Q4 2019 Earnings Call
[music].
Good day and welcome to the gloves life first quarter 2019 earnings release Conference call. Today's conference is being recorded for opening remarks interconnection sounds like you're trying to cover effort to make make sure executive Vice President Investor Relations. Please go ahead Sir.
Thank you good morning, everyone, joining the call today, or Gary Coleman, and Larry Hutchison or co Chief Executive officers breaks about at our Chief Financial Officer, and Brian Mitchell, Our General Counsel.
Her comments or answers your questions may contain forward looking statements that are provided for general guidance purposes.
Accordingly, please refer to our 2018 10-K and any subsequent forms 10-Q.
While the FCC.
Yeah work on this may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures.
I'll just call over to Gary Coleman.
Thank you Mike good morning, everyone.
Since.
Net income was $187 million four dollarssixty guidances for sure.
Compared to $165 million were dollar 45 cents for sure.
[music] net operating income quarter was $188 million or dollar 70 cents for sure.
Sure increases 9% leader.
On a GAAP reporting basis return on equity for the year was 11.6%.
For sure was $66 into service.
Excluding unrealized gains and losses.
It is.
Return on equity was 14.5%.
Hi, I'm sure you see 9% to $48.26.
[music] life insurance operations premium revenues increased 5% to $631 billion in life underwriting margin was $177 million.
For several years ago.
In 2020 weeks <unk> running income to grow around <unk> to 5%.
[music].
Outside <unk>, 7% nearly $75 million did help erotic larger was up 5% to $61 million.
Gross written premium exceeded underwriting margin growth, primarily due to lower margins at Liberty National.
2020, we expect health underwriting income to grow around 4% to 6%.
[noise] administrative expenses were $61 million or 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, administrate expenses were $240 million or 6.7% or premium compared to 6.5 pursuit in 2018.
In 2020, we expect administration this is to grow approximately 6% and to be around 6.7% or free.
I'll now turn the call over Larry for his comments on the marketing operations. Thank you Gary.
Sure the fourth quarter results at each of our distribution channels.
Sure how shall I am pleased with the shells crossamerica agencies in 2009 change.
I'm, particularly pleased to see agent count growth.
Management will increase we've seen across all the worst solicit agencies and 2009 chain.
At American income life premiums were up 8% to $297 million.
Life underwriting margin was 9% to $98 million.
Life sales were $59 million upside for sure.
The average producing shell.
For the fourth quarter was 7631 up 10% from the original quarter and one for SAP from the third quarter.
It's producing agent count it's again in the fourth quarter 7551.
Net life sales for the full year 2019 grew 6% sales increase was driven by increases in agent count.
Not at Liberty National Life premiums were up 3% to $72 million.
Underwriting margin was up 4% to $18 million.
Net life sales increased 13% to $15 million and that's health sales were $7 million.
12% from the Ergo corridor.
The average producing agent count for the fourth quarter was 2534.
Up 17% from the original quarter and up 6% for the third quarter.
They're producing agent count it was pretty national and as a quarter or 2660.
Net life sales for the full year 2019 grew 9%.
I have health sales for the full year 2018 grew 11% the sales increase was driven by increases in agent count.
To better described are not agency business as long life National Insurance company.
The kind of replacing the term directory slosh, that's direct to consumer.
And our direct to consumer Division Anglo applies life premiums are up 4% to $209 million and life underwriting margin was flat at $39 million.
Net life sales for $30 million up 2% from the Ergo corridor.
For the full year 2009 chain that my sales were slach due primarily to a decrease as you've heard me lifestyle.
Certainly from a decline in response rates part you don't really offers.
At family Heritage Health premiums increased 8% to $76 million and health underwriting margin increased 7% Tonight.
Yes.
Health sales were up 19% to $18 billion due to an increase in both agent productivity and agent count.
The average producing agent count for the fourth quarter was 1228.
I appreciate that figure in the quarter.
8% from the third quarter.
Producing agent counts because he ended the quarter 1286.
Net health sales for the full year 2009 chain grew 9%.
Sales increase was primarily driven by an increase in Asia cow.
At United American General Agency Health premiums increased 11% to $108 million on margins increased 12% to $15 million.
Net health sales were $32 million up 7%, apparently ergo corridor.
[noise] to complete my discussion marketing operations I'll now provide some projections.
We expect it producing agent count for each agency as they enter 2022 being the following ranges.
American income, 5% to 7% gross.
Liberty National five is 13% gross.
Family Heritage to the 7% growth.
Net life sales for the full year 2020 are expected to be as follows.
American income, 5% to 9% gross.
Liberty National 8% to 12% growth direct to consumer Alan to to about 2%.
That's health sales for the full year 2000, its watching are expected to be as follows Liberty National nine just 13%.
Family Heritage, 8% to 12%.
I don't American individual Medicare supplement relatively flat.
I'll now turn call back to Gary.
There's a few minutes discussing our vessel operations first excess investment income.
Investment income, which we defined as net investment income less required interest on that policy obligations. The.
$63 million, a 1% increase over the year ago corridor.
Oh sure basis, reflecting the impact of our share repurchase program excess investment income increased 6%.
For the year excess investment income grew 5% wrong for sure 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%.
<unk> for sure basis be flat to up 1%.
Now regarding the investment portfolio invested assets or $17.3 billion, including $16.4 billion, a fixed maturities is amortized cost.
Now the fixed maturities $15.7 billion are investment grade with an average rating by minus.
And below investment grade bonds or $674 million compared to $666 million a year ago.
The percentage below investment grade bonds, the fixed maturities is 4.1% compared to 4.2% a year ago.
Overall, the total portfolio was rated a modest compared to triple B, plus a year ago [noise].
Bonds rated triple B or 55% of the fixed maturity portfolio down from 58% at the end of 2018.
Well this ratio was in line with the overall bond market. It is high relative to our peers.
However, we have less exposure there appears to higher risk assets such as revenues equities.
For mortgages and asset backed securities.
We believe that the triple B securities that we acquire provide the best risk adjusted capital just a returns due in large part through our unique ability the whole securities to maturity, regardless of fluctuations in interest rates or equity markets.
Finally, we have net unrealized gains in the fixed maturity portfolio, a $2.5 billion $97 million lower than the previous corn.
Yes, the investment yield.
In the fourth quarter, we invested 449 days dollars an investment grade fixed maturities.
Early in the Middle School industrial.
And financial sectors.
We invested in an average yield of four point, 11% and average ready they plus at an average life was 31 years.
For the entire portfolio, the fourth quarter yields a spot for 1% down 15 basis points from deal fourth quarter 2018.
As of December 31st the portfolio yield was approximately 5.41%.
For 2020 at the midpoint of our guidance, we assumed an average new money yield of four point, 10% for the full year.
Well, we would like to see higher interest rates going forward and global I Cant road thrive in a lower for longer interest rate environment.
Extended low interest rates will not impact the gap, our statutory balance sheets under the current accounting rules since we sell non interest since the protection products.
While our net investment income into a lesser extend our pension expense will be impact the impact is that a continuing low interest rate environment.
Our excess investment income will still grow it just won't grow at the same right. It was invested assets.
Fortunately the impact lower new money right. So our investment income is somewhat limited as we expect to have an average turnover or less than two per cent per year and our investment portfolio over the next five years [noise].
Now I'll turn call over to Brian.
Thanks, Gary first I want to spend a few minutes discussing our share repurchases and capital position.
The parent began the year was liquid assets a $41 million.
In addition to these like what assets the parent generated excess cash flow in 2019, a $374 million as compared to $349 million in 2018.
The parent company excess cash flow as we define it results primarily from the dividends received by the parents from its subsidiaries less the interest paid on debt and the dividends paid to globalize shareholders.
That included the assets on hand at the beginning of the year.
We had $415 million available to parent during the year.
As discussed on our prior calls we accelerated the repurchase of $25 million a goal by shares into December 2018, with commercial paper and parents cash.
We utilized $20 million are the 2019 excess cash flow.
Reduced the commercial paper for those repurchases.
That left $395 million available for other uses including the $50 million of liquid assets, we normally retain as parents.
In the fourth quarter.
We spent $93 million two by 930000 globalize shares at an average price of $99 an 82 sets.
For the full year 2019, we spent $350 million a parent company cash.
Acquired 3.9 million shares at an average price of $89.04.
So far in 2020, we have spent $33.5 billion two by 322000 shares at an average price of $104.20.
The parent ended the year with liquid assets of approximately $45 million.
In addition to these like what assets the parent will generate excess cash flow in 2020.
While our 2019 statutory earnings had not yet been finalized we expect excess cash flow in 2020 to be in the range of 375 million to $395 million.
Not including the assets on had a January 1st we currently expect to have around 420 million to $440 billion of cash and liquid assets available to the parents in 2000 and twice.
As noted on previous calls we will use our cash is officially 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 asset alternatives of higher value to our shareholders. We expect the share repurchases will continue to be a primary used to those funds.
We believe the yield their return that is better than other available alternatives and provides a return that exceeds our cost of equity.
Now regarding capital levels, and our insurance subsidiaries [laughter].
Our goal is to maintain capital at levels necessary to support our current ratings.
As noted on previous calls global life, that's targeted at a consolidated company actually level RBC ratio in the range of 300% to 320% for 2019.
Although we had not finalize our 2019 statutory financial statements, we anticipate that our consolidated RBC ratio for 2019 will be toward the higher in the this range.
For 2020, we will continue to target a consolidated company actually 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 $1.77.
In addition, net operating income per share for the full year 2019 was $6.75. This was once that 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're projecting the net operating income per share will be in the range of $7, a three cents to $7 a 23 cents.
$7 and 13 sat mid point of this guidance is slightly lower than previous guidance due to higher than expected employee pension and health care costs in 2020.
Those are my comments I will now turn the call back to Larry. Thank you Frank So it's our comments, we'll now open the call for questions [noise].
Thank you.
Yes. Good question, please signals I pressing star.
Tell us.
<unk>.
Yes, I guess speakerphone. Please state your name your production it's turned off <unk>.
Sorry to ask your question.
Our first question comes from interest.
<unk>.
Hey, good morning, just sticking with that.
Guidance EPS guidance question, so the new the new mid point to give guidance is a mere two cents slower then.
In previous and I think you've just cited that it's the lower discount rate.
Just wanted to make sure.
Could you give us essentially how many cents per share that impacted.
Your outlook and if there were any other contributors to the.
Revise guidance and how much.
Sure.
Yes, the as I noted in the comments really the kind of the primary reduction primary causes for the reduction in the midpoint, what's kind of higher employee costs in general, including our pension and health insurance costs, a combination of though is that right at that two cents per share.
We also there are some offsetting items.
Yeah that are impacting the overall guidance, but as we look at the lower interest rates. Yeah. We did have a little bit lower excess investment income expectations from what our previous guidance was.
But a lot of that was also due to some higher than previously anticipated acquisition I mean does fall investments. So all that's driving down our excess investment income. We're also seeing a little lower effective tax rate because that those largely offset each other in addition, higher share price had some impact a warehouse.
Getting less of an impact of our overall buyback program, but we're also seeing higher excess tax benefits, which impacts that the stock option expense stock compensation expense.
And again those are roughly offsetting each other so net net we really look too they kind of the higher higher pension expense and to some degree our higher health insurance cost for our employees as being the primary contributors.
I did a lot of lot of moving pieces there.
Looking at those line items for both the life and health segments.
We notice that the non deferred commissions and on realization line and the non deferred acquisition expense line.
Both up materially.
No.
Segment, I guess, but average it out for both it looks like.
No, it's 10% life and you can maybe north it's going to maybe closer to.
So did you know.
10 plus percent.
Health as well so so.
[laughter] question is what what's driving that number up so much that kinda dampened the U.P.S. versus what we would've expected.
Yeah, we did see some higher.
Growth in the Sun deferred acquisition costs during the quarter over quarter.
Some of that is due to some timing of certain expenses, where they kind of hit on that as the year, but in general there up yeah, we already carrying higher costs.
In support of our various agencies are there there's higher marketing cost that we incur some of our Barry meeting costs.
Increased a little bit in 2019 over 2018 and the we also saw some of the branding changes so as we're going through and as you may noted that noticed in some of the material where the process of converting all of our agencies from the individual individual agencies to.
Divisions of go life, and so there's a fair amount of expenses the we've incurred in the fourth quarter just associated with.
Changes overall brand of those particular agencies and helping the individual agencies I make that conversion as well.
So we do anticipate the benefits of that really in the future.
But then a really a key driver of the of the higher percentage increased a really some of the I.T. cost we've incurred year over year.
We implemented a new CRM system that a couple of the agencies as well as a new Commission systems and just other agency support systems that we're starting to see the depreciation on those.
Beginning 2019, and then you on overall just trying to improve their overall agent experience.
And there and the service levels to the agencies.
I see we really.
Okay and say in 2020.
Really see a leveling out it shouldn't we do not expected to increase at the midpoint of our guided that at near that level will be a lot closer to.
Overall, six or 7% increase.
That's helpful and then just lastly.
Your your agent Count just increased so robustly and as I look at your sales guidance, which is very compelling the crime across both segments I Wonder one.
Well is it the rebranding that kind of got that grows into 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 true drivers for agency growth ensure night chain.
Recruiting activity in our middle management gross.
If you live across the three agencies American income had an 11% increase recruiting in 2009 chain.
Three national in the 30% increase your recruiting yeah steady retention at both agencies.
Chris I started retention is there's always the middle management gross American Vanguard says, 9% Middle management growth in 2020.
Liberty National is 17% Middle management gross.
Thanks, those are the primary factors you know branding helps with the recruiting but it was year long recruiting activity that really increased the agent count.
Family Heritage, we had 2% year over year recruiting gross where we doubled our retention.
Family Heritage that was driven by a 23% of Christmas management.
I should know middle management really treasure recruiting and our training. So that also helps retention and agency growth.
I think that the guidance for given assurance is good guidance, let's remember that agency grocers stair step process and you don't expect the same percentage growth every year.
It's possible we could exceed that we're early in 2020 or next call, we'll have better guidance in terms of the final patient count for each of the three exclusive agencies.
So much.
[noise] next question comes from Jimmy Bhullar JP Morgan.
I had a question just on recruiting I would've thought that strong labor market routing and so it wouldn't have been as good as they've been so if you could just.
Finally, I'd make those comments [laughter] unemployment really.
Affects retention not recruiting.
Most river cruise, you're not people would rather employs people looking for greater opportunity.
So we really saw an increase in recruiting despite the record low unemployment so sure I.
I think the growth of middle management to help us retention.
Because most of the training comes from Middle managers.
And as agents are better trained they're more productive and they stick with the company longer. So I think that was real driver for.
The study retention, we sought American and color Liberty National.
First the increase retention, we saw at family Heritage.
[laughter] and any comment do you have or any sort of metrics you could share on the quality of the new recruits and so just somebody can get an idea on how.
Sales would fall <unk> would still that given the strong growth in the agent count recently.
Jimmy I think was new recruits you always see a little less productivity. There's just there's just not quite as productive in terms of the percentage of business submitted.
The average premium as a more better in Asia.
The fact that we had sales growth in all three agencies tells me that we have a fairly high quality of recruit across the three agencies.
And just lastly on direct response yourselves or the last couple of orders have been up slightly they are down a lot from where they used to be.
Do you think the channels sort of turned the corner and what's your expectation in terms of a much.
Growth you have a in this business in the next step two to three years.
The fourth quarter, and a better than expected sales.
Due to the strong electronics sales across both adult juvenile products as.
Well look at the guidance for 2020, I guess refer the early.
As there are four primary drivers and direct response and if I look at 2020, those four metrics versus through Chessen night chain.
The second certain media will be up about 2%.
We expect electronic media to be up about 5%.
Our circulation, we up about 2%.
<unk> mail volume will be stable slide six a range of negative true, possibly 2% sales.
It's really good guys at this point, let's remember our focus really is our accretion sales it's accretion total profit dollars.
[noise]. Thank you.
Our next question.
Thanks.
Hi, Thanks for taking my question just wanted to ask on the health margin. So while margin the underwriting income increased nicely year over year. The margin percentage was a little down just what didn't know if you're seeing any changes in utilization for Medicare. So.
Products or if there's anything yeah, you see on the horizon.
Well I think you know maybe too well.
There are contributing factors is that in the.
Med sub business, we saw an increase in claims are here and that's something that was industry wide.
The the policy obligations.
Andrew.
Jay business was where we have the Medicare supplement was a little over 65% that's high compared to the previous years.
But yeah that.
We will be implemented a REIT increases in 2020 and going forward and won't.
Not only slowed increases.
Policy obligations, but hope, we're bringing back closer to the 65%.
Great and then just to clarify the excess investment income.
Thank you guys said it was gonna grow 2% to 3% just wanted to clarify and what your expectations are for a excess investment income growth next year.
Well for a prediction for 2020, you were thinking in dollars excess investment it can be down 1% to 3%.
Our per share basis will be.
The 1% <unk>.
What the issues there is there because their investment income will be a decline of 1% to 2%.
And that's it based on the roll off of a higher yielding or is it just you know a lower new money yield that you're expecting to get.
Excuse me as soon as declined to one tubes, and that's when it comes gonna grow 1% to 2%.
Whereas a invested assets are going to grow 4% and the reason, we're having a lower gross investment income is because the impact of lower rates. It's the.
No the new money rate that we.
This your worst in 2020 were saying four point, 10% that's down almost 50 basis points were what we did in 2009 too.
So that's.
As far as the other components of.
Excess investment income there are about well, we expected and what we had in 2000 my team.
Okay great.
That I would just add to that it's clear that the volume of the called that we did have in 2019 and that we we do anticipate some additional called in the first part of 2020, so those roll off the books and get reinvested at lower rates, that's all for having a dampening effect given the low new money right yeah.
Glad Frank mentioned that I'm isn't the opening comments that the.
Going forward do we would expect the only about 2% or the portfolio coming on.
That.
That was 6% 2000, IP, that's going to be around 3%. In 2020, you will be one per cent per year going forward for awhile and Frank loosen the calls.
We.
We have.
10 years ago, we both build America bonds. Those are now callable in so we had 550 move the calls in 2019, reflecting another three remains those to be called.
In 2020, and then after that.
No it would be very little calls so I agree with frac them.
Recall activity in 2009 to 2020.
A big impact on the.
So you can grow.
Great appreciate the detail.
[noise] <unk> <unk> question. Please press star.
<unk>.
Our next question.
Goldman Sachs.
Hi, I'm [laughter] I just had a question around I guess reinsurance costs, where you do every insurance.
A lot of your peers, if they've talked about increased costs. There you are I think probably a little more geared towards interest sensitive box I was just wondering if you have you seen any of that and you know if there's anything we should consider on principle based reserves in kind of gone fully into effect at the beginning in 2020.
[noise] well first of all I'll listen I think Francisco <unk>.
Well those reserves as far as reinsurance costs, we do very very low reinsurance is so oh that we it really has no impact on us remember the personnel policies, we sell rhythm.
If it was 20 to 30000 40000 right.
So we just don't do reinsurance.
Right, Yeah with respect to that the principle based reserves you know we are pretty much.
That's pretty much implemented that for all the bar all of our company. We've got a couple of our smallest smaller companies that were.
Implementing that for the new business here in 2020, really do not anticipate a real meaningful impact one way or the other we're finding that net yeah, probably slightly favorable for us.
Versus your reserving methodology, a pretty PBR for those wind but.
Steve yard primarily focused on that aggressive turban.
Much of the UL policies and secondary guarantees and we just don't write those businesses.
Right as line so it doesn't have a significant impact overall on us.
Got it Okay and then just in terms of the 375 to 395.
Excess cash flow you mentioned he talked about just priorities. There I know you said you know share buybacks are probably continue to be the primary method. You know I know you guys have looked good acquisitions in the past I mean is that something you guys Bristow entertaining.
Yes.
Absolutely. So we do take we spread that those buybacks out you know intend to spread about ratably over the course of a year that gives us flexibility to redirect those.
Later in the year throughout the year, if we find other alternatives that provided greater return to shareholders. One of those it's clearly M&A. We we are interested in M&A, we're very focused on what to do a target.
Organization that would be strategically accretive to us.
That is and that helps us to a bright protection oriented products to the middle market.
And that has a controlled distribution and so.
We continue to do look for opportunities and we'll continue to do so and if we come across a good opportunity during the year. They clearly that would be a we would really clearly look at to redirecting some of that free cash flow into that type of an opportunity.
Got it thank you.
And that.
Further questions.
Alright. Thank you for joining us. This morning. Those are comment then we'll talk to you again next quarter.
Thank you ladies and gentlemen.
[noise].