Globe Life Inc.
Q4 2007 Earnings Call Transcript

Published: 7 Feb 2008

[Operator:]

Good day everyone and welcome to the Torchmark Corporation Fourth Quarter 2007 Earnings Release Conference Call. (Operator Instructions) At this time, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Mark McAndrew, please go ahead sir.

[Mark McAndrew:]

Good morning everyone, joining me this morning is Gary Coleman, our Chief Financial Officer; Larry Hutchison, our General Counsel; Rosemary Montgomery, our Chief Actuary and Joyce Lane Vice President of Investor Relations. Some of my comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2006 10-K, which is on file with the SEC. Net operating income for the fourth quarter was $132 million dollars or $1.41 per share, a per share increase of 8% from a year ago. For the year, net operating income was $522 million or $5.45 a share, an increase of 9.2% on a per share basis. Our return on equity was 15.8% and our book value per share was $36.26 a 9% increase from a year ago. In our life insurance operations, premium revenue grew 3% to $393.5 million, and life underwriting margins increased 6% to a $108 million. As the percentage of premium revenue, life underwriting margins were 28% versus 27% a year ago. Life insurance net sales were $68.3 million up 12% from the fourth quarter of 2006 with our three largest life distribution channels contributing double-digit growth. To our knowledge this marked the first time in our history that all three of these distribution systems experienced double-digit growth in sales during the same quarter. At American Income, life premiums grew 8% to a $114 million for the quarter. Live underwriting margin was up 14% to $35 million. Net life insurance sales increased 15% to $24.2 million with first year collected premiums growing 5% to $19 million. I am very pleased with the results of the American Income. Sales growth improved each quarter during 2007 and we entered 2008 with significant momentum. I now have a high level of confidence that we can sustain this positive momentum through 2008 and beyond. The compensation changes we implemented in July at American Income appeared to have had a positive impact on both agent retention and productivity. We are continuing to make progress in our efforts to centralize the lead generation function at American Income, which eliminates the need for exclusive territories. We believe this change will be instrumental in achieving our long-term growth objectives. In our direct response operation, life premiums were up 6% to a $120 million and life underwriting margin increased 8% to $29 million for the quarter. As expected, net life sales grew 12% to $29 million, primarily as a result of increased insert media circulation during the prior quarter. We anticipate continued double-digit growth and direct response life sales during the first half of 2008. Predicting sales beyond that point is difficult because it is dependent upon our ongoing efforts to find better products and packaging identify other forms of media and to better isolate our target markets. At Liberty National, life premiums declined 2% to $72 million and life underwriting margin was down 1% to $21 million. Net life sales grew 12% for the quarter to $10.3 million. New sales at Liberty National were a pleasant surprise, while we implemented some significant compensation changes at Liberty National at the start of the fourth quarter; I have to give credit for this turnaround to the sales management team at Liberty National. They have embraced the changes that we have made and they have performed well beyond my expectations. I am excited about our growth prospects in 2008. On the health side, premium revenue excluding Part D declined 2% to $252.5 million while health underwriting margin increased 1% to $46 million. Health net sales were down 8% for the quarter to $59 million. For the independent agency operation the United American health premiums declined 8% to $93 million and the health underwriting margin was down 6% to $16 million. Net health sales grew 18% to $16 million as a result of a $4 million increase in our group Medicare supplement business. On the branch-office side, health premiums were up 3% at $96 million and health underwriting margin was also at 3% at $14 million. Net health sales were down 18% in the branch office to $36 million and first year collected premiums were down 4% to $29.5 million. The branch office sales were a disappointment as I mentioned on the last call. The decline in our branch office sales has been caused by overly rapid expansion of our branch offices. We not only promoted significant numbers or our best producing agents in the management. Our selection criteria for management candidates were not up to our previously established standards. As a result of turnover and demotions, our field management ranks had declined 16% since the end of the third quarter, which has significantly impacted our new agent recruit. You may recall that we transferred Andy King in 2006 from the United American to become President and Chief Marketing Officer at Liberty National. We have now assigned Andy dual responsibility for both United American and Liberty national and I am confident we will have a branch office back on track by mid-year. Premium revenue for Medicare Part D was down 8% for the quarter to $52 million and our underwriting margin declined 21% to $6.7 million. For the full year Part D revenues increased 1% with a 5% decline in underwriting margin. Administrative expenses increased 2% for the quarter to $38.9 million but declined slightly for the full year as we expected. Parent company expenses were up $1.9 million for the quarter, most of which, resulted from expenses related to an unsuccessful acquisition attempt during the quarter. I will now turn the call over to Gary Coleman, our Chief Financial Officer for his comments on our investment operations.

[Gary Coleman:]

I want to spend a few minutes discussing excess investment income and share repurchases. First, investments; Torchmark has $9.3 billion of bonds at amortized cost, which comprise 94% of invested assets of our bonds, 92% of corporate bonds in hybrid securities. Less than 1% of bonds are in residential or commercial mortgage bank securities and none of those are backed by sub-prime or mortgages. Overall, the total portfolio is rated A-minus, the same as the year ago. Regarding new investments, we invested almost exclusively in investment grade corporate bonds and hybrid securities. In the fourth quarter, we invested $348 million and an average annual effective yield of 7.09% and average life to worst call of 32 years and an average rating of A-minus. This compares to the 6.65% yield, 22-year average life and A-minus rating of bonds acquired in the fourth quarter of last year. The new money yield for the quarter exceeded the portfolio yield. However, for the full year, the new money yield was just slightly lower than the portfolio yield. At December 31st, the average yield on the portfolio was 6.96%, six basis points lower than a year ago. Now, turning to excess investment income, it was $80 million the same as a year ago. However, on a per share basis, excess investment income increased 8%, which reflects effect of our share repurchase program. Excess investment income is net investment income less the interest cost on the net policy liabilities and the financing costs or debt. As mentioned in the Earnings Press Release, both investment income and interest experience were $3.6 million higher than usual in the fourth quarter of 2006 due to the pre-funding of debt that was retired late in that quarter. For the year-over-year comparison of the components of excess investment income, I will exclude the effects of the pre-funding from the fourth quarter 2006 numbers. With that in mind, the comparison is as follows. First, net investment income was up $7 million. However, taking into consideration the $256 million of municipal bonds acquired earlier this year or earlier in 2007, total investment income on a tax-equivalent basis was up $8 million. This represents a 5% increase of income, slightly lower than a 6% increase in average investment assets. Next, the interest cost on the net policy liabilities increased $5 million or 8%, due primarily to 7% increase in the average liabilities. And lastly, financing calls were up $2 million due to higher average short-term debt and outstanding. Regarding our share-repurchase program, in 2007 we spent $402 million to buy $6.1 million towards market shares. We used our $358 million of pre-cash flow and $44 million of short-term borrowings to turn these purchases. In 2008, we expect pre-cash flow to once again be around $360 million the reason that it will be about the same as last year is that 2007 pre-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 pre-cash would be a strategic acquisition. Absent in acquisition, stock repurchases will be the best use of our available cash. Those are my comments. I will now turn it back to Mark.

[Mark McAndrew:]

For 2008, we project net operating income per share will be in the range of $5.88 to $5.94 per share. This projection assumes that we will continue to invest our free cash flow in our share repurchase program. Those are my comments. I will now open it up for questions.

[Operator:]

(Operator Instructions) We will take our first question with Jamminder Bhullar with J.P. Morgan

[Jamminder Bhullar:]

I have a couple of questions; the first one is on your outlook for health sales. If you can talk about just the decline and the agent count at your branch, what caused that with your outlook as in terms of how long it is going to take for you to turn that around? I do realize that you are making some changes. And then, how do health sales look for the first half of the year given the decline in the agent count? And then, secondly on acquisition, you mentioned you have an interest in doing deals, I think the unsuccessful acquisition that you mentioned in the fourth quarter release was in the health business. Would you then talk about which areas of your business you are targeting in terms of M&A activities and what the environments out there?

[Mark McAndrew:]

First off on health sales, I do believe it will take us a couple of quarters to get our health sales turned around. Again, we opened a substantial number of new losses in the last year and a half and we have experienced some turnover particularly to branch manager level. I think, at the end of the third quarter we only had two openings there and by the end of the quarter, we were up to about 17. And that has impacted our new agent recruiting. We are working to fill those vacant seats with qualified people and I have every confidence that we will do that in the first half of this year. But we really think it will be the second half before we will start seeing growth in health sales. Our guidance, I believe, for the year, even though we expect growth in our health sales in the second half of the year, we are projecting between 4% and 5% decline for the full year.

[Jamminder Bhullar:]

Okay and the one thing that seems interesting is in the United American Branch, your life sales are still increasing. They have been increasing for the last several quarters, even though health sales have been weak. Is there a product issue there or I realized that life is a small part of the business, if you can talk about that also?

[Mark McAndrew:]

Again, it is something I think we have talked about in prior calls and that we did make some changes a couple of quarters back to where we made a concerted effort to try to generate more life sales in conjunction with our health sales. Well, the people that we are selling health insurance to, basically have no health insurance and they have very little or no life insurance. So, we are seeing more life insurance sales being made in conjunction with the health sales. But overall, our health sales have declined. So, as the health sales turn around, the life sales will continue to grow also. As far as acquisition, Jimmy, yes, the one we were unsuccessful was primarily in the health business. We would prefer to have life but the thing about that particular company, their health products were supplemental products that we felt very comfortable with, that had very predictable and stable loss ratios and margins had very good and consistent cash flow. So, even though it was primarily health, it would have been a good fit for us. One of the things we are looking for in a potential acquisition is controlled distribution, which made that attractive. So, either our captive agency force or something in direct response would be our preference. But we would consider anything in the life and health field but as long as those products that we are comfortable with.

[Operator:]

(Operator Instructions) We will take our next question from Mark Finkelstein with FPK.

[Mark Finkelstein:]

I have got a few questions. Just to go back to the prior comment, what I am trying to reconcile is, I believe you talked on the last quarter call, about taking some of your producers in the health side, moving them into management positions. And now we are kind of talking about I guess some retention issues at the branch manager level. Can you just reconcile those two things?

[Mark McAndrew:]

Well, I can, it is really a combination of the two. I do not have my last quarter comments in front of me but we did rapidly expand both our Branch Managers, as well as our middle manager levels. Basically, the people we are promoting were the better producing agents, so that did have a, rather immediate impact on our sales. Unfortunately, also, what we have now seen in the fourth quarter is by expanding that rapidly, some of the people we were promoting really were not ready to be promoted and we were not able to make those people successful. So, we have seen, basically fail in that position and we have got to replace those people and that is going to take us a quarter or two to get those positions filled.

[Mark Finkelstein:]

Just moving on the Liberty National margin, margin was higher in the quarter. Was that kind of an anomaly with fourth quarter, at times have good performance or do you see that sustainable going forward?

[Rosemary Montgomery:]

I think that the margin is sustainable going forward. We did have, trying to look back at the numbers here. You are comparing it back to the fourth quarter, I would say that margin does fluctuate a little bit during the year and we actually had really quite a bit different seasonal pattern in claims for 2007 than we have had in prior years. Actually, I would say that the year-to-date margin for all of 2007 is more what I would look at, in terms of what I think is sustainable going forward.

[Mark Finkelstein:]

You re-domesticated some subs, I guess I am curious about the progress or status, in terms of actually merging staff Subs and do you have an estimate on what would be the capital freight up if you were to go this route?

[Mark McAndrew:]

You are right; we have re-domesticated some of our subsidiaries to Nebraska. We saw an immediate savings there in our premium tax rate of $2 to $2.5 million. We probably will, I think in the next 12 months, merge United American and Liberty National into one entity. There is significant savings there, but Gary I guess I would have you comment on what you think we might free up as far as capital.

[Gary Coleman:]

We will free of some capital. I do not have a good estimate on that at the moment; I am working on our yearend statutory numbers to do that. I do not know there is going to be that significant but there will be additional capital.

[Operator:]

(Operator Instructions) We will take our next question with Ed Spehar with Merrill Lynch

[Edward Spehar:]

Just one quick question, Gary on free cash flow and going forward, I think for a long time now, you have dividending up all of statutory income and I am wondering, is there any, you suggested that this year would be down from last year because you are not going to take a special dividend. I think that is what you said. Is there any reason to think that the ration of free cash to stat earnings is changing at all?

[Gary Coleman:]

No, what I mentioned is that our pre-cash flow for last year was a little higher because we did a $36 million extraordinary dividend that is a one-time item. Going forward, I think you will continue to see our pre-cash grow and I think that question is whether we can continue to take the earnings of the companies out. And the answer is for the perceivable future, I do not see a problem with this, taking all of the earnings as we have done. We are at a capital level that is more than sufficient now and our earnings are growing at a little bit higher rate than the Campbell requirements are. You have got to remember, with the type of assets we have and the products we have the capital requirements are less volatile and they grow at pretty consistent pace. So because of that, I think that our capital will grow sufficiently, even with taking the earnings out as dividends and on top of that I think, for our ratings, we are in an excess capital situation.

[Operator:]

We have no further questions. I like to turn it back over to management for any additional or closing remarks.

[Mark McAndrew:]

Thanks everyone for joining us. Those are our comments today and we will talk to you next quarter.

[Operator:]

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