Q2 2019 Earnings Call
Good day and welcome to the Torchmark Smart Corporation's second quarter 2019 earnings release Conference call.
Today's conference is being recorded.
For opening remarks, and introductions I would like to turn the conference over to Mike Majors Executive Vice President Investor Relations. Please go ahead.
Thank you good morning, everyone. Joining the call today are Gary Coleman, and Larry Hutchison, Our co Chief Executive officers, Frank said, Voda, our Chief Financial Officer, and Brian Mitchell, Our General Counsel.
Some of our comments or answers to your questions may contain forward looking statements that are provided for general guidance purposes only.
Accordingly, please refer to our 2018 10 k. any subsequent forms 10-Q on file with the SEC.
Never comments May also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures.
Ill now turn the call over to Gary Coleman.
Thank you, Mike and good morning, everyone.
In the second quarter net income was $287 million or dollar 67 cents for sure.
And $184 million or dollar 59. This is for sure a year ago.
Net operating income for the quarter.
$187 million or 62 cents for sure.
Hey per share an increase of 11% from a year ago.
On a GAAP reported basis return on equity as of June 30 was 12.3%.
For sure was $60.22, excluding unrealized gains losses on fixed maturities return on equity was 14.6% and book value per share grew 2% to $46 43 soon.
In our life insurance operations premium revenue increased 5% to $631 million in life underwriting margin was $175 million.
9% from a year ago.
Growth in underwriting margin exceeded the premium growth due to a higher percentage of premium margins in all distribution channels.
For the year, we expect life when running encounter grew around 6% to 7%.
On the health side premium revenue grew 6% to $266 million and health underwriting margin was up 1% to $60 million.
Growth in premium exceeded underwriting margin growth, primarily due to lower margin as you know the American.
For the year, we expect health underwriting income to grow around 3% to 4%.
Administrative expenses were $59 million for the quarter up 7% from a year ago and in line with our expectations.
As a percentage of premium administrative expenses were 6.6 versus.
Compared to 6.5% a year ago.
For the full year, we expect administrative expenses to grow approximately 6% and to remain around 6.6% in the premium compared to 6.5% in 2018.
I will now turn the call over to Larry for his comments on the marketing operations. Thank you Gary.
At American income life premiums.
7% to $288 million and life underwriting margin was up 9% to $97 million.
Life sales were $61 million up 2%.
The average producing agent count for the second quarter was 7364.
Up 4% from the year ago quarter, and up 7% from the first quarter.
The producing agent count at the end of the second quarter was 7477.
Liberty National life premiums were up 3% to $71 million and life underwriting margin was up 6% to $18 million.
Health premiums were down 1% to $47 million and the health underwriting margin was down 4% to $12 million.
Net life sales increased 3.4% to $13 million net health sales were $6 million up 11% from the year ago quarter.
The sales growth was driven primarily by agent count growth.
The average producing agent count for the second quarter was 2290.
5% from the year ago quarter.
5% from the first quarter.
The producing agent count at Liberty National as a quarter or 2319.
And our direct response operation at goals life life premiums were up 4% to $217 million and life underwriting margin increased 9% to $39 million net life sales were $34 million down 2% from the year ago quarter.
Year to date sales are flat.
As we go forward, we expect to grow sales and profits.
At family Heritage Health premiums increased 8% to $73 million and health underwriting margin increased 14% to $18 million.
Net health sales were up 9% to $17 million due primarily to increased agent productivity.
The average producing agent count for the second quarter was 1081.
Up 3% from the year ago quarter.
Up 8% from the first quarter.
The producing agent count at the end as the quarter was 1089.
At United American General Agency Health premiums increased 9% to $102 million, while margins declined 8% to $14 million.
Net health sales were $17 million.
Up 24% compared to the year ago quarter.
To complete my discussion of the market operations I will now provide some projections.
We expect the producing agent count for each agency at the end of 2019 to be in the following ranges.
American income 7202 7500.
Liberty National.
2300 to 2500.
Family Heritage.
1175 to 1225.
Approximate net life sales for the full year 2019 are expected to be as follows.
American income.
5% to 9% growth.
The re national 9% to 13% growth.
Direct response.
Flat to 2% growth.
Approximate net health sales for the full year 2019, our structure to be as follows.
Three national 7% to 11% growth.
Family Heritage, 3% to 7% growth.
United American individual Medicare supplement, 7% to 13% growth.
I'll now turn the call back to Karen.
I want to spend a few minutes discussing our investment operations first excess investment income.
Excess investment income, which we define as net investment income was quite interesting net policy liabilities and debt.
With $65 million, an 8% increase over the year ago quarter.
On a per share basis, reflecting the impact of our share repurchase program.
Excess investment income increased 12%.
Year to date excess investment income is up 7% and dollars and 10% per share.
For the full year 2019, we expect excess investment income to grow about 5%, which would result in the per share an increase of around 8% to 9%.
Invested assets are $16.9 billion, including $16 billion of fixed maturities and amortized cost.
Other fixed maturities $15.3 billion are investment grade with an average rating of a minus and below investment grade bonds are $646 million compared to $688 million a year ago.
The percentage of below investment grade bonds to fixed maturities is 4.0% compared to 4.5% a year ago.
This is the lowest this ratio has been in the last 20 years.
Overall, the total portfolio is rated triple B plus the same as the year ago quarter.
Bonds rated triple b or 56% of the fixed maturity portfolio as compared to 58% at the end of 2018.
While this ratio is high relative to our peers.
We have no exposure to higher risk assets, such as derivatives equities and little exposure to commercial mortgages and asset backed securities.
We believe that Triple B securities provide us the best risk adjusted capital adjusted returns.
Due in large part to our unique ability to hold these securities to maturity, regardless of fluctuations in interest rates or equity markets.
Finally, we have net unrealized gains in the fixed maturity portfolio $2 billion $715 million higher than the previous quarter due primarily to changes in market interest rates.
Regarding investment yield in the second quarter, we invested $253 million in investment grade fixed maturities, primarily in the financial and industrial sectors, we invested at an average yield of 4.95%.
An average rating of a minus and an average life of 49 years.
For the entire portfolio.
The second quarter yield was 5.50%.
Down seven basis points from the 5.57% yield in the second quarter of 2018.
As of June 30, the portfolio yield was approximately 5.50%.
At the midpoint of our guidance, we are assuming an average new money rate around 4.5% for the remainder of 2019.
Well, we would like to see higher interest rates going forward.
We can thrive in a lower for longer interest rate environment.
Extended low interest rates will not impact the gaffer statutory balance sheet under current accounting rules since we sell non interest is protected products.
While our net investment income will be impacted the continuing low interest rate environment, our excess investment income will still grow it just won't grow at the same rate as invested assets.
Now I'll turn the call over to Frank.
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 is generating excess cash flow in 2019.
The parent companys excess cash flow as we define it results primarily from the dividends received by the parent from subsidiaries.
Less the interest paid on debt and the dividends paid to torchmark shareholders.
We anticipate our excess cash flow in 2019 to be in the range of $365 billion to $375 million.
The us including the assets on hand at the beginning of the year. We currently expect to have around $405 million to $415 million available to the parent during the year.
As discussed on prior calls we accelerated the repurchases of $25 million at Torchmark stock into December 2018, with commercial paper and parent cash.
We have utilized $15 million than the 2019 excess cash flow to reduce the commercial paper for those repurchases.
As such we expect to have approximately $390 million to $400 million to be available to the parent for other uses including the $50 million of liquid assets, we normally retain at the parent.
In the second quarter.
We spent $85.4 million to buy 979000 torchmark shares at an average price of $87 an 18 cents.
Including the $88.6 million spent for repurchases in the first quarter and the $16 million spent so far in July .
We have spent $190 million of parent company cash thus far in 2019.
To acquire more than 2.2 million shares at an average price of $84.67.
Taking into account the $190 million spent on year to date repurchases and the $50 million, we plan on retaining at the parent.
We will have approximately 150 million to $160 million of excess cash flow available to the parent for the remainder of the year.
As noted on previous calls, we will use our cash as efficiently as possible.
If market conditions are favorable and ads and alternatives with higher value to our shareholders.
We expect that share repurchases will continue to be a primary use of those funds.
Now regarding capital levels at our insurance subsidiaries.
Our goal is to maintain capital levels necessary to support our current rates as discussed on our previous call torchmark intends to target a consolidated company action level RBC ratio in the range of 300% to 320% for 2019.
Finally, with respect to our earnings guidance, we are projecting the net operating income per share will be in the range of $6.67 to $6.77 for the year ended December 31 2019.
The $6.72 midpoint of this guidance reflects a 4% increase over the prior quarter midpoint of $6.68.
Primarily primarily attributable to the favorable underwriting results in the second quarter and an improved outlook on life underwriting income for the second half of the year.
These positive adjustments are offset somewhat by slightly lower expectations of excess investment income and health underwriting income for the remaining part of the year.
Those are my comments I will now turn the call back to Larry.
Thank you Frank.
We have two more topics, we discussed before taking questions, we announced yesterday, the torchmark will be renamed worldwide.
Yes.
We will be listed on New York stock exchange as GL.
The name change reflects the company's commitment to an enterprise wide brand alignment to enhance sales and recruiting through improved name recognition.
We chose the globe life named to capitalize on the branding investments. We've made in recent years at global life and accident insurance company.
These investments have increased close name recognition and improved sales in Texas and the surrounding states.
While the individual insurance subsidiaries will continue to exist this legal entities and retain their unique cultures and market niches. They will all eventually use and take advantage of the goals life Grant.
Our operating companies have had successful using their own brands. Despite a lack of name recognition among agent recruits and prospective customers.
We expect unified branding and the resulting name recognition to expand that success over time, Brandon will significantly enhance our ability to recruit agents have reached new customers.
We expect this initiative to evolve over a number of years and create a strong unified brand.
As we go forward, we will maintain our usual disciplined approach to expense management.
To ensure branding has a positive effect on recruiting sales and underwriting income.
Lastly, we announced earlier today the global life is now the official life insurance for the Dallas Cowboys. We are excited about this new relationship.
It provides a great opportunity to strengthen global lifestyle brand recognition in a cost effective manner.
Those are our comments, we will open the call up for questions.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure your mute function is turned off.
Signal to reach our equipment.
Again, the press star one to ask a question.
Well pause for just a moment to highlight everyone an opportunity to signal for questions.
Well take our first question from Jimmy Bhullar of JP Morgan.
Hi, good morning.
I had a couple of questions first on the direct response business.
I think you're guiding to flat to up 2% sales growth.
And for the year or first half youre down almost 1% and I think that this quarter, obviously was down after two positive quarters in the last couple of quarters. So what gives you the confidence that things or the insight or that things are going to get better in the second half.
And then secondly on American income.
There are a lot of concerns last year on the how the strong economy was going to affect your ability to recruit and also just how your sales were going to be affected by the Supreme Court decision related to unions and I was wondering if you can comment if you've seen any impact on your close rates or any it on the sales side or on recruiting just from that type of market.
Right well first the first quarters you stated it was up slightly at one for sure.
As expected the second quarter was down 2%.
The decline was due primarily to a decrease in mailing volumes.
We are expecting to have 2% to 3% sales growth for the second half of the year. So your guidance is flat to up 2%.
With respect to American income.
The Supreme Court decision, which had no effect on our sales recruiting or persistency.
To me I think your third question has to do with retention.
And.
What we've seen as agent retention is it in the first or second quarter.
The increase in agent count should reflect an increased our year over year recruiting.
Short term positives as terminations have slowed down compared to new agent appointments.
For the year.
Right.
Any major account.
Page 7000 207500.
We expect that that will be the case.
The sales.
Gross didnt equal the agent growth in the second quarter.
That's because new agents are generally less productive.
Our first several months just comparative veteran agents.
Okay, and maybe if I could just ask one more on the name change any financial impact do you expect from that like either in the form of.
Increased spending initially and maybe to build the black and brown further or maybe expense efficiencies or something like positive or negative financial impacts from the name change over the next year.
Well Jimmy additional Amortizes failing is one to be coordinated with the random why am a timeline for various distribution channels. We plan on increased advertising spend.
In a measured way to coincide with increases in our sales recruiting.
We do not believe there will be a significant impact on our underwriting income.
Okay. Thank you.
Thank you.
Once again, ladies and gentlemen, if you would like to ask a question. Please press star one now.
Well take our next question from Erik bass.
Thomas Research.
Hi, Good morning. Thank you based on your strong life underwriting margins in the first half of the year are you, making any changes to your full year expectations and over the longer term targets for margins by business.
Yeah, I would say areas that we are.
Increasing our expectations with respect to our overall like for the second half of the year.
You look at last year, we probably.
Total life basis.
We were just a little bit under 20% margin for the second half of the year.
This year, we probably given the favorable experience we've seen so far in the first half of the year, we're thinking that's probably going to be closer to 28%.
For the remainder of the year, just a little bit of an uptick.
Great and what we saw last year, and a little bit better than what we had anticipated.
As of our last call I think most of this.
All it really relates to American income, but we're also just seeing a slightly better.
Expectation with respect to direct response.
As well.
Eric I would add is.
It is most in margin improvement to the growth in premium in the second half of year, we'll we'll be very close wanted to grow through first half years growth due to kind of news coming from increased margins it Brian .
Got it thank you and with that margin be something that you would expect to continue into 2020.
But a little bit above 28.
Well, we'll obviously be taking a look at those projections again here in the next quarter when would go and give some better guidance on that.
Next quarter, where we kind of see 2020.
Coming out, but I would add I don't think it will we expect to see was ready to build it.
Oh for example were 27 point.
So this year, we were 27.1.
Last year.
It's not going to vary too much from those numbers.
Got it thanks, and then on just life sales I think you are trending year to date, a little bit lower than your full year targets that can you talk about some of the dynamics behind that and.
Your expectations for the second half of the year, where it.
It seems from your guidance that you expect activity to pick up a bit.
Very good question here was life sales the second half of the year.
Oh, yes.
Of the life sales I think the guidance you gave for the second half of the here.
Yes.
Rishi project, where sales have reached distribution.
No American income for the full year, 5% to 9%.
We had.
For for sure.
Super show first or second quarters, well see a little stronger life sales in the second and the third and fourth quarter.
Do you think about it those are fairly easy Comparables, we had weaker third and fourth quarter sales last year.
There were to national net life sales for the rest of the year should be strong again the guidance for the full year started 13 percentage.
And direct response.
Answer Jamie's question, our guidance is still flat so at 2%.
Got it thank you.
Thank you once again, ladies and gentlemen, if you would like to ask a question. Please press star one now.
Well take our next question from Alex Scott of Goldman Sachs.
Hi, good morning.
First question I had was just a bit of a housekeeping question.
Yeah, as we think about the decline in rates actuarial reviews, and so forth.
Yeah would you expect to have any impact I mean, I think a lot of your business is fairly fixed fee and so you know I would think there's probably plenty of margin and no risk from cash flow testing is that the case, what do you use for long term rate assumptions when you do that work.
Well.
You are right.
Almost all our businesses fell 60 basis and.
As far as the rights that we use we.
For each year of issue, we've learnt through interest rate based on what kind of rates or.
But in doing so the cash flow testing that we do too.
We we have never had an issue where we are.
Change in writing some calls also.
Right I'll do you see or.
Current liabilities is just.
For one thing.
We don't sell interest. This is the only thing we have such a strong margins of the business is to.
We would I can't ever see us getting to the board would have to make any kind of adjustment.
Got it.
And then the second question I had was just on.
Expenses that I guess, you know there was some headwinds that I think are facing the industry in general which is.
System upgrades, improving tech and.
Dealing with the new accounting standards, and all the time and effort.
Probably going into converting.
Yeah.
No I know they got pushed back a year.
With all these things going on and just.
The scale of Torchmark I would think that maybe some of those expenses might impact you guys a bit more than some of the bigger.
Life insurers are you feeling any of that is that already in numbers in the run rate that you're kind of showing us today.
You know any anticipation of any of those expenses increasing over the next year or two.
Oh, the answer is yes, and yes. So we are feeling good and it is in our numbers.
So.
The.
The 7% increase this year and administrative expenses.
Most of that is related to.
Hi to you and information security expenses.
You are right I think all companies industries or are being hit by that.
And this is a true over the last few years, we ramp of these expenses.
We expect it to continue.
The increase is maybe not the right we have.
In the last year or so but in our guidance what we say.
We expect.
MS Rice mixes vsix was 6% for the year that includes.
Although.
The two most assuredly caused dismissed.
Thanks very much.
Thank you once again, ladies and gentlemen, if you would like to ask a question. Please press star one now.
At this time there are no further questions in the queue.
[noise] alright, thank you for joining us. This morning, those are our comments and we will talk to you again next quarter.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.