Globe Life Inc (GL) 2018 Q2 法說會逐字稿

Good day, and welcome to the Torchmark Corporation Second Quarter 2018 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, VP, Investor Relations. Please go ahead, sir.

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 2017 10-K 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 a discussion of these terms and reconciliations to GAAP measures.

I will now turn the call over to Gary Coleman.

Thank you, Mike, and good morning, everyone.

In the second quarter, net income was $184 million or $1.59 per share compared to $140 million or $1.18 per share a year ago. Net operating income for the quarter was $175 million or $1.51 per share, a per share increase of 27% from a year ago. Excluding the impact of a tax reform, we estimate that this growth would have been approximately 8%.

On a GAAP-reported basis, return on equity was 12.2%, and book value per share was $48.44. Excluding unrealized gains and losses on fixed maturities, return on equity was 14.6%, and book value per share grew 26% from a year ago to $42.08.

In our life insurance operations, premium revenue increased 5% to $603 million, and life underwriting margin was $161 million, up 9% from a year ago. Growth in underwriting margin exceeded premium growth due to higher margins in American Income and Direct Response. For the year, we expect life underwriting income to grow around 5% to 7%.

On the health side, premium revenue grew 4% to $251 million, and health underwriting margin was up 8% to $60 million. Growth in underwriting margin exceeded premium growth due to higher margins at Family Heritage. For the year, we expect health underwriting income to grow around 6% to 8%.

Administrative expenses were $55 million for the quarter, up 8% from a year ago and in line with our expectations. As a percentage of premium, administrative expenses were 6.5% compared to 6.3% a year ago. For the full year, we expect administrative expenses to be up 5% to 6% and around 6.5% of premium compared to 6.4% in 2017.

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

Thank you, Gary.

At American Income, life premiums were up 9% to $270 million, and life underwriting margin was up 11% to $89 million. Net life sales were $60 million, up 5%.

The producing agent count for the second quarter was 7,064, up 1% from a year ago and up 4% from the first quarter. The producing agent count at the end of the second quarter was 7,143.

At Liberty National, life premiums were up 2% to $69 million. Our life underwriting margin was down 7% to $17 million. Net life sales increased 9% to $13 million, and net health sales were $5 million, up 9% from a year ago quarter. The sales increase was driven primarily by growth and agent count.

The average producing agent count for the second quarter was 2,185, up 9% from a year ago and up 5% compared to the first quarter. The producing agent count at Liberty National ended the quarter at 2,198.

Our Direct Response operation at Globe Life, life premiums were up 3% to $209 million, and life underwriting margin increased 21% to $36 million. Net life sales were down 5% to $35 million. As we've discussed on previous calls, the sales decline is by design. We continue to refine and adjust our marketing programs in an effort to maximize the profitability of new sales.

At Family Heritage, health premiums increased 8% to $68 million, and health underwriting margin increased 14% to $16 million. Health net sales grew 10% to $16 million.

The average producing agent count for the second quarter was 1,052, up 2% from a year ago and up 6% from the first quarter. The producing agent count at the end of the quarter was 1,090.

At United American General Agency, health premiums increased 3% to $94 million. Net health sales were $13 million, up 3% 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 end of 2018 to be in the following ranges: American Income, 7,000 to 7,300; Liberty National, 2,200 to 2,400; Family Heritage, 1,160 to 1,210. Approximate life net sales trends for the full year 2018 are expected to be as follows: American Income, 4% to 8% growth; Liberty National, 8% to 12% growth; Direct Response, 7% to 10% decline. Total net sales trends for the full year of 2018 are expected to be as follows: Liberty National, 4% to 8% growth; Family Heritage, 5% to 9% growth; United American individual Medicare Supplement, 10% to 20% growth.

I will now turn the call back to Gary.

I will 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 $60 million, a 3% decrease over the year ago quarter. On a per share basis, reflecting the impact of our share repurchase program, excess investment income was flat. Year-to-date, excess investment income is up 1% in dollars and 4% per share.

For the full year 2018, we expect excess investment income to grow by around 2%, which results in a per share increase of 4% to 5%.

Now regarding the portfolio. Invested assets are $16.1 billion, including $15.4 billion of fixed maturities at amortized costs. Of the fixed maturities, $14.7 billion are investment grade with an average rating of A-, and below investment grade bonds are $688 million compared to $672 million a year ago. The percentage of below investment-grade bonds to fixed maturities is 4.5% compared to 4.6% a year ago. With a low portfolio leverage of 3.2x, the percentage of below investment-grade bonds to equity, excluding the unrealized gains of fixed maturities, is 14%.

Overall, the total portfolio is rated BBB+, same as the year ago quarter. In addition, we have net unrealized gains on fixed maturity portfolio of $935 million, approximately $732 million lower than the year ago due primarily to changes in market interest rates.

In the second quarter, we invested $182 million in investment-grade fixed maturities, primarily in industrial and financial sectors. We invested at an average yield of 5.16%, an average rating of BBB+ and an average life of 18 years. For the entire portfolio, the second quarter yield was 5.57%, down 11 basis points from the 5.68% yield in the second quarter of 2017. As of June 30, the portfolio yield was approximately 5.56%.

At the midpoint of our guidance, we are assuming an average new money rate of around 5% for the remainder of the year.

We would like to see higher interest rates going forward. Higher new money rates have a positive impact on operating income by driving up excess investment income. We are not concerned about potential unrealized losses that are interest rate-driven since we would not expect to realize them. We have the intent and, more importantly, the ability to hold our investments to maturity. However, if rates don't rise, a continued low interest rate environment will impact our income statement but not the GAAP or statutory balance sheets, since we primarily sell noninterest-sensitive protection products accounted for under FAS 60.

While we would benefit from higher interest rates, Torchmark would continue to earn substantial excess investment income in an extended low interest rate environment.

Now I'll turn the call over to Frank.

Thanks, Gary. First, I want to spend a few minutes discussing our share repurchases and capital position. The parent company's excess cash flow, as we define it, results primarily from the dividend received by the parent from its subsidiaries, less the interest paid on debt and the dividends paid to Torchmark shareholders. We expect excess cash flow in 2018 to be around $325 million. Thus, including the assets on hand at the beginning of the year of $48 million, we currently expect to have around $375 million of cash and liquid assets available to the parent during the year.

In the second quarter, we spent $88 million to buy 1 million Torchmark shares at an average price of $84.54. So far in July, we have spent $20 million to purchase 243,000 shares at an average price of $83. Thus, for the full year through today, we have spent $195 million of parent company cash to acquire approximately 2.3 million shares at an average price of $85.16. These purchases are being made for the parent company's excess cash flow.

As noted on previous calls, we will use our cash as efficiently as possible. If market conditions are favorable, we expect that share repurchases will continue to be a primary use of those funds. We also expect to retain approximately $50 million of parent assets at the end of 2018, absent the need to utilize any of these funds to support our insurance company operations.

Now regarding capital levels at our insurance subsidiaries. Our goal is to maintain capital at levels necessary to support our current rating. For the past several years, that level has been around an NAIC RBC ratio of 325% on a consolidated basis. In light of the current tax reform legislation and proposed adjustments to the NAIC RBC factors, we are having discussions with the rating agencies to determine the appropriate target consolidated RBC ratio for our insurance subsidiaries going forward. We will continue our dialogue with them over the next several months before making any final decisions.

In June, the NAIC issued adjustments to certain RBC factors to reflect the reduction of the corporate income tax rate from 35% to 21%. These new factors will be effective for 2018. Taking into account these new factors, we have roughly estimated that our company action level RBC ratio for year-end 2018 could be in the range of 275% to 285%. As previously noted, we have not yet finalized our target RBC ratio. However, if we were to set a target ratio of 300% to 325%, it would require approximately $100 million to $225 million of additional capital.

We understand that we may not be required to meet the appropriate target RBC ratio immediately, and that we would be allowed -- could be allowed to reach the target over a period of time. Given the fact that tax reform increase our GAAP equity substantially and, thus, lower our debt-to-capital ratio, we have additional borrowing capacity. Thus, we are confident that we can find any amounts to be contributed without a significant impact on our excess cash flow. Furthermore, any additional borrowings should not adversely impact earnings as the additional capital will be invested by the insurance companies in long-duration assets.

Next, a few comments on our operations. With respect to our Direct Response operations, the underwriting margin as a percent of premium in the quarter was 17% compared to 15% in the year ago quarter. This was primarily attributable to favorable claims in the second quarter of this year compared to higher-than-normal winter claims in the second quarter of 2017. On our last call, we estimated that the underwriting margin percentage for the full year 2018 would be in the range of 15% to 17%. Now for the full year 2018, we are estimating the underwriting margin percentage for Direct Response to be in the range of 16% to 18%. We are encouraged by the improved claims experience and the fact that the underwriting margin percentage for the last 4 quarters has averaged 17%. We are obviously pleased to see the underwriting income from Direct Response increasing here.

With respect to our stock compensation expense, we saw an increase during the quarter, primarily attributable to the decrease in the tax rate and excess tax benefits in 2018 as a result of the tax reform legislation. We are anticipating the expense for the full year 2018 to be in the range of $21 million to $23 million.

Finally, with respect to our earnings guidance for 2018, we are projecting the net operating income per share will be in the range of $6.02 to $6.12 for the year ended December 31, 2018. The $6.07 midpoint of this guidance reflects the $0.07 increase over the prior quarter midpoint of $6 primarily attributable to the continued positive outlook for underwriting income, especially for our Direct Response channel.

Those are my comments. I will now turn the call back to Larry.

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

(Operator Instructions) Our first question comes from Ryan Krueger with KBW.

First, on Direct Response, on the updated margin expectation, as we look beyond 2018, at this point, are -- would you expect the margins to continue to gradually move back up? Or should we think about it as something that would be more stable at this point?

Yes, Ryan. At this point of time, with the information that we do have today, we do anticipate the margins really continuing in the -- that 16% to 18% range. As always, we don't really give guidance 1 year out. But looking forward, yes, we know the a new business that we're putting on the books has a little bit of a -- has an underwriting margin higher than that, but it will take some time for that to really, I think, bleed into the results.

Okay. And then last quarter, you indicated your interest in Gerber Life. As the sale process has continued to move forward, is that still a property that you're interested in acquiring and looking at?

Brian, why don't you take that question?

Certainly. In accordance, Ryan, with our corporate policy, we are not addressing or taking any questions regarding any possible transactions prior to a formal announcement, if and when such an announcement is made.

Our next question comes from Jimmy Bhullar with JPMorgan.

So just on a potential acquisition, how do you think about your capacity to do a deal? And how large of a deal you could do without really tapping in -- or without really issuing equity, so just using debt and actually, maybe using some of the cap-built capacity within your subsidiaries?

Jimmy, yes, just in general terms, with respect to any large transaction, potential acquisition or whatever, of course, any analysis that we would do would have to stand on its own as far as any merits or concern. Yes, we do look, and we say we have around -- as of the end of the year, we anticipate that we have around $700 million of debt capacity just to stay within some of the guidelines that our rating agencies have established to keep our current rating. I think as we noted on the last call, that there's -- if it's in connection with an acquisition, at least in the past, and as we've had -- well, as we've said in the past, that you -- we would be able to probably go over that -- some of the guidelines that they have established, as long as we would have a plan to be able to get back underneath those using some of the cash flows from any acquired entity to get ourselves back within an appropriate debt-to-capital ratio. So that's probably the extent of what we could do without having to issue some type of equity or without, at least, having to partner with somebody on some type of a transaction.

Okay. And then on -- your margins, overall, in the life business are pretty good this quarter. But Liberty, the margins in the last couple of quarters have been weaker than they used to be, I think, in the 24% to 25% range recently versus 27%-plus in the past. Is there anything specific going on in terms of claims trends? Or is it just normal [volatility] in the benefits ratio?

Jimmy, we were -- the underwriting margin in the second quarter was 24.5%. We were lower than that in the first quarter because we had a high claims quarter, but we expect the declines to even out. But even at that, I think that our margin will be in the 24% to 25% range for the year. And last year was a 26%, and the reason for the lower margin is the amortization is a little bit higher, and that's because of the volume, the new business we've put on the books in recent years had a little bit higher amortization rate than the older blocks that are running off. It's not a huge difference. It's a gradual trend. We were -- amortization was at 31% last year. It will be just a little over 32% for this year. That, along with the fact that our -- or the nondeferred acquisition expenses are a little higher, a little over 6% now versus 5% last year, and that's due to additional technology cost of -- in improving our agency operations, but that should -- that shouldn't any go higher. So -- and getting back to it, we're not in the 26% range where we were last year. I think we're more in the 24% to 25% range going forward.

Okay. And then just lastly, on expectation for Direct Response sales, I think you mentioned that for this year, you expect to meet the 10 -- 12% drop. You were down 11% year-to-date but were down only 5% in 2Q. So are you expecting results to get worse from -- than 2Q in the second half? Or are you -- is your guidance just somewhat conservative?

The guidance is we'll be down 7% to 10% for the entire year 2018. We don't expect the sales to get weaker. But if lower volumes in the second half of the year in terms of the Direct Response, Jimmy, I think, it'll be the early 2019 we start to see positive sales growth in the Direct Response channel.

Our next question comes from Erik Bass with Autonomous Research.

You moved up the growth guidance for health underwriting margin pretty materially for the year. I was just hoping you could talk about the drivers of the better outlook for that business.

Erik, it's the -- the improved guidance there is, really, we're experiencing a little better claims experience than we expected. And it's been 2 quarters now, and we expect that to continue for the year. And that's really not just a 1 particular distribution. It's really across the board in terms of the Family Heritage, the other health, American Income and Liberty National. It's -- and so we do that. We've increased our underwriting income estimate.

And your sales guidance for health was also pretty promising, I guess. Should we expect the premium growth to start to pick up there as well?

Yes, Erik. With the -- in time here with some of that, that will definitely flow through the additional premium growth here, probably not so much impacting this particular year, making just a little bit of it here or the remainder of the year, but more in the 2019.

Erik, last year, health premiums grew 3%. And I think, if I'm wrong, at the midpoint of our guidance, we're expecting more of a 4% or a little higher increase in 2018.

And then just lastly, and you mentioned in your discussion or your script that you have or having ongoing discussions with the rating agencies. I know A.M. Best recently put Torchmark on a negative outlook. And I realize your business is less rating-sensitive than many others. But how important is it for you to maintain the A+ rating? And what actions would you contemplate to do this, if needed?

Well, it's -- we would like to retain that rating, but it really -- even an investment rating is not used that much in our marketing operations. So it's -- we had a downgrade there to saying, "Hey, I don't know that, that would be a big effort." We would like to retain that rating. But I think, as Frank has mentioned, yes, we're going to work with A.M. Best, the other rating agencies. And I think we feel like our -- we have appropriate capital levels, and I think we need to work with them to -- and make our case there and see where we go. Frank, do you have any comments?

No. That's -- don't really have anything more to add to what you said. And we'll continue. We would like to as Gary said maintain where we're at, but we'll continue to work with them. And we do think that there are reasonable arguments for why target levels could be a little bit less than 325%, and we'll make our case in over the coming months.

Our next question comes from Alex Scott with Goldman Sachs.

So I had a question about the -- there's a recent supreme court ruling related to -- I guess, it was public labor unions and just around collective bargaining fees. And I guess, there's been some speculation that it could lead to reductions in just like the members of public sector labor unions. So the question I have for you guys was just -- when I think about Torchmark's earnings stream and sales, how much of it currently comes from unions? And is there any way for you to like help us dimension what portion comes from the public sector versus the private sector unions?

I'm not sure I can address what percentage comes from the public sector versus the other unions. But currently, about 30% of the new business that we issued American Income comes from union relationships or union lease. And over the last 10 years, that percentage has really dropped. We're dependent upon the referrals. And certainly our union relationships are important as a number of those referrals, the nonunion members come from our union relationships, so -- and we're hopeful that this won't have a major impact on the public unions. But we have relationships with all the internationals and all the local unions in the U.S., and so I don't see it have any material impact on Torchmark.

Got it. And when I think about the in-force, if there were greater-than-expected reduction in unions, would it -- do you think -- would it affect persistency? And I guess, specifically, what I'm asking is, are the premiums paid by the union, in some cases? Or were they paid by the individual, in which case, maybe it would stay with them, even if they dropped out of the union?

The premiums were paid by the individuals, not the union. And so if there's a reduction in union members, it has something to do with the payment process.

Our next question comes from John Nadel with UBS.

I've got just a couple of quick ones. One, Gary, I think you mentioned on excess investment income and expectation that in dollar terms, it would grow around 2% in 2018. I think in the first half of the year, it's running at just about 1%. What's the driver of the sort of acceleration? I know it's only modest. Is that just about new money yields being a bit better? Is it -- is it about cash flows being maybe stronger?

John, the new money would have a -- have a little bit of an impact but be small. I think the biggest impact is that we had a little bit of a timing difference of some nonfixed maturity income, limited partnership income we have was a little bit lower in the second quarter, and that should pick up -- we should regain that in the second half of the year. I think that's the -- and also, the interest expense on the short-term debt is going to stabilize, we believe. So I think it's a combination of those 2 things. It would get us -- that will get us to the 2% growth.

Got you. Okay, that's helpful. And then, I know in American Income and Liberty, there has been a pretty sizable correlation, of course, between agent count growth -- or producing-agent count growth and sales growth. Family Heritage, though, we saw a pretty sizable pickup in sales growth, and your agent count is growing but not nearly as quickly. What's sort of happening there? It seems like productivity is certainly improving. Is there something on that product offering side that has changed? Or is there something on the demand side that you think has changed?

There's nothing in the operating side. The products are basically the same. What we've seen is an increase in the percentage of agents submitting business. We've also seen an increase in the average premiums submitted per agent. The emphasis should -- Family Heritage has been their consistency in production. And so that emphasis has resulted in an increase in percentage of agents producing. Long term, there's a close correlation between agent growth and production, John. In the short run, really, is productivity has a bigger driver quarter-to-quarter.

Got you. Okay, that's helpful. And then the last one, I don't know, maybe for Gary or Frank. What dialogue have you had to date with the rating agencies? I was interested in your comment, Frank, that it sounds like you're saying, there might be an opportunity to sort of raise your risk-based capital level or recover, if you will, the risk-based capital ratio over a longer period of time than necessarily having to get there by year-end 2018. Is that something that you're just speculating? Or is that something that you've had some initial discussions with the rating agencies around?

Yes. So far, John, we've had -- we have had discussions with Moody's, and we've had a discussion with A.M. Best, obviously. And at least, there are some of those discussions with Moody's, they have at least indicated the potential, a little bit on a company-by-company basis, and we have to indicate that we'd be outside of that realm. But then, at least, that there was a willingness to -- if companies were coming in below their target RBCs for their ratings, that there at least be some, some within a period of time that they would be allowed to replenish that capital, generally giving some credence to the fact that with the new tax law, generally, it's considered to be a capital-favorable or at least -- and a credit-favorable event to rebuild that. But again, the companies would need to be making a commitment in having some type of a plan in order to do so in order for them to give them that period of time. So we still have those indications, so.

And then at your current rating levels, assuming they will downgrade, how much incremental borrowing capacity would you estimate Torchmark has?

Again, by the time we get to the end of the year, we would estimate that we have about $700 million.

Right. Okay. So this $100 million to $225 million estimate really does not push you anywhere close to your sort of upper limits, if you will?

Yes. That's the way we are looking at it.

And from a cash flow coverage, you feel very comfortable with that, too, I would assume.

Absolutely. We've been on a -- we're -- we currently have a cash flow coverage of about 5x, and that's above what the rating agencies look for us to have. And so we feel really comfortable with that. We've also got some optimism knowing that our 9 1/4% debt that's coming due here in 2019, we're looking at that and evaluating that. But as we refinance that, we'll obviously be able to refinance that at lower rates. And that would give us some additional cushion, if you will, on those coverage ratios.

Our next question comes from Bob Glasspiegel with Janney Montgomery Scott.

The outlook for Direct Response has improved a little bit. Could you give us a little bit more color on whether it's pricing working its way through the system? Or it's just experience bottoming out? And how soon do you think you can put your foot on the gas pedal on this one?

With respect to what's really kind of driving some of that guidance, it really is the claims settling in again in the second quarter, really just give us some additional confidence with respect to where those claims should emerge here for the remainder of 2018. In part, it's due to some of the changes that we did make, overall, to our marketing and underwriting processes, but that's -- at this point in time, most of those changes didn't go in until 2017, so we're not seeing a lot of experience from that yet. So a lot of it is really just a settling down of some of the claims in that 2011 to 2015 era of policies. So again, that gives us some added comfort. With respect to the sales volume...

The sales volume, what we're seeing for 2018 is that our media inquiries, only down about 1% or 2%; our metal volume, only be down another 2% or 3%. At the same time, electronic inquiries are up 6% to 10%, and circulations is up about 6% to 8%. And when we look at our most recent analysis of the profitability impact for those rate increases of 2016 to '17 in all states, in order to maximize total profits, we're going to return to the previous rates in certain of those states. Those reduced rates will be implemented at the end of the third quarter, and that will -- that should result in a pickup in sales in the first and second quarter of next year. Any additional adjustments to rates will depend on future results. We're really focused on maximizing total profits, not trying to just maximize the margin.

Bob, to summarize, the -- right now, the improvement is really that there's -- frankly, it's in the lower claims. We -- as we mentioned, we haven't seen the full impact of the underwriting exchanges that we -- and prices exchanges. But what we have seen from those so far is positive. We don't give guidance past a year as far as sales. But we think, sales, as Larry mentioned, will increase. And so we're really positive about Direct Response. And one, we think -- the margin, we've reached the bottom level. And if anything, it will increase. That's a positive. We think with improved sales growth, we'll get higher premium growth. And the combination of all that is very positive because we think we'll see greater growth on our underwriting income. After having 2 years where underwriting is declining, we're going to see growth this year, and we think that growth will continue.

Got you. And just a follow-up on Frank's color on potential borrowing, what I think you were saying was you can now invest your cost of debt or roughly match it with whatever you borrow, and so the income impact for borrowing wouldn't be material?

Yes, I do think that's correct, Bob.

(Operator Instructions) I'm showing no more questions in the queue at this time.

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