Globe Life Inc (GL) — Q4 2019 Earnings Call Transcript

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 2018 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 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 fourth quarter, net income was $187 million or $1.69 per share compared to $165 million or $1.45 per share a year ago. Net operating income for the quarter was $188 million or $1.70 per share, a per share increase of 9% from a year ago. On a GAAP reported basis return on equity for the year was 11.6% and book value per share was $66.02. Excluding unrealized gains and losses on fixed maturities return on equity was 14.5% and book value per share grew 9% to $48.26. In our life insurance operations, premium revenue increased 5% to $631 million, and life underwriting margin was $177 million, up 6% from a year ago. In 2020, we expect life underwriting income to grow around 4% to 5%. On the health side, premium revenue grew 7% to $275 million and health underwriting margin was up 5% to $61 million. Growth in premium exceeded underwriting margin growth, primarily due to lower margins at Liberty National. In 2020, we expect health underwriting income to grow around 4% to 6%. Administrative expenses were $61 million for the quarter, up 7% from a year ago. As a percentage of premium, administrative expenses were 6.7%, the same as a year ago. For the full year, administrative expenses were $240 million or 6.7% of premium compared to 6.5% in 2018. In 2020, we expect administrative expenses to grow approximately 6% and to be around 6.7% of premium. I will now turn the call over to Larry for his comments on the marketing operations.

Thank you, Gary. I'm going to go through the fourth quarter results at each of our distribution channels. I'll start out by saying that I'm pleased with the sales growth in our agencies in 2019. I'm particularly pleased with the agent count growth and middle management increase we've seen across all of our exclusive agencies in 2019. At American Income life premiums were up 8% to $297 million and life underwriting margin was up 9% to $98 million. Net life sales were $59 million, up 9%. The average producing count for the fourth quarter was 7,631, up 10% from the year ago quarter and up 1% from the third quarter. The producing agent count at the end of the fourth quarter was 7,551. Net life sales for the full year 2019 grew 6%. The sales increase was driven by increases in agent count. At Liberty National, life premiums were up 3% to $72 million and underwriting margin was up 4% to $18 million. Net life sales increased 13% to $15 million and net health sales were $7 million, up 12% from the year ago quarter. The average producing agent count for the fourth quarter was 2,534, up 17% from the year ago quarter and up 6% from the third quarter. The producing agent count at Liberty National ended the quarter at 2,660. Net life sales for the full year 2019 grew 9%. Net health sales for the full year 2019 grew 11%. The sales increase was driven by increases in agent count. To better describe our non-agency business at Globe Life And Accident Insurance Company, we have begun replacing the term direct response with direct-to-consumer. At our direct-to-consumer division at Globe Life, life premiums were up 4% to $209 million and life underwriting margin was flat at $39 million. Net life sales were $30 million, up 2% from the year ago quarter. For the full year 2019, net life sales were flat due primarily to a decrease at juvenile mailing volume, resulting from a decline in response rates from our juvenile mailing offers. At Family Heritage, health premiums increased 8% to $76 million, and health underwriting margin increased 7% to $19 million. Net health sales were up 19% to $18 million due to an increase in both agent productivity and agent count. The average producing agent count for the fourth quarter was 1,228, up 9% from the year ago quarter, and up 8% from the third quarter. The producing agent count at the end of the quarter was 1,286. Net health sales for the full year 2019 grew 9%. The sales increase was primarily driven by an increase in agent count. At United American General Agency, health premiums increased 11% to $108 million. Our margins increased 12% to $15 million. Net health sales were $32 million, up 7% compared to the year ago quarter. To complete my discussion on marketing operations, I will now provide some projections. We expect the producing agent count for each agency at the end of 2020 to be in the following ranges. American Income 5% to 7% growth; Liberty National, 5% to 13% growth; Family Heritage, 2% to 7% growth. Net life sales for the full year 2020 are expected to be as follows. American Income 5% to 9% growth; Liberty National 8% to 12% growth; Direct-to-Consumer down 2% to up 2%. Net health sales for the full year 2020 are expected to be as follows. Liberty National 9% to 13%; Family Heritage 8% to 12%; United American Individual Medicare Supplement relatively flat. I will now turn the call back to Gary.

I want to spend a few minutes discussing our investment operations. First, excess investment income. Excess investment income, which we defined as net investment income less required interest on net policy obligations and debt, was $63 million, a 1% increase over the year ago quarter. On a per share basis, reflecting the impact of our share repurchase program, excess investment income increased 6%. For the year, excess investment income grew 5%, while on a per share basis, it grew 8%. In 2020, due to the impact of lower interest rates, we expect excess investment income to decline by 2% to 3%, but on a per share basis be flat to up 1%. Now regarding the investment portfolio, invested assets are $17.3 billion, including $16.4 billion of fixed maturities and amortized cost. Now the fixed maturities $15.7 billion are our investment grade with an average rating of A minus, and below investment grade bonds are $674 million compared to $666 million a year ago. The percentage of below investment grade bonds to fixed maturities is 4.1% compared to 4.2% a year ago. Overall, the total portfolio is rated A minus compared to BBB plus a year ago. Bonds rated BBB are 55% of the fixed maturity portfolio, down from 58% at the end of 2018. While this ratio is in line with the overall bond market, it is high relative to our peers. However, we have less exposure than our peers to higher risk assets such as derivatives, equities, commercial mortgages and asset-backed securities. We believe that the BBB securities we acquire provide the best risk-adjusted capital-adjusted returns due in large part to our unique ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. Finally, we have net unrealized gains on the fixed maturity portfolio of $2.5 billion, $97 million lower than the previous quarter. Now to the investment yield, in the fourth quarter, we invested $449 million in investment grade fixed maturities, primarily in the municipal, industrial and financial sectors. We invested at an average yield of 4.11%, an average rating of A plus and an average life of 31 years. For the entire portfolio, the fourth quarter yield was 5.41%, down 15 basis points from the yield of fourth quarter 2018. As of December 31, the portfolio yield was approximately 5.41%. For 2020 at the midpoint of our guidance, we assumed an average new money yield of 4.10% for the full year. While we would like to see higher interest rates going forward, Globe Life can thrive in a lower-for-longer interest rate environment. The extended low interest rates will not impact the GAAP or statutory balance sheets under the current accounting rules, since we sell non-interest sensitive protection products. While our net investment income, and to a lesser extent, our pension expense will be impacted in a continuing low interest rate environment, our excess investment income will still grow. It just won't grow at the same rate as the invested assets. Fortunately, the impact of lower new money rates on our investment income is somewhat limited as we expect to have an average turnover of less than 2% per year in our investment portfolio over the next five years. 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 began the year with liquid assets of $41 million. In addition to these liquid assets, the parent generated excess cash flow in 2019 of $374 million as compared to $349 million in 2018. The parent company's excess cash flow as we define it results primarily from the dividends received by the parent from its subsidiaries, less the interest paid on debt and the dividends paid to Globe Life shareholders. Thus including the assets on hand at the beginning of the year, we had $415 million available to the parent during the year. As discussed on our prior calls, we accelerated the repurchase of $25 million of Globe Life shares into December of 2018 with commercial paper and parent cash. We utilized $20 million of the 2019 excess cash flow to reduce the commercial paper for those repurchases. That left $395 million available for other uses including the $50 million of liquid assets we normally retained at the parent. In the fourth quarter, we spent $93 million to buy 930,000 Globe Life shares at an average price of $99.82. For the full year 2019, we spent $350 million of parent company cash to acquire 3.9 million shares at an average price of $89.04. So far in 2020, we have spent $33.5 million to buy 322,000 shares at an average price of $104.20. The parent ended the year with liquid assets of approximately $45 million. In addition to these liquid assets, the parent will generate excess cash flow in 2020. While our 2019 statutory earnings have not yet been finalized, we expect excess cash flow in 2020 to be in the range of $375 million to $395 million. Thus including the assets on hand at January 1, we currently expect to have around $420 million to $440 million of cash and liquid assets available to the parent in 2020. As noted on previous calls, we will use our cash as efficiently as possible. It should be noted that the cash received by the parent company from our insurance operations is after they have made substantial investments during the year to issue new insurance policies, expand our information technology and other operational capabilities and acquire new long-duration assets to fund future cash needs. With the parent company excess cash flows, if market conditions are favorable and absent alternatives with higher value to our shareholders, we expect that share repurchases will continue to be a primary use of those funds. We believe to yield a return that is better than other available alternatives and provides a return that exceeds our cost of equity. Now regarding capital levels at our insurance subsidiaries. Our goal is to maintain capital at levels necessary to support our current ratings. As noted on previous calls, Globe Life has targeted a consolidated company action level RBC ratio in the range of 300% to 320% for 2019. Although we have not finalized our 2019 statutory financial statements, we anticipate that our consolidated RBC ratio for 2019 will be towards the higher end of this range. For 2020, we will continue to target a consolidated company action level RBC ratio in the range of 300% to 320%. Finally, with respect to our earnings guidance, as Gary previously noted, net operating income per share for the fourth quarter of 2019 was $1.70. In addition, net operating income per share for the full year 2019 was $6.75. This is $0.01 above the midpoint of our previous guidance, primarily due to greater-than-anticipated life underwriting income at Liberty National and higher excess investment income. For 2020, we are projecting the net operating income per share will be in the range of $7.03 to $7.23. The $7.13 midpoint of this guidance is slightly lower than previous guidance due to higher-than-expected employee pension and healthcare costs in 2020. Those are my comments. I will now turn the call back to Larry.

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

Hey, good morning. Just sticking with that guidance, EPS guidance question. So the new midpoint of your guidance is a mere $0.02 lower than previous. And I think you've just cited that it's the lower discount rate. I just want to make sure, could you give us a sense of how many cents per share that impacted your outlook and if there were any other contributors to the revised guidance and how much?

The primary reason for the reduction in the midpoint was increased employee costs, including pensions and health insurance, accounting for about $0.02 per share. There are some offsetting factors influencing the overall guidance. Lower interest rates have resulted in slightly reduced expectations for excess investment income compared to earlier forecasts, partly due to higher than expected acquisitions in municipal investments. This decrease in excess investment income is being offset by a lower effective tax rate. Additionally, the higher share price is affecting our buyback program, while we are also seeing greater excess tax benefits that influence stock compensation expenses. Overall, the primary contributors to the adjustment have been the elevated pension expenses and, to some extent, the increased health insurance costs for our employees.

There are many factors at play. In examining the line items for both the Life and Health segments, we observed significant increases in the non-deferred commissions and amortization line as well as the non-deferred acquisition expense line in each segment. On average, this appeared to be around 10% for Life and possibly over 10% for Health. The key question is what is causing such a substantial increase that impacted the EPS compared to our expectations?

Yes, we observed an increase in non-deferred acquisition costs compared to the previous quarter. This is partly due to the timing of certain expenses throughout the year. Overall, costs are rising as we support our various agencies, including higher marketing expenses and some increased meeting costs in 2019 compared to 2018. We also made some branding changes, as we are transitioning all of our agencies to divisions of Globe Life, which has resulted in significant expenses in the fourth quarter related to this brand conversion and assisting the individual agencies. We expect to see the benefits from these changes in the future. Furthermore, a major factor behind the increased percentage is the IT costs incurred year-over-year. We've implemented new CRM systems and commission systems at a few agencies, along with other support systems which began to depreciate in 2019. Overall, we aim to enhance the agent experience and improve service levels to the agencies.

I see.

I was going to say in 2020, willing to see a leveling out. It should and it will. We do not expect it to increase at the midpoint of our guidance at near that level be like closer to the overall 6% or 7% increase.

Got it, that's helpful. And then just lastly, your agent count just increased so robustly. And as I look at your sales guidance, which is very compelling across both segments, I wonder, one, was it the rebranding that kind of got that growth? And two, maybe you could even exceed the guidance in sales that you just provided on the call for 2020?

So, talking about the agency growth first, I think the two drivers for growth in 2019 were recruiting activity and our middle management growth. If you look across the three agencies, American Income had 11% increase recruiting in 2019; Liberty National had a 38% increase in recruiting. We had steady retention at both agencies. The steady retention was a result of the middle management growth. American Income had 9% middle management growth in 2020. Liberty National had 17% middle management growth. I think those were the primary factors and our branding helps with the recruiting, but it was year-long recruiting activities that really increased the agent count. At Family Heritage, we had 2% year-over-year recruiting growth. We redoubled our retention at Family Heritage. That was driven by a 23% increase in middle management. As you know, middle management really drives our recruiting and our training, so that also helps retention and agency growth. I think the guidance we've given this year is good guidance. Just remember that agency growth is a stair-step process. And you don't expect the same percentage growth year-over-year. It's possible we could exceed that, but we're early in 2020. Our next call will have better guidance in terms of the final agent count for each of the three exclusive agencies.

Thank you so much.

Sir, I had a question just on recruiting. I would have thought that with the strong labor market, the recruiting trends wouldn't have been as good as they've been. So if you could just...

Surely, I'll make this comment. Unemployment really first impacts retention and not recruiting. Most of our recruits were not people, they're rather employees, people looking for greater opportunity. And so we really saw an increase in recruiting despite the record low unemployment this year. I think the growth in middle management helped with retention because most of the training comes from middle managers, and those agents are better trained and more productive, and they stay with the company longer. So I think that was the real driver for the steady retention we saw at American Income and Liberty National, and of course the increase in retention we saw at Family Heritage.

Do you have any comments or metrics to share regarding the quality of the new recruits? This would help us understand how sales might be affected by the recent strong growth in the agent count.

Jimmy, I think with new recruits, you always see a little less productivity. They are just not quite as productive in terms of the percentage of business submitted. The average premium is better with a better agent, but the fact that we had sales growth in all three of the agencies tells me that we have a fairly high quality recruit across the three agencies.

And just lastly on direct response, your sales in the last couple of quarters have been up slightly. They are down a lot from where they used to be. Do you think that the channels sort of turned the corner and what's your expectation in terms of how much growth you have in this business in the next two to three years?

In the fourth quarter, the better than expected sales were due to the strong electronic sales across both adult and juvenile product lines.

If I look at the guidance for 2020, I guess referred to early is there are four primary drivers in direct response. And if I look at 2020, those four metrics versus 2019, we think insert media will be up about 2%. We expect electronic media to be up about 5%. Our circulation will be up about 2%. And our mailing volume will be stable. So I think the range of negative 2% to positive 2% sales is really a good guidance at this point. Let's remember, our focus really is not on increasing the sales, it's on increasing total profit dollars.

Thank you.

Hi, thank you for taking my question. I would like to inquire about the health margin. Although the underwriting income saw a nice year-over-year increase, the margin percentage has slightly decreased. Are you noticing any changes in the utilization of Medicare Supplemental products or any trends on the horizon?

I believe one of the contributing factors in the Medicare Supplement business was an increase in claims throughout the year, which was consistent across the industry. The percentage of policy obligations for the group insurance business, where we offer Medicare Supplement, was a little over 65%. This is higher compared to previous years. However, we plan to implement rate increases in 2020 and beyond, which should help curb the rise in policy obligations and ideally bring it back closer to the 65% mark.

Great. And then just to clarify on the excess investment income. I think you guys said it was going to grow 2% to 3%. Just wanted to clarify on what your expectations are for excess investment income growth next year?

For 2020, we expect excess investment income to decrease by 1% to 3%. On a per share basis, it should remain stable or increase by 1%. The decline in investment income is projected to be between 1% to 2%.

And that's just based on the roll-off of higher yielding or is it just a lower new money yield that you're expecting to get?

Excuse me, we anticipate a decline in investment income of 1% to 2%. However, we expect invested assets to grow by 4%. The slower growth in investment income is largely due to the effect of lower rates. The new money rate for this year is down almost 50 basis points from the 4.10% we had in 2019. As for the other components of excess investment income, they align with our expectations compared to 2019.

I would just add to that, it is clearly the volume of the calls that we did have in 2019, and that we do anticipate some additional calls in the first part of 2020. So as those roll off the books and get reinvested at a lower rate, that's also having a dampening effect given the lower new money rate.

I'm glad Frank mentioned that. I noted in the opening comments that going forward we expect only about 2% of the portfolio to come in. That was 6% in 2019, expected to be around 3% in 2020, and then 1% per year for a while. Frank brought up the calls; ten years ago we bought Build America Bonds, and those are now callable. We had 550 million calls in 2019 and are expecting another 300 million to be called in 2020. After that, there will be very few calls. I agree with Frank that the call activity in 2019 and 2020 significantly impacts investment income growth.

Great. I appreciate the details.

I just had a question around I guess reinsurance costs, where you do a reinsurance. A lot of your peers have just talked about increased costs there. I think probably a little more geared towards interest-sensitive box. So I was just wondering if you've seen any of that and if there is anything we should consider around principal-based reserving kind of gone fully into effect at the beginning of 2020?

Well, first of all, I think Frank will discuss the principal-based reserves. Regarding reinsurance costs, we do very little reinsurance, so it really doesn't affect us. The face amount of the policies we sell is in the range of $20,000 to $30,000 or $40,000, so we simply do not engage in reinsurance. Frank?

Yes. Regarding the principal-based reserves, we have essentially implemented this across all of our companies. We have a few smaller companies where we are implementing it for new business in 2020. We do not expect any significant impact either way. Overall, it appears to be slightly favorable for us compared to the reserving methodologies we used before principal-based reserving for those lines. However, principal-based reserving primarily targets aggressive term and some universal life policies with secondary guarantees, which we do not underwrite. Therefore, it does not significantly affect us overall.

Got it, okay. And then just in terms of the $375 to $395 excess cash flow you mentioned, can you talk about just priorities there? I know you said share buybacks would probably continue to be the primary method. I know you just have looked at acquisitions in the past. I mean is there something you guys are still entertaining?

Yes, we definitely plan to spread out our buybacks throughout the year, which allows us the flexibility to redirect funds later if we find better opportunities that offer higher returns for our shareholders. One area of interest is mergers and acquisitions. We are focused on targeting organizations that would complement us strategically and help us develop protection-oriented products for the middle market with a controlled distribution. We will keep looking for opportunities, and if a good one arises during the year, we will consider allocating some of that free cash flow toward it.

Got it. Thank you.

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