Q4 2019 Earnings Call
[music].
That's a 19 earnings release Conference call. Today's conference is being recorded for opening remarks introduction. So I'd like to turn the conference over 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, our co chief Executive officers ranks the vote 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 only.
Accordingly, please refer to our 2018 10-K and any subsequent forms 10-Q on file with the FCC.
Never comments May also contain non-GAAP measures. Please see our earnings release in West side for a discussion of these terms and reconciliations to GAAP measures I will now turn the call over to Gary Coleman [noise].
Thank you, Mike and good morning, everyone.
In the fourth quarter net income was $187 million or dollar 16 guidance is for sure.
Compared to $165 million were dollar 45 cents for sure a year ago.
Net operating income for the quarter was $188 million or dollar 70 cents for sure the per share increase was 9% Leer ago.
On a GAAP reported basis return on equity for the year was 11.6% and book value for sure was $66 in two cents.
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 in life underwriting margin was $177 million up 6% from year ago.
In 2020, we expect life underwriting income to grow around four to five or soon.
On the health side premium revenue grew 7% to $235 million and health underwriting margin was up 5% the $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%.
The administrative expenses were 61, the dollar for the core up 7% from 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% or premium compared to 6.5% in 2018.
In 2020, we expect administrate expenses to grow approximately 6% and to be around 6.7% a friend.
I'll now turn the call over to Larry for his comments on the marketing operations. Thank you Gary I'm wondering what your the fourth quarter results at each of our distribution channels I will start help I shall I am pleased with the sales growth in our agencies in 2000 might change.
I'm, particularly pleased with the agent count growth.
Middle management increase we've seen across all of our exclusive agencies in 2009 chain.
At American income life premiums were up 8% to $297 million.
Life underwriting margin was up 9% to $98 million.
Net life sales were $59 million upside for chef.
The average producing Cal.
For the fourth quarter was 7631 up 10% from the year ago quarter and up 1% from the third quarter.
Producing agent count at the end of the fourth quarter was 7551.
Net life sales for the full year 2019 grew 6%.
Sales to increase was driven by increases in agent count.
At Liberty National life premiums were up 3% to $72 million.
An 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 ergo quarter.
The average producing agent count for the fourth quarter was 2534.
Up 17% from Tahira more quarter and up 6% from the third quarter, you're producing agent count it was pretty national and as a quarter of 2660.
Net life sales for the full year 2019 grew 9%.
Net health sales for the full year 2018 grew 11%.
Sales increase was driven by increases in agent count.
To better described are not agency business to grow life National Insurance company.
The gun, replacing the term direct response, but direct to consumer.
And our direct to consumer Division and global life life premiums are up 4% to $209 million and life underwriting margin was flat at $39 million.
Net life sales were $30 million up 2% from the ergo corner.
For the full year 2019, net life sales were flat due primarily to a decrease as you've only line volume.
Good morning from a decline in response rates for 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 1228.
9% from a year ago quarter, and up 8% from the third quarter.
We are producing agent count if the ended the quarter 1286.
Net health sales for the full year 2009 chain grew 9% sales increase was primarily driven by an increase in agent count.
At United American General Agency Health premiums increased 11% to $108 million, while margins increased 12% to $15 million.
Net health sales were $32 million up 7% compare to the year ago quarter.
To complete my discussion marketing operations I'll now provide some projections.
We expect that 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 five that 13% growth.
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% growth.
Liberty National 8% to 12% growth direct to consumer down to two 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'll now turn call back the Gary.
I want to spend a few minutes discussing our investment operations first excess investment income.
Investment income, which we defined as net investment income less required interest on net policy obligations in debt.
It 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% longer per share basis. It grew 8%.
In 2020 due to the impact of lower interest rates, we expect excess investment income to declined about 2% to 3%.
But on a per share basis be flat to up 1%.
Now regarding the investment portfolio invested assets or $17.3 billion, including $16.4 billion, a fixed maturities at 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 is rated a modest compared to triple B plus a year ago.
Bonds rated triple B or 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 triple B securities that we acquire provide the best risk adjusted capital adjusted returns due in large part to 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 with $2.5 billion $97 million lower than in previous quarter.
Yes, the investment yield.
In the fourth quarter, we invested $449 billion, an investment grade fixed maturities, primarily in the municipal industrial if financial sectors.
We invested in an average yield of four point, 11% and average rating of a plus at an average life with 31 years.
For the entire portfolio the fourth quarter yield was 5.41% 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.
While we would like to see higher interest rates going forward and global life can throw 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 intrusive protection products.
While our net investment income and to a lesser extend our pension expense will be impact the impact is on a continuing low interest rate environment.
Our excess investment income will still grow it just won't grow at the same rate is invested assets.
Fortunately the impact lower new money rates on our investment income is somewhat limited as we expect to have an average turnover or less than 2% per year and our investment portfolio over the next five years.
Now I'll turn the 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 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 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 go by shareholders.
That included the assets on hand at the beginning of the year, we had $415 million available to apparent during the year.
As discussed on our prior calls we accelerated the repurchase of $25 million of globalized 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 retain at the parent.
In the fourth quarter.
We spent $93 million to by 930000 globalize shares at an average price of $99 in 82 cents.
For the full year 2019, we spent $350 million a 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 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 liquid 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 at 2020 to be in the range of 375 million to $395 million.
Thus, including the assets on had a January onest. 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 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 capability 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 use of those funds.
We believe the yield they 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.
Our goal is to maintain capital at levels necessary to support our current ratings.
As noted on previous calls gold life has targeted a consolidated company action level RBC ratio in the range of 300% to 320% for 2019.
Although we had not finalized our 2019 statutory financial statements, we anticipate that our consolidated RBC ratio for 2019 will be toward 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 cents.
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.
The $7 and 13 sat midpoint 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 goes our comments, we'll now open the call for questions.
Thank you.
Yes. Good question. Please take note pressing star one on your telephone keypad.
Yes, I guess speakerphone. Please make sure Im your question is turned off to layer signal to reach our Clinton.
Press Star one to ask your question.
Our first question comes from Andrew segment of Credit Suisse.
Hey, good morning.
Just sticking with that.
Guidance EPS guidance question, so the new the new midpoint to give guidance is a mere two cents lower than.
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 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.
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 cost a combination of those is that right at that two cents per share.
We also there are some offsetting items.
That are impacting the overall guidance, but as we look at the lower interest rates, we did have a little bit lower excess investment income expectations from what our previous guidance was.
But a lot of that was also was due to some higher than previously anticipated acquisition and municipal investments. So while that's driving down our excess investment income. We're also seeing a little lower effective tax rate because of that those largely offset each other in addition, higher share price had some impact we're happy.
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 kind of net net we really look too they kind of a higher higher pension expense and to some degree our higher health insurance costs for our employees as being the primary contributors.
Got it 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 onboard as Asian line and the non deferred acquisition expense line were both up materially.
Ill.
In each segment I guess, but average it out for both it looks like.
10% life, and maybe north of maybe closer to.
Sure.
Yes, 10 plus percent.
Health as well so so.
The question is what what's driving that number up so much that kind of dampened the EPS versus what we would have expected.
Yes, we did see some higher.
Growth in the Don deferred acquisition costs during quarter over quarter. If some of that is due to some timing of certain expenses and where they kind of hit on the in the year, but in general there up we are incurring higher costs.
In support of our various agencies I mean, there's higher marketing cost that we incur some of our various meeting costs increased a little bit in 2019 over 2018.
We also saw some of the branding changes so as we're going through and as you've made noted that noticed in some of the material where in the process of converting all of our agencies from the individual.
Individually agencies to divisions of gold life, and so there's a fair amount of expenses. The we've incurred in the fourth quarter just associated with.
Changes in overall brands of those particular agencies in helping the individual agencies make that conversion as well. So we do anticipate the benefits of that really in the future.
But then I'm really a key driver of the of the higher percentage increased a really some of the key cost we've incurred year over year.
We've implemented some new CRM systems 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.
To begin in 2019.
And then on overall, just trying to improve their overall agent experience and there and the service levels to the agencies.
I see we really could you.
Okay, let's say in 2020.
Really see a leveling out at shouldn't it well, we do not expected to increase at the midpoint of our guided that at near that level will be a lot closer to the 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.
Was it the rebranding that that kind of got that growth into maybe you could even exceed.
The guidance in sales that you just provided on the call for 2020.
Just talking about the agency growth first so I think the two drivers for agency growth and Tonight chain.
Recruiting activity in our middle management growth.
If you look across the three agencies American income had an 11% increase recruiting in 2000 night chain.
International and 38% accretion recruiting you had steady retention that both agencies.
For the study retention as result of the Middle management growth American and has 9% middle management growth in 2020.
I'd National is 17% Middle management growth I.
I think those are the primary factors in our branding helps with the recruiting but it was year long recruiting activity that really across the agent count.
Family Heritage, we had 2% year over year recruiting growth, where we doubled our retention.
Family Heritage that was driven by a 23% accretion middle management.
As you know middle management really treasure recruiting and our training. So that also helps retention and agency growth.
I'll take that the guidance for given this year is good guidance. This remember that agency grocer 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.
Our next call, we'll have better guidance in terms of the final patient count for each of the three exclusive agencies.
So Mike.
Thanks.
Our next question comes from Jimmy Bhullar of JP Morgan.
Okay.
I had a question just on recruiting I would've thought.
On labor market.
The recruiting and it wouldn't have been as good as they've been so if you could just.
Sure, Yes make thats comment.
Unemployment relief.
Effects retention not recruiting.
Sure recruits are not people that employs people looking for greater opportunity.
And so we really saw an increase in recruiting despite the record low unemployment to share.
Thanks, a growth of middle management to help us retention because most of the training comes from our middle managers and the changes are better trained they're more productive in the state with a company longer. So I think that was the real driver for.
It's steady retention, we saw at American income and Liberty National and of course to increase your retention we saw at family Heritage.
And any comments you have or any sort of metrics that you could share on the quality of the new recruits and so just somebody can get an idea on how sales would fall the wood sales.
Given the strong growth lesion count recently.
Jimmy I think was new recruits you always see a little less productivity, they're just they're just not quite as productive in terms of the percentage of business submitted.
The average premium as have more better in Asia.
Thats, a fact that we had sales growth in all three agencies tells me that we have a fairly high quality of recruit across all three agencies.
And just lastly on direct response your sales of 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.
Growth you have in this business in the next two to three years.
The fourth quarter did better than expected sales.
We are due to a strong electronic sales across both adult jumbo product clients.
Well it looks at the guidance for 2020, I guess refer the early.
Four primary drivers in direct response lunch and if I look at 2020, those four metrics versus through chess and night chain.
We think insert media will be up about 2%.
We expect electronic media to be up about 5%.
Our circulation, we up about 2% or E mail volume will be stable. So six a range of negative to approximately 2% sales is really good guidance at this point, let's remember our focus really isn't accretion sales accretion total profit dollars.
Thank you.
Our next question comes from Ian Thanks.
Bank of America.
Hi, Thanks for taking my question.
Just wanted to ask on the health margin so.
While margins the underwriting income increased nicely year over year, the margin percentage was a little down.
Just wanted to know if you're seeing any changes in utilization for Medicare stop products or if theres anything.
Yeah, you see on the horizon.
Well I think.
Maybe too well.
Contributing factors is that in the.
Med sub business, we saw an increase in claims earlier and that's something that was industrywide the.
The policy obligations.
Sure.
Jay business, which is where we have the Medicare supplement was a little over 65% that's high compared to the previous years.
But yes that.
We will be implementing right increases in 2020 and going forward and will.
Not only slow the increase and then I'll policy obligations been hope, we bring it back closer to the 65%.
Great and then just to clarify the excess investment income.
Thank you guys said it was going to grow 2% to 3% just wanted to clarify and what your expectations are for.
Excess investment income growth next year.
Well for US for next for 2020, you were thinking to the dollars excess investment income will be down 1% to 3% or per share basis will be flat the 1%.
What the issues there.
Investment income will be.
A decline of one of the 2%.
And that's it based on the roll off of higher yielding or is it just lower new money yield that you're expecting to get.
To the outset, a decline was due to investment income is going to grow 1% to 2%.
Whereas invested assets are going to grow 4% and the reason we're happy to lower growth investment income is because the impact of lower rates. It's the.
The new money rate that we.
This year, whereas in 2020, we're seeing and four point, 10% that's down almost 50 basis points were what we did in 2009 team.
So that's.
As far as the other components of.
Excess investment income there about will we expected and what we had in 2019.
Okay great.
Of that I would just added that it's clear that the volume of the call that we did have in 2019 and that we would you anticipate some additional called in the first part of 2020, so those roll off the books and get reinvested at a lower rate. That's also having a dampening effect given the low new money rate yes.
As Brian mentioned that I mentioned in the open the comments that the.
Going forward do we would expect the only about 2% or the portfolio coming on.
That that was 6% in 2000, IP, that's going to be around 3% in 2020, who will be 1% per year going forward for awhile and Frank mentioned the calls.
We.
We have.
10 years ago, we both build America bombs those are now callable and so we had 550 mood of calls in 2019 were 50, another three or move those would be coal.
In 2020, and then after that.
The they'll be very little calls so grew frac them.
Recall activity in 2009 to 2020.
Thats, a big impact on the investment income growth.
Great appreciate the detail.
And as a reminder, we'd like to ask question. Please press the star to your thoughts on the one team.
Our next question comes from Alex kind of Goldman Sachs.
Hi.
I just had a question around I guess reinsurance costs, where you do have reinsurance.
A lot of your peers have talked about increased costs. There you are I think probably a little more geared towards interest sensitive box I was just wondering if you've seen any of that and if there's anything we should consider around principle based reserves and kind of gone fully into effect.
Again in 2020.
Okay.
Well first I'll listen I think Franco proof of principle based reserves as far as reinsurance costs, we do very very low reinsurance. We so that we it really has no impact on us remember that base amount policies, we sell room.
It was 20 to 30000 40000 range.
So we just don't do reinsurance.
Right, yes, with respect to that the principle based reserves, we are pretty much.
At pretty much implemented that for all of our 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 had.
Probably a slightly favorable for us.
Versus your reserving methodologies.
PBR for those wind but.
PBR, primarily focused on that aggressive turbine and a bunch of UL policies and secondary guarantee them and we just don't write those businesses.
Right those lines. 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.
Can you talk about just priorities. There I know you said you know share buybacks would probably continue to be the primary method.
Yeah, I know you guys have looked at acquisitions in the past I mean, if that's something you guys Bristow entertaining.
Yes.
Absolutely. So we do take we spread that those buybacks out.
Intend to spread about ratably over the course of the year that gives us flexibility to redirect those.
Later in the year throughout the year, if we find other alternatives that provide a greater return to the shareholders. One of those it's clear the M&A. We we are interested in M&A, we're very focused on wanting to target.
Organization that would be strategically accretive to us.
That is in the helped us to right protection oriented products to the middle market.
And that have the controlled distribution and so.
We continue to look for opportunities and we'll continue to do so and if we come across good opportunity. During the year, then clearly that would be we would we clearly look at redirecting some of that free cash flow into that type of an opportunity.
Got it thank you.
And at this time, we have no further questions in queue.
Alright. Thank you for joining us. This morning does your comments and we'll talk to you again next quarter.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
Yes.