Globe Life Inc. (GL) Q4 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the Torchmark Corporation fourth quarter 2013 earnings release conference call. Today's conference is being recorded. At this time, I'd like to turn the call over to Mike Majors, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good morning, everyone. Joining me 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 2012's 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 fourth quarter was $134 million or $1.46 per share, a per share increase of 10% from a year ago. Net income for the quarter was $143 million or $1.56 per share, a 1% decrease on a per share basis. With fixed maturities at amortized cost, our return on equity was 15.5% and our book value per share was $38.77, a 10% increase from a year ago. On a GAAP reported basis, with fixed maturities at market value, book value per share was $41.49, a 10% decrease due to the impact of higher market interest rates and the valuation of our fixed maturity portfolio. In our life insurance operations, premium revenue grew 4% to $468 million and life underwriting margins increased 6% to $137 million. The growth in underwriting margin exceeded the premium growth due to the lower amortization on deferred acquisition cost and the deferral of certain direct response internet acquisitions cost that had not been deferred prior to the second quarter of 2013. The lower amortization rate is a result of improvements and persistency attributable to our ongoing conservation program and is incorporated in our guidance. We are pleased with the results of our conservation program and expected to see continued improvement and persistency. Net life sales were flat at $83 million compared to the fourth quarter of last year. However, they increased 4% over the third quarter of 2013. On the health side, premium revenue, excluding Part D, increased 6% to $215 million and health underwriting margin grew 11% to $49 million. Improvement in the health premium and underwriting margin was due primarily to the addition of Family Heritage. Health sales increased 13% to $40 million, also due primarily to the acquisition of Family Heritage. I will now turn the call over to Larry Hutchison for his comments on the insurance operations.

Thank you, Gary. First, let's discuss American Income, which generates approximately 39% of our life premiums. American Income's life premiums were up 6% to $182 million and life underwriting margin was up 4% to $59 million. Net life sales decreased 5% in the quarter to $38 million. The producing agent count at the end of the fourth quarter was 5,302, up 2% over a year ago and down 3% during the quarter. While we indicated on our last call, the sale should be down for the year, the fourth quarter results were slightly weaker than we anticipated. The changes that were made in 2013 just didn't create the results we hope for. However, while sales were lower than expected, they did increase sequentially from the third quarter to the fourth quarter by 3%. We said on the third quarter conference call that we expected changes to be implemented early in the first quarter to promote increased enthusiasm and activity in the field in 2014. While we are still implementing these changes, we do believe they will drive increases in agent retention and sales activity. We plan to open six new offices in 2014, and we'll continue to focus on developments of middle management to develop new SGA candidates. In 2014, we should start to see the results from the recent initiatives and the SGAs added in 2013 will also begin to make an impact. We expect life sales growth in 2014 to be within a range of 3% to 6%, as most of the growth coming in the third and fourth quarters. Now, Direct Response, which generates 35% of our life premiums. In our Direct Response operation at Globe Life, life premiums were up 6% to $162 million and life underwriting margin increased 19% to $41 million. Net life sales…

To complete the discussion of insurance operations, administrative expenses were $46 million for the quarter, 3% more than a year ago. The increase is in line with our expectation and we anticipate that administrative expenses should remain relatively flat in 2014 and be approximately 5.7% of premiums. 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 $1 million or 2%, but a 3% increase on a per share basis from the fourth quarter of 2012. For the full year 2013, excess investment income decline 8% on a dollar basis and 3% on a per share basis. This decline was due to lower new money yields and the call of hybrid securities that occurred in late 2012 and early 2013. 2013 was the third consecutive year that excess investment income declined. In 2014, we expect to see a reverse of this downward trend. We expect excess investment income to increase by approximately 5% to 6% in 2014. Further, reflecting the impact of share repurchases, we expect excess investment income per share to increase about 10% to 12% compared to 2013. Now, regarding the investment portfolio. Invested assets were $13 billion, including $12 billion of fixed maturities at amortized cost. Of the fixed maturities, $11.9 billion are investment grade with an average rating of A- and below investment grade bonds were $566 million compared to $585 million a year ago. The percentage of below investment grade bonds to fixed maturities is 4.5% compared to 4.9% a year ago. With a portfolio leverage of 3.5x, the percentage of below investment grade bonds to equity, excluding net unrealized gains on fixed maturities, is…

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 fourth quarter, we spent $95 million to buy 1.27 million Torchmark shares at an average price of $74.45. For the full year, we spent $360 million of parent company cash to acquire 5.5 million shares at an average price of $65.21. The parent ended the year with liquid assets of approximately $60 million. In addition to these liquid assets, the parent will generate additional free cash flow in 2014. Free cash flow results primarily from the dividends received by the parent from subsidiaries less the interest paid on debt and the dividends paid to Torchmark shareholders. While our 2013 statutory earnings have not yet been finalized, we expect free cash flow in 2014 to be in the range of $370 million to $380 million. Thus, including the $60 million available from assets on hand, we currently expect to have between $430 million and $440 million of cash and liquid assets available to the parent during the year. To date, in 2014, we have used $40.2 million of this cash to buy 529,000 Torchmark shares. 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 use of those funds. We also expect to retain approximately $50 million to $60 million of liquid assets at the parent company. Now, regarding RBC at our insurance companies. We plan to maintain our capital at the level necessary to retain our current ratings. For the last two years that level has been around an NAIC RBC ratio of 325% on a consolidated basis. This ratio is lower than some peer companies, but is sufficient for our companies in light of our consistent statutory earnings, the relatively lower risk of our policy liabilities and our ratings. Although, we haven't finalized our 2013 statutory financial statement, we expect the RBC percentage at December 31, 2013, will be slightly above the 325% consolidated target. We do not anticipate any changes to our targeted RBC levels in 2014. Those are my comments. I will now turn the call back to Larry.

Thank you, Frank. For 2014, we expect that our net operating income will be in a range of $6.05 per share to $6.35 per share. Those are our comments. We'll now open the call for questions.

(Operator Instructions) And we'll take our first question from Jimmy Bhullar with JPMorgan.

I had a couple of questions, first one on capital. I think you mentioned $430 million to $440 million of available cash. And if you keep $50 million to $60 million of a cushion that means like buybacks of around 380-ish or so for the year, is that the right way to think about that?

Yes, you should. We expect the buybacks to be right in that or the free cash flows in that $370 million to $380 million range.

And then on the business, maybe Larry on Liberty National, how much of the growth in agent count is coming just from the new offices that you're opening up versus growth at existing offices? And then on the related count, the agent count at American Income, you mentioned that some of the initiatives that you had implemented haven't like gained traction as fast as maybe you thought. Can you discuss, what's you're doing and what gives you comfort that trends will get better in 2014?

At Liberty National, the agent growth is coming from the new offices. We also see some increase in existing offices. So it comes from both sets of offices. American Income, we just did not see the expected correction in agent retention or agent activity we hoped for, and we made the changes in retention bonuses earlier in 2013. The sales growth in 2014 will come primarily from the bonuses structure change, we began implementing last month. This change is aimed at increasing agent compensation early in agent's career and encouraging greater agent activity. The bonus change also affects managers, because it ties their compensation, Jimmy, to increased recruiting and agent retention. We have tested these changes in the third and fourth quarters of 2013, before they were implemented. And then additionally simplify the commission process, so that our agents will have a greater certainty of payment at the point of sale at American Income.

Jimmy, I might add. For the six new offices, I think we have 86 agents from those offices.

And then on Part D, like you are in 15 regions, you were in seven last year. Should we assume that premiums were double or obviously there is a difference in size of all the regions than the market folks that you have? So could you discuss like how that relates to expected premiums?

Our premiums last year were approximately $300 million. We expect our premiums this year to be approximately $340 million. And most of that pickup comes from the additional regions, where we receive auto-enrollees. We get different numbers in different regions. I don't think it's fair to see with double.

The number of auto-enrollees would not necessarily double, but overall premiums I guess you're expecting a little bit north of 10% up?

That's correct.

And we'll take our next question from Steven Schwartz with Raymond James & Associates. Steven Schwartz - Raymond James & Associates: Larry, a follow-up on Jimmy's Part D question. I know obviously, you have your regular enrollees, you also have auto enrollees and the number of characterized auto-enrollees is doubled, so that's the thing. What I'm not quite understanding is that your in force went from about $300 million to $322 million at the end of this quarter versus the third quarter, that's an 8% increase. My understanding was that the sales for the first quarter are reflected at the end of the fourth quarter, is that not accurate? I'm trying to find out where this other 7% is going to come from basically, because you'd been averaging about $300 million of gross premium in force?

I'm thinking about your question. With the auto-enrollees, some of those come each quarter, but we're going to be having auto-enrollees throughout the year, Steven. I don't know if I can track back instantly what the percentages are each quarter, but I do have confidence that the premium number we're giving you is fairly close, which you'll see for the year of about $340 million. Steven Schwartz - Raymond James & Associates: Margin in Part D, I think it was about 11.8% for 2013?

I think we're producing about 10% margin for Part D in 2014.

And we'll take our next question from Bob Glasspiegel with Janney Montgomery Scott.

You're looking for investment income to start moving up. I assume your comments are predicated with the 10 year where it is. I suspect maybe your spreads have won and the stuff you're buying isn't going down in line with treasuries this year?

Bob, we have seen a little bit of decline in the rates, but we're still investing this quarter near the 550 that we've assumed in our guidance for the year.

So 255, 10 year doesn't really impact you. You're not looking this to like a blip and rates you're going to move up, this is the real-time based on where we are today?

Well, I think our 550 is based on a little bit -- we don't look so much at the 10 year, but to 30 year side. And the 550 was based on a little bit higher 30 year rate than we have right now, but it's not materially different.

It's not a regular period, so just slight uptick from where we are right now in yields?

I think we feel confident of the 5.5 for the year.

And as we think about your conservation program on the life side, what sort of persistency improvement can you see from it?

Well, I think we see improvement both in our first year and renewal year rates. And I think we have scheduled out on the web site that showed that improvement. In 2013 we conserved $38 million of lapse premium, that's about 15% of our lapses for the year. And we think we can continue to increase our percentage. We think within a couple of years we'll be around 17% of life's premium. The good thing about it is that once that premium is conserved, we're seeing about the same persistency, as a matter of fact a little bit persistency than we do in our other business. But at some point the improvement in persistency will level out a little, that is as we go forward with the conservation program, as we conserve more we're going to have some lapses of premiums that we conserved in prior years. But the rates that you see on that schedule of those persistency rates, we think will continue to hold or improve slightly.

Just so I understand it, that if you hadn't done the conservation program, you'd have $38 million less in premium for the year?

$38 million less of premium in force, that's right.

And we'll take our next question from Eric Berg with RBC Capital Markets.

I was hoping we could return to the first question by Jimmy. Can you just, one more time, sort of contrast with respect to American Income, the initiatives at the start of last year with the change in compensation now, how are those two moves different? And again why are you confident, that I know you mentioned you tested, but why are you confident that presumably you tested before, that this time you're going to get the desired outcome? What's the difference and why are you confident?

Eric, this is Larry. I'll try to answer that. In 2013, we slightly changed our compensation systems by introducing agent 10-year bonus. We did that in the first quarter and the third quarter of the year. In 2014, we've initiated a revised bonus system that's really aimed at increasing the agent compensation early in agent's career, encouraging greater agent activity. In addition, manager bonus is depended on their recruiting activity and the success of their agents. If you think about 2013, we tweak an existing system. In 2014, what we're introducing is a complete revision to our bonus system. When we tweaked the system, we didn't test the same, because it's a slight change and all changes were based on the experience of our leadership and our sales. Before we changed a bonus system throughout the company, we do test the same from six of our offices, from smaller to larger offices, we tested the change in bonus at the agent and manager level and based on those test results, we're confident that we'll see an increase in recruiting activity among the managers and the agents.

And just to be clear, when you say you tested, is this essentially asking the individuals involved how they would respond?

Both. When we test, we take the actual new bonus system and we install that bonus system in the different SGA offices where we're testing the same. So it's a live test with a new bonus system, and then we measure those recruiting, those retention, those activity results with that new bonus system. And we certainly received feedback from the field before we introduced this to field. We talked about this with all the SGAs and we talked with the leadership council within the SGA group. So we've tested their response as we showed them the results of the test. We received feedback and we made minor changes based on the feedback. But basically the installation followed a testing of this new bonus system.

And we'll take our next question from Joanne Smith with Scotia Capital.

I was just wondering if you could just revisit just one last time here on American Income. Do you think that there might be an issue of competition, because I don't think that that's been the case in the past, but I am just wondering if maybe there has been some ramping up of some of your competitors, maybe in some of your regions, and that could be the cause for the weaker recruiting and retention? So if you could address that? And then I have a follow-up.

Actually the issue is not competition. The American Income really doesn't have a competition within their field force, within their sales. As we study the sales, we don't see that we are involved in replacing the policies nor our policy is replaced. When you look at the lack of growth in 2013, this really a result of not increasing our agent counts. And the agent count was a result of two things. We had a decline in agent count. We've seen a lower retention of the agents and we did not achieve our recruiting objectives. The two go hand-in-hand. So we think with our new systems as we inspect our existing recruiting systems, we need to increase our recruiting objectives and we want to work on the decline in our actual agent terminations.

And Joanne, I would add that we feel like as far as retention is narrated, we need to tweak the bonuses to get more money in their hands earlier in order to help them survive their first year, because we know that once they have survived their first year, they'll persist better going forward. And to do that we also had to incentivize the managers to recruit and train more and that's the tweaks that Larry was talking about, tweak to do those two things.

I just want to follow-up and say that if you look at the history of the American Income, it's not unusual to see a very strong sales year followed by a slower sales year. And so given the double-digit increase in sales and agent counts in 2012, it's not surprising that we struggled somewhat in 2013. We think about agent growth and the growth of American Income as a bit of a stair step process. And so we're hoping that we've come to the end of the stairs. We're going to step upward this year as we see greater agent recruiting, a better retention within the agency.

Yes. I recall your stair step function comments previously. I guess one last follow-up on that, do you think that maybe the recruiting targets haven't been met maybe because the unemployment rate in the U.S. has improved?

I don't think so because when Gary and I look across the agency, what we're seeing, there are plenty of resumes that are within those individual agencies. There's no shortage of candidates. It's really an activity, which is having recruits in its office and then turning those recruits into national agents and then returning those agents to their first year. So I don't think unemployment rates really have much of an impact on American Income.

And then just a completely separate subject, now that the Family Heritage I guess is kind of up and running, you're still rolling out I guess new offices and stuff, do you see anything on the M&A landscape that could interest you?

Not at this moment, we continue to look, as we talked about before, we're fairly narrow on our scope. We're looking for companies that are in the middle income market, similar to other companies and that have either captive agencies or direct control distribution. We haven't seen that many candidates recently, but we'll continue to look.

And we'll take our next question from Christopher Giovanni with Goldman Sachs.

Can you talk a little bit about the 8% growth within direct response and maybe the mix of that in terms of what's coming from the new higher face amount policies? And then along the line, is there any changes in kind of the behavior experience you've seen early on with those higher face amount consumers?

We are seeing positive results from the higher face amount, the adult products, and all the all of the issued policies about 50,000 are actually still a small percentage of our total net premium. It does drive the increase in our total adult net premium. What I mean by that Christopher is that, if we don't make a $100,000 offer, it may result in their final sale, the people may elect a smaller-face policy. So it's an overall lift to the sales as they cross $100,000 offers. As we look at our test, we expect in 2014, the total we're seeing the same favorable results. So from 2014, we're going to roll out more of those campaigns with a higher face mailings and we have rate adjustments based on those additional test results.

And any plans to expand the face amount value further to get into additional markets?

Well, not really. I think what we're looking now is we're comfortable with the face amount, the other initiatives will be testing different rates, different packaging, down to different creative to reach that customer. And other expansion will be internet or electronic media, continue to see our greatest growth there. So we have different campaigns aimed reaching more consumers in that middle income market electronically.

And Chris although the prescription drug, access to those records have allowed us to do a little more underwriting than we've done in the past. It's helped us to give out from the 50,000 to the 100,000 face amount. In direct response, you really can't do enough underwriting to justify showing face amount above that.

And then you've targeted kind of overtime 10% growth in agent count in American income. Wondering if that's still a range that you think is achievable and what's the environment that we need to be in to achieve those, maybe both at macro as well micro level?

Chris, as a good rule of thumb, our projected agent count growth for 2014 is not that high. We're currently at 5,000 agents. The projected agent count for yearend 2014 is between 5,500 and 5,600 agents.

That's a 5% to 6% growth.

In the past you've talked about kind of over time a 10% growth, is that still a level of agent count growth that you think is kind of achievable? And then again, kind of what type of environment do we need to be in to kind of get those agent growth levels?

Surely it's achievable and we think we'll achieve that in the future. And we need to se it's certainly in the year and we need to see what the effect these two initiatives will have on agent recruiting with the managers on the agent retention, so as we see the effect of those two initial use, we could get closer to 10%, but right now based on test, best on our best judgment, we think it will be a little lighter for 2014.

And we'll take our next question from John Nadel with Sterne, Agee.

My question is on direct response as well, and it's really more around I think you had mentioned a lower level of DAC amortization, but I don't recall if that was specifically the direct response, but then there was also a comment about the ability to defer some of the internet-related acquisition costs. Could you just help us understand, the net impact of those things, how do we think about that as in terms of the margin, direct response is doing something around 25%, 25.5% margin currently. It looks like that's about two points higher than it was historically. Is that about the right way to think about that?

John, first of all in the amortization, we've seen slightly lower amortization this year and we think that's due to the improved persistency from the conservation program, but the biggest challenge is the deferral of those internet expenses. I think we talked about this in the second quarter when we made the change under the new accounting rules for deferred acquisition costs that were adopted a couple of years, we had a certain amount of record keeping evidence to show that these costs are leading to direct sales of the policies. And we finally were able to demonstrate that early this year and as a result, beginning of the second quarter, we started to deferring those costs. Now, what the impact to that was within 2012, our non-deferred acquisition expenses were 3.3% of premium. This year there is 1.6% of premium. It was due to that fall of those costs. And so we were 23% private margin in 2012, we ended this year right at 25% and we expected to be at that level going forward.

And we will take our next question from Yaron Kinar with Deutsche Bank.

Question on margins, it seems like really the underwriting margins have been the main driver for earnings growth in the foreseeable or in the recent past. Is that story pretty much over or are there other leverage to pull to further improve margins?

Well, I think there is improved persistency. It helps our amortization. As we talked about, we can continue to improve persistency somewhat. Controlling our non-deferred acquisition costs that we were just talking about gives us some more opportunities, but I don't look for big changes in the margins. Pretty high they are and I don't know that we can increase some great deal.

Before you hang up, I would just add Gary that that is, you're right, in 2012, we had a significant initiative as we really changed over to that variable cost model, where we had a big reduction to those non-deferred cost and then as we talked about the internet costs here in 2013. We really don't see significant movements in those non-deferred costs, as we have here those last couple of years.

And then, switching gears to American Income and headcount there again. I guess I was a little surprised by going for 5% to 6% growth in headcount there given that you're coming out with a new initiative that pretty much is going to impact three full quarter of this year, and not very strong prior year results, so why wouldn't growth year be closer to 10% long-term range?

The long-term range, I hope it is closer to 10%, but we just came out from a year in which agent growth was flat. We didn't have that kind of growth. Again, we tested these new initiatives at six offices, but we have 75 American Income offices that we've rolled this out into. And it's just too early to see the results of those initiatives. I think we'll have a better guidance in terms of agency growth at the end of the first quarter and at the second quarter. Again, we think the growth at American Income will be stronger in the third and fourth quarter. Some time in third quarter call, we'll see the real effects of these initiatives, and obviously the sales growth will attract the agent growth.

And we'll take our next question from Mark Hughes with SunTrust.

I'm not sure whether you touched on this earlier, but could you talk about the Medicare supplement market, kind of how you see that playing out, given healthcare reform and Medicare Advantage of funding that sort of things. What do you think is coming over the next 12 months?

Brian, you want to talk about the Medicare Advantage?

We are confidently looking at various proposals that are coming about with regards to Medicare reform. It seems like every quarter, couple of trends a year, there are various proposals. The most recent had been put forth by Senate Finance, and those include to consider merging the part A, part B deductible, various reforms to the coverage, but nothing right now is firmed up. That is something that I continue to monitor almost daily.

And I don't know whether you described sales outlook in that category for 2014. But are there any expectations that you can share?

We are seeing strong Medicare supplemental growth in the individual market. This year we had about 20% growth in individual sales. It's harder to predict the group sales, those tend to be a little lumpier in a sense that they either get a large case or you don't, those tend to come in more in the fourth quarter than they do in the first quarter.

But Mark, overall, I think we're looking for growth somewhere between 10% and 20% as far as the Medicare supplemental sales, as Larry mentioned. The reason for the big range is we're just not sure what the group sales are going to be.

And you'd ask about the Medicare Advantage and the Affordable Care Act. There are subsidies that are proposed to be eliminated. I don't know that we've actually seen that play out and what the effect of that is yet to Medicare Advantage.

Right. But presumably more positive when Medicare Advantage, if it is more restrained perhaps? That will be [multiple speakers].

Yes.

And at this time, there are no other questions in queue. I'll turn it back to our presenters for any closing remarks.

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

And that concludes today's conference call. We appreciate your participation.