Globe Life Inc. (GL) Q2 2013 Earnings Report, Transcript and Summary

Good day and welcome to the Torchmark Corporation Second Quarter 2013 Earnings Release Conference Call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Mike Majors, Vice President of Investor Relations. Sir you may begin.

Thank you. Good morning everyone. Joining me today are Gary Coleman, 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 2012 10-K and any subsequent forms 10-Q on file with the SEC. I will now turn the call over to Gary Coleman.

Thank you Mike, and good morning everyone. Net operating income for the second quarter was $133 million or $0.42 per share, a per share increase of 9% from a year ago. Net income for the quarter was $134 million or $44 per share also a 9% increase on a per share basis. With fixed maturities at amortized cost, our return on equity as of June 30 was 15.6% and our book value per share was $36.73 a 2% increase from a year ago. On a GAAP reported basis, with fixed maturities at market value, book value per share remained flat $41.19. In our life insurance operations, the premium revenue grew 5% to $475 million and life underwriting margins increased 9% to $136 million. The growth in underwriting margin exceeded the premium growth due to lower amortization of deferred acquisition costs and the deferral of certain great response and acquisition costs that previously have not been deferred. Lower amortization rate is a result of improvements and consistency attributable to our ongoing conservation program and is incorporated in our guidance for the full year. Brian will discuss the deferrable within the net cost in just a few minutes. Finishing life, net life sales increased 2% to $91 million. On the health side, premium revenue, excluding Part D, increased 23% to $280 million. And health underwriting margin grew 25% to $50 million. Improvement in health premium and underwriting margin was due primarily to the addition of Family Heritage. Health sales increased 88% to $24 million also due primarily to the acquisition of Family Heritage. I will now turn the call over to Larry Hutchison for his comments on insurance operations.

Thank you Gary. First let’s discuss American Income. At American Income, life premiums were up 9% to $178 million and life underwriting margin was also up 5% to $57 million. Net life sales increased 2% for the quarter to $41 million. The producing agent count at the end of the second quarter was 5,540 up 4% from a year ago but down 1% during the quarter. Our net sales increased less than we expected for the second quarter we 1, 5.49 (inaudible). We’re pleased the first quarter sales decline has reversed I believe this agency is moving in the right direction. American Income has had a long history of stair-step growth and continued adjustments have always been needed to ensure long term agency growth. We continue to make changes to address new agent retention and agent productivity. And we’re adding new SGA’s in certain existing territories. We have large offices with solid growth rates. We expect sales growth for the full year 2013 to range from 3% to 6%. Now Direct Response. And our direct response operation at Globe Life, life premiums were up 7% to $169 million and life underwriting margin increased to 24% to $43 million. Net life sales were up 3% to $40 million. Response rates began to improve during the second quarter and as we mentioned last quarter we’re confident that our new initiatives will help further increase response rates in 2013. We introduced rate adjustments and higher face amount offerings on adult products late in the second quarter. We expect mid-single-digit sales growth for the full year 2013. Now, Liberty National. At Liberty National, life premiums declined to 2% to $69 million while life underwriting was down 1% to $17 million. Net life sales grew 2% to $8 million while net health sales declined 5%…

To complete the discussion of insurance operations, administrative expenses were $44.1 million for the quarter, 11% more than the year ago. The increase is in line with our expectations and is due primarily to the addition of Family Heritage. As a percentage of premium, administrative expenses in 2013, should be around the same level as 2012. Now, I want to spend a few minutes discussing our investment operations. First, excess investment income. Excess investment income, which we define as net investment income less required interest on policy liabilities and debt was $55 million a decline of $8 million or 12%; 8% on a per share basis from the second quarter of 2012. These to clients, due to lower new money yield, and the call of $467 million to hybrid securities since June 30 of 2012. For the full year 2013, we expect the decline in excess investment income to be approximately 7% to 8%. However, reflecting the impact of share repurchases, we expect 2013 excess investment income per share to be down around 3% compared to 2012. Now regarding the investment portfolio, invested assets were $12.8 billion, including $12.2 billion of fixed maturities at amortized cost. Of the fixed maturities, $11.6 billion are investment grade with an average rating of A-, and below investment grade bonds are $585 million, compared to $764 million a year ago. The percentage of below investment grade bonds to fixed maturities is 4.8% compared to 6.9% a year ago. With a portfolio leverage of 3½ times, the percentage of below investment grade bonds to equity, excluding net unrealized gains on fixed maturities is 17%, which is less than most of our peers. Overall, the total portfolio is rated A-, compared to BBB+ a year ago. In addition, we have net unrealized gains in the fixed…

Thanks, Gary. I want to spend a few minutes discussing our share repurchases and capital position. First, regarding share repurchases and parent company assets: In the second quarter, we spent $90 million to buy 1.43 million Torchmark shares at an average cost of $62.77 per share. For the full year through June 30th we have spent $180 million dollars of parent company cash to acquire three million shares at an average cost of $59.26 per share. The available liquid assets at the parent consists of assets on hand plus the expected free cash flow from operations. As we’ve said before, free cash flow results primarily from the dividends received by the parent from its subsidiaries less the interest paid on debt and the dividends paid to Torchmark shareholders. The Parent entered the second quarter with liquid assets of $138 million including $94 million that has been invested to redeem our senior notes that mature on August 1st, 2013. Assuming shareholder dividends remain at the current level, we expect free cash flow for the remainder of 2013 to be around $206 million. Along with the $138 million of liquid assets available as of June 30th the parent will have around $344 million of available liquid assets for the remainder of the year. As previously noted, $94 million of these assets will be used to redeem our senior notes on August 1st and we expect to utilize approximately $20 million in other financing activities. Leaving the Parent with around $230 million of liquid assets for the remainder of the year. Of this amount we expect to retain approximately $50 million at the Parent company. As noted before, we will use our cash as efficiently as possible. If market conditions are favorable, we expect that share repurchases will continue to be a primary…

Thank you, Frank. For 2013, we expect our net operating income will be within a range $5.60 per share to $5.75 per share. Those are our comments for this morning. We will now open it up for questions.

(Operator Instructions). And our first question will come from Jimmy Bhullar from JPMorgan. Jimmy Bhullar – JPMorgan: Hi, good morning. First I had a question on just the agent count, it had begun to recover and this quarter dropped at both American Income and Liberty National, Liberty is actually been down for two consecutive quarters. So the first one is just what’s going on there, what’s driving that. And then secondly, are you still comfortable that you could achieve your sales growth targets if the agent count doesn’t begin to pick up? And then another question just on your expectations for Part D enrollments in 2014 and what type of products are you planning and now you’re expecting a pickup in auto-enrollees next year.

Jimmy, this is Larry, I’ll address Liberty National first. As our new systems were implemented. We just found that agents did not meet the new activity levels required and those agents lapped the agency also a new training process is of Liberty National and the implementation and the lifetime presentation for individual sales, enrollment of its agents, but managers recruiting that within the first six months for 2013. Our guidance for agent relative at Liberty National is a yearend we believe the agent count at Liberty National is between 1400 and 1500 agents. At American Income, what we found is our initiatives to improve agent retention did not give us the desire results as quickly as we’d hoped. Also our agent (inaudible) 0:02:45.5, needed to achieve double digit agents sales growth in the second quarter. Again we have initiatives that are changing at Liberty National and American Income, our guidance for agent growth is the year end agent count at American Income should be in the range of 5,800 to 6,000 agents. In terms Part D in 2014, Jimmy it’s really too early to really give a guidance on 2014 Part D sales, we’ve submitted our bid, but we don’t see the results of those bids until October- November of this year. Jimmy Bhullar – JPMorgan: And then just maybe one more Family Heritage, you had the company for a few quarters now, what if then sort of the positives or negatives versus what you might have assumed initially and then what’s your longer-term expectation for growth of that business.

At Family Heritage the integration is going very well. We’ve not lost a single agency director since the acquisition. Our internet recruiting system is coming on line at all agencies, and Family Heritage sales directors are now familiar with the system and they can manage their resume volume, in addition in response to the growth we’re seeing at Family Heritage. We’ve had a full time recruiting director to manage internet recruiting at Family Heritage. And Family Heritage is also we had a director of agency development, it’s important for agency directors. Jimmy, this year we’ve added approximately nine new agency directors, and again to avoid confusion in the call we talk about agency directors at Family Heritage, also the SGA’s, those are the managers and other two systems for [recent term] sales director that means the new agency he had within Family Heritage. But with those – with that, with the increase in agency counts that we see sequentially, we think there is a good growth prospects at Family Heritage Jimmy Bhullar – JPMorgan: Thank you.

Our next question will come from Erik Bass from Citi. Erik Bass – Citigroup: Hi, good morning, thank you. I was hoping you could talk little bit about competition both in the life and health businesses. And the life side you’re seeing more insurers beginning to focus on the middle market consumers. They are often using different distribution than you are. I’m just wondering are you seeing that your customers have more options for purchasing insurance than had historically. And then on the health side, I’ve also seen increased focus on supplemental products from some insurers and is there been any noticeable impact on pricing there?

With respect to life insurance we’ve not seen any impact of other insurers entering the middle income market. We are still seeing and we make presentations in our customer’s homes, we’re the only agent in their home. And we’re not seeing any replacement activity that results from those sales. The second question I believe was health insurance. And again they are not health insurance went to niche with Family Heritage they operate in basically rural areas. And we’re the only agent in this home making presentations metric supplement obviously is very competitive market, although we’ve seen good growth in our Medicare supplement sales, energy distribution. Health sales for the new independent agents which is primary Medicare supplement growth, 17% in the quarter, and we think for the year within that agency we’re going to have double digit sales growth in the independent agents size slow double digit sales growth to be 9% or 10% in that range. But again we are not seeing competition affect our sales. Erik Bass – Citigroup: Okay, thanks, that’s helpful. And then just one American, you mentioned that you added some more SGA’s this quarter and the opportunity to add, additional SGA’s and sort of slower growth market, so just wondering what is your, and kind of what is the opportunity to add there and how much middle management capacity do you have currently to fill those roles

Oh we seen there’s pretty good middle management capacity because we really focused on middle management and American Income over the last two years. As we stated on the call, and on January 1st, 2013 our SGA count was 64, we’ve added the eight SGA’s in the second quarter we selected the SGA’s in second quarter that measured probably 72. We anticipate by year-end 2013 will be at 75 SGA’s, not a good guidance from last year but it’s our expectation that we’d be having additional SGA’s next year and those areas where we don’t have high growth rates, we’re going to have plenty of lease, we have resumes to recruit agents who will be adding additional SGA’s Erik Bass – Citigroup: Okay, thank you.

Our next question will come from John Nadel with Sterne, Agee. John Nadel – Sterne, Agee, & Leach: I think it’s still good morning in Texas, good morning. And the question, I guess you two places where I want to focus. One, obviously some challenges at Liberty, but really wanted to more focus on American Income and agent count growth. So the target for year-end is largely unchanged right, despite some pressure in 2Q. And I guess I’m just wondering if you could just help us understand where your confidence comes from like what are the specific efforts that have been put in place, or can you talk it also any sort of progress in July that helps us feel better about the turnaround there.

John, this is Larry again it’s really not July progress that we’re focused on, the reason we’re expecting the stronger third and fourth quarter is because the changes that we introduced in the first and second quarter really focused on increased agent activities. And we have compensation changes with progress on field agent retention. We think those are going to have a greater impact on the third and fourth quarter. The other change at American Income is the starting in August, we’re going to introduce another compensation change at the agent level, but we balanced this level to the agents let’s say a longer retention, exercises we talk about agent retention. We’re not talking about 12 month agent retention, we’re talking about increased agent retention in the third and fourth and fifth and sixth months through the 12 months. John Nadel – Sterne, Agee, & Leach: Understand, okay. And then I am sorry I might ask you later.

Yeah, John, I was just going to add that yeah we as Larry alluded to, we had to make adjustments along the way. Yeah, couple of years ago we identified getting agents to level where they were getting the top bonus as it mean to growing agency and what we found is that we were getting there is supervision trying to get them to the top bonus level but we weren’t staying with them or helping them to stay at their level and so that contributed to the lower retention levels. The things that Larry pointed out specially bonus at the agent level to – as they improve their tenure I think will help not only to get them – we don’t have to as to get them to the level they need to be able to stay there in order to while we make it to the fourth (inaudible) they could make it about half way through the year they have a much better chance of making it through the four year. John Nadel – Sterne, Agee, & Leach: Okay understood and then really nice rebound in direct response this quarter I know that last quarter you had talked about some initiatives there. Maybe you could help us understand sort of what’s – where the success was. And in particular I know that you had talked about introducing through Globe the opportunity for higher face amounts on the life insurance side and I’m wondering if you have any success with the higher face amount product?

This is Larry I’ll answer that two parts. The first is really, regarding response rates overall, direct response some improvement in response rates in the second quarter was frequent down a little bit the demand in June we really didn’t see an improvement in response rates the circulation enquiries. But we did see a significant increase of response rates for our email campaigns and our mailing response rates were much better in the second quarter than the first quarter 2013 with the final quarter of 2012. So we’re definitely seeing overall increase in response rates. I think your other question is really the rollout of our rates in our adult products and there we’re seeing good early results. And that’s reflected in our guidance for the third and fourth quarters of 2013. John Nadel – Sterne, Agee, & Leach: Okay very good thank you very much.

We’ll now go to a question by Mark Finkelstein from Evercore. Mark Finkelstein – Evercore: Good morning. I actually want to go back to American Income as well. I guess I’m just trying to put the mosaic together the sales outlook was moved from 10% to 14% down to about, 3% to 6% or whatever the number was. But you really aren’t changing the outlook on agents for the year. I think you said last quarter 5900 and 6000 now you are 5800 to 6000. Why that sizable drop in sales given that the agent counters just because of the impact of the second quarter in the kind of the steeper ramp to getting back to that aging count or is there something else going on?

Mark just think about 2012 versus 2013 these two years have evolved very differently. In 2012 American Income had an 18% first quarter year-over-year and 8% first quarter and then we really saw sales as agent sales have dropped to the third and fourth quarters. We sold out the year with 11%. If you look at American Income we have a negative first quarter with a 2% first quarter. So you’re looking at fairly strong third and fourth quarters to still reach that range of 3% to 6%. The reason we think we’re going to be able to grow this agency in 3% to 6% range is these initiatives and compensation the activity models are going to take hold in the third and fourth quarter and we’ll see better results. Additionally if we add these additional SGA’s that will start to boost some of the sales, some of the agent activity in the second half of 2013.

Excuse me. I would add to that I think in our previous guidance we anticipated the increase in production for agent that we didn’t see in the second quarter. It’s going to take us little bit longer to get to that productivity level. So I think that’s why you may see that same number of agents but not quite most productive. Mark Finkelstein – Evercore: Okay and then just on the direct response deferral of certain cost related to internet distribution I guess just to – I’m surprised to see that this change kind of fully result in the decline in and just a quick why is that and so that’s a change in estimate it’s not a change in accounting principle is that right?

That’s correct. That’s right.

Okay is it a change in estimate that will be applied on a going forward basis. Mark Finkelstein – Evercore: Okay so as the – as this build up in the deferral occurs on the amortization the impact will kind of slowly ease but it will take a very long time for that to happen essentially.

Correct yeah you’ll see generally maybe about an 8% of the, in your first year cost will result in increase in amortization at first year and then it will be spread out over a long period of time as the premiums are collected on that business. Mark Finkelstein – Evercore: Okay alright thank you.

(Operator Instructions) And our next question will come from Mark Hughes with SunTrust. Mark Hughes – SunTrust Robinson Humphrey: Yeah thank you very much. Is there any opportunity for other expenses to be deferred where you might not have adequate track records?

Yes but you could at some point down the road.

We’re always taking a look to see to look at the various expenses that we have in valuating them at this point in time there are none that we you’d see we’re focusing on like we have been here on these internet expenses in building that historical track record.

Yeah Mark I would add that we took a really hard look at that this and some of the agency expenses back in 2011 and I don’t know that we – we’ve seen more expenses that we can move from non-deferral to deferral there. The difference was direct response was those the deferral comes under the advertising cost rule. And those are a little bit harder to say as Frank said you really have to develop information over a long period of time. I really kind of think this is part of the last and direct response because most of the other expenses we had are non-deferred to mostly salaries at Wal-Mart these people that it can be or something I think we were set now that’s how we got our expenses defined. Mark Hughes – SunTrust Robinson Humphrey: Okay, thank you.

And our next question will come from Randy Binner with FBR Capital Markets. Randy Binner – FBR Capital Markets: Hey good morning thanks. I just want to follow-up on that deferral thing I apologize I missed this. What is the nature of the data that’s changed or you’ve been able to gather that, that leads you to have a better deferral view on the internet. What is it that you’ve captured in the data that changes that view?

What you have to do is develop enough of the historical data that shows that the expenses that you’re incurring of advertising expenses that you have, result in the probable future benefit that actually exceeded the amount of expense. So you have to be able to show that the, yes so expenses result in sales and that you have overall a profit margin relating from those particular activities but they’re really very similar to what we do in the insert media and these cost rates essentially the same other than rather than being in the print. These are electronic type and so at this point in time it’s going to reach, we’d now have just, we’ve got enough history, we’ve got a full five years under our belt if you will and the analysis of the data we can, we are very comfortable that we can fully support that we do in fact have this probable future benefit of profit. Randy Binner – FBR Capital Markets: Is that probable future benefits over the whole scope of that activity right that’s not is it do you think they kind of hit a certain profit margin before you can say all of this activity is profitable. Because there is a lot of, there is a lot of initiative that go out that don’t have the result of a successful sales. Is it like a profit margin hurdle, is that what the hurdle is?

Not as much of a profit margin hurdle as much as there is with the overall activity it can be shown to be that will in fact be profitable over a long period of time. Randy Binner – FBR Capital Markets: Okay interesting but similar to what you were able to achieve over the years with the print media that’s the, that’s kind of the philosophy of that?

Exactly.

Yeah Mark we have when we applied this in 2011we had many years of experience drawn focused mail side and also the internet media side. It’s just that its internet it’s got just really started up we just didn’t have the data there. And we probably have that and I will add to the prior question. You did have to show a profit margin to be able to defer the expenses because you’ve got to be able to show that you can recover that DAC over time so it is, there is a little bit of a hurdle there from the profit margin side. Randy Binner – FBR Capital Markets: Yeah I appreciate that just, I’m more interest in it because we need the accruals. And just one other clean up question and then I apologize to you if I missed this. But Gary did you lay out kind of what the new money yield was this quarter and if you could compare that to over your last quarter I’d be interested in that?

I’d mentioned earlier that our new money rate 4.07% for the quarter part of that reason it was lower than it was in the first quarter was the fact that we had to invest new money short at Family Heritage, one time assets liability matching thing. We really would have expected to have a higher rate than its already got us to 420 it would invest those that many long. We were expected to have a little bit higher rate but we happen to invest our money in like the first six or seven weeks of the quarter when present rates were lower than they were in the first quarter. So we missed the increase in the treasury rates later in the second quarter. But we expect that going forward we’re going to invest and obviously grow to 4.07% and in our guidance will last throughout the year we’re built-in that we would be investing at four and three quarters percent. Randy Binner – FBR Capital Markets: Is that four and three quarters. That’s perfect thank you.

Our next question will come from Dan (inaudible).

Thanks I had two questions one on Liberty National you talked about it being a gradual process can you kind of revisit what your long term goals would be for growth and agent count and sales?

Our long term growth for agent count at Liberty National as we think it is stable year-on-year our major growth were about 10%. And we know to do that we need to expand our geographic number of offices as I mentioned that we opened four new offices second quarter we’re going to, between now and then in the year we’re going to open traditional three offices those thing our office growth is really dependent upon we develop middle management we will expand geographically.

Got it thanks. And secondly your premium growth in life accelerated a bit year-over-year maybe and then part of on your conservation efforts what’s in the vision in your full year 2013 guidance for life premium?

See I think we’re looking between 4% to 5% and I think we will roll over 5% during the quarter but I think over the four would be four to five.

Great thanks.

Our next question will come from Eric Berg with RBC. Hello Mr. Berg we’re unable to hear you. Eric Berg – RBC Capital Markets: Could you hear me now?

Yes we could thank you. Eric Berg – RBC Capital Markets: Alright. Thank you I’m sorry I had my phone on mute and just have this one question. The profitability of Family Heritage continues to be on the health side of course materially less than the overall underwriting margin in your health business. Now I know that was anticipated when you acquired the company last November. But what’s the outlook there and in particular do you see profitability the true profitability numbers moving closer overtime?

Eric we’re looking at a margin around 19%, 18% to 20% for the year. That’s what we expected for this type of business. And we don’t expect that to change overtime. We – one thing we could – that’s not reflected in the other item margin is we get a more investment income on this business because as you’ll remember a lot of this is where we have a refund to premium. Future after 20 years so now we’re happy with this margin and I don’t see it moving up we need to match it more than the other products. Eric Berg – RBC Capital Markets: Is the margin on – is the margin on its supplemental health business as opposed to your Medicare business similar to that on the legacy towards market your existing supplemental medical margin?

Eric I’m not sure did you say it came by Family Heritage as supplemental – Eric Berg – RBC Capital Markets: Yes I’m trying to compare the profitability of Family Heritage supplemental medical business profitability to the profitability of the supplemental medical business of Torchmark other distribution agencies.

I would say it’s, its notable that higher than the non-med sup business in our other lines. It obviously is between its – it’s more towards the Medicare supplement than it is non-med so… Eric Berg – RBC Capital Markets: Alright then thank you very much.

(Operator Instructions) And our next question will come from Chris Giovanni with Goldman Sachs. Chris Giovanni – Goldman Sachs: Thanks so much. Most asked just one question regarding I guess M&A pipeline and you changed the buyback strategy just to be a bit more I guess conservative and consistent in terms of when you’ve been in the market. But is anything out there in terms of M&A that is enticing to you guys or can you remind us just what your potential actions would be in terms of what you’d be looking for obviously some form of captive distribution but both maybe U.S. as well as internationally?

Chris it really hasn’t change over what we talked about before we do in type of companies that we would be interested in acquiring are companies that add capital to our controlled distribution it could be agencies or direct response. That are in the middle income market and selling products similar to what we’re doing in the other are the lines of – those are – that’s the, to talk of insurance that we’re comfortable with and we want to sell. And I would say it’s going to be primarily domestic at least in what we’re seeing. We’re still looking (inaudible) report any different from last quarter we’ll continue to look as I mentioned before we’re very pleased in buying the Family Heritage. And we’ll be on the lookout for a company similar to that because that’s what we’re interested in, we’re not interested in companies in other lines of business. It’s – we want more of the type of businesses we already have. Chris Giovanni – Goldman Sachs: Okay and is there a certain size deal you’d like to try and find?

Well as I mentioned before we, we do wish that the Family Heritage may be have been little bit bigger we can – there’s no particular size I’d say there are meters of limit to how much we can go but each deal with paying out so – Chris Giovanni – Goldman Sachs: Thanks so much.

(Operator Instructions). And at this time we have no further questions in the queue and I’ll turn the call back over to our presenters for any additional or closing remarks.

Right. Thank you for joining us this morning. Those are our comments. And we will talk to you again next quarter.

That does conclude our conference for today. Thank you for your participation. And you may now disconnect.