Globe Life Inc. (GL) Q2 2008 Earnings Report, Transcript and Summary

Gary Coleman, our Chief Financial Officer. Larry Hutchison, our General Counsel, Rosemary Montgomery, our Chief Actuary, and Mike Majors, Vice President of investor relations provide this report. Some of my comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly please refer to our 2007 10-K which is on file with the SEC. Net operating income for the second quarter was $131 million or $1.44 per share, a per share increase of 7% from a year ago. Our return on equity was 15.6% for the quarter and our book value per share was $37.93, up 11% from a year ago. In our life insurance operations premium revenue grew by 4% to $406.5 million and our life underwriting margin increased 3% to $104 million. Life insurance net sales were $76 million, up 13% from the second quarter of 2007. At American Income, life premiums grew 9% to $119 million. Life underwriting margin was up 11% to $38 million. Life net sales increased 21% to $28 million with first year collected life premiums growing 11% to $21 million. The agent count at American Income was up 17% from a year ago to 2,805. Sales growth at American Income continued to accelerate in the second quarter as a result of increased recruiting and improved retention of new agents. The results at American Income are pleasing so we and remain very optimistic in regards to both our short and long-term growth prospects. In our direct response operation, life premiums were up 7% to $129 million, and life underwriting margin grew 2% to $30 million. Life net sales again increased 8% to $32 million and were in line with our expectations. We expect to continue to see sales growth in the 5% to 10% range for the balance of this year. At Liberty National, life premiums declined 3% to $72 million and life underwriting margin was also down 3% to $16 million. Life net sales jumped 34% from a year ago to $12 million. Our producing agents grew to 3189, up 64% in the past year. The sales growth at Liberty National is significantly exceeding my expectations. The bonus compensation programs we have put in place are working well, and a new need based laptop sales presentation has been very well received by both our agents as well as our customers. We believe we will continue to see sales growth at Liberty National in excess of 30% for the second half of this year. On the health side, premium revenue excluding Part D declined 6% to $242 million and health underwriting margin declined 5% to $44 million. Health net sales dropped 41% to $38 million. The decline in health sales was again primarily attributable to the United American Branch Office operation, where health net sales were down 53%. On the last call, I expressed an expectation that our agent count would flatten during the second quarter, but I was wrong and the decline continued. The health insurance market United American is the only market we serve that is highly competitive. As a result of this competition we have seen huge swings in our sales results for more than 20 years. The non-Medicare health business at United American is also the least persistent, highest risk and least profitable business we write. Going forward, we are going to focus our efforts on shifting this distribution system to other product lines ar more persistent , less risky and yield higher profit margins. We have introduced Liberty National life and work site supplemental health products to the Branch Office operation. While we will continue to offer our current product portfolio, in fact we are filing a new under age 65 health product this quarter. The majority of our financial incentives will be used to encourage sales of the Liberty National product line. Premium revenue for Medicare Part D was down 19% for the quarter to $44.5 million. Underwriting margin declined 9% to $5.4 million. Due to a renegotiated contract with our Pharmacy Benefits Manager, we expect underwriting margins on this block of business to increase roughly $1 million per quarter for the balance of this year. Administrative expenses increased 3% for the quarter to $38 million, primarily the result of increased pension expense. We continue to expect an increase in administrative expenses for full year 2008 of roughly 1%. Gary Coleman, our Chief Financial Officer gives his comments on our investment operations.

Thanks, Mark. I want to spend a few minutes discussing investments, excess investment income and share repurchases. First on our investments, we have $9.5 million of bonds and amortized costs which comprise 95% of invested assets. Of those bonds, 92% are corporate bonds and hybrid securities. Less than 1% are in residential or commercial mortgage-backed securities and none of those are backed by sub prime or Alt-A mortgages. The low investment grade bonds as a percentage of invested asset declined to 6.2%, the lowest percentage since the second quarter of 2000. Overall the portfolio is rated A-minus, same as a year ago. Regarding new investments, we invest almost exclusively in investment grade corporate bond and hybrid securities. In the second quarter, we invested $241 million at an average annual effective yield of 7.04%, an average rating of a plus, and an average life depending on future costs of between 23 and 32 years. This compares to the 6.77% yield, A-rating in 20 to 33 year average life of bonds acquired in the second quarter of last year. This is the third consecutive quarter that the new money yield exceeded 7% and also exceeded the portfolio yield. The average yield on the portfolio in the second quarter was 6.98%, two basis points higher than the second quarter of 2007 and virtually the same as it has been for the last four sequential quarters. To turn to excess investment income. It was $84 million, up 5% or $4 million. However, on a per share basis, excess investment income increased 12% which reflects the effect of our share repurchase program. Excess investment income of course is the net investment income less the interest cost on the net policy liabilities and the financing costs for our debt. The year-over-year comparison of each component is as follows. First, net investment income was up $7 million. This represents a 4.4% increase in income just slightly lower than the 4.8% increase in average invested assets. Next, the interest cost of the net policies increased $5 million or 8% due primarily to a 7% increase in the average liabilities. Lastly, the financing costs were down $2 million, due to the lower short-term borrowing amount and also lower interest rates. Regarding our share repurchase program in the quarter, we spent $89 million to buy $1.5 million Torchmark shares. For the year, we've used $235 million to buy just fewer than four million shares. This is comparable to the $298 million used to buy 4.5 million shares in the first half of 2007. We used free cash flow at the holding company to fund our stock repurchases. In 2008, we expect net free cash flow to be around $350 million. With our debt at an appropriate level and again given the lower interest rate environment we feel that the best use of our free cash would be a strategic acquisition. Without the acquisition, then share repurchases will be the best use of our available cash.

For the second quarter, we missed the consensus estimate of our earnings per share by $0.03 and we missed our own estimates by about $0.015 cents due to higher than expected life claims paid during the quarter. We expect these claims to return to more normalized levels for the balance of the year. Additional money is being contributed by the new Part D Pharmacy Benefits Manager contract; we continue to expect our full year earnings per share to be in the range we stated last quarter.

Thank you. For those of us who will be joined by the telephone today, today's question-and-answer-session will be conducted electronically. (Operator Instructions). We will take our first question from Jimmy Bhullar, JPMorgan. Please go ahead.

Hi, good morning. Thank you. I just have a couple of questions. The first one is on your outlook for producing agent growth at American Income and Liberty National. I think sequentially you were up almost 10% in those channels. What sort of growth rate do you expect in that going forward? Then secondly on M&A, you've talked about wanting to do a deal for a while, haven't found anything. Do you see any opportunities in the market, whether it's distressed sales or just company selling non-core businesses?

Okay. Jimmy, I'm very encouraged by both American Income and Liberty National. Again, we had over 20% growth in sales at American Income for the quarter. I think with the compensation programs we have in place and the direction we're heading, I expect to see at least the balance this year and into next year, I think we've got some other things, some other plans that will continue to allow that type of growth to continue. Liberty National, I think is going to surprise people. They had 34% growth this quarter. Although it's just gotten us back to where we were before we made the major changes two years ago. The momentum we have there is extremely good. Again, this new software we put together for the new laptop presentation, it's improved our closing rates. It’s really been received well. When I say I expect 30% or more growth there the second half of this year, I think that's on the conservative side. I think we can continue that type of growth. I think over the next year, Liberty National is going to surprise people. On the M&A activity, Jimmy, I really can't comment about any specific activity. We continue to think there are opportunities out there. But I can't really comment beyond that.

Just one follow-up on the health side. Do you see a turnaround anytime soon, either the agent count our just you returning to flat sales or sales growth at least over the next two to three quarters or not?

We expect them to level out again. But right now, our projections. We're still in the branch office. We're still expecting about another additional 10% off of where we were this quarter. It started to come back in the fourth. But again, we really are going to use this opportunity to try to shift that into another marketplace. Again, the volatility of those sales, it is extremely competitive, highly regulated and it is the least profitable business we have. It is a good opportunity for us to really make an effort to shift that production into more persistent profitable business.

Thank you.

Our next question is from Ed Spehar with Merrill Lynch. Please go ahead.

Thank you. Good morning. Had a couple of questions. First, Mark, on the sales strength in the life business, when do you think about the health business being less persistent and the sales being down much more than what you were thinking, is the strength, the better than expected life sales in your eyes enough to offset sort of the weakness in the health that we're thinking about kind of earnings over the next, beyond this year just generally?

I'm glad you asked that, Ed because actually in fact, if you can try to follow these numbers, I want to go through a little example. If we compare the American Income life insurance to the Branch Office health. If you look at our financials, the life business at American Income has a 32% underwriting margin versus 13% in the Branch Health. Now if we just assume 6% administrative expenses, that says we have 26% underwriting profit at American Income on their life business versus 7% in the underage health business. That means that for every dollar of premium we collect, the American Income business is almost four times as profitable. But beyond that, the average life of the business at American Income is more than double what it is in the United American underage health sales. So for every dollar of new sales at American Income is worth almost, actually over $8 worth of health sales in the Branch office. So the additional $5 million of sales we picked up at American Income would be roughly equivalent to $40 million of underage health sales in the branch office, so will offset? Yes, in fact, if I look at the additional $5 million we picked up there, plus Liberty National's life business is about five times as profitable per dollar of new sales. So the additional $3 million of sales we picked up there, more than offsets, in fact, it would offset if all of our health sales at United American disappeared. The growth in sales we're seeing at American Income and Liberty National would offset all of the lost profitability. You follow that?

Yeah. That's extremely helpful. I guess the second thing I wanted to ask is on the unusual number of claims in a few different distribution channels I think a few pennies off of a consensus number for our financial services company is probably not considered a big deal in most instances these days. But when you look at your company and the stability of earnings, this was a bigger miss than what you would normally see. So I'm wondering if you can give additional color on why we should be comfortable that this is just an aberration, a bad mortality quarter, and maybe give us some color on, where the claims are coming from. Is it old books versus new books, is there any different types of products versus what you historically sold? Anything, would be help on that.

I'll turn it over to Rosemary in a minute. Although I would say, Ed yes, we did miss consensus by $0.03. But, if I compare to where our estimates that we used in our guidance, we were about 1.5 cents less. But I will let Rosemary talk more about the claims. Rosemary?

Okay. We did have higher claims than expected and it was actually in three different lines. I would say that the reasons are actually different for those three lines. As far as direct response is concerned, in terms of the analysis that we've been able to do so far, we really have not seen any kind of a trend emerging that would cause us to think that our underlying mortality assumptions are off, and so we really do not anticipate that the level going forward for underwriting income would be about what it was in the first quarter of this year. As far as the next line would be Liberty National, where we had higher claims than anticipated, and we've always had variance among the quarters in terms of what our underwriting income our profits are for that line. Last year we saw more of the variance than what we had been used to seeing. We really hadn't anticipated that would actually continue for 2008. But, what we're seeing now for 2008 really is pretty close to the pattern that we saw in 2007 for Liberty National. So we're actually anticipating that the remainder of 2008 is going to really mimic more of 2007 and so that the underwriting income will actually come up in the second two quarters there.

Rosemary, I also know, the July paid claims of Liberty National have come back in line with September.

Yeah. Actually I was going to mention that, too. Actually in all of the lines the July claims based on what we have so far, really are looking better, as they are lower than what they had been before. The third line where we had higher claims and what we were anticipating is in the other category. That actually is coming from United Investors. United investors have a much higher average size. So, it really doesn't take much of a fluctuation in the number of claims for the dollars to fluctuate. But it you look at that line and you compare the first six months of 2008 to the first six months of 2007, we're actually in about the same place even though the individual quarters have fluctuated more. So, we're anticipating really that we're going to finish the year in that other category as consistent with what we saw in 2007.

Just Rosemary, back on the Liberty National, I understand that the 2Q was elevated last year as well. But is there something going that suggests that this is going to be an annual event or what makes you comfortable that there isn't something else happening in the mortality in Liberty National?

Well, as I said really, in terms of the analysis we've done so far, we just really haven't seen any trends emerge. There is no one product that's really emerging that looks like it's a problem. And Liberty National has always had variation among the quarters.

In fact, for the last several years we've seen prior paid claims in the first half of the year, than we have in the second half.

Right. There is just a little bit more pronounced than what it had been. But it really is tracking with what 2007 did.

Okay. Thank you.

Our next question is from Bob Glasspiegel with Langen McAlenney.

Good morning everyone. You guys are not the type of company that goes and hires Mackenzie consultants and does strategic reviews and announces like major changes in strategy which I sort of find refreshing actually compared to most of the other companies that we follow. But Mark, I'm just trying to see whether your comment on switching to health emphasis to lets say from individual, is major long-term change or just a time-out pause? We can't make much money in health because the metrics, margins and persistency on life versus health are not new numbers. Those are numbers that have been around for as long as I've been involved in the company. But it sounds like you guys have made a pretty significant change in strategy that may be more than just a one-quarter response to market competition.

Well, I would agree with that, Bob. Is it a quick fix? No. It will take sometime to do it actually. One of the things is we're very encouraged with the model we put together at Liberty International, the compensation, the products, the sales presentation. We're seeing extremely good results there. So much of our sales come from new agents. All of our distributions, roughly half of our sales come from really agents in our first six months. So by focusing even just on our new hires and training them and using this sales presentation, these products, we can see over the next year to two years a significant movement. Why haven't we done it before now? One, when sales are growing by 50%, it's kind of hard to rock the boat too much. Aso, if I look back a year ago, two years ago, our life distribution systems were not performing, at least to my satisfaction. It is a good opportunity to do this. We've battled that health market; we're not going to abandon it, but it has just seen huge fluctuations over the last 20 years. It is highly competitive, and it is highly regulated. So, I just think now is the time to do it. The thought was, over the next year we were going to merge the two entities, and we still have plans to do that. It's a good time for the United American agents to begin getting comfortable with Liberty National products. Although we will continue to allow them to offer the products they currently have.

Do you have any other products that you don't manufacture in this work site to broaden it out or do you think you have the full arsenal of products?

At Liberty National we offer a couple of outside products. But the vast majority of the sales come from products we have, that we manufacture.

Okay. Last question, just on the acquisition front, it was a quarter or two ago that you said you might do a deal that would take you out of share repurchase for a year or two but you charged ahead at a little slower than last year's pace. Is there a read that that's a big acquisition that would take you on a cash flow needs for buyback? Did you think it might have been there

Well, Bob, again, I can't comment on our acquisition activity. We're being more selective this year. Last year, we did heavily weight our stock repurchase in the first half of the year. With the volatility we're seeing in the market and in our stock price, we're being a little more selective at what price we're buying it at. So, we're spreading it out a little more and we're not going to stop our share repurchase unless we do find a good acquisition. So we're continuing to repurchase shares.

Thank you very much, Mark.

Then our next question is from Stephen Schwartz with Raymond James. Please go ahead.

I just wanted to follow up on what Bob asked in the restructuring of branch. Mark, put this in the right way, you're going to be increasing the incentives on the life side. Is that correct? You are trying to get these guys over to the LNL products?

Well, we are already at Liberty National.

I am talking about actually the Liberty National Product.

I'm just saying, at liberty national we have put together some very strong bonus incentives there which is part of the reason we're seeing the growth that we're seeing at Liberty National. We will put those same incentives in for the United American agents, which the opportunity for them to make a very good living, selling life insurance, is definitely there. The compensation per sale, we feel good about. So, we are going to continue to really try to direct those sales in that direction.

Okay, let me ask you this. Because I would imagine an independent sales guy who specializes in health wants to continue specialize in health, he would just take his business elsewhere. These are obviously branch agents. Is there something in the branch, some kind of deal or something like that, if they're not happy with the way things are going that would still keep them with you?

Well, again, the veteran agents that we have, we're not taking products away from them. In fact, as I mentioned we're actually filing a new health product this quarter that we'll probably have out in the fourth quarter. We're not trying to run those people off and don't intend to. We will continue to provide them with products to write. But for newly hired agents, we're sure going to try to move them into writing the Liberty National product line.

Sure

Again within six months, a substantial portion of our sales come from agents that have been recruited in the past six months.

That's true. Is there going to be any changes on the under 65 health side in commissions?

I don't think there is. We are looking at that, but we haven't, there's no definitive decision being made there.

Okay. All right. Thank you.

Our next question is from Eric Burke with Lehman Brothers. Please go ahead.

Thanks. With respect to the incentives that you mentioned Mark, to encourage new agents hired at United American to sell Liberty products, are you talking about Liberty life products or health products?

Well, both. We're putting out basically the Liberty National portfolio to them. Again, we're trying to encourage both individual life sales as well as worksite sales. About 40% of Liberal National sales are worksite, both supplemental health as well as life and so all of the entire product line is being introduced. But again, the need-based sales presentation that Andy King has put together for the Liberty National agents has made the training and actually the closing rates that we're seeing at Liberty National are far superior to what we've seen in the past and we think it's going to be much easier to recruit and train and make agents successful in the United American Branch Office as a result of that sales tool also.

Do you think that the health insurance business can, I'm still trying to get a sense of the outlook for the health business at United American and in particular, with the making of available to the United American agents of Liberty Health products, do you think that will make a difference?

Well, yes, I hope it makes a difference, but I don't know that the United American health sales are just, we have roughly $20 million of health sales at United American this quarter. Our expectation right now are that it is going to drop to about $18 million next quarter, then be back up in the $20 million range in the fourth quarter. So we don't see much additional drop off, but we hope to add to that with writing a substantial amount of the Liberty National product.

Eric, I've got an additional comment. I think really what we're trying to do is also improve the persistency because of that.

Absolutely.

Really is going to make a huge difference and if we can structure the agent compensation so that it is dependent on that good persistency, I think that's really what will make a big difference with that.

That is part of the incentive compensation.

Right.

Okay the other question, the final question I had relates to the mortality issues that were referenced in earlier questions and by you, Mark. When I look at your financials here, you call it your financial supplement and I look at the underwriting results. It’s not apparent to me that there was adverse mortality in the sense that if you look at, for example, at Liberty and at the direct response operation and you just look at the set, a ratio of net policy obligations to premiums, which is all shown in page 8 of your financials. It doesn't look like there was really much of a change indeed for the entire life business. The underwriting margin was essentially the same this year as last. So if the disappointment was related to adverse mortality, why don't we see it in these numbers?

I think what we were saying is that for one thing, the deviation or the difference from what we expected wasn't a large dollar amount. But we compare our numbers pretty closely. If we have any deviation at all we're going to look at it to see what the differences really are.

Also, you know, in comparison to what Rosemary said earlier. Second quarter of last year at Liberty National, we had the highest paid claim in a quarter that we've had in three years, so we are comparing to a quarter last year that had very high claims. What Rosemary has said was we were not anticipating that same pattern this year. We were expecting more of a level pattern. But we have seen again higher claims in the second quarter than what we anticipated. The actual paid claims in the second quarter this year were less at Liberty National than they were the second quarter of last year. But they were still higher than what we had projected.

Thank you.

Our next question is from Mark Finklestein with FPK. Please go ahead.

Hi, just a couple more quick questions on the health restructuring. I guess just hearing you and talking about the merging of the stack companies and kind of getting a little bit closer to LNL, is the end game to essentially merge these distributions, so we do not see a separate LNL in UA branch distribution?

Yes. I think that is where we end up really within the next year. That's the United American offices will become Liberty offices, and they will basically offer the same product portfolio with the same compensation systems.

Okay.Then, the only other question I was going to ask you is, are they largely in the same markets and is there any risks of channel conflicts and maybe any concerns on the L&L side about this transition?

Very little. Again, Liberty National is so concentrated in the South-East, particularly Alabama, where we have no branch office, United American doesn't have a branch office in Alabama.

Right.

The United American branch offices are spread out over 36 states, and there's very little conflict there. I don't think that's a problem.

Okay. Thank you.

Our next question is from Jeff Schuman with KBW. Please go ahead.

Good morning. You talked a fair bit about the under age 65 health strategy. I was wondering if you can just give us an update on how you're thinking about the Part D business. It has turned out to be a profitable business certainly. But, at this point the premiums are declining. Is the plan from here just to manage that for whatever growth you can get, or is there some strategic rethink you can do to maybe actually turn that into a growth vehicle?

It's such a small part of our business and, I think the first option is where we're at. We will manage it and we will try to maximize our profits on that. But I don’t want to expend a lot of effort and I don’t see potential to try to really focus our efforts on growing that business.

Is this a franchise that might have some value to another party or not?

Oh, possibly. But just like most of our businesses, we've never been able to find people that will pay us what we believe its worth. So, it might have some value, but I don't know if it would have more value than what it has to us.

Great. Thank you.

Our next question is a follow up from Stephen Schwartz with Raymond James. Please go ahead.

Thanks. To follow up on Part D, I'm just wondering, Mark. With the PBM fees change, I think your margin is going to get north of 15%. Do you think that's sustainable in ‘09?

Rosemary, you want to comment on that?

Mark. If you don't mind, I think I can answer that question.

Alright.

We expect to see, about 15.5% margin for the remainder of this year. But we expect 2009, that's going to go back to ‘11.

Back to ‘11. Okay.

Yes.

Glad I asked. Rosemary, going back a little bit to the adverse mortality a tiny bit that you have, I'm just wondering about the timing of it. Maybe there was a lag in reporting from the first part. The entire industry had poor mortality pretty much, in the first quarter. You guys did not, and then suddenly you see it a little bit. So, I'm just wondering if maybe, what we're seeing here is a lag from what the industry saw in the first quarter.

I think that there were some, lags in our reporting and how we viewed it, and so it's probably true that some of the claims that we're dealing with being paid now might have actually been incurred in 2007. That's just always a real hard number to try to guess or not to guess sorry, that's a bad word, but to try to estimate. But, yeah, I think we did see some changes in our lag patterns that impacted that number.

From 2007 or from first quarter ‘08?

Well, I’ll put more of it in ‘07 I think.

Well, okay. All right. That's interesting. Thanks.

(Operator Instructions) And our next question comes from Eric Burke from Lehman Brothers. Go ahead.

Thanks. It seems like the independent side of United American health business is enjoying a level of production that, while not increasing, is not deteriorating to nearly the same degree that your branch office is. Why is that?

I don't know if I have an answer for you on that, Eric.

Must be a good question then, right?

It is a good question. We have a core group of long-term, independent agents that have continued to produce for us over the years some Medicare business that we write. Again, we're still out recruiting new, independent agents. But it just hasn't been impacted as much by the competition. Again, because there have been companies out there specifically going after our branch office managers, agents, and recruiting them away from us.

Okay. Thank you.

There are no further questions at this time. I would like to turn it back over to Mr. McAndrew.

All right. Well thanks for joining us this morning everyone, and we’ll all talk to you again next quarter.

Ladies and gentlemen, this does conclude the conference. Thank you for your participation. You may now disconnect.