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Torchmark Corp (NYSE:TMK)
Q2 2019 Earnings Call
Jul 25, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Torchmark Corporation Second Quarter 2019 Earnings Release Conference Call. [Operator Instructions]

For opening remarks and introductions, I would like to turn the conference over to Mike Majors, Executive Vice President, Investor Relations. Please go ahead.

Michael C. Majors -- Executive Vice President, Administration and Investor Relations

Thank you. Good morning, everyone. Joining the call today are Gary Coleman and Larry Hutchison, our Co-Chief Executive Officers; Frank Svoboda, our Chief Financial Officer; and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2018 10-K and any subsequent forms 10-Q on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for a discussion of these terms and reconciliations to GAAP measures.

I'll now turn the call over to Gary Coleman.

Gary L. Coleman -- Co-Chairman and Chief Executive Officer

Thank you, Mike and good morning, everyone. In the second quarter, net income was $187 million or $1.67 per share compared to $184 million or $1.59 per share a year ago. Net operating income for the quarter was $187 million or $1.67 per share, a per share increase of 11% from a year ago. On a GAAP reported basis return on equity as of June 30 was 12.3% and book value per share was $60.22. Excluding unrealized gains and losses of fixed maturities return on equity was 14.6% and book value per share grew 10% to $46.43.

In our life insurance operations, premium revenue increased 5% to $631 million and life underwriting margin was $175 million or 9% from year ago. Growth in underwriting margin exceeded premium growth, due to a higher percentage of premium margins in all distribution channels. For the year, we expect life underwriting income to grow 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 margins at United 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% 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% of premium compared to 6.5% in 2018.

I will now turn the call over to Larry for his comments on the marketing operations.

Larry M. Hutchison -- Co-Chairman and Chief Executive Officer

Thank you, Gary. At American Income, life premiums were up 7% to $288 million and life underwriting margin was up 9% to $97 million. Net life sales were $61 million, up 2%. The average producing agent count for the second quarter was 7,364 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 7,477. At 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 4% to $13 million. And 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 2,290 up 5% from the year ago quarter, and up 5% from the first quarter. The producing agent count at Liberty National ended the quarter at 2,390. In our Direct Response operation at Globe 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 were flat. As we go forward, we expect to grow with 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 in the second quarter was 1,081, up 3% from the year ago quarter, and up 8% from the first quarter. The producing agent count at the end of the quarter was 1,089. At United American General Agency, health premiums increased 9% to $102 million, while margins declined to 8% to $14 million. Net health sales were $17 million, up 24% compared to the year ago quarter.

To complete my discussion on the marketing operations. I will now provide some projections. We expect producing agent count for each agency at the end of 2019 to be in the following ranges: American Income 7,200 to 7500; Liberty National 2,300 to 2,500; Family Heritage 1,175 to 1,225. Approximate net life sales for the full year 2019 are expected to be as follows: American Income 5% to 9% growth; Liberty National 9% to 13% growth; Direct Response flat to 2% growth. Approximate net health sales for the full year 2019 are expected to be as follows: Liberty 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 Gary.

Gary L. Coleman -- Co-Chairman and Chief Executive Officer

I want to spend a few minutes discussing our investment operations. First excess investment income. Excess investment income, which we define as net investment income less required interest on net policy liabilities and debt was $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% in dollars and 10% per share.

For the full year 2019, we expect excess investment income to grow about 5%, which would result in a per share increase of around 8% to 9%. Invested assets are $16.9 billion, including $16 billion of fixed maturities at amortized cost. Of the fixed maturities $15.3 billion are investment grade with an average rating of A minus and below investment grade bonds were $646 million, compared to $688 million a year ago. The percentage of below investment grade bonds to fixed maturities is 4% 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 BBB plus, same as the year ago quarter. Bonds rated BBB 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 or equities and little exposure to commercial mortgages and asset-backed securities. We believe that BBB securities provide us the best risk-adjusted, 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.

Finally, we have net unrealized gains in the fixed maturity portfolio of $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 an average yield of 4.95%, an average rating of A minus and an average life of 29 years. For the entire portfolio, the second quarter yield was 5.50%, down 7 basis points from the 5.57% yield in the second quarter of 2018. As on June 30, the portfolio yield was approximately 5.50%.

At the midpoint of our guidance, we are assuming an average new money rate of around 4.5% for the remainder of 2019. While, we would like to see higher interest rates going forward, we can thrive at a lower for longer interest rate environment. Extended low interest rates will not impact the GAAP or statutory balance sheet under current accounting rules, since we sell non-interest sensitive protection products. Our net investment income will be impacted in the continuing low interest rate environment. Our excess investment income will still grow. It just won't grow at the same rate as the invested assets.

Now I will turn the call over to Frank.

Frank M. Svoboda -- Executive Vice President and Chief Financial Officer

Thanks, Garry. 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 company's 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 of the dividends paid to Torchmark shareholders. We anticipate our excess cash flow in 2019 to be in the range of $365 million to $375 million. Thus 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 of Torchmark stock into December 2018 with commercial paper and parent cash. We have utilized $15 million of 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 a 979,000 Torchmark shares at an average price of $87.18. 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 absent 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 at levels necessary to support our current ratings. 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 $0.04 increase over the prior quarter midpoint of $6.68, 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.

Larry M. Hutchison -- Co-Chairman and Chief Executive Officer

Thank you, Frank. We have two more topics to discuss before taking questions. We announced yesterday that Torchmark will be renamed Globe Life Inc on August 8. We will be listed on New York Stock Exchange as GL. Name change reflects the company's commitment to an enterprisewide brand alignment to enhance sales and recruiting through improved name recognition. We chose the Globe Life name to capitalize on the branding investments, we've made in recent years at Globe Life and Accident Insurance Company. These investments have increased Globe's name recognition and improved sales in Texas and the surrounding states.

All the individual insurance subsidiaries will continue to exist as legal entities and retain their unique cultures and market niches and will all eventually use and take advantage of the Globe Life brand. Our operating companies have been 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. Overtime branding will significantly enhance our ability to recruit agents and reach 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 Globe Life is now the official life insurance of the Dallas Cowboys. We are excited about this new relationship. It provides a great opportunity to strengthen Globe Life's brand recognition in a cost effective manner.

Those are our comments, we will now open the call up for question.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll take our first question from Jimmy Bhullar of JP Morgan.

Jimmy Bhullar -- JP Morgan -- Analyst

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, first half you are down almost 1% and I think this quarter obviously it was down after two positive quarters in the last couple of quarters. So what gives you the confidence that things or the insight that things are going to get better in the second half? And then secondly, on American Income. There are lot of concern last year on 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 wondering if you can comment on -- if you've seen any impact on your close rates or any on -- the sales side or on recruiting just from the tight labor market.

Larry M. Hutchison -- Co-Chairman and Chief Executive Officer

I could go first. The first quarter, as you stated, was up slightly at 1% as expected, the second quarter was down 2% that 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. Thus, our guidance is flat to up 2%. Respect to American Income, the Supreme Court decision has had no effect on our sales or our recruiting or persistency. Jimmy, I think the third question has to do with agent retention. And what we've seen on agent retention is that in the first and second quarter, the increase in agent count seems to reflect an increase in our year-over-year recruiting. The short-term is positive since terminations has slowed down compared to new agent appointments. But for the year, our guidance will be -- in agent count is between 7,200 and 7,500 and we expect that, that will be the case. For the sales growth didn't equal the agent growth in the second quarter and that's because new agents are generally less productive in the first several months as compared to veteran agents.

Jimmy Bhullar -- JP Morgan -- Analyst

Okay. And maybe if I could just ask one more on the name change, any financial impact do you expect from it like, either in the form of increased spending initially and maybe to build the brand further or maybe expense efficiencies or something like positive or negative financial impacts from the name change over the next year?

Larry M. Hutchison -- Co-Chairman and Chief Executive Officer

Well, Jimmy, additional amortized is spending is one recorded with the brand alignment timeline for a various distribution channels. We plan on increased amortized is spend in a measured way to coincide with increases and our sales and recruiting, we do not believe there will be a significant impact on our underwriting income.

Jimmy Bhullar -- JP Morgan -- Analyst

Okay. Thank you.

Operator

Thank you. [Operator Instructions] We'll take our next question from Erik Bass of Autonomous Research.

Erik Bass -- Autonomous Research -- Analyst

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/or the longer-term targets for margins by business?

Frank M. Svoboda -- Executive Vice President and Chief Financial Officer

Yeah. I would say, Erik that we are increasing our expectations with respect to our overall life for the second half of the year. If you look at last year, we probably on a total life basis, we were just a little bit under 28% margin for the second half of the year. This year, we probably given the favorable experience that 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 grater than 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.

Gary L. Coleman -- Co-Chairman and Chief Executive Officer

Erik, I would add that , it is mostly margin improvement. The growth in premium in the second half of the year will be very close to what the growth in the first half of the year. The growth net income is coming from the increased margins that Frank mentioned.

Frank M. Svoboda -- Executive Vice President and Chief Financial Officer

Yeah.

Erik Bass -- Autonomous Research -- Analyst

Got it. Thank you. I mean, would that margin be something that you would expect to continue into 2020, I mean, a little bit above 28?

Frank M. Svoboda -- Executive Vice President and Chief Financial Officer

Well, will obviously be -- taking a look at those projections again here in the next quarter, we're going to give some better guidance on that next quarter where we kind of see 2020 coming at?

Gary L. Coleman -- Co-Chairman and Chief Executive Officer

But I would add, I don't think we expect to see much variability. For example, we're 27.7% this year, we were 27.1% last year. It's not going to be very conventional in those numbers.

Erik Bass -- Autonomous Research -- Analyst

Got it. Thanks. And then I'm just life sales. I think you're trending year-to-date, a little bit lower than your full year targets. So can you talk about some of the dynamics behind that and your expectations for the second half of the year, where it seems from your guidance that you expect activity to pick up a bit?

Larry M. Hutchison -- Co-Chairman and Chief Executive Officer

Erik, your question again was life sales in the second of the year?

Erik Bass -- Autonomous Research -- Analyst

Yes.

Larry M. Hutchison -- Co-Chairman and Chief Executive Officer

The life sales, I think the guidance again for the second half of the year is, we are going to see positive life sales out of each distribution. On American Income, for the full year 5% to 9%. We had really 4% to 2% in the first and second quarters. So [Indecipherable] stronger life sales in the second, and in the third and fourth quarter. When you think about it, those are fairly easy comparables. We had weaker third and fourth quarter sales last year. Liberty National net life sales for the remainder of the year should be strong. Again the guidance for the full year is not 13%. [Phonetic] And Direct Response to answer Jimmy's question, our guidance is still flat to 2%.

Erik Bass -- Autonomous Research -- Analyst

Got it. Thank you.

Operator

Thank you. [Operator Instructions) We'll take our next question from Alex Scott of Goldman Sachs.

Alex Scott -- Goldman Sachs -- Analyst

Good morning. First question I have was just a bit of a housekeeping question, as we think about the decline in rates actuarial reviews and so forth. Would you expect to have any impact, I mean I think a lot of your business is at 60 and so I would think there is probably plenty of margin and no risks and cash flow testing like, is that the case? What do you use for long-term rate assumptions when you do that work?

Gary L. Coleman -- Co-Chairman and Chief Executive Officer

Well, you're right. Almost all of our business is at 60 basis. And as far as the rate that we use, we -- for each year, this year we select an interest rate based on where our current rates are. But in doing the cash flow testing that we do each year, we have never had an issue with a change in rates could cause us to write off DAC or affect our liabilities. It's just -- for one thing, we don't sell interest as the business, I think we have strong margins of the business as to -- we would I can is for see us getting to the point we had to make any kind of adjustment.

Alex Scott -- Goldman Sachs -- Analyst

Got it. And then second question I had was just on expenses. And I guess there is 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 that's probably going into converting even though I know that got pushed back a year. With all these things going on and just like 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. Any anticipation of any of those expenses increasing over the next year or two?

Gary L. Coleman -- Co-Chairman and Chief Executive Officer

The answer is yes. So we are feeling it. It is in our numbers and in our guidance. So the 7% increase this year in administrative expenses, most of that is related to IT and information security expenses. You're right,, I think, all companies and industries are being hit by that. And this is a trend over the last few years we ramp up these expenses. We expect to continue to increase expenses, maybe not to rate we have in the last year or so. But in our guidance, what we say, we expect to administrative expenses to be 6.6% for the year that includes all the IT and information security costs that I've just mentioned.

Alex Scott -- Goldman Sachs -- Analyst

Thanks very much.

Operator

Thank you. [Operator Instructions] At this time there are no further questions in the queue.

Michael C. Majors -- Executive Vice President, Administration and Investor Relations

All right, thank you for joining us this morning. Those are our comments and we'll talk to you again next quarter.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Michael C. Majors -- Executive Vice President, Administration and Investor Relations

Gary L. Coleman -- Co-Chairman and Chief Executive Officer

Larry M. Hutchison -- Co-Chairman and Chief Executive Officer

Frank M. Svoboda -- Executive Vice President and Chief Financial Officer

Jimmy Bhullar -- JP Morgan -- Analyst

Erik Bass -- Autonomous Research -- Analyst

Alex Scott -- Goldman Sachs -- Analyst

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