Globe Life Inc.
Q1 2008 Earnings Call Transcript

Published: 18 Apr 2008

[Operator:]

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 would like to turn the conference over to your Chairman and Chief Executive Officer Mr. Mark McAndrew. Please go ahead sir.

[Mark McAndrew:]

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, our 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 a $132 million or $1.43 per share, a per share increase of 8% from a 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% or $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. On American Income life premiums grew 8.5% to a $115 million; life underwriting margin was up 15% or $37 million. Net life sales increased 17% for the quarter to $24 million refer to your collected life premiums grew in 7% to $19 million. The ageing accounted American Income was up 9% from a year ago to 2616. Sales at American Income once again exceeded our expectations and sales growth continues to accelerate. As you know, American Income is almost profitable distribution system contributes roughly 30% of our total underwriting income. We’ve remain very optimistic in regards to both our short and long term growth prospectus. In our Direct Response operations, life premiums were up 5% to $129 million and life underwriting margin grew 3% or $30 million. Net life sales increased 8% or $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 in net sales for the year with mid single digit in both premiums and underwriting margins. At Liberty National life premiums decline 3% of $72 million life and life underwriting margin was down 6% to 18 million. Net light sales increased 14% from a year ago to $10 million. The growth in our raise account at Liberty National which was up 62% to 28,140 significantly our paced the growth in sales due to the high concentration of first year agents. Well our new agents believed and doubled in the past year. Our more productive renewal year agents declined by 18%. The good news is that the drop in better in 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 a right path and continue to expect strong doubled sales growth for the balance of 2008. On the health side premium revenue excluding per deed declined 4% of $253 million and help underwriting margin also declined 4% to 45 5 million. Health net sales dropped 29% for the quarter of $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 turnover 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 1/3 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 majority of lost managers. New agent recruiting is now increasing and we expect little of any further deterioration. We have loaded our expectations and now anticipate health sales remain adversely the first quarter level for the balance of 2008. I point out that the United American Branch Office contributes only about 7% of our total underwriting income. So our lowered sales estimates had only a minor impact on our 2008 earnings projection. Premium revenue from Medicare part A was down 13% for $47 million and the underwriting margin declined 4% to $4.9 million for the quarter. For the balance of 2008, we expect party underwriting margins 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 four 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.

[Gary L. Coleman:]

Thanks Mark, I will spend two minutes discussing investments, excess investment and income and share repurchases. First our investments. Torchmark has $9.5 billion of bonds and amortized cost which comprise 95% of the invested assets. There were bonds 92% of or corporate Bonds in Hybrid Securities. Less than 1% of the bonds are in residential our commercial mortgage back securities and none of those are backed by sub-prime all of they mortgages. Overall the total portfolio is rated A-minus same a year ago. Regarding new investments that we invest almost exclusively investment grade corporate bonds and hybrid securities. In the first quarter widening spreads more than offset lower credit rates resulting in higher yields on the investments. We invested $431 million and an average annual effective yield of 7.25% and average rating of A-minus, and average life depending on future calls between 22 to and 35 years. This compares to 6.6 yield averaging [ph] in 2 X 29 year average life of bonds requiring first quarter of last year. The second quarter yield of new investments was the highest yield to the first quarter 2003. And for the second consecutive quarter, the new money yield exceeded the portfolio yield. The average years on the fourth quarter and first quarter was 6.97% 4 basis points lower than the first quarter 2007, but the same thing that is being for the last previous sequential quarters. Now turning to excess investment income, it was $83 million, the same as a year ago. However, on the per share basis, excess investment income increased 8%, which reflects the affect of our share repurchase program. Excess investment income in money investment income what else the interest caused for the net net policy liabilities and the financing costs or debt. The year-over-year comparison of each of these components is as follows. First, the investment income was at $4 million. However, taking into consideration the municipal bonds acquired later in the first quarter of 2007, investment income on a tax-equivalent basis was up $5 million. This represents a 3% increase of income, slightly lower than a 4% 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 down $1 million due to lower short-term falling [ph] rates. Now, regarding our share-repurchase program, in the quarter, we spent $145 million about $2.5 million towards market shares. This is comparable to $167 million used by 3.6 main shares in the first quarter of 2007. The use of pre-cash flow at whole income to pond our stock repurchases. In 2008, we expect free cash flow to be around $55 million. The reason that will be above to sign of last years that in 2007 a free cash flow included 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. But absent in acquisition, share repurchases will be the best use of our available cash. Those are my comments. I will now turn it back to Mark.

[Mark McAndrew:]

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 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 Tamara Kravec with Banc of America Securities. Please go ahead.

[Tamara Kravec:]

Thank you. Good morning, I was hoping that you can tell them into the Liberty National little bit more you seen very significant agent growth, and you have a concern, a higher concentration of first year agent, so you can talk little bit more about your expectation for those agents to become productive over the courses see the 12 to 18 months? That’s my first question and then I have follow-up.

[Mark McAndrew:]

Certainly, I don’t have the number in front of me but my recollection is that we knew your agent’s Liberty National will produce on average roughly. I believe it some one 30% more production for agent then a first year agent. And may be slightly higher then that, but again if you look at the trends that Liberty National on agent counts. A year ago we had 720 renewal agents were down to 588. But if you look at the growth in first year, they have 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 higher at age 12 months later will flow into the renew your agent count. So I do expect were the first year agents of the last 12 months had doubled I expect to see over the next twelve months substantial improve in our new your agent count, I would be surprised that we didn’t see our new year agent increase by at least 50% over the next 12 months. So when we, if it continue to see growth in a first year agents then we, we can also if we can see 50% growth in our new your agents I think the prospects were sales growth that Liberty National our excellent.

[Tamara Kravec:]

Okay. Thank you. And my second question is on the United branch office operation you talk briefly about the high turned over in your branch office managers and I’m guessing you are seeing you know still increase competition that if you could elaborate more on you know essentially is the problem were compensation is that, is that you know just growth opportunities on and then how fast you, you have replaced managers set on you are expecting age or where continuing to increase that how quickly do you think it can, you can get back to the level by you, that you were before the environment [inaudible]?.

[Mark McAndrew:]

That was a very good question. I wish I knew exactly, but it is United American and the health insurance market place it is the most competitive market that we see in any _ distribution system, over last 25 years we seen numerous occasion, were we have big peaks and values in our sales as result the competition and what we have seen we introduce product roughly 3 years ago what we saw very nice increase is in our sale and agent growth and now we are seeing competitor copy the product copying the under writing and really target our Asian C-force. If not so much compensation it’s we have competitors that offer may be wider ranges products and we, then we currently offer but they have seen some success reputing way some our people, we have replace most of those losses and we have to build to back but I really – I am going to be cautious about making any projections about when we see a go back to the level it was. Well, 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 difficult to say how quickly that will turn around.

[Tamara Kravec:]

Okay and just lastly, quickly on your investment portfolio, you are moving further out and in terms of the maturity of the investments you are acquiring. Is that a strategy you expect to maintain, is it really just now given the wider spread and what you are seeing out in the market place, you know, any commentary about your strategy in light of market conditions would be very helpful?

[Mark McAndrew:]

This is the perfect time to be going on over the one spreads as well as they are, but we have been going on and at some point at the spreads time and again we’ll go back to what we have done in the past. We targeted the yell about 6.5%. It’s always been getting quality bonds yelling that amount, we are going to go long, we can do that because of the type of cash flow we have but in the past years where we couldn’t get a 6.5%, we would go shorter but right now, again this is perfect time to go along. Some of the quarters, I mentioned earlier that’s the highest we invested since early 2003 and that we are going to continue to invest long and to get those higher yeild.

[Tamara Kravec:]

Okay, thank you.

[Operator:]

And we will take our next question with Nigel Dally with Morgan Stanley. Please go ahead.

[Nigel Dally:]

Great, thank you and good morning. First on direct response, you have breakdown of South Coast in a direct response between insert media and remote additional channels. Also, Pat if you can discuss the – with the insert media initiatives that you are in thought of results that you expected and then I expect a couple of quick follow ups as well?

[Mark McAndrew:]

Okay, well I do, Nigel, and we are probably not going to provide quiet as much details we have in the past and some of our direct response. We did as a result of the acquisition last year, but much of that is somewhat confidential, but I’ll do as far as for the quarter. If I look at our insert media just net sales, the about sales in the insert media, which comprise all between 20 to 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 dollar sales had a one-month introductory offer where as the juvenile has the three month, so the significant increases in circulation that we saw in the second, particularly in the fourth quarter really had on flow 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 it somewhere close for the 12% growth for the quarter and they were in the lower 8%. So, I am not – it’s not a significant difference but they were a little bit less than what I projected.

[Nigel Dally:]

Okay and then next on capital, you wished that capital ratio at year end was terribly low. Can you discuss your plans to move it back towards your target range, I think it’s over 300% with the writing agencies are still comfortable with your repurchasing so you think averaging ratio come from?

[Mark McAndrew:]

Nigel, we slipped to below 300% on a consolidated basis this year to do the several one time unusual items for example we were at extra ordinary debtors that I mentioned earlier we also adopted a [inaudible] plan and we had settlement of prior year taxes all of which had a negative impact on surplus in 2007 and also our required GAAP was a still hardly expected to do the really some changes in rules in the placement of our certain our assets with our company, we just been like a job in participating the impact of those or we could have taken steps to keep that at above the 300% level we will go impact those steps now in the, in these low cost steps we will increase our stationery surplus we can do that through our increased to the company re insurance of a premium efficiency reserves we can monetize in more right as bounces there were additional before the tax credits that we can recognize all those things will improve our surplus in on the campus side we can reduce our campus charges about personal re emerging and where companies and in sight we just where we place the assets but we expect certainly before the end of the year that will be back up in the 302 to 330 range that we had been into the over the last five or six years in it. We can take these steps pretty quickly and also all these lines are reduced in and more heavily impact on our pre cash flows.

[Nigel Dally:]

Okay and then the as the last question I had was on Industrial income in the positive benefited from interested rates swaps you close that you know the flat yield to now we since in stepping as you could I say some thing you are looking to you put by back on place?

[Mark McAndrew:]

You know where we that’s one we need to look it again because that was very beneficial back few years [inaudible] that was we, we have doing thing we have a view we will take a look at it.

[Nigel Dally:]

Again is that incorporated in your guidance as yet to with that be with a potential positive?

[Mark McAndrew:]

There will be a positive we do not count with that again it.

[Nigel Dally:]

Okay, thanks a lot, thanks a lot?

[Operator:]

Now we will take our next question with Robert Galsspiegel with Langen McAlenney. Please go ahead sir.

[Robert Galsspiegel:]

Good morning and pretty close I guess as the, the then of [inaudible] I just wanted pass on thanks for Joyce on the great job she started investor relations in worker and I will wish her well in the future Mark as way we could go into watch behind the increase in earnings got its should be best investments income had a couple of minus negative doctors and sales in premiums but it’s the best one income that when in offsetting this?

[Mark McAndrew:]

Yeah Bob it is the increase is strictly on a higher yield on our new investments then what we had anticipated and it’s an investment again.

[Robert Galsspiegel:]

And I just want to follow up, just a tremendous question here giving the yields to higher why would be keep on down a bit, on the quality may be it’s the that was says out there that are long and going longer see to sort of by the time that you don’t need to make numbers stretch on duration in yield your credit analysis say these are right opportunities or this had been more significant drive in this that call?

[Mark McAndrew:]

No Bob it is the further analysis we say we’re dipping down already but we have been a month over the last several quarters but again we know we will obviously pay attention to the right. We do our own credit research and we feel like we are getting good credits otherwise we wouldn’t be buy them we are not settled down and credit it was just to get more yield. Again we are benefiting by the water spreads but we are not setting down a quality.

[Robert Galsspiegel:]

Okay, just reading through the annual report and your commentary on the last call, it just seems like you have upgraded your acquisitions in your thought process and you mentioned you won the silver medal on the last quarter. Is anything live that we should be thinking about or just give us a little bit of hope what would be motion trigging to you?

[Mark McAndrew:]

Well Bob obliviously we are continuing to look and that’s about all I can comment on their other than you know again what we are looking for, we are looking for companies that have predictable stable earnings. We definitely like to see some type of capital distribution whether it is an agency force or direct response. We accompany that has high expenses, also something we believe we can add significant value to you, so those are some of the biggest factors we are looking at and there is number of companies out there but I cant really talk anymore specific about anything other than that Bob.

[Robert Galsspiegel:]

Pan America [ph] financial services is the ventures that came in the market and its more towards [inaudible] in capital distribution and relatively predictable earnings.

[Gary L. Coleman:]

Well if it had the predictable earnings of capital distribution then it would be something we would take a look at.

[Robert Galsspiegel:]

Ok thank you very much.

[Gary L. Coleman:]

Sure Bob.

[Operator:]

And we will take our next question with Edward Spehar with Merrill Lynch please go ahead.

[Edward Spehar:]

Thank you, good morning, a couple of questions, first Gary I just want to know if you could you help us in terms of the portfolio yield trend, given the cash that you see coming in over the next year, if reinvestment rate state where they are. Do you have any sense 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 competitive issue that you talk about in health. Are you seeing is this insurance company, mutual, or they are healthcare companies. Who is the sort of source of this competitive pressure and is there anything to be optimistic in terms of Medicare supplement, any changes that you seeing come in terms of reimbursement that might make that business a little bit better at, some point? Thanks.

[Mark McAndrew:]

Alright, Gary you want to take the first.

[Gary Coleman:]

Sure. Ed, if we invested the 7% for the remainder year, year for now, our portfolio year will still be around 697 just under 7%, they would help to add additional little bit extra yield there but also we got bonds coming off at little bit higher yields but again the 7% we should be at least at the 697 over our day might be slight higher. Alright, add-on the health competition I don’t really want to names but there are the company too out there that is Health Insurance Companies that basically have seen products we have been offering and/or underwriting in it, basically duplicated the products and these are the companies that are already in the major medical market place, but they are underwriting on major medical is very strict. The products we have offered with more limited benefit had a little more lenient underwriting and we also lower priced, which was kind about our niche and they have taken basically our products and copied our underwriting and that really gone after entire our agents. We will over come up and we will rebuild and move forward. We are 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 rate 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 the democratic congress. I would think there is a much bigger chance to see many those Medicare advantage plans really squeeze much further and that I wouldn’t be at all surprised if certain things significant [inaudible] should that happen but it is really kind on that.

[Edward Spehar:]

Ok if I could just follow up with Gary if the numeral yield was 7. I think it was 7.2% in the quarters, is that correct?

[Gary Coleman:]

Within quarter yeah.

[Edward Spehar:]

Ok if it is 71/4 quarter going forward rather than 7, how much does that change the mass on the overall portfolio?

[Gary Coleman:]

I think that moves up to 7.

[Edward Spehar:]

Ok, thank you. Do you have an estimate on the staff benefit of merging the sub at this stage.

[Gary Coleman:]

Well we know we can do it in stages and I known merging a couple of companies as fare as required capital will save us somewhat between $5 million and $10 million of capital which was significant. I don’t have [inaudible] overall. We re-domesticated our companies

[Edward Spehar:]

Okay. And then just a, at UA branch on, on the last call you talked about some I guess some ill advised promotions to branch managers etcetera. I guess with filling those positions now I likely feeling them I guess what gives you confidence that the replacements you know are the right ones and on you know some of thus made mistake or made last quarter. You not repeat them selves.

[Gary Coleman:]

Well, there is always someone certainty, but where we are holding, we are enforcing higher standard for promotion, we still have at about 150 branch office, we still have I believe 18 openings right now, so we are not just putting [inaudible] and there we part of our problem was we got relaxed on our promotion standards both quality business and recruiting in and we gone back and we’re enforcing those standards and we are not promoting people that do not meet those standard any more so we still have replace all of, a losses we still do have I think right now about 18 openings, but a we do expect to fill those during this quarter.

[Edward Spehar:]

Okay. And then, if you mentioned in the, you know your opening remarks I apologies but can you what are the growth sales trends at direct responds?

[Gary Coleman:]

Okay. As far as growth, so those are policies that have been issued but haven’t paid first [inaudible] well just hold on you second I am going to those your actually for the second quarter. Total growth sales and direct responds were up 28%, now I don’t we because of the mix of the business and certain media trends to have a lower, first will be call first exposure process and submitting well over have a lower percentage of policies paying first fall premium versus the direct mail so I don’t expect to see that 28% growth and net sales next quarter it will be something listen that but it should still be, we still expect to see double digit growth at least for the next quarter.

[Edward Spehar:]

Okay. Great, thanks.

[Operator:]

(Operator Instructions). We take our next question with Jamminder Bhullar – J.P. Morgan. Please go ahead

[Jamminder Bhullar:]

Cole I thank you. I just have a couple of question the first one is on I think Mark you mentioned that you expect United American sales of brand sales to be stable from here, what gives you the confidence that’s going to happen to be loss of lot of Asian. May be you could give us some numbers on what’s happen in the Asian count since the end of the first quarter and then secondly on American Income you have seen nice improvement in sales last few quarters what really driven that if you can discuss your outlook for that channel and also adjust an update on the new SGAs that you are adding to existing territory there what going on of that?

[Mark McAndrew:]

Okay. Jimmy let see its branch our office and I have got some numbers here in front of me. We have seen the decline, well we seen the turn over the branch managers first slow down and we got few openings then we had two months ago, where we did have close to thirty openings now we have we are down to 18 over result we seen our new agent recruiting was up particularly in the lot of part of first quarter was up about 10% from year ago. So we seen the Asian can’t stabilize and plus there was such an effort to recruit our people way I think most of the managers who where going to leave have left. And again, find the numbers for the last three weeks since end of the quarter but the number have stabilize out and American Income there is, there is number of thing contributing to its growth and sales. if recall I believe it was beginning in the third quarter last year, we did make some changes in our compensation and our bonus compensation at America income, and is really pretty simple with _ paying months like bonuses to paying bonuses on a weakly basis, and they were design to not only give more money to the Asian _ but it was design to reward consistent production. They earn the bonus, if I hit the bonus level of first week I get certain amount it builds up if they hit at again the second, and third week, if they miss week at it the bonus level goes back down. So that has encourage much more consistent production of the Asians, so we have seen a, an increase in our production for Asians, we made the change or similar change Liberty National beginning in the fourth quarter and we saw nice increase and sales Liberty National. But we also are moving forward with adding SGA and describe before centralizing our lead generation function. It still slow or then I would like to see at, we are still only about a quarter of the total territories were we consolidated the public relation function. Part of that reason would generating net American Income roughly 100 thousands leads of month. And up until now the tracking and distribution roughly is been pretty much a manual process, what were developing systems to how to make that and what we the expect to have those system in place by June. Once those systems during place it that process will speed up significantly, because that right now that is, that is the one portion of that holdings its back.

[Jamminder Bhullar:]

Okay. And just to follow up, you some one you done this before on acquisition but I think there is an acquisition last year that you lost out on the you, still have an interest and doing deals with environment like at is it a reasonable chance that you will find something that’s suitable this year, or do you just expect spending the money on buyback.

[Mark McAndrew:]

Do I , I wish I had a crystal [inaudible] Jimmy. You know are there properties that are out there because of what’s going on the economy and better available now at attractive prices are just looking for a while or so.

[Jamminder Bullar:]

Well, I really think, we [inaudible] been looking seriously now for may be nine months and they are companies out there, [inaudible] of investors where not necessarily for sales. It’s just impossible to say. There is nothing imminent but there are some companies out there we would definitely have an interest in we think it’s a good time to make one. But I really just can even predict when they will happen there could be something come up in the next three months, it would take two years to find something.

[Jamminder Bullar:]

Okay. Thank you.

[Operator:]

(Operator Instructions) And we have no further questions. I like to turn it back over to management for additional or closing remarks.

[Mark McAndrew:]

Okay. Well those are the comments and thanks for joining us this morning and we will talk to you next quarter.

[Operator:]

Once again ladies and gentlemen, this will conclude today conference; we thank you for your participation you may now disconnect.