Globe Life Inc (GL) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Torchmark Corporation first quarter 2008 earnings release conference call. Please note that this call is being recorded and also being simultaneously webcast. At this time I'd like to turn the conference over to your Chairman and Chief Executive Officer, Mr. Mark McAndrew. Please go ahead sir.

Thank you. Good morning, everyone. Joining me this morning is Gary Coleman, our Chief Financial Officer, Larry Hutchison, our General Counsel, Rosemary Montgomery, our Chief Actuary, Joyce Lane, Vice President of Investor Relations, and Mike Majors, Director of 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, please refer to our 2007 10-K, which is on file with the SEC. Net operating income for the first quarter was $132 million or $1.43 per share. A per share increase of 8% from the year ago quarter. Our return on equity was 15.7% and our book value per share excluding FAS 115 was $36.88, up 10% from a year ago. In our life insurance operations, premium revenue grew 3% to $403 million and life underwriting margins increased 6% to $108 million. As a percentage of premium life underwriting margins were 27% versus 26% a year ago. Life insurance net sales were $70.5 million, up 13% from the first quarter of 2007.

At American Income life premiums grew 8.5% to $115 million. Life underwriting margin was up 15% to $37 million. Net life sales increased 17% for the quarter to $24 million with first year collected life premiums growing 7% to $19 million. The agent count at American Income was up 9% from a year ago to 2,616. Sales at American Income once again exceeded our expectations and sales growth continues to accelerate. As you know, American Income is our most profitable distribution system, contributes roughly 30% of our total underwriting income. We remain very optimistic in regards to both our short and long-term growth prospects. In our direct response operation, life premiums were up 5% to $129 million and life underwriting margin grew 3% to $30 million. Net life sales increased 8% to $31 million and were slightly less than projected.

As a result of our first quarter experience, we have made some small downward adjustments in our 2008 projections for direct response. We now anticipate high single digit growth net sales for the year with mid-single digit growth in both premiums and underwriting margins. At Liberty National, life premiums declined 3% to $72 million and life underwriting margin was down 6% to $18 million. Net life sales increased 14% from a year ago to $10 million. The growth in our agent count at Liberty National, which was up 62% to 2840, significantly outpaced our growth in sales due to the high concentration of first year agents. While our new agents more than doubled in the past year, our more productive renewal year agents declined by 18%. The good news is that the drop in veteran agents stopped in the first quarter and we will see significant improvement in these numbers as the year progresses. We believe that Liberty National is on the right track and continue to expect strong double digit sales growth for the balance of 2008.

On the health side, premium revenue excluding part D declined 4% to $253 million and health underwriting margin also declined 4% to $45.5 million. Health net sales dropped 29% for the quarter to $42 million. The decline in health sales was almost entirely attributable to the United American branch office operation, where health net sales dropped 40%. We continue to see high turn over of our branch office managers as a result of both overly aggressive expansion as well as increased competition. During the last six months, we have lost roughly one-third of our branch office managers, which has adversely impacted our new agent recruiting, agent count and net sales. This high turnover appears to have subsided and we have replaced the majority of our lost managers. New agent recruiting is now increasing and we expect little if any further deterioration. We have lowered our expectations and now anticipate health sales to remain at roughly the first quarter level for the balance of 2008.

I would point out that the United American branch office contributes only about 7% of our total underwriting income. So our lowered sales estimates have only a minor impact on our 2008 earnings projections. Premium revenue for Medicare Part D was down 15% to $47 million and the underwriting margin declined 4% to $4.9 million for the quarter. For the balance of 2008 we expect Part D underwriting margins to remain roughly the same level as they are in the first quarter. Administrative expenses increased 3% for the quarter to $39.8 million. For the full year we currently project administrative expenses to increase less than 1%. I will now turn the call over to Gary Coleman, our Chief Financial Officer, for his comments on our investment operations.

Thanks, Mark. I want to spend a few minutes discussing investments, excess investment income and share repurchases. First our investments. Torchmark has $9.5 billion of bonds at amortized cost, which comprised 95% of invested assets. Of our bonds, 92% are corporate bonds and hybrid securities. Less than 1% of the bonds are in residential or commercial mortgage backed securities and none of those are backed by subprime or alt-A mortgages. Overall, the total portfolio is rated A minus, same as a year ago. Regarding new investments, we invest almost exclusively in investment grade corporate bonds and hybrid securities. In the first quarter, widening spreads more than offset lower treasure rates, resulting in higher yields on new investments. We invested $431 million at an average annual effective yield of 7.25%, an average rating of A minus and an average life, depending on future calls, of between 22 and 35 years. This compares to the 6.6% yield A rating and 20 to 29 year average life of bonds acquired in the first quarter of last year.

The 7.25 yield on new investments was the highest yield since first quarter 2003. And for the second consecutive quarter, the new money yield exceeded the portfolio yield. The average yield on the portfolio in the first quarter was 6.97%, four basis points lower than the first quarter of 2007, but the same that it's been for the last three sequential quarters. Now turning to excess investment income, it was $83 million, the same as a year ago. However, on a per share basis, excess investment income increased 8%, which reflects the effect of our share repurchase program. Excess investment income is net investment income less the interest cost on a net policy liabilities and the financing cost for our debt. The year-over-year comparison of each of these components is as follows. First, net investment income was up $4 million.

However, taking into consideration the municipal bonds acquired late in the first quarter of 2007, investment income on a tax equivalent basis was up $5 million. This represents a 3% increase in income, slightly lower than the 4% increase in average invested assets. Next, the interest cost on a net policy liabilities increased $5 million or 8%, due primarily to a 7% increase in the average liabilities. And lastly, financing costs were down $1 million due to the lower short-term borrowing rates. Regarding our share repurchase program, in the quarter we spent $145 million to buy 2.5 million Torchmark shares. This is comparable to the $167 million used to buy 2.6 million shares in the first quarter of 2007. We used a free cash flow at the holding Company to fund our stock repurchases.

In 2008 we expect free cash flow to be around $355 million. The reason that it will be about the same as last year is that in 2007 our free cash flow included a $36 million extraordinary dividend from one of our subsidiaries. With our debt at an appropriate level and given the low interest rate environment, we feel that the best use of our free cash flow would be a strategic acquisition. But absent an acquisition, share repurchases will be the best use of our available cash. Those are my comments. I will now turn it back to Mark.

Thank you, Gary. For 2008 we are raising our earnings per share projections by $0.02 to a range of $5.90 to $5.96 per share, which assumes we continue to invest our free cash flow in our share repurchase program. Those are my comments for this morning. I will now open it up for questions.

(OPERATOR INSTRUCTIONS) And we will take our first question with Tamara Kravec with Banc if America Securities. Please go ahead.

Thank you, good morning. I was hoping that you could delve into the Liberty National a little bit more. You've seen very significant agent growth and you have a higher concentration of first year agents. If you could talk a little bit more about your expectations for those agents to become productive over the course of, say, the next 12 to 18 months. That's my first question and then I have a follow-up.

Certainly. I don't have the numbers in front of me, but my recollection is the renewal year agents at Liberty National were producing on average roughly, I believe it was somewhere in 30% more production per agent than a first year agent. It may even be slightly higher than that. But again, if you look at the trends at Liberty National on the agent counts, a year ago we had 720 renewal year agents. We're down to 588. But if you look at the growth in first year, they really began -- we really started to see significant growth in the second quarter of 2007 when it jumped from 1037 to 1273.

And we saw big jumps in the third, fourth, and first quarter of this year. Those newly hired agents 12 months later will flow into the renewal year agent count. I do expect where the first year agents over the last 12 months have doubled, I expect to see over the next 12 months substantial improvement in our renewal agent count. I would be surprised if we didn't see our renewal year agents increase by at least 50% over the next 12 months. If we can continue to see growth in our first year agents and we can also -- if we can see 50% growth in our renewal year agents, I think the prospects for sales growth at Liberty National are excellent.

And my second question is on the United branch office operation. You talked briefly about the high turnover in your branch office managers and I'm guessing you are seeing still increased competition. If you could elaborate more on essentially is the problem more compensation? Is it just growth opportunities? And then how fast -- you've already replaced your managers, but you're expecting agent recruiting to continue to increase. How quickly do you think you can get back to the levels that you were before the environment got a little tougher?

That's a very good question. I wish I knew exactly. It is -- United American in the health insurance marketplace, it is the most competitive market that we see in any of our distribution systems. Over the last 25 years we've seen numerous occasions where we have had big peaks and valleys in our sales as a result of the competition. And what we have seen, we introduce product roughly three years ago where we saw very nice increases in our sales and agent growth. And now we're seeing competitors copy the product, copy the underwriting and really target our agency force. It's not so much compensation. We have competitors that offer maybe a wider range of products that we currently offer.

But they have seen some success in recruiting away some of our people. We have replaced most of those losses and we'll have to build it back, but I really-- I'm going to be cautious about making any projections about when we'll see it get back to the level it was. Where right now we have lowered our assumptions for the balance of this year to be roughly the same as the first quarter level. We hope to beat that. But it's really too early to say how quickly that will turn around.

Okay. And just lastly, quickly, on your investment portfolio, you're moving further out in terms of the maturity of the investments you're acquiring. Is that a strategy you expect to maintain? Is it really just now given wider spreads than what you're seeing out in the marketplace? Any commentary about your strategy in light of market conditions would be very helpful.

Tamara, this is Gary. This is the perfect time to be going long with the spreads as wide as they are. But we have been going long and at some point if the spreads tighten again, we'll go back to what we've done in the past. We targeted a yield of about 6.5%. As long as we can get quality bonds yielding that amount, we're willing to go long. We can do that because of the type of cash flow we have and product liabilities. In the past years, when we couldn't get the 6.5%, we would go shorter. But right now, again as I said, it's the perfect time to go long. 7.25, as I mentioned earlier, that is the highest we have invested in since early 2003. So we're going to continue to invest long to get those higher yields.

Okay. Thank you.

We'll take our next question with Nigel Dally with Morgan Stanley. Please go ahead.

Great, thank you and good morning. First on direct response. Do you have a breakdown of the sales growth in direct response between insert media and your more traditional channels. Also, perhaps if you can discuss whether the insert media initiatives are yielding the type of results that you expected. Then accept a couple of quick follow-ups as well.

Okay. Well, I do, Nigel, in -- we're probably not going to provide quite as much detail as we have in the past in some of our direct response. We did as a result of the acquisition last year. Much of that is somewhat confidential. But I do. As far as for the quarter if I look at our insert media, just net sales, the adult sales in the insert media, which comprises between 20% and 25% of our total sales, were up 23% for the quarter, which was in line with our expectations. If I look at the juvenile sales coming from insert media, they were down 10% for the quarter. Part of the reason for that is our adult sales have a one month introductory offer, whereas the juvenile has a three month. The significant increases in circulation that we saw on the second, particularly in the fourth quarter, really haven't flowed through the juvenile sales yet where they are flowing through the adult. But again, direct response sales were a little bit less than what I had forecast. I would have expected somewhere closer to 12% growth for the quarter and they were a little over 8%. I'm not -- it's not a significant difference. But they were a little bit less than what I projected.

Then next on capital. Your risk based capital ratio at year-end was roughly lower. Can you discuss your plans to move it back towards your target range, which I think is over 300% and whether the rating agencies are still comfortable with you aggressively repurchasing stock given where the RBC ratio currently is. .

Sure. Nigel, we slipped below the 300% on a consolidated basis this year due to several one time unusual items. For example, we had an extraordinary dividend that I mentioned earlier. We also adopted a supplemental retirement plan and we had a settlement of prior year taxes, all of which had a negative impact on surplus in 2007. And also our required capital was a little higher than expected due to really some changes in the rules and the placement of our, certain of our assets within our companies. We just didn't do a good job of anticipating the impact of those or we could have taken steps to keep that at above the 300% level. We'll go ahead and take those steps now. And these are low cost steps. We'll increase our statutory surplus.

We can do that through our increased intercompany reinsurance of premium deficiency reserves. We can monetize some more of our agents' balances. We have additional deferred tax credits that we can recognize. All those things will improve our surplus. And on the capital side we can reduce our capital charges by first of all we are merging some of our companies. And then secondly just where we place the assets. But we expect certainly before the end of the year that we'll be back up in the 310% to 330% range that we've been in over the last five or six years. And we can take these steps pretty quickly, and also all these things that we are doing won't have any impact on our free cash flow.

And then the last question I had was on investment income. In the past you benefited from interest rate swaps, which you closed out due to the flat yield curve. Now we're seeing some steepening at the curve. You said something, you are looking to put that back in place.

That's something we need to look at again. That was very beneficial back a few years ago when the curve was steep as it was. We haven't done anything yet, but we'll take a look at that.

Again, is that incorporated in your guidance as yet? Or would that be a potential positive?

That would be a positive. We did not contemplate that in the guidance.

Okay, thanks a lot.

We'll take our next question with Bob Glasspiegel with Langen McAlenney, please go ahead, sir.

Good morning. Pretty close. I guess as the dean of Torchmark analysts I just wanted to pass on thanks for Joyce and the great job she's done in Investor Relations and wish her well in the future. Mark, I was wondering if you could go into what's behind the increase in earnings guidance? Is it the investment income? It seems like you had a couple of minor negative deltas in sales and premiums. It's the investment income that is more than offsetting that?

Yes, Bob, it is. The increase is strictly in the higher yield on our new investments than what we had anticipated and it is in the investment income.

I just want to follow just on Tamara's question. Given that yields are higher, why would you be dipping down a little bit in the quality? Maybe there's less As out there that are long. And going longer, so you are sort of at a time that you don't need to to make numbers stretching on duration and yield, is it your credit analysis saying these are the right opportunities or there's something more significant driving that call?

No. It is the credit analysis. We say we're dipping down in ratings, but we've been a A, A minus over the last several quarters. Again, obviously, we pay attention to the ratings, but we do our own credit research. And we feel like we're getting good credit, so otherwise we wouldn't be buying them.. We're not stepping down in credit worthiness just to get more yield. Again, we're benefiting by the wider spreads, but we're not stepping down in quality.

Okay. And just reading through the annual report and your commentary on the last call, it just seems like you've upgraded acquisitions in your thought process and you mentioned you won the silver medal last quarter in one act. Is there anything live that we should be thinking about? Or just give us a little bit of help on what would be most intriguing to you.

Well, Bob, obviously -- we're continuing to look and that's about all I can comment on there. Other than, again, what we're looking for -- we're looking for companies that have predictable, stable earnings. We definitely like to see captive, some type of captive distribution, whether it's an agency force or direct response. We -- a Company that has high expenses is also something we believe we can add significant value to. Those are some of the biggest factors we're looking at and there's a number of companies out there. But I can't really talk any more specific about anything other than that, Bob.

Would Primerica Financial Services be of interest if that came on the market? It is a former Torchmark employee, I guess, that founded it and captive distribution and relatively predictable earnings.

Well, if it had predictable earnings with captive distribution, then it would be something we would take a look at.

Thank you very much.

Sure, Bob.

We'll take our next question with Ed Spehar with Merrill Lynch. Please go ahead.

Thank you, good morning. A couple questions. First, Gary, I was wondering if you could help us in terms of the portfolio yield trend, given the cash that you see coming in over the next year. If reinvestment rates stayed where they are, do you have any sense of how the portfolio yield would progress upward? And then on the underwriting side, I was wondering if you could expand, Mark, a little bit on the competitive issue that you talk about in health. Are you seeing -- is this insurance companies, mutuals, are they health care companies? Who is it that is sort of the source of this sort -- this competitive pressure? And is there anything to be optimistic on in terms of Medicare Supplement, any changes that you see coming in terms of reimbursement that might make that business a little bit better at some point? Thanks.

All right. Gary, you want to take the first.

Ed, if we invested at 7% for the remainder of the year, a year from now our portfolio yield would still be around a 6.97, just under 7%. They would helpful to add the additional little bit of extra yield there, but also we got bonds coming off at a little bit higher yields. Again, at 7% we should be at least at the 6.97 where we are today, maybe slightly higher.

All right. Ed, on the health competition. I don't really want to name names but there are, there is a Company or two out there that are health insurance companies that basically have seen the products that we have been offering and our underwriting and have basically duplicated the products. These are companies that are already in the major medical marketplace, but their underwriting on major medical is very strict. The products we've offered with more limited benefits had a little more lenient underwriting and were also lower priced, which was kind of our niche and they've taken basically our products and copied them and copied our underwriting and have really gone after and targeted our agents. We'll overcome it. We'll rebuild and move forward.

We're also looking at other products and other markets that we might be able to move into there. As far as Medicare supplement, I don't see any short-term significant changes there. I know the reimbursement rates for the Medicare Advantage plans are not keeping up with inflation. So those margins will be squeezed. But it will be interesting to follow the election this year. If there should be a democratic President as well as a democratic congress, I would think there's a much bigger chance to see many of those Medicare Advantage plans really squeezed much, much further and in fact I wouldn't be at all surprised to start seeing significant dis-enrollments should that happen. But it's really kind of early to say on that.

If I could just follow-up with Gary. If the new money yield was 7.2% in the quarter. Is that correct?

7.25%, yes.

If it was 7.25 going forward rather than 7, how much does that change the math on the overall portfolio yield.

Okay, I think that moves you up to 7.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) We'll take our next question with Mark Finkelstein with Fox-Pitt Kelton. Please go ahead.

Good morning. I've got a few questions. I'll just kind of go through them individually. Firstly, looking at the change in the end realized and, I guess, the very small realized loss in the quarter. I am just curious if there's anything in the portfolio credit related or any changes on the credit side? Or was the full unrealized change based on interest rate changes.

I think the full change was based on interest rate changes. We have to review our portfolio quarterly for other and temporary impairments, but we're obviously doing that more than just quarterly. This quarter we did write-down, I think we had a total write-down of $3 million where the bonds for other than temporary impairment. But the unrealized losses were $300 million higher at the end of the first quarter than they were at fourth quarter the end of the year, but it is essentially the same portfolio. So we really feel it's the interest rates that have caused that change.

Okay, great. Do you have an estimate on the stat benefit of merging the subs at this stage?

We're going to do it in stages. And I know merging a couple of companies will, as far as a required capital, will save us somewhere between $5 million and $10 million of capital which is significant to us. I don't have an estimate overall. We re-domesticated our companies in the fourth quarter and first quarter this year into Nebraska and we're starting to merge the companies together. So we'll see benefits later on, we're just not sure what the total is going to be.

Okay. And then just at UA branch, on the last call you talked about some, I guess, some ill advised promotions to branch manager, etc. I guess with filling those positions now or largely filling them, what gives you the confidence that the replacements are the right ones? And some of the mistakes that were made last quarter didn't repeat themselves.

There's always some uncertainty. But we're holding -- we're enforcing higher standards for promotion. We still have out of our 150 branch offices, we still have, I believe, 18 openings right now. So we're not just putting bodies in there. Part of our problem was we got lax on our promotion standards. Both quality business and recruiting and we've gone back and we're re-enforcing those standards. And we're not promoting people that do not meet those standards anymore. We still haven't replaced all of our losses. We still do have, I think, right now about 18 openings. But we do expect to fill those here this quarter.

Okay. And then if you mentioned it in your opening remarks, I apologize, but what are the gross sales trends at direct response?

Okay. As far as gross, now those are policies that have been issued but haven't paid the first full premium.

Correct.

Well, let's see. Hold on just a second. I've got those here. Actually, for the second quarter total gross sales and direct response were up 28%. Now, I don't -- we -- because of the mix of the business, the insert media tends to have a lower what we call first exposure persistency. Meaning, it will have a lower percentage of the policies paying the first full premium versus the direct mail, so I don't expect to see that 28% growth in net sales next quarter. It will be something less than that. But it should still be -- we still expect to see double digit growth at least for the next quarter.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) We'll take our next question with Jimmy Bhullar with JPMorgan. Please go ahead.

I just have a couple of questions. The first one is on, I think, Mark, you mentioned that you expect United American sales of branch sales to be stable from here. What gives you the confidence that's going to happen, because you lost a lot of agents? Maybe you could give us some numbers on what has happened in the agent count since the end of the first quarter. And then secondly, on American Income, you've seen nice improvement in sales the last few quarters. What's really driving that? If you can discuss your outlook for that channel and also just an update on the new SGAs that you were adding to existing territories there. What's going on with that?

Jimmy, let's see. Branch office. I know I've got some numbers here in front of me. We have seen the decline. Well, we've seen the turnover in our branch managers first slow down. And we've got fewer openings than we had two months ago, where we did have close to 30 openings, now we're down to 18. As a result we've seen our new agent recruiting was up, particularly in the latter part of the first quarter. It was up about 10% from a year ago. We've seen the agent count stabilize. And plus, there was such an effort to recruit our people. I think most of the managers who were going to leave have left. I can't find the numbers for the last three weeks since the end of the quarter, but the numbers have stabilized.

At American Income, there's a number of things contributing to its growth in sales. If you recall, I believe it was beginning of the third quarter last year, we did make some changes in our compensation, in our bonus compensation at American Income. And it was really pretty simple, we went from paying monthly bonuses to paying bonuses on a weekly basis. And they were designed to not only get more money to the agent quicker, but it was designed to reward consistent production. They earn a bonus -- if they hit a bonus level the first week, they get a certain amount. It goes up if they hit it again the second and third week. If they miss a week, the bonus level goes back down. So that has encouraged much more consistent production out of the agents. We have seen an increase in our production per agent. We made the same or similar change at Liberty National beginning in the fourth quarter and we saw a nice increase in sales at Liberty National.

But we also are moving forward with adding SGAs and, as described before, centralizing our lead generation function. It's still slower than I would like to see it. We're still only at about a quarter of the total territories where we've consolidated the public relations function. Part of that reason is we're generating at American Income roughly 100,000 leads a month. And up until now, the tracking and distribution of those leads has been pretty much a manual process. We're developing systems to automate that and we expect to have those systems in place by June. Once those systems are in place, it -- that process will speed up significantly. Right now that is the one portion of that that's holding us back.

Okay. And just to follow up. You had someone you had answered before on acquisitions, but I think there was an acquisition last year that you lost out on. Do you still have an interest in doing deals? What's the market like, is it a reasonable chance that you will find something that's suitable this year? Or do you just expect to spending the money on buybacks?

Boy, that's -- I wish I had a crystal ball there, Jimmy.

Are there properties that are out there because of what's going on in the economy that are available now at attractive prices, because you've been looking for a while.

I really think we've only been looking seriously now for maybe nine months. And there are companies out there that are of interest to us. They are not necessarily for sale. It's just impossible to say. There's nothing imminent but there are some companies out there that we would definitely have an interest in. We think it's a good time to make one, but I really just can't even predict when that will happen. There could be something come up in the next three months or it could take two years to find something.

Okay, thank you.

(OPERATOR INSTRUCTIONS) And we have no further questions. I'd like to turn it back over to management for any additional or closing remarks.

Those are our comments and thanks for joining us this morning. And we'll talk to you next quarter.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.