear from .

Yeah, just the-the . It looks like it dropped down sequentially from the second half of last year, around 64 percent . I can't remember the last time that loss ratio went down. What do you see in there and is that sustainable?

Well, on the branch office side, 65 percent. I think we're going to stay at that level going forward on the side it ran 63 percent and that number should stay at that level as well. On the side we're writing other business besides Medicare supplement. We've got better persistency on the than we do on the branch. So, yeah. As far as-I can't be sure but I'm guessing the 63 percent and the , the 65 on the branch going forward for at least the rest of this year.

At this time, it does appear to be no further questions. I'll turn the conference back over to you, Mr. Hudson.

All right . Thank you for joining us this morning and have a good day.

That does conclude today's teleconference. Thank you for your participation.