Globe Life Inc.
Q4 2009 Earnings Call Transcript

Published: 11 Feb 2010

[Operator:]

Good day, everyone and welcome to the Torchmark Corp., fourth quarter 2009 earnings release conference call. Please note that this call is being recorded and is also simultaneously webcast. At this time I will turn the call over to Chairman and Chief Executive Officer, Mark McAndrew; please go ahead, sir.

[Mark McAndrew:]

Thank you. Good morning everyone. Joining me this morning is Gary Coleman, Chief Financial Officer, Larry Hutchinson, our General Counsel, Rosemary Montgomery, Chief Actuary and Mike Majors, 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 2008 10-K and any subsequent forms 10-Q on file with the SEC. Net operating income for the fourth quarter was $122 million or $1.47 per share, a per share increase of 5% from a year ago. Net income for the quarter was $113 million or $1.36 per share. Excluding FAS 115 our return on equity was 14.3% and our book value per share was $44.22 a 13% increase from a year ago. On a GAAP reported basis with fixed maturity investments carried at market value, book value was $40.87 per share. In our life insurance operations premium revenue grew 4% to $418 million and life underwriting margins increased 2% to $114 million. Life net sales were $81 million, up 5% from a year ago. At American income life premiums were up 11% to $132 million and life underwriting margin was up 6% to $43 million. Net life sales increased 24% to $35 million. Producing agents at American Income grew to 4,154, up 35%. I am pleased with results at American Income. We believe we have the processes in place to sustain long term double-digit growth and life sales as well as premiums and underwriting margins. We continue to test new ways to improve these processes to enhance our agent recruiting, training and retention as well as our policy persistency. In our direct response operation life premiums were up 6% to $133 million and life underwriting margin grew 13% to 35 million. Net life sales were down 3% to $30 million for the quarter but increased 7% for the full year. For 2010 we expect to see low single-digit growth in life sales during the first quarter improving to double-digit growth for the balance of the year. At Liberty National life premiums declined 2% to $74 million and life underwriting margin was down 26% to $14 million. Net life sales for the Liberty National offices declined 26% to $10 million and the producing agent count was down to 1,740. The decline in life sales and producing agents was greater than we expected during the quarter. While we have seen significant improvement in our policy persistency it will take us little longer to rebuild than I indicated on the last call. The sales and agent count numbers should stabilize in the first quarter and begin to show growth in the second quarter. We now expect low single-digit growth for the full year 2010. On the health side premium revenue excluding Part D declined 11% to $201 million and health underwriting margin was down 18% to $34 million. Health net sales increased 28% to $39 million due primarily to strong group Medicare supplement sales which are normally concentrated in the fourth quarter. We remain cautiously optimistic concerning renewed growth in our Medicare supplement sales, particularly in the second half of 2010. By June 1 we expect to introduce a new standardized Medicare supplement plan as well as reprice our existing products in many states. We believe we will be better able to compete not only with Medicare advantage plans but with other companies offering Medicare supplement products. Premium revenue for Medicare Part D was $45 million for the quarter, a 4% increase while underwriting margin improved 16% to $6 million. Part D sales grew 69% for the quarter to $27 million, and were up 52% for the full year. Underwriting margin for our annuity business was $1.1 million for the quarter versus a loss of $8.8 million in the year ago quarter. Administrative expenses were $38 million for the quarter, down 13% from a year ago. For the full year administrative expenses were down 3%. I will now turn the call over to Gary Coleman, Chief Financial Officer, for his comments.

[Gary Coleman:]

Thanks Mark. I want to spend a few minutes discussing our investment portfolio and liquidity and capital. First, investment portfolio, on our website there are three schedules that provide summary information regarding our portfolio as of December 31, 2009. As indicated on these schedules, invested assets are $11 billion, including $10.2 billion of fixed maturities at amortized costs. Combined RMBS, CMBS and mortgage loans are $38 million. Of the $10.2 billion of fixed maturities $9.3 billion are investment grade with an average rating of A minus. The low investment grade bonds are $824 million, 8.1% of fixed maturities. We began 2009 with $712 million of below investment grade bonds 7.4% fixed maturities at that time. By June 30 the below investment grade bonds are grown to $1.2 billion, 13% of the portfolio due primarily to down grades of formally investment grade securities. In the last six months of 2009 there were no material down grades and we reduced below investment grade bonds through sales of $350 million and impairments of $76 million, thus ending the year with $824 million of below investment grade bonds. We expect that the percentage of below investment grade bonds at 8.1% is still high relative to our peers. However, due to our significantly lower portfolio leverage, the percentage of below investment grade bonds to equity excluding FAS 115 is 22% which is likely less than the peer average. Overall the total portfolio is rated BBB plus same as a year ago. During the quarter we charged realized caps losses for other than temporary impairments four bonds. The total charge was $25 million pretax or $16 million after tax including net gains on asset sales, net realized capital losses for the quarter were $15 million after tax. Year-to-date realized capital losses are $93 million after tax. For further information regarding impairments, see the schedule on our website entitled summary of net realized investment losses. Net unrealized losses in the fixed maturity portfolio are $456 million compared to $1.8 billion a year ago. They are $60 million higher than in September primarily because Treasury rates increased slightly more than spreads tightened in most of our sectors. Now I would like to discuss the asset types within our fixed maturity portfolio. 74% of the portfolio is in corporate bonds and another 14% is in redeemable preferred stocks. All of the $1.4 billion are redeemable preferred stated maturity date in other characteristics that make them more like debt securities and to date all scheduled interest payments have been received none of these securities are perpetual preferred. Municipal bonds now comprise 10% of the portfolio compared to 3% a year ago. In 2009 we purchased $773 million of build America bonds. These are taxable debt securities issued by state and local governments who receive a federal subsidy equal to 35% of the required interest payments. Our BAB bonds are rated AA and have an average yield of 6.3%. Due to concentration considerations we do not expect to make significant investments in build America bonds in 2010. The remaining 2% of the portfolio consists primarily government related securities, our CDO exposure is down to $55 million in two securities were the underlying collateral is primarily bank and insurance company trust preferred. Now to conclude discussion of investments our recovery investment yield. We ended the third quarter with excess cash due primarily to the portfolio repositioning undertaken late in that quarter to reduce the amount of below investment grade bonds. At September 30 we had approximately $1.1 billion in cash, short-term investments, and receivables from the sale of securities. In the fourth quarter we invested $879 million in investment grade fixed maturities primarily in the municipal, industrial, and utility sectors. We invested an average annual effective yield of 6% and average rating of A, and an average life of 18 years to 23 years. For the full year we invested $2.3 billion at an average yield of 6.4%, rating of A and life of 16 to 21 years. For the entire portfolio, the fourth quarter yield was 6.86%, compared to 6.97% yield earned in each of the previous eight quarters. The decline in yield is due primarily to the previously mentioned portfolio repositioning that took place late in the third quarter into a lesser extent the lower fourth quarter new money yield. As of 12/31/09, the yield on the portfolio is 6.81%. We ended the year with $590 million of cash in short term investments, $435 million in the insurance companies; and $155 million in the parent company. Now regarding RBC, as previously indicated, we intend to maintain RBC ratio at the 300% plus level held in past years. This ratio is lower than some peer companies, but is sufficient for our companies in light of our consistent statutory earnings and relatively lower risk of our policy liabilities and our ratings. Entering 2009, our consolidated RBC ratio was 329%, but by June 30, the ratio had fallen to 245% due to bond impairments and down grades and a disproportionate share of dividends to the parent during the first half of the year. In the last half of 2009, we took steps to improve the RBC ratio. We increased the capital of the insurance companies by having the parent company contribute $175 million, $125 million in the third quarter, and $50 million in the fourth quarter, and we reduced required capital by selling below investment grade bonds. Although we haven’t finalized our 2009 statutory financial statements, we expect that RBC at 12/31/09 will be in the range of 325% to 330%, this mean that we are approximately $125 million of capital in excess of that required to meet the target 300% ratio. In addition, assuming no impairments, we estimate that excess capital should increase by around $100 million in 2010 primarily, because statutory income will exceed dividends paid to the parent. Regarding liquidity, at December 31, parent company had $155 million of cash. In addition, we estimate that free cash flow for 2010 will add another $260 million of cash. As a result, the total cash available at the parent for 2010 will be around $415 million. In addition to the cash at the parent, we have other sources of liquidity such as debt issuance, increased credit facilities and inner company financing. Although we don’t think we’ll need to tap these sources, they could provide another $1.2 billion of cash. Based on the $150 million of excess capital within the insurance companies at 12/31/09 and the expectation that it will grow in 2010, and the available cash and other liquidity at the parent, we believe there is more than sufficient liquidity to offset the impact on statutory capital of future realized losses in down grades. In 2010, we plan to utilize excess cash as efficiently as possible, but we’ll be prudent in doing so. We plan to maintain a cash reserve at the parent and then determine the best use of the remaining cash after we’re sure that our desired capital levels will be maintained. Those are my comments I will turn the call beck to Mark.

[Mark McAndrew:]

Thank you Gary, the last year-and-a-half has been a difficult time for Torchmark and our industry. A number of tough decisions were made in the last year to ensure our liquidity insolvency at the expense of growth and earnings. I am pleased with the results we’ve had during this difficult time and confident that the worst of this crisis is behind us. We can now refocus our efforts on improving our earnings growth. Those are my comments for this morning. Kayla, I’ll now open it up for questions.

[Operator:]

(Operator Instructions) Your first question comes from Paul Ryan - Macquarie.

[Paul Ryan:]

Its my first question on Liberty is thinking about where the problem exactly is, I guess to frame my question, if you’re still hiring agents at the same rate and the question is, are you seeing new agents leave sooner than before the comp changes, or is it primarily the agents that were there in place when you made the changes?

[Mark McAndrew:]

Paul, I would have to say, its sum of both. We made some changes in our compensation, really set higher standards for persistency in quality business being written and that did cause some increased turnover, particularly in agents who were writing poorer quality business, but also unfortunately the focus being on improving the quality of the business took some of the focus away from our recruiting. So in the fourth quarter our recruiting numbers at Liberty National were also down about 25% from where they were prior year. So we believe we made the changes that are necessary there. We actually had to close some office during the quarter, but we now are refocused on getting our recruiting backup and moving forward.

[Paul Ryan:]

Do you expect that recruiting to come back towards the level it was before the changes in the near term?

[Mark McAndrew:]

Yes, I do, by the end of the first quarter I expect our recruiting levels be back at prior levels.

[Paul Ryan:]

Turning to the capital position, I guess if I add up what you have now plus what you’re expecting to generate over 2010, around $640 million before any realized capital losses. So you say that, you plan to hold a cushion at the holding company. Can you hand if talk about how you will decide how big of a cushion to hold? When you’ll start thinking about deploying some of that capital?

[Mark McAndrew:]

We have a Board meeting here in two weeks, which that will be a topic of discussion. As Gary mentioned, we feel good about the capital that we have in the subsidiaries. Right now we have I think Gary said $125 million of excess capital there, and that should grow by another $100 million this year, so we think we have more than adequate capital in the insurance companies. So I mean it’s something that we need to address that the $415 million of cash that we’re going to have at the parent. I can’t really say at this point how much of a cushion we will keep there, or exactly how much we might use for share repurchase or other uses at this point. Something we’ll definitely be discussing in next Board meeting.

[Paul Ryan:]

Do you think it might be difficult to ask you how to handicap it, but do you think there will be a chance you’ll start share repurchases before the end of the year?

[Mark McAndrew:]

It’s hard to handicap that, but if I look at our capital situation and the excess cash that we have, we would definitely look for a good use of that cash between now and the end of the year. We don’t need to hold $415 million of excess cash.

[Operator:]

Your next question comes from Michael Grondahl - Northland Securities.

[Michael Grondahl:]

Could you just kind of take us through the growth initiatives you have for American Income and direct response and what you’re trying to accomplish there on the growth side in 2010 and get us thinking a little bit about 2011 growth?

[Gary Coleman:]

Mike, I shouldn’t point out, and one of the reasons our life sales don’t look quite as attractive this year as we monitor our sales and track our sales on a weekly basis. So we typically report 13 weeks of sales in our financials, which means about once every five years, we have a 14 week quarter, which the fourth quarter of 2008 was a 14 week quarter. So part of the only having 5% growth in our life sales this year is a poor quarter to compare with last year. We did have a 14 week quarter at fourth quarter of last year, so actually our life sales if I compare the same 13 weeks that we reported this year, we were actually up 12% versus the five, so we are continuing to see a very positive trend there. If I look at American Income, again, we’ve been making changes there for the last two and a half to three years as far as taking control of the lead generation and some of the changes we made in our bonus compensation, and we feel very good about where it’s at today. We went from 63 to 70 SGAs during the year. We increased our lead generation by 11% for the year, and it’s really in a good spot right now. Some of the things we’re doing, I guess the biggest thing we’re doing. As I mentioned in prior calls, changing the sales process to a laptop sales presentation. We’re taking this very slowly. We’re introducing it with a handful of our SGAs at this point in time, but the early results are very good. We’re getting higher average face amount, higher average premium, higher closing ratio, so I think that has the potential to continue to fuel growth. Although even without that we’ve fully expected to see growth. We think we can continue to maintain the level of growth that we’ve been seeing at American Income. Direct Response, I think we reported sales down 3%, again if I compare the same 13 weeks with 13 weeks a year ago was actually up 8.5% for the same comparable period. We’ve got very good things going on in Direct Response. We’ve had some very encouraging tests. Second half of 2009 with particularly in our packaging, we tried some packages where we’ve had more personalization and a higher quality package, and it generates substantially 15% to 18% better response and the test that is we performed. Unfortunately we have to order new equipment and order the rollout with these new packages, and that equipment won’t be installed until April. So I feel very good about the second half of this year and Direct Response should see double-digit growth in sales. First quarter, some of the cutbacks that we did in the second half of last year, we only expect low single-digit growth in the first quarter, but that growth will accelerate significantly in the second half, really in the last three quarters of the year. So I feel good about where it is. Although it’s still a constant challenge to find new and better ways to do things. Based upon the results of the tests, we’ve already seen. I feel very good about the growth that we’re going to see in 2010.

[Operator:]

Your next question comes from Bob Glasspiegel - Langen McAlenney.

[Bob Glasspiegel:]

The Medicare Advantage disenrollees, you’re thinking that could be sort of inflection point in the market behind sort of mid year new product rollout. What are you seeing from Medicare Advantage di-senrollees in the marketplace? How is Obama healthcare snafu play into that?

[Mark McAndrew:]

Bob, that remains to be seen. I guess unless some of the estimates that I’d seen prior to the election in Massachusetts were that the Medicare Advantage enrollments would go from $11.5 million to roughly $4.5 million over the next three years. I’m not without healthcare reform or without knowing where healthcare reform is going to end up. I guess there’s more question about just how many people will be disenrolled there and how that funding will be affected. I still think they’ve got to reduce the funding from Medicare Advantage plans with or without healthcare reform, but it may not be quite as quickly. We still believe that there’s a market there. We picked up a little bit of business but less than 1,000 disenrollees in the fourth quarter. We still believe that market will rebound, but again we’re not making any wild projections of what we think that might be. So I guess I would still say we’re cautiously optimistic.

[Bob Glasspiegel:]

On the buyback you already have authorization, just a tactical question. Do you feel like you have to tell the investment world that you’re buying back stock before you’re doing it?

[Mark McAndrew:]

I will defer to our General Counsel, but yes. Since we announced that we were discontinuing it, we have to get reauthorized.

[Larry Hutchison:]

That’s correct.

[Bob Glasspiegel:]

So you would have to have a Board meeting first before you could begin to buy?

[Mark McAndrew:]

Yes, that’s correct, Bob.

[Operator:]

Your final question comes from Randy Binner - FBR Capital Management.

[Randy Binner:]

Just a quick question, the required interest on net policy liabilities and the income statement, it is going up on an absolute basis, but not quite as much as at least we had modeled and so it is not focus on a lot. I was wondering if you give a color on what’s going on there and if indeed that is a slowing obligation?

[Mark McAndrew:]

Rosemary, do you want to fill that one?

[Rosemary Montgomery:]

Well, the required interest for one thing we do split it out between what we have for the life and the health business versus the annuity business, since the annuity business is actually based on a credited rate that we declare monthly and so that can have a little bit of fluctuation to it, but the actual interest on the net liability is really pretty stable as I see it going through ‘09, at least for the life and the health business, and changing a little bit more than that for the annuity business, but still something that we see as a pretty stable number.

[Randy Binner:]

So it’s not something that would necessarily be trending down because of the low overall interest rate environment?

[Rosemary Montgomery:]

Not particularly, no.

[Randy Binner:]

Because the in force block is so big relative to the new obligations?

[Rosemary Montgomery:]

Right.

[Randy Binner:]

Then if I could, just on the risk based capital ratio, to kind of understand maybe some of the drivers with Gary, how much rating drift impact was there in the fourth quarter or is there anyway to quantify that hit against the denominator?

[Gary Coleman:]

Randy, there was very little in the fourth quarter, and what we gave in the last two calls we gave a best case estimate, worst case estimate, and our best case I think we said no down grades, and we saw that came true as we really had. I can’t remember the exact number, but it’s very small amount in the fourth quarter. So denominator didn’t change that much. Now, what we did pickup a little in terms of the relaxation on the deferred taxes and statutory side, we picked up $40 million to $50 million there and then we had our earnings were a little higher, so more of the increase came, because we had more capital than we expected as opposed to lower change in the expected or the required capital.

[Randy Binner:]

Then just quickly on the commercial paper program. It looks like kind of a similar size to what it was in the third quarter. Do you intend to keep that size of program out there just to keep it marketable? Is that a fair statement?

[Gary Coleman:]

Well, we’re at $230 million of CP and to be marketable. We need to at least have $100 million out there. Now, we could reduce that somewhat. Obviously, we’ve got enough cash at the parent company to do that, but the cost of that just keeps going down. The cost is about 40 basis points, and we’re not increasing it. We’re just as money matures we just roll it over and with rates being so low, I don’t see a need to reduce and now if we see rates going up, we’ve got cash at the holding company if we need it we can pay that down.

[Operator:]

With no further questions, I’ll turn the call back over to your host, Mr. McAndrew.

[Mark McAndrew:]

Thanks everyone for joining us this morning and we’ll talk to you again next quarter. Have a great day.

[Operator:]

This concludes today’s presentation. Thank you for your participation.