Q1 2020 Earnings Call
[music].
Ladies and gentlemen, good day and welcome to the global Life incorporated first quarter 2020, <unk> earnings release Conference call. Today's conference is being recorded for opening remarks, and introductions I would like to turn the conference over to Mr., Mike Majors Executive Vice President Investor Relations. Please go ahead Sir.
Thank you good morning, everyone, joining the call today, or Gary Coleman, and Larry Hutchison Arco, Chief Executive officers ranks about our Chief Financial Officer, and Brian Mitchell, Our General Counsel.
Never comments or answers to your questions may contain forward looking statements that are provided for general guidance purposes only.
Accordingly, please refer to the first quarter earnings release, we issued yesterday.
Never comments May also contain non-GAAP measures. Please see our earnings release in website for discussion of these terms and reconciliations to GAAP measures I'll now turn the call over to Gary Coleman.
Thank you Mike.
Good morning, everyone.
The developments of the last several weeks have been difficult everyone. In our dogs are with all those impacts but current prices.
Today, most of our comments will address our thoughts on the potential impact of cobot, 19, or insurance operations and financial position.
However, we do want to begin by giving a brief summary of the first quarter results.
In the first quarter net income was $166 million, our dollar 52 cents per share compared to $185 million or $1.65 cents per share a year ago.
Net operating income for the quarter was $189 million our dollar soon be three cents per share.
<unk> per share increase of 5% from a year ago.
On a GAAP reported basis return on equity for the year was 9.6% and book value per share we $6.98.
Excluding unrealized gains and losses on fixed maturities return on equity was 14.1% and book value per share grew 9% to $49. It's 66 cents.
In our life insurance operations premium revenue increased 4% to $650 million in life underwriting margin was $179 million up 5% from year ago.
Health insurance premium revenues grew 5% to $280 million and health underwriting margin was up 3% to $63 million.
Administrative expenses were $64 million core upside in pursuit of clear, though and in line with our expectations.
For the full year, we expect administrative expenses to be up around 5%.
I'll now turn the call over that Larry for his comments on first quarter marketing tool.
Thank you, Gary we had strong sales and record recruiting growth in the first quarter.
Total life sales were up 5% health sales were up 9%.
Combined average agent count at the three exclusive agencies was up 15% over the year ago quarter.
Total agent count at the ended the quarter was just over 12000.
I will discuss current trends at each of the distribution channels later in our comments I'll now turn the call back to Gary for his comments on our investment operations.
Thanks, Larry.
Excess investment income, which we defined as net investment income unless required interest on that policy liabilities and debt.
With $63 million, a 4% decrease over the year ago order.
On a per share basis, reflecting the impact of our share repurchase program.
This investment income declined 2%.
That's an investment yield in the first quarter, we invested $212 million an investment grade fixed maturity.
Primarily in municipal industrial and financial sectors.
We invested at an average yield of 3.81%.
An average rating of a plus.
In an average lives of 27 years.
Our portfolio.
First quarter yield was 5.39% down 14 basis points to the yield in the first quarter 2019.
As of March 31st the portfolio yield was approximately 5.39%.
We had net unrealized gains the fixed maturity portfolio of $1.5 billion.
One last item for first quarter results.
We took an after tax impairment of approximately $25 million offshore driller during the first quarter.
Later, I will discuss our investment portfolio in more detail.
Now, let's move to the current crisis is potential impact on our insurance operations investments in capital.
I'd like to start by talking about our general approach.
To effectively navigate a crisis.
Our planning.
Communication and teamwork is critical.
Back in January we formed a working group to monitor and evaluate granola bars development.
And discuss the possible it can pack it could have on our business.
Once coven Nike was recognized immediately disruptive issued.
We acted activated the crisis management teams as contemplated in our formal business continuity plan.
These teams monitor developments identify issues recommend solutions.
And develop communications for employees agents and customers.
The entire executive management team that on a daily basis as well.
All this activity was designed to incorporate both a top down and bottom up approach.
Ensure unaffected comprehensive response to the crisis.
In addition, the executive management team has having bi weekly meetings with the board of directors.
Skus or ongoing response to this crisis.
Our main priority was to develop a plan that would maximize the safety and well being of our employees agents and customers.
And ensure our ability to continue normal business operations.
We were able to quickly shift most of our employees to working remotely.
While maintaining compliance with our information as security protocols.
Well it employs his duties require them to be in the office, we implemented processes and procedures consistent with CDC guidelines Gulf provide a safe environment.
We are extremely pleased with the manner in which our employees who responded to this crisis.
I would like to take this opportunity to express our gratitude for everything our employees have done.
Thanks to their efforts we were operating at nearly full capacity with respect to all of whom office operations.
In monitoring operations, one key area of focus spring input.
Well it is still early he has not seen an unusual decline in daily premium Kuwait.
This is consistent with past experience.
As a persistency of our enforced block has historically been stable when did difficult macro economic conditions exist.
For the full year, we currently project why premiums go around 3%.
Hi, Bob underwriting margin to be up 1% with a potential range of a decline of 3%.
An increase of 4%.
We expect help frame is drove 5% to 6% and.
And health underwriting margins go approximately 1%.
With a potential range of a decline of 2% to an increase of 4%.
Frank will provide more detail on the underlying assumptions related to premiums underwriting margins.
Got it later in his comments.
I'll now turn call back over to Larry to discuss impact is 19 hold our marketing operations.
Ask Gary our agents has always done business face to face customer homes and businesses.
Obviously carbonite chain presents a challenge to this way of doing business.
As the crisis again, we quickly pivoted to a virtual sales and recruiting process to enable our agencies to continue their activities.
Oh sales for the past several weeks from declined I'm very pleased with the willingness and ability of our agencies to quickly adapt to this difficult environment.
I will now discuss current trends and each distribution channel.
At American income over the last four weeks sales have been approximately 20% lower than they were in the weeks leading up to the crisis.
However sales for the last two weeks have only been around 10% lower and during the same time period last year as agents have more fully adapted to the virtual sales process.
This trend is very encouraging and demonstrates the resiliency of this agency.
At Liberty National initial impact of covert 19 crisis has created a 30% reduction in sales.
However, the agencies in the field are very quickly adapting to the virtual sales process.
I'm also pleased with the immediate success seamless virtual recruiting.
We continue to support ongoing personal training and sales we feel that the next two or three weeks these systems and processes will be fully adopted as well.
Because of it is we should see a continuation in sales and recruiting.
At family Heritage answers just converted to a digital presentation last year. So the transition to a virtual sales process has been challenging.
Over the last several weeks level of sales declined approximately 30% compared to the same time period last year.
However, I'm encouraged with the positive attitude as the agency owners I'm optimistic that we'll work hard and make the best of the situation.
For all the exclusive agencies, assuming shelter in place begins to ease in the near future.
Mid third quarter and fourth quarter sales are expected to return to normal levels as we return to in home selling in addition to virtual sales.
New agent recruiting has been very strong since mid March and we're seeing a concentration of high quality candidates.
It's difficult to predict so when these new agents because when there's never crews will become licensed agents with our companies just most of the license testing centers were initially closed.
A growing number of stays for now, allowing new agents to work with the temporary license and testing centers are starting to reopen which will allow licensing to resume in the remaining stage recruiting is expected to continue to increase given the large number of displaced workers in this environment.
It is too early in the second quarter have any data for terminations.
However, given the limited number of other work opportunities, we do not anticipate a significant increase in agent termination rates.
At direct to consumer we have seen an increase in interest in our life insurance products over the past several weeks.
Applications to our Internet and inbound phone channels have increased significantly.
As we've noted in the past difficult times tend to highlight the importance of basic protection life insurance.
We believe our investments over the past few years in the digital self serve and phone channels will generate continued success and the current environment.
Well, that's difficult to predict what will happen going forward. If we continue to see this level of activity throughout the second quarter and into the third quarter.
It's likely we will the upper end of our sales guidance or even slightly above for the full year.
At this point, our mailing facilities continue to operate normally.
Host off a surplus levels are inline with what we've experienced in the past.
We have not seen any impact to our mailing processes.
The U.S. Postal office has continued to report only minor minor disruptions to some retail locations a certain high skytouch, primarily in New York.
Pennsylvania and Ohio.
There has been significant discussion the media about the postal service running out of money and shutting down on the next few much.
We believe that would be unrealistic from any perspective political or otherwise that the federal government would allow the postal service to cease operations.
At General agency into the early part of the second quarter individual Medicare supplement sales are down approximately 30% from year ago.
It is always difficult to predict sales in this competitive marketplace, but I am encouraged to see I'm encouraged to see if the current levels of activity.
Group Medicare shales are even more volatile and are generally heavily weighted towards the end of the here so trends over the past several weeks or not meaningful.
Let's summarize the marketing discussion I feel very good about the progress we're making.
Since the onset as a pandemic direct to consumer has seen an increase in demand.
While there are sales challenges in this environment.
We're seeing our agents continue to sell business.
The virtual sales Henry screening process will continue to provide great value and watch the crisis is over.
I believe the success. We are currently seen with Asian recruiting will help provide a strong foundation for long term growth.
Although it's difficult to predict sales activity in this uncertain environment, we are providing our best estimates based on knowledge of our business and the current trends we are seeing.
Net life sales for the full year 2020 are expected to be as follows.
American income life.
The decrease of 5% to 10%.
Liberty National flat to a decrease of 15%.
Direct to consumer an increase of 5% to a decrease of 5%.
Net health sales for the full year 2020 are expected to be as follows.
Liberty National.
Flat to a decrease of 15%.
Family Heritage flat to a decrease of 10%.
United American individual Medicare supplement.
Flat to a decrease of 30%.
Now I will turn the call back to Gary to discuss the investment portfolio.
Thanks, Larry.
Invested assets or $70.6 billion, including $16.3 billion are fixed maturities at amortized cost.
Oh, the fixed maturities $15.6 billion are investment grade with an average ready they myles.
And below investment grade bonds or $740 million compared to $671 million a year ago.
And the percentage of below investment grade bonds fixed maturities is 4.5% compared to 4.2% a year ago.
Overall, the total portfolio is rated triple B plus same as a year ago.
Bonds rated triple B or 55% of the fixed maturity portfolio same is at the end of 2019.
While this ratio is in line with the overall bond market. It is high relative to our peers.
However, we had little or no exposure to higher risk assets, such as derivatives equities commercial residential mortgages steel lows and other asset backed securities.
We believe that the triple B securities that we acquire.
Provide the best risk adjusted.
And capital adjusted returns.
Due in large part to our unique ability to hold the securities to maturity, regardless of fluctuations in interest rates or equity markets.
At this point I'd like to provide some additional information on certain components of our fixed maturity portfolio.
The potential impact that fold in IP that certain sectors of the economy.
Has recently been the subject that much discussion.
Our investment in those sectors, which we consider to be.
Airline Department store leisure restaurant lodging gaming apparel auto parts.
Toys and trucking sectors is about $444 million.
Or less than 3% of our fixed maturity holdings.
We have no unsecured debt in the airline or restaurants sectors.
Now while those exposures are relatively minimal approximately 10% of our fixed maturity portfolio is comprised of energy sector hold.
I want to take a moment discuss how we view our position.
Approximately 57% EUR $922 million as energy portfolio is in the midstream sex.
The second involves transportation storage in wholesale fuel oil and gas.
It is generally well positioned to manage oil and gas price volatility.
Our exposures here a focus on large cap.
Our quality issuers that don't critical infrastructure assets.
Backed by long term contracts.
With minimal direct exposure to commodity prices and volumes.
We expect these issuers to adjust capital allocation policies to defend their credit quality.
We anticipate limited downgrades in view default risk is limited.
Approximately 34% our $556 million as energy portfolio consists of exploration and production.
Our investments here are weighted towards us independent issuers with significant scale and adequate liquidity.
Manage cash flow issues in this environment.
Generally our issuers in this sector are reducing capital investments dividends buybacks and headcount.
To mitigate the impact of lower oil prices.
Many have hedged positions that provide additional protection.
We view default risk with our MP issuers to be limited.
With the primary RIS being potential downgrades from in a C too.
They see three.
Approximately 6% or $90 million or energy portfolio is in the refinery sector.
Hi issues here are the two largest U.S. refiners.
Narrow and marathon petroleum.
And both are expected to maintain investment grade ratings during this cycle.
The sectors, most vulnerable to low oil prices or oilfield service and offshore drillers.
Less than 4% or $63 million of our energy portfolio is in the old field service and offshore driller suckers.
Our oilfield service exposures into the largest service companies in the World Halliburton and Baker Hughes.
Both with strong balance sheets and investment grade ratings.
We see limited downgrade wrist.
Finally, we have only $13 million invested in offshore drillers.
Because we invest so long a key criteria and utilizing our investment process is that an issue or must have the ability to survive multiple cycles.
This is particularly true in the energy sector.
Our energy portfolio as well the gross fraud across sub sectors issuers in is heavily weighted towards issuers that are less vulnerable to depressed commodity prices.
While we have no intent to increase their holdings in this sector, we're comfortable with our current energy holdings.
Okay.
Finally, lower interest rates continue to pressure investment income.
For 2020, the average new money yield assumed that the midpoint of our guidance is 3.40% for the full year.
Compared to 4.47% in 2019.
While we.
I'd like to see higher interest rates going forward, well block can thrive at a lower for longer interest rate environment.
Extended low interest rates will impact the gap, our statutory balance sheets and recurrent accounting rules since we sell non interest since the protection products.
While our net investment income and to a lesser extend our pension expense will be impacted continuing low interest rate environment.
Our excess investment income will still grow it just won't grow at the same right is invested assets.
Fortunately.
The impact of lower new money rates on our investment income is somewhat limited as we expect to have averaged turnover of less than 2% per year.
And our investment portfolio over the next five years.
Now I'll turn the call for his comments on capital and liquidity.
Thanks, Gary first I want to spend a few minutes discussing our share repurchases available liquidity and capital position at the parent company.
Plus some actions we've taken recently in response to the current situation.
In the first quarter, we spent $139 million to by 1.6 million Global life Inc. shares at an average price of $85.47.
The amount was higher than normal due to higher excess cash flows available to the parent in the quarter plus a favorable share price in March what do we repurchased slightly over 1 million shares at an average price of $75 in 31 cents.
The company has temporarily post on future repurchases, while evaluate the impact the Cosan 19 pandemic will have on our operations.
The parent ended the first quarter with liquid assets of $247 million.
His amount is higher than normal due to the first quarter repurchases being less than the excess cash flows available to the pair.
Plus we increased our commercial paper borrowings by approximately $160 million late in the month to enhance our liquidity position.
On October nine global life entered into a new 300 million dollar 364 day term loan facility from members of its bank line and buyout all $300 million on April 15th.
We utilize a term loan structure and as it was easier and less costly to obtain that a public debt offering.
Plus the fact of the term loan can be repaid at any time before its maturity.
Giving us added flexibility since we don't think we will need to pull them out.
With the receipt of the 300 million dollar term loan plus the $247 million of liquid assets that were available at the end of March.
The company now has approximately $550 million of liquid assets at its disposal.
In addition to these liquid assets the parent company will still generate additional excess cash flow during the remainder of 2020.
The parent company's excess cash flow as as we define it.
Results, primarily from the dividends received by the parent from its subsidiaries.
Yes, the interest paid on debt and the dividends paid to globalize shareholders.
We intend on keeping our common dividend rate at its current level for the remainder of this year.
We anticipate the parent company's excess cash flow for the remainder of the year to be in the range of 180 million to $200 million.
Thus, including the roughly $550 million of liquid assets available currently available we expect the parent company to have around 730 million to $750 million available during the remainder of this year.
As I'll discuss in more detail and just a few moments. We believe this amount of available assets is more than necessary to support the targeted capital levels within our insurance operations.
Given that the parents still has access to its credit facility and two public debt markets.
We had substantial flexibility over the remainder of the year.
Assuming current debt levels, including the new 300 million dollar term loan our debt to capital ratio at the end of the year should be approximately 27% less than the 30% maximum ratio our rate rating agencies used to support our current ratings.
As such we would still have approximately $300 million of additional borrowing capacity if needed.
Now regarding liquidity and capital levels at our insurance subsidiaries.
In the current environment, we had been keenly focused on liquidity and capital within our insurance operations.
With respect to liquidity, our insurance operations had over $100 million of cash and short term investments on hand at the end of the first quarter.
Over the remainder of 2020, they expect to generate around $500 million of excess operating cash.
This amount is net of anticipated higher claims and other impacts on cash flow from coated 19, and after payment of all remaining dividends to the parent.
While we anticipate investing this cash long term to fund future policy obligations. This liquidity is available in the near term should cash needs within insurance companies be greater than anticipated.
Given this level of operating cash flows the insurance companies will be able to find all remaining dividends payable to the parent and we don't see and we don't foresee any situation, where any bonds would have to be sold to provide liquidity.
Now with respect to capital.
Our goal is to maintain capital at levels necessary to support our current ratings.
As discussed on previous calls.
Global life intends to target a consolidated company action level RBC ratio in the range of 300% to 320%.
At December 30, Onest 2019, our consolidated RBC ratio was 318% near the high end of our range.
Taking into account the downgrades and the impairment that incurred in the first quarter. This ratio would have been approximately 316%.
At an RBC ratio, 316%, we have approximately $80 million of capital at the insurance subsidiaries over the amount required at the low end of our consolidated RBC target of 300%.
This excess capital along with the over $700 million of liquid assets that we expect to be available at the parent provide over $800 million of assets available to fund possible capital needs.
As we consider the potential need for additional capital. The primary catalysts are lower statutory income due to covert 19 related factors lower statutory income due to investment portfolio defaults or impairment.
And investment downgrades that increase required capital.
In 2020, we anticipate that the higher claims from cobot 19 will be substantially offset by reduced commissions and other expenses associated with our lower sales.
Thus, we believe our capital needs will be largely dictated by the amount of downgrades and future impairments on our investments.
To estimate the potential impact of these items, we have modeled several scenarios that take into account consensus views on the economic impact of the recession.
The strength and timing of the eventual recovery.
And a bottoms up application such views on the particular holdings in our investment portfolio.
We have also analyze transition and default rates as published by Moodys and evaluated the potential impact to our RBC ratios should we experienced the same transition and default rates as were experienced in 2001 in 2002.
As well as from 2008 to 2010.
Considering these various scenarios.
We estimate our RBC ratios could be reduced over one or two years by approximately 35 to 60 points.
Requiring an additional $100 million to $235 million of capital to maintain a 300% RBC ratio.
This is well below the amount of liquidity available to the parent company.
It is important to note that globalized statutory reserves are not negatively impacted by the low interest rates or the lower equity market given our basic fixed protection products.
Furthermore, the current interest rates do not have an impact on our statutory reserves given the strong underwriting margin in our products.
In the aggregate our statutory reserves are more than adequate under all cash flow testing scenarios.
Finally, with respect to our earnings guidance for 2020.
We are projecting the net operating income per share will be in the range of $6.65 to $7 in 15 cents for the year ended December 31 2020.
The $6 a 97 midpoint of this guidance reflects a 23 cent decrease over the midpoint of our previous guidance a $7.13 per share.
This decrease is entirely attributable to several factors associated with the ongoing koeppen 19 pandemic.
The first factor is lower sales and thus lower premium.
As Larry indicated earlier, we now expect a decline in both life and health sales in 2020, rather than the increase we anticipated on our last call.
These lower sales will lead to lower premium growth in 2020.
Our premiums could also be negatively affected to a lesser extent by an increase in lapses due to the economics of area. This pandemic.
Overall at the midpoint of our guidance, we expect our total life premiums to grow in 2020 by around 3% down from the 4% growth we expected at the beginning of this year.
In addition, we expect our total help profit premiums to grow by approximately 5% to 6% down from the 7% to 8% growth indicated in our previous guidance.
Despite this reduction in expected premiums are total premium income is still anticipate anticipated to be approximately 3.5 to 3.6 higher than 2019 levels.
The next factor, causing a reduction in guidance into higher anticipated claims from the pandemic.
At the midpoint of our guidance, we estimate additional life policy obligations of around $25 million.
Based on a review of various models that estimate total coven 19 related deaths in the United States.
And applying favorable available fatality rate statistics to globalize distribution of attained ages and face amounts across its policies in force.
This takes into account that less than 5% of globalize inforce relates to individuals over age 70.
We also anticipate higher supplemental health benefits of approximately $7 million.
Taking into account these higher claims.
As well as the impact of the lower premiums and lower acquisition costs.
We now expect the life underwriting margin as a percentage of premium to be approximately 27.4% at our midpoint.
Down slightly from the 28% previously expected.
The health underwriting margin percentage of premium should decrease from around 22.2% does as previously anticipated to approximately 21.7%.
Overall, the impact of the reduced premium and higher expected claims offset by lower cost.
Is expected to reduce our net underwriting income by approximately $30 million to $35 million or about 24 cents per share on an after tax basis.
In addition to the adverse effects of cobot on our underwriting income, we expect lower excess investment income of $6 million to $10 million, primarily due to the additional interest expense on the new 300 million dollar term loan.
The impact of the lower excess investment income on our earnings per share is offset by the impact of lower average diluted shares than previously expected due to the lower share price.
With respect to our share repurchases. Our first priority is to ensure we have enough liquidity at the holding company to provide any additional capital that might be required as we recover from this pandemic.
Well, we will not resume share repurchases until prudent to do so.
The midpoint of our guidance does assume that we will be able to continue repurchasing shares in the third quarter. This year and we'll be able to do so at a lower average share price than previously anticipated.
While we can't say exactly when that will be.
We will be in a better position as time goes on to estimate the additional capital needs for our insurance operations and whether the parents excess cash flows will be needed to finance such capital.
If the parents excess cash flows are not needed to finance insurance company Cat capital as we currently expect we anticipate returning any available excess cash flows back to our shareholders.
The effect on our earnings per share of not repurchasing any additional shares in 2020 is included in the range of our guidance.
We have provided a wider range than normal due to the AD uncertainty associated with the mortality and morbidity rates in this particular pandemic and the potential that attempts to reduce shelter in place restrictions could result in higher claims than expected or that sales could be lower than we estimate.
The low end of our range takes into account higher mortality claims should use deaths from the pandemic during 2020 be more than double our base estimates.
The high end of the range contemplates that mortality claims are much lower than we anticipate and that sales are able to return to normal levels more quickly.
Those are my comments I will now turn the call back to Larry Thank you Frank.
I would like to discuss one more item before we open the call that for questions.
Several investors have asked just recently how global life was impacted during the global financial crisis for 2008 in 2009.
Well every crisis is different I think this relevant to briefly review revisit our experienced during that period.
That crisis did not really impact our insurance operations.
During 2009, we grew life sales and premiums.
As has been the case in all difficult macroeconomic environments, we did not see any significant impact to the persistency of our enforced block.
We did have declines and health insurance, but that was due to market conditions. The health insurance landscape at that time not related to general economic issues.
Well, we did see an impact to our investment portfolio and capital position the impact was relatively minimal.
Over a two year period, we had approximately $134 million an after tax impairments, which were primarily related to bonds issued by highly rated financial institutions.
We still had significant excess free cash flow in 2009 and 2010.
Last companies to stock repurchasing stock in 2009.
One of the first to resume repurchasing stock early in 2010.
We did not issue equity we did issue debt that was found to refinance expiring debt.
Although every crisis is different the global financial crisis help demonstrate the strength of our business.
Our business model is uniquely designed to provide stability throughout the economic cycles.
We firmly believe the global life is well positioned and navigate the current crisis and come out stronger on the other side.
Finally in closing I also want to thank all of our employees and agents for their efforts during these challenging times.
As always our comments, we will now open the call up those questions.
Okay.
Thank you ladies and gentlemen at this time the floor is open for questions. If he would like to ask a question you may do so now by pressing star one on your Touchtone phone. If you are using a speaker phone. Please make sure that your mute function is turned off to allow your signals to reach our equipment.
Again press star one for questions.
First question comes from Andrew Klingerman with credit Suisse.
I guess first.
Thank you for the.
Great slot fall in detail.
Hi discussion point turns very helpful.
So just talking points.
The clarification.
First one being you were talking about theme.
Share repurchases and its little tough update on my line did you say that it's possible you could share repurchases.
Starting in Florida.
Andrew that is correct thats at our base case for those that serves as the midpoint of our guidance. We do assuming that we will start repurchasing again in the third quarter.
Great and then with respect to the RBC.
About.
45.
Basis point.
Klein overall, one to two year period.
And then being about 160 to 235 million short of where you want to be 300%.
Okay that not taking into account the cash flow generation from operations like is that Didnt include rating downgrades to fall.
Offset partially by the earning cash gains that you generally.
That is taking into account just the impact of the downgrades and any potential defaults during that period [noise].
Great. So you could probably jen.
Cash flows to offset that one two years time period pretty comfortably satellite.
Yes that would be right.
Excellent and just in terms of on.
The.
The agent count and the ability to recruit any do you see that ramping up pretty sharply in the second half.
These are not bad numbers and Im just wondering.
Maybe a little more color on how you might see that ramping up in the second half.
Well there is a matter wrapping up I think this morning ramped up we've had so much interest.
And the agency position since we got to see offsetting KOVA crisis.
But the difficulties that is licensed agents initially tested centers were shut down.
Only a handful of station reforestation temporary licenses now over 20 States Jaffray licenses.
That's a centers are starting to reopen so we're going to see an increase.
In Asia, let's see how known as does the termination rates because of the absence of work opportunities to the everywhere I think we'll see.
Our termination wasted on increase so I think we'll see an increasingly kurt.
The balance sheet here like what kind of the last two years.
And then just slab.
The the the mortality seems very manageable could you give us a little color on what you what.
Kind of base case assumptions.
Yes, you are incident on the overall mortalities in United States and.
What that mortality rate be.
Most numbers.
Sure.
Yeah, just as you know Andrew that as we think about how we come about uplift are.
Estimate we have to take a look at the total us death, and trying to kind of really see what the data has out there for where those might occur and and the level of coverage and how our policies kind of state over top of all that as a base case, we are estimating total us depth of around 80000.
At this point in time and there is the and that's probably about 120% of fixed term model. That's been out there for the institute of health metrics and evaluation.
And then that translates.
Well, we're estimating is probably about.
Two and a half to 3000 deaths that with respect to the global life companies themselves and that.
Cash flow would be about by $30 million and then there is some reserves of course on that it should around the $25 million that we've got at the midpoint.
Of our estimate statutory in this particular case really we do not expect to be.
Significantly different than gap, it's Paul we have a little bit higher reserves as a little bit less but not materially so.
Awesome. Thanks, so much.
Thank you. My next question comes from Eric Space with elements research.
Yeah.
Hi, Thank you Steve first I was hoping you could talk a little bit more about the reasons you elected to take the one year term loan as opposed to issuing longer term debt and then just thinking about your liquidity I think you've drawn down the term loan and you've issued some additional commercial paper and.
Thinking about it in would your plan b that kind of once you have a better sense of claims and potential capital needs in the insurance subsidiary you would.
You kind of first pay down the excess liquidity and then you is remaining cash flows would be the source for buybacks.
Yes, I think that's exactly right. The we've talked about that we did take out the short term because what it was.
Something that was readily accessible and as we were looking at the beginning of April just wanted to make sure that we had as much flexibility as we could as we navigated through the next several months as time goes on and as we get more comfortable with where we think the.
The mortality experience will be as well as what the potential impact from the economic.
Situation and potential downgrades.
When we do have that ability to too.
Reduce overall use some of that excess cash.
To reduce the amount of the term loan over the period of time and get that paid back and then as well as we'd have the capacity.
You know to still be able to make some additional any additional capital contributions that we would.
Be required to make.
You know clearly as time goes on and we would also be looking to see how would we if if in fact, there art needs for additional capital in the insurance companies.
Whether or not we would want to finance that with any type of long term debt.
We would just have to what the see what the extent of that is and where that ultimately Texas.
Got it thanks, and as we look towards kind of the capital generation from the business that here you're right. It is kind of as we're thinking about cash flows I guess into next year that you would expect relatively little impact on kind of ordinary dividend capacity because the higher claims would be offset by lower capital strain on the sale side.
That's exactly right and so just keep.
In your mind that we do generate on annual basis north of $400 million.
Of the new capital each and every year within the insurance operations and as you said right now it would appear that the the mortality that we're expecting mortality and morbidity that we're expecting from this would be largely offset by.
The lower capital strain from the lower sale, therefore, our real exposure to our future statutory earnings is really whatever type of default.
Impairments that we did take from a statutory basis.
Got it thank you and it on that note if I could sneak in one more can you just comment a little bit more on the assumptions underlying stress test that you gave for credit impairments and ratings downgrades. I think you said, it's kind of framed off of 2001 and the financial crisis spend there maybe any specifics on what that and.
In terms of kind of total impairments or the amount of triple beans downgraded to high yield.
Yeah, No we took a look at AD.
Kind of our internal.
Fundamental process was to look at a lot of different factors and different default rates for different segments, and trying to us and applying that to our particular holdings.
And in that particular situations, we're looking at overall.
About.
14% of our total portfolio being downgraded.
And we would end up with below investment grade at that point of time of around 12% to 12.5%.
With respect to default.
Really at this point in time, we don't.
We don't see particular names that were seeing that were thinking have a have a high degree of risk of going into default. This point of time, but looking at just average if we took a look at worthy kind of an average moody's default rates and applying that.
Then there's potential for having.
Maybe $50 million of default.
In the time of any.
The particular year, so taking those into account is what really frames.
Having a 35.
Point reduction in the RBC.
And get the again $100 million of additional capital needed to get back up to 300%.
If you look at the old one stress test to kind of in our internal worst case, it gets pretty close to where really taking a look at all want to know to where we probably see more downgrades then we really have default risk.
And in those particular case, you're probably running somewhere in that.
16% to 20% range on defaults or excuse me on downgrades and a little bit higher below investment grade.
Not significantly different on the default side.
Got it thank you very much.
Yes.
Thank you. Our next question comes from a CRM revive with the bank of America.
Thank you for taking my question.
I also creates additional.
Information on the impacts from distribution and its financials related to this pandemic that's very helpful.
Wanted to ask questions on the energy holdings.
No.
So going back to 2015 in 2016 and thinking about what has happened than what's happened since that have you [laughter] from a high level your philosophy on investing in energy since then.
We we have invested that much in energy since that point time, but what what I would like to point out is the holdings that we have today are generally the same holdings, we had back in 2015 and 16.
And as you'll remember in early 2016 annually great concern over over these energy holdings and.
And then one year later as well all prices went back up the.
We went from the unrealized loss on those investments to gain so.
Right and then I ask all into as well.
Yes, I was just sit out what else is all this because you are investing for 25 plus years. So it is a lot longer and as you're looking to try to navigate this you got to pick obviously longer term approach.
That's kind of the Diego I'm going for.
Yes, hi.
What was going to say is that the I think the fact in that period.
These particular bonds.
The show that these companies can navigate the different cycles and that's what we're looking for.
As you said, because we're holding long term so.
Yes, they came through that period, well, we think they'll come through this period as well as well.
Right and then.
Your breakout of Triple B minus holdings for the energy.
I don't have that here in front me, but.
Thank you have the.
Yeah at our total Triple B minus holdings in the energy is at a at amortized cost about $560 million.
And 300 million of that is in the midstream and the remainder then NP.
Great appreciate it thanks.
Thank you. Our next question comes from Tom Gallagher with Evercore ISI.
Hi, just.
Follow up on on Eric's question.
On the.
The decision to use more short term debt I guess, if I, if I kind of and everything up that would be one year or less maturity. I think you. We've now had around 760 million.
And I guess just thinking about.
Most other companies had been doing recently, they've been terming out debt, making sure they don't potentially have to roll any debt.
Case, the market becomes a lot more dislocated.
Recognizing I realize the funding markets are open today, but if this is being done for contingency planning.
When you have been better off.
Doing something longer further out so you weren't vulnerable to near term debt maturity and just just want to know sort of strategically how you're thinking about that.
Yes, again, we really wanted to look at.
The added flexibility that that would that that provides us really work.
Interested in trying to access the long term to get a long term financing in the they called the in stable environment at the public debt markets were in the early part of February or assuming the early part of April.
So as we as we do look.
Got it we say, we if we have around $740 million of total cash available at this point in time and at the high end of what we think could be needed out of that to contribute into our insurance commit capital that was about $235 million. So that would still leave us with just a little over 500 million dollar.
Powers of cash available and that we would have with it that would provide the $300 million and we'd be able to repay that short term loan or that the the term loan leave us with around $200 million to use for buybacks or whatever purposes. Now we do anticipate that the CP markets.
We need to be available to us throughout the year. They have been available to US here this month and weve been able to especially here in the more recent weeks issue.
Maybe add a with tenors and a rates.
That are reasonable unacceptable to us that and so we do anticipate that that'll continue expansion with a different programs that the government has put in place.
But we do kind of look and and as a backstop.
This is another.
Reasonably kinda did it this way is that we do have our bank line that we are our regular credit facility of $750 million serves as a backstop for that CP program. So in the worst case it should the CE Mark and go away, we have that ability to pull on that bank line to pay down that's it.
Okay.
Gotcha and are you.
Are you either directly or indirectly participating in the government's Tom seats for the fed CP program.
We are not at this time.
Okay, but are you eligible based on your rating.
We are not currently eligible there's been some discussions on how we have a split rating and to be qualified under its existing terms you have to not have a split rating and.
But there have been some efforts on the part of us as well as other various entities.
In different industries.
To have the government expand that and it's my understanding that the fed is considering that but has not done that at this point in time.
Got you and then just a few other quick ones for me.
Direct response.
Just given that you've had pretty strong sales momentum. There is there any concern that were to be done any screen for.
Hi, rich in terms of this sales.
Hello.
Yes, rich in the sense that we check applications or come in we haven't seen a change in the mix of business by state.
Hi age group by type of products. So I'd say is going to normal distribution, just we're not expecting.
And disparate impact from covered on our new business that we're selling.
We have made some minor modifications in the underwriting also.
Got you, but nothing you haven't seen any there's no no real change that you've seen that which would be indicative that selection or anything like that.
No.
And there is a direct to consumer or in the agency. We've done the same studies and the agency business.
During the same mix of business same products again, we've made some minor underwriting changes in the agency business as well, but there are minor.
Yes.
Got you and then final question did you did you say you expect sales to normalized fight three Q or for Q.
This year.
Yes for we're talking about mid third quarter of this year fourth quarter, that's showing that the shoulder.
In place restrictions.
Our our and in the near term, which is sometime in the summer.
Okay, I guess I guess my question related to that even even if the shelter in place.
Orders or eliminated don't you think theres going to be at very low.
Or or reduced ability for face to face meetings.
I am going forward that it's probably going to take longer than that for the.
Normalized if any water from a sales standpoint to improve.
It is it may take longer but the same five virtual sales our training and our success our closing price of virtual sales are going up so as version virtual cells become the norm I take it will help our sales process.
Again, it's impossible for Hecht at this 0.1 is just going to live shelter in place I think.
People's behaviors are going to change, but I don't think and eliminate face to face it really depends a little bit of what.
State or what part of the country or or Canada that you're talking about.
Gotcha, Okay. Thanks.
Thank you. Our next question comes from Ryan Krueger with KBW.
Hi, good morning.
Hi, some additional detail on the extra health claims that you expect is that primarily hospital indemnity and Medicare supplement.
Just additional assumptions for hospitalization.
Yes, the at that at the midpoint of our guidance really most of the impact on the.
What we see as they get on a GAAP financial is really going to be from.
The IC you claims and maybe a little bit from hospital indemnity EBIT in large part why with see probably some higher med Supp claims.
Related to co bid, we're also seeing an actual a little bit of some lower claims countering that.
From some of the.
Non essential.
Cases, not going through so we're actually started that we kind of expected on the med supp that that'll for the large part will be offset and.
And that will end up kind of on a net net basing a basis, having it with the additional being from the IC claims.
Got it and then I am I correct that family heritage that not offer short term disability policies.
That is correct.
Okay. Thank you.
Thank you. Our next question comes from Jimmy Bhullar JP Morgan.
Hi, Good morning. So first started a question just on the fixed income portfolio can you comment on what's happened to your marks in recent weeks since we ended the quarter Im assuming they might have improved given the fed announcement.
And if that is the kids are you considering it all sort of de risking the portfolio to try to take advantage of deep Goldman and.
Education, and especially as it relates to either energy or Triple B.
Is that something that you're contemplating.
First of all Jimmy I don't have Bob.
How the market both improved quarterly I'm, a bit I agree with the than it might be better, but we we don't have any plans at this point too.
The risk of portfolio.
Again as Frank mentioned, we're are concerned is more really from.
Possible downgrades versus defaults.
In.
Based on our experience in 2000.
Hey, nine, though we had suffered significant downgrades in the later, we held on those bonds because we do hold maturity.
Those bonds were upgraded so.
No.
We don't contemplate doing the de risking at this point.
Okay and then on have you noticed any impact on your persistency in the.
The light business because of all that over the last month and half or so.
Right.
Yes, no we really haven't seen.
We really have looking at this point in time any real change in our we've been monitoring change in our overall persistency or really any impact on on claims either we do track on a daily basis and been looking to see more.
Indication of any adverse claims as well as other metrics that we have available to us and at this point in time had not seen anything unusual.
Okay and then just.
We've seen.
Jimmy we've actually seen a little bit of an increase in premium over prior year.
But it's early that's only about months worth of data but.
The good news is that we haven't seen decline at all.
Yeah, I think that concerned that a lot of investors have had is generally youre action film or the middle income lower income and they might be suffering.
To begin to it but I guess a premium levels are fairly low so people. It's as one of the last thing people actually canceled.
[music].
Yes, I agree that yeah. The other the last thing I had a question on just was on.
And on share buybacks, what does it said you're going to be watching.
And whether and when to.
Resumed share buybacks because the world.
We see a lot more that you bought back a lot more the films and.
One Q, but then ended up against thing or suspending the program, but what are you going to be watching to see you've been doing so.
Yes, I think.
Jimmy will really be taken a look to see.
In during here in the second quarter as we get more information on the bond holdings of we can see what their reports are take that information into account take a look at what happens with as we come out a shelter in place as a country and.
And really from the world's perspective, and how that impacts.
A large part on the.
Holdings that we have so that we can get a better sense of what downgrade exposure that we might have in our portfolio. Since we think that's probably the greatest exposure that we have quite honestly to our capital.
And then we'll be seeing whether as as we.
Our the current trends that we're seeing from a mortality perspective within the U.S.
And some of that were not maybe getting back into a second wave or some of the that effect, but if the.
Actions that have been taken by the country.
And as it kind of turned out as as.
I think the consensus if you will has estimated then I think that's what gives us more comfort that we'll be able to then startup the buybacks in the third quarter, we'll have a little bit more clarity as to where all that really has to go.
Yeah Jim.
We feel good about the estimate that we've given based on what we know today.
We we won't be cautious and you know the next two or three months, we'll learn a lot more.
A lot more sure what what the impact is going to be I think that's when.
We can make better decisions regarding share repurchases.
Yeah Okay.
Okay. Thank you good luck with RBC.
Thank you. Our next question comes from Alex Scott with Goldman Sachs.
Hi, good morning.
Apologies. If this is a little repetitive I figured I'd ask about just the seven fish good liquidity, which I think included the 180 to 200 and make sure I understand what's sort of embedded in that.
And what would be potentially pay back in terms of data. So I mean in terms of the 750 to 180 to 200 does adding that includes your downgrades and your credit losses in sort of your base case, and how did that comparative I think you gave details on the stress case going what do you assume in terms of base case.
And then yeah, yeah, Yeah, maybe start there and then I've got a follow up.
So as you think about just kind of how we get to the 740 again was that we had around 247.
Million dollars on this agent for round numbers say $250 million entered into the first quarter.
And again that was a little higher than normal because we did have.
Well, we would have our normal cash on hand, we had some excess cash flows in the first quarter over what we used for buybacks and we used and we had we increase that CP borrowings by about $160 million all those together get shipped around the 250 and then.
And then you're looking at the term loan of another $300 million and then about another $180 million of additional excess at that kind of at the midpoint of excess cash flows at the holding company.
In the second half of the year. So that's what really gets you.
Ultimately to your $740 million.
And then the 80 million is the excess capital.
At the holding at the within the insurance companies that obviously can be used for any.
Capital needs that they might have without having to look to the holding company themselves are without having to look to that 740.
So as we look at the 740, we're thinking are the.
Based on our estimates at this point of time the range of those capital contributions could be a 100 million to $235 million.
So that's going to leave us somewhere we would think $500 million to $650 million of excess cash at the holding company. When this would be all said and done that ability to payback to $300 million, it's still having cash available for buybacks.
And should we consider a reduction in commercial paper as well, which I think is.
It's increased by a decent amount would that be paid down as well or should we just thinking about the term loan.
Well I think.
I clearly we would take a look at that and I think on with respect to the CP.
If we were able to go out and replaced I think I think our preference would be.
For long term capital needs that we would not be using the CP market for that that we would be wanting to access long term capital markets the public debt markets.
For that.
For the long term capital need so depending upon how much additional capital we in fact might might if it's a very small number we probably would not go out and access.
Public debt markets for a very small amount and but if it was the larger amount than we would do that and then be able to pay back some of that CP if necessary.
Okay.
Yes.
And then maybe a follow up to 200 Jimmy's question is on ability to whole bonds I heard comments like unfair that I think you guys have the ability told them, but I guess in terms of willingness and thinking through high yield allocations.
There is relative to equity relative to the portfolio I mean, how how high would you be willing to let that go before you would you know.
[noise] can consider de risking and you know if you did decide to just let it go higher.
And not so would it change your view on where you should be running RBC ratio in terms of what you're targeting.
[laughter].
Right so.
Yes.
Back in.
Going back in 2009 here, we've got a 13% and a lot investment grade bonds Stefan and then.
Just a year to lighter what's happened there.
We're we're we're going to hold them unless we think there there is a credit issue will they're not going to where they're going to default or whatever would probably get out as soon as kieran.
But just the fact that they get down growth.
And to the high yield.
That doesn't mean, we're going to.
Make the decision to go ahead and sell just to repeat this reduced level.
So now in terms of.
How that affects RBC, if we do have that high amount in we or the high yield increases a great deal that will cause us we'll have to hold more capital.
And you know who will do that but I don't see that changing our overall.
You know risk.
Columnists level.
Got it thank you.
Okay.
At this time, we have no further questions in the Q.
Alright. Thank you for joining us. This morning, those are a comment saying, we'll talk to you again next quarter.
Ladies and gentlemen that concludes today's presentation. You may disconnect. Your phone lines on thank you for joining us today.
Yes.
[noise]. Thanks.
Okay.
[noise].