Good day. Welcome to the Globe Life Inc. Third 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, sir.
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. 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 discussion of these terms and reconciliations to GAAP measures. I'll now turn the call over to Gary Coleman.
Thank you, Mike, and good morning, everyone. In the third quarter, net income was $202 million, or $1.82 per share, compared to $179 million, or $1.55 per share a year ago. Net operating income for the quarter was $192 million, or $1.73 per share, a per share increase of 9% from a year ago. On a GAAP-reported basis, return on equity as of September 30 was 12%, and book value per share was $65.96. Excluding unrealized gains and losses on fixed maturities, return on equity was 14.7%, and book value per share grew 10% to $47.58. In our life insurance operations, premium revenue increased 4% to $631 million, and life underwriting margin was $181 million, up 8% from a year ago. Growth in underwriting margin exceeded premium growth due to higher margin percentages in all distribution channels.
For the year, we expect life underwriting income to grow around 7%-8%. On the health side, premium revenue grew 5% to $269 million, and health underwriting margin was up 1% to $61 million. Growth in premium exceeded underwriting margin growth primarily due to a lower margin percentage at United American. For the year, we expect health underwriting income to grow around 3%-4%. Administrative expenses were $61 million for the quarter, up 8.5% from a year ago. As a percentage of premium, administrative expenses were 6.7%, compared to 6.5% a year ago. For the full year, we expect administrative expenses to grow approximately 6% and to be around 6.6%-6.7% of 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. I'm going to go through the results in each of our distribution channels. I will start by saying we are especially pleased with the year-to-date agent count growth we've seen across all three of our exclusive agencies. At American Income, life premiums were up 7% to $293 million, and life underwriting margin was up 9% to $100 million. Net life sales were $60 million, up 9%. The sales growth was driven primarily by agent count growth. The average producing agent count for the third quarter was 7,578, up 7% from the year-ago quarter and up 3% from the second quarter. The producing agent count at the end of the third quarter was 7,770. At Liberty National, life premiums were up 2% to $72 million, and the underwriting margin was up 12% to $19 million.
Net life sales increased 12% to $13 million, and the net health sales were $6 million, up 8% from the year-ago quarter. The sales growth was driven primarily by agent count growth. The average producing agent count for the third quarter was 2,398, up 10% from the year-ago quarter and up 5% from the second quarter. The producing agent count at Liberty National ended the quarter at 2,421. At our Direct Response operation at Globe Life, life premiums were up 2% to $212 million, and life underwriting margin increased 5% to $41 million. Net life sales were $30 million, down 1% from the year-ago quarter. Year-to-date, sales are down 1%, due primarily to a decrease in juvenile life insurance mailing volume. At Family Heritage, health premiums increased 7% to $74 million, and health underwriting margin increased 12% to $19 million.
Net health sales were up 9% to $18 million due to an increase in both agent count and agent productivity. The average producing agent count for the third quarter was 1,135, up 5% from both the year-ago quarter and the second quarter. The producing agent count at the end of the quarter was 1,236. At United American General Agency, health premiums increased 8% to $103 million, while margins declined 10% to $14 million. Net health sales were $16 million, up 25% compared to the year-ago quarter. To complete my discussion of the marketing operations, I will now provide some projections. We expect the producing agent count for each agency to be in the following ranges for the full year 2019. American Income, 7,350-7,450. Liberty National, 2,300-2,400. Family Heritage, 1,210-1,230. Approximate net life sales are expected to be as follows.
American Income, for the full year 2019, 6%-7% growth. For 2020, 5%-9% growth. Liberty National, for the full year 2019, 8%-10% growth. For 2020, 6%-10% growth. Direct Response, for the full year 2019, down 2% to flat. For 2020, down 3% to 1% growth. Approximate net health sales are expected to be as follows. Liberty National, for the full year 2019, 7%-9% growth. For 2020, 6%-10% growth. Family Heritage, for the full year 2019, 5%-7% growth. For 2020, 5%-9% growth. United American Individual Medicare Supplement, for the full year 2019, 8%-12% growth. For 2020, relatively flat. I will now turn the call back to Gary.
I want to spend a few minutes discussing 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, a 5% increase over the year-ago quarter. On a per share basis, reflecting the impact of our share repurchase program, excess investment income increased 7%. For the full year, we expect excess investment income to grow by about 5%, which would result in a per share increase of around 8.5%. Regarding the investment portfolio, invested assets are $17.2 billion, including $16.2 billion of fixed maturities at amortized cost. Of the fixed maturities, $15.6 billion are investment grade with an average rating of A-, and below investment-grade bonds are $623 million compared to $682 million a year ago. The percentage of below investment-grade bonds to fixed maturities is 3.8% compared to 4.4% a year ago.
This is the lowest this ratio has been in the last 20 years. Overall, the total portfolio is rated A- compared to BBB+ a year ago. This is the first time the overall portfolio rating has been A- since 2016. Bonds rated BBB are 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 BBB securities provide us the best risk-adjusted capital adjusted returns, due in large part to our unique ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets.
Finally, we have net unrealized gains in the fixed maturity portfolio of $2.6 billion, $638 million higher than the previous quarter, due primarily to changes in market interest rates. Regarding investment yield, in the third quarter, we invested $409 million in investment-grade fixed maturities, primarily in the financial, industrial, and municipal sectors. We invested at an average yield of 4.12%, an average rating of A, and an average life of 29 years. For the entire portfolio, the third quarter yield was 5.47%, down nine basis points from the 5.56% yield in the third quarter of 2018. As of September 30, the portfolio yield was approximately 5.45%. At the midpoint of our guidance, we are assuming a new money rate of around 4% in the fourth quarter and a weighted average rate of 4.25% in 2020.
At these new money rates, we expect the annual yield on the portfolio to be around 5.49% in 2019 and 5.38% in 2020. While we would like to see higher interest rates going forward, Globe Life can thrive in a lower-for-longer interest rate environment. Extended low interest rates will not impact the GAAP or statutory balance sheets under the current accounting rules since we sell non-interest sensitive protection products. While net investment income and to a lesser extent, pension expense will be impacted in a continuing low interest rate environment, investment income will still grow. It just won't grow at the same rate as the invested assets. Fortunately, the impact of lower new money rates on our investment income is somewhat limited, as we expect to have an average turnover of less than 2% per year in our investment portfolio over the next four years.
Now I'll turn the call over to Frank.
Thanks, Gary. 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. As is the norm for Globe Life, the parent will generate 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 the dividends paid to Globe Life shareholders. We anticipate our excess cash flow in 2019 to be approximately $375 million. Including the assets on hand at the beginning of the year, we currently expect to have around $415 million available to the parent during the year. As discussed on our prior calls, we accelerated the repurchases of $25 million of Globe Life 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, leaving approximately $400 million available to the parent, including the $50 million of liquid assets we normally retain at the parent. In the third quarter, we spent $83 million to buy 933,000 Globe Life shares at an average price of $89.26. In October, we have spent $25 million to purchase 265,000 shares at an average price of $93.50. For the full year through today, we have spent $282 million of parent company cash to acquire more than 3.3 million shares at an average price of $86.33. Taking into account the $282 million spent year to date, we now have around $118 million of available cash, of which $50 million will be retained as a parent, leaving approximately $68 million for use in the remainder of the fourth quarter.
Looking forward to 2020, we preliminarily estimate that the excess cash flow available to the parent will be in the range of $365 million-$385 million. 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. As discussed on our previous call, Globe Life intends to target a consolidated company action level RBC ratio in the range of 300%-320% for 2019.
With respect to our earnings guidance for 2019 and 2020, our third quarter earnings were slightly higher than we anticipated, primarily due to favorable life claim fluctuations during the quarter, plus a one-time $1.2 million consent fee received on the forced exchange of one of our bond holdings. We are now projecting net operating income per share will be in the range of $6.71-$6.77 for the year ending December 31st, 2019, a $0.02 increase at the $6.74 midpoint of this range over the prior quarter midpoint of $6.72. For 2020, we are projecting the net operating income per share will be in the range of $7-$7.30, a 6% increase at the midpoint from 2019. Growth will be impeded in 2020 due to the lower interest rate environment, which we currently expect to continue through 2020. Those are my comments.
I will now turn the call back to Larry.
Thank you, Frank. Those are our comments. We will now open the call up for questions.
Thank you very much. Ladies and gentlemen, at this time, we would like to open the floor for questions. If you would like to ask a question, please press star one on your telephone keypad now. Again, that is star one to ask a question. Our first question will come from Jimmy Bhullar, JPMorgan.
Hi, good morning. I had a couple of questions. First, on Direct Response, your margins seem like they're starting to recover now. Given sort of changes in pricing, marketing, to what extent do you think this is the continuation of a trend? Are the margins that you reported in the third quarter sustainable in Direct Response? Also just on sales in Direct Response, I think you had been expecting an improvement in late 2019. Do you still expect sales to turn positive in the fourth quarter? What your outlook is into 2020?
Jimmy, first of all, on the Direct Response margins, at 19.5% in the third quarter, that was a little bit higher than expected. We think for the year that they'll be between 18%-18.5%. That's for 2019. As far as 2020, our preliminary guidance there is that we will still be at around the 18% level. We talked about a couple years ago that that's where we thought we were getting to the 18%, where we'd get to. We're there now, and we think it's going to be stable.
Okay. One thing I'd just add to that, Gary, is that, we're pleased we're seeing the real stabilization in the policy obligation percentage there at around that 54%. I agree with Gary that we would expect that 18% to, looking forward, around that level anyway. Probably the one thing in the Q3 that we benefited from, and there was a little bit of a fluctuation on our amortization of our acquisition cost due to just updating some models, and we had some favorable persistency. We don't really see that continuing into Q4. That'll bring down Q4 a little bit from where we saw Q3.
Jimmy, I think you also had a question about fourth quarter sales and Direct Response. We are expecting to have lower sales in the fourth quarter. This is due to lower juvenile mailing volumes in the third quarter. The decline has been due to weaker than expected juvenile response rates.
Okay. For Gary or Frank, how much insight do you have on the changes in accounting for long-duration contracts? Obviously, that's been delayed by one year, how do you think your book value and/or future earnings would be affected by it?
Yeah, Jimmy, we do continue to work through the implementation of that new guidance. We are pleased to see that it was extended for another year just to give us more time, and I think the industry as well, to really make sure we understand what the implications are. We do have some ideas on directionally, yet at this point in time, still working through a lot of the details. So there's not a lot of details to share. I think the one thing we would say is that at the current interest levels, we do anticipate that the reserve levels would end up going up. So would have some negative impact on that overall equity. And so there will be some adjustments there. There's a certain portion of that that's going to be included in other comprehensive income.
As far as what the amounts are and what that's actually going to look like, we really don't have anything to share at this point in time.
Okay. Thank you.
Thank you. Our next question will come from Andrew Kligerman, Credit Suisse.
Hey. Good morning. First question. The health margins were 100 basis points lower year-over-year on lower Medicare Supplement margins at United American. I guess the question is, will these margins continue to face pressure from higher medical inflation from med supp products? Do you think we're at kind of a level where it's going to stay?
Well, Andrew, we have seen an uptick in the claims this year, and as you mentioned, I think it's industry-wide. Our expectation now is that going forward that the policy obligations, say in 2020, will be in the 65%-66%, somewhere in between in that range. It's early. I think when we give our guidance in fourth quarter call, I think we'll have a better feel for that.
Okay. What was driving the strong health sales growth at United American and Family Heritage in the quarter? It was pretty robust.
At United American, the growth is driven primarily by the individual business. In the individual business, market conditions are favorable from a pricing standpoint at this time. We had some strong growth from some of our larger agencies. At Family Heritage, the sales growth is driven by a rising agent count and greater productivity.
Okay. Lastly, just on the new money yields, it was interesting that you came in with a new money yield of 4.1% in the quarter, just given that last quarter you had a 5% new money yield. I get that interest rates came down pretty sharply, but maybe a little color on why it was such a steep drop off quarter-over-quarter.
Well, Andrew, the biggest part of it was the drop in the treasury rates during the quarter. To a lesser extent, the quality of the bonds purchased in the third quarter is a little higher than we had in the second quarter. The big part of it was out of that 412 that we had in the third quarter, the spreads were pretty much the same, but the treasury rates had dropped by 60 basis points. That's what's impacted our new money rate that we're projecting for the fourth quarter and for 2020, because for all we can see, those rates are going to be that low going forward.
Yeah, I think you said a little earlier it's going to be 4.25% is your projection next year for the new money rates. Is that right? Do you expect a little rise-
Yes
in treasury? Yeah. You do?
Yeah, just slightly. A little bit higher treasury rates, that's more toward the end of the year. That 4.25 is a weighted average rate. It'll start out lower in the first part of the year. We do think it'll increase slightly as we move through the year.
Got it. Thanks a lot.
Thank you. Our next question will come from Erik Bass, Autonomous Research.
Hi, thank you. Just wanted to touch on life underwriting margins more broadly, as it looked like they came in better than your expectations across almost all of the segments this quarter. I know you touched on Direct Response, but was this just a particularly favorable quarter for mortality experience at American Income and Liberty, or is there something else that led to the improvement? What are you assuming for life margins across the other businesses in 2020?
Erik, you're right. Across the board, we did have better mortality than expected. I think the bigger surprise was at Liberty, and that one, we're thinking it may be a fluctuation because the policy obligation there, the ratio there at 33.7 is lower than we've seen in quite some time. At American Income, we saw improvement there. We think that we've seen improved mortality over the last several quarters at American Income, and as the impact on the margin has been the underwriting margin going from 33% to 33.6%. That doesn't sound like a big change, but over $1 billion worth of premiums, it does make quite a bit of a change for our growth in earnings. The margins for this quarter were over 28% for the overall life business.
We think that's going to revert back, and we're looking for underwriting margin for the full year being around 27.9%, right at 28. Our early thoughts on 2020 are that we'll still be in that same range. What we've seen is improved mortality, especially at American Income and also Direct Response over the last couple of years. We don't think we'll see improvement going forward, but we think we'll maintain the profit margins at where we are for this year. Again, we think we'll be right around 28% for the year, and we think that that'll hold in 2020 as well.
Got it. Thank you. Just moving to the health side, I guess you gave some expectation around the United American margin, which looks like it would stabilize a bit. Is the reason that you're assuming flat sales that you're having to raise price a bit to reflect some of the experience?
I think it's given the strong growth in Medicare Supplement sales in 2019, it's really a tough comparable. Medicare Supplement sales in the individual market are hard to predict. We use general agency distribution, those market conditions can change rapidly. Although we're giving our guidance that it'll be flat, it's really too early to give any certainty to the guidance.
Got it. Okay. Thank you.
Thank you. Our next question will come from Ryan Krueger, KBW.
Hi, thanks. Good morning. I had a couple questions about the 2020 EPS guidance. Can you give us a sense of what your expectation is for admin expense growth in 2020?
Yeah, Ryan, we're expecting around a 5%-6% growth in administrative expenses.
Yeah. Got it. Then Okay.
I was just going to say that we really anticipate that percentage of premium to be about the 6.7% that we're anticipating here for 2019.
Thanks. I may have missed it, but could you also give the rough expectations for underwriting income growth for both life and health in 2020?
Well, for life, we're looking at 3%-5% growth, and for the health insurance, we're looking 4%-6%.
Great. Thank you.
Thank you. Again, as a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your touch-tone phone now. Our next question will come from Ian Ryave, Bank of America.
Thank you for taking my question. On Direct Response margins, you're now at about 18%-19% for life underwriting margin. If we look back to 2011 through 2015, that margin percentage has been in the 23% range. Is there anything that's preventing you from getting back to that level?
I think at this point in time, as we're having to kind of recalibrate our thought process, taking into account the additional information that we're getting on the Rx underwriting and the results that we had from that during that 2011-2014 timeframe. In the near term, we really think that it's going to continue to be in this 18%-19% range. It's difficult to say over time as we work through testing and work through continuing changes if we can get back.
To those levels, at least in the near term, we think we'll be closer to this 18%-19%.
Does it have anything to do with the IRRs on new products? Is that a consideration as well?
I don't think it's really the IRRs on the new products. The products are essentially the same, it's just getting the right mix of pricing and underwriting and working through all those so we can really maximize those underwriting dollars, and trying to get the right mix to give us the right response rates, growth in sales, but at a price and a margin that we can ultimately grow underwriting dollars more so that we're not as focused on the underwriting percentage as much as we are trying to grow the underwriting dollars.
Got it. Then just real quick on American Income sales. You talked about some near-term pressure from just opening up new offices. I assume this kept middle management busy, just onboarding and training new agents. Given the results the last couple of quarters, they were particularly good this quarter. Are we starting to see a turnaround in sales? Is this headwind starting to abate?
I think we've had several factors in American Income that led to the agency growth. First, we've had strong recruiting and fewer terminations that was caused in part by the restructuring of compensation. Year-to-date, our recruiting's up 9%. I think another important factor is that for this year, we've had middle management growth of 9% year-to-date. As you stated, we have 13 new offices have opened since January of 2018. Those middle managers come as offices have been replaced now. We're starting to see recruiting activity in those 13 new offices. All those factors are at work in increasing the agent count at American Income.
Great. Thank you.
Thank you. Our next question will come from Alex Scott, Goldman Sachs.
Hi, good morning. First question I had was on the agent count and recruiting. I guess just looking at the landscape, it sounds like some of these online distributors are looking for higher growth rates.
there's a bit more conversation around sort of a gig economy type approach to agents and so forth. I'd just be interested to hear your take on that business model versus yours and what you're doing this resulting in you not feeling pressure from agents leaving for that kind of a gig or any other color that you could provide on what's allowing you to strengthen your agent recruiting here?
Well, I think if you stress the marketing generally, we operate in an underserved market. Typically, we're the only agent in that home. There's not competition from other agents, nor is there digital competition in the sense that this is a need that's filled. People aren't looking to buy life insurance. You're really explaining the need, and people buy insurance after they understand the need.
I think there'll be a place for life insurance agents as we go forward. The other thing is we're selling smaller face policies, and there's not real competition in that part of the market because other agencies or other companies can't control expenses, and expense control is so important when you're writing lower face policies. For both for expense control and for the market that we serve, I think the agents fill an important niche in that market.
Got it. In the last couple of years and thinking now longer term, you're not seeing any signs that would lead you to believe in any way that there's shifting consumer preference for online purchasing versus in-home with an agent in person. You still feel like all the trends are still there for this to be the business model long term?
Yes, I think all the trends are there, and we continue to grow the agency force. We continue to grow middle management and open offices. We haven't seen a change of persistency that we're losing policies as we study our persistency and the retention of agents has remained unchanged. The short-term factors we've discussed on other calls was a low unemployment rate, and we've dealt with that in much restructuring our compensation and really focusing on the training and retention of our new agents. I think it's a long-term business model that works.
Got it. Okay. Maybe one last one for you guys. One of your peers has talked about efficiencies, and I think they were similarly organized with multiple subs under a holding company with maybe some different brands. I guess I'd just be interested to know if you guys are looking at anything structurally or if there's anything going on. I know you changed the name of the company recently at the parent level. Any thoughts on if there's sort of more to come in terms of thinking through structure and efficiency, particularly as I know some of the tech, the systems, and progress towards the new accounting requirements, some companies are thinking more holistically. Any insight there?
There's not major plans to change structure. First, from a legal structure, there's really no plans. We'll continue to have the separate companies. We'll operate under the Globe brand. As far as a lot of our, for example, our systems and back office operations, we consolidated those quite some time ago. What we're doing now is we're upgrading those systems, and we'll have systems that are enterprise-wide. We've had them, but what we're doing now is upgrading to more efficient and systems that'll provide better service.
The one thing I would just add to that, I think from a pure structural perspective, we don't have that many operating companies to begin with as we have taken a look at it and considered it along with the branding strategy.
The cost ultimately of moving that, working through changes to all the policyholders and the transferring of policyholders through some type of a merger, putting the entities together really wasn't worth the additional benefits that we might be able to achieve from that. As Gary said, we felt comfortable operating within the current legal structures that we have and still be able to get good efficiencies from the overall consolidation of systems and then working under the unified brand.
Thanks.
Thank you very much again. Ladies and gentlemen, to ask a question, that is star one on your touchtone phone now. Speakers, at this time, we have no further questions in the queue.
All right. Thank you for joining us this morning. Those are our comments. We'll talk to you again next quarter.
Thank you very much. Ladies and gentlemen, at this time, this concludes today's conference. You may disconnect your phone lines and have a great rest of the week. Thank you.