Last one of the day. You hardy folks that have stuck around, thank you. Next presenter is Globe Life. I'm pleased to introduce Gary Coleman, Larry Hutchison, Co-CEOs of Globe Life, and Frank Svoboda, the company CFO. Gary and Larry have held the CEO office for the past six years. Prior to their current roles, Gary served as CFO, and Larry served as General Counsel. Each have over 25 years of experience with the company. They've been around a while. Frank's been with the company since 2003, when he joined from KPMG. Globe has been one of the most consistent, the most consistent company. I don't have to say one of the most consistent company in terms of earnings, capital distribution, and book value growth in the life sector. In the life sector, not overall.
Right.
Maybe the bar is low, but you have been-
We'll take it though.
Years ago, we had an analyst at Merrill when I was there, a life analyst, who loved the old Torchmark. He loved it so much. After the crisis, the stock took a big hit, I wanted to buy the stock personally. I went to compliance to see if I could buy it, they said, "Well, you're sitting next to the life analyst." You don't remember this, I remember it. They said, "You can't buy the stock." I think the stock is up something like ninefold since then. I couldn't buy it. It does speak to the brilliance of our former life insurance analyst. I wanted to start with a question that I had asked myself when I heard about your company, I think it's a good place to start, not everyone has heard the story.
When you look at Globe Life, what makes it unique? You look very different than other companies. Your results are quite different. Where is the uniqueness of the story?
Well, it's really several things. One is the market that we operate in, and the products that we offer, and also the way we distribute those products is different than most of the other life insurance companies. We operate in the middle-income market, selling protection life, and supplemental health products. We sell it through distribution that we control, and by doing that, we're able to control the cost and generate strong underwriting margins. The middle-income market is such a large market, it's an underserved market. We know from studies that a majority of the people in the middle-income market are either uninsured or underinsured, but there's a little competition there.
Gary, why is that? I mean, we know it's a big market. You know it's underserved. You're not the only ones that know that. How come no one's been able to, I shouldn't say no one. You haven't had a big rush of people trying to serve that market.
Well, I think the primary thing is that we're selling small face amount policies, which means our premium revenues are fairly low. 20, 30 years ago, everybody was in the middle-income market, but the cost of operating the distribution grew at a greater rate than the premiums. Torchmark, now Globe Life, our history has been we've been able to control the cost of distribution, and it's helped us stay competitive in the market. Others started moving up to the higher income market, and we don't want to be in that market because there's so much competition, not only for the customers but for the agents, because they're selling through independent agents. Having controlled distribution through exclusive agencies in our direct response, it gives us a real advantage in keeping those costs down.
Got it. We've had a buy in it since we launched on the stock. The pushback I often get is valuation. It looks expensive, and I have an answer for that. When you're talking with investors, is there something that you think people just don't quite get or don't appreciate about your company?
Well, I think it goes back to they don't appreciate the advantage we have in operating in the market that we do, and selling the type of products we do. It has a positive impact on both profitability and capital. We don't have a lot of competition in the market, and it is a large market, we're able to generate substantial underwriting margins. At the same time, due to the nature of the products we sell, they're low risk, and we don't have to hold much capital to support them. For example, we're able to operate at a lower RBC ratio than most other companies that have the same ratings we have from rating agencies. It's that ability to generate those profits and keep the capital low that allows us to generate more cash and get that cash to the shareholders.
What has been, say, average sort of cash generation relative to your core earnings, your operating earnings?
That's changed since the tax law. Frankie?
Yeah. I think historically, if you kind of look back over time, it's really been in that 70%-80% range that we've been able to return of our earnings. It's really dropped here in the last couple of years due to the tax law change. They're more around 60%, in a large part because we did get an earnings bump, if you will-
Right
from the lower effective tax rate. Whereas from a pure cash perspective, our cash taxes really haven't changed. It's been a little bit beneficial, but not at the same degree as we really saw in the overall GAAP earnings.
Do you see that getting back up to those levels where you were before?
I think it'll take a little bit of time to get there. I think for the near term, because just some of the nuances of the tax law and how they hit our particular company.
We're seeing some benefits still of that cash, but it'll be a little while, I think, before we get ultimately back up to that same level, but we'll see.
Got it. Let's talk about American Income. You've talked about the impact of low unemployment on agent retention at American Income. How have you been dealing with that, and are there new methodologies for recruiting and retaining people?
I'll cover that. When we talk about low retention, we're really talking about new agents. If we look at our retention over the last three years at American Income and other exclusive agencies, 12-month retention and six-month retention is about the same. The issue with low unemployment is for new agents, because if they're not immediately successful, there's a lot of other work opportunities. The thing that's unique about American Income is probably 70% of our recruits are internet recruits, so that resume stays out on the internet. With all the other work opportunities, they're constantly being contacted by other prospective employers or other companies. I think with American Income, we've addressed it in four ways. In 2019, the first thing we did was increase our recruiting. We had more than a 10% increase in recruiting last year. Low unemployment hasn't affected recruiting.
In fact, most of our recruits aren't the unemployed. They're people that are underemployed and are looking for a better opportunity. The second thing we did early in 2019 was restructure our compensation. We didn't increase our compensation. We moved some of that sales commission off the back end of the renewal and moved it to the front, the point of sale, so the new agents have a greater income, and they stay with the company longer. The other thing we did last year is we increased middle management. We had a middle management increase of 10%. Within our agencies, middle management does most of the recruiting, but also most of the training for new agents. A better-trained agent makes more money, and if they have a higher income, they're going to stay with the company.
I think the last thing we're doing this year really is we're introducing more technology. The technology has really made it easier for the new agent to sell. As Gary said, our products are simple. They're simple to understand, so the training is quick. When a new agent comes with the company, they see that opportunity without the competition, lots of prospects. They're in the field selling within 5 to 10 days after their license as an agent. The products are that simple, and the training is that direct. Their opportunity is immediate. I think the other thing that helps American Income is we promoted 16 new agency owners over the last two years. When new agents come in, they see a real opportunity if they decide to go into middle management. They can quickly move up in a short period of time.
It's a real possibility they can run their own agency.
That ability to sell products so quickly since once they're trained, has that time shortened? That used to be 30 days or something.
No. What's really made it easier is the digital presentation. In 2009, American Income was the first of our agencies to go to a digital presentation. You recruit, you train to that. It's really a needs-based presentation. Most of our sales, the presentation takes about one hour, it's not about the right sale, it's making lots of presentations. On average, you'll close one out of three presentations. The key success for an agent is not just being in the field quickly, but making lots of presentations.
One out of three seems high to me. Is that a high number from an industry standpoint, do you know?
I don't know from an industry standpoint. For us, for a veteran agent, which would be an agent that's been in business more than six months, we'd expect to see about a one in three closing rate.
Wow.
That's why sometimes we talk about our productivity went down a little bit in the quarter. In the fourth quarter, we had a number of agents at Liberty National and at American Income. New agents are less productive. They're not in the field as much. They're not as effective in terms of the average premium. That's how we define productivity. Veteran agents are pretty consistent that they'll close about one out of three sales. As a rule of thumb, you want to see an agent making 10 presentations a week, and you'll keep that agent if they have that level of activity.
Yeah. American Income has historically marketed, I guess, primarily to labor unions. Just talk about the inherent advantage by using that channel of labor unions.
It's an inherent advantage. We have a long relationship with labor. That goes back to 1960. Every one of our agents is a union member. In our home office in Waco, those are union members, too. We have another team called our PRs that came out of labor, and they work on that relationship with labor. The leads we get in labor are our best leads in terms of closing sales but also getting referrals. It's a really long history of really that was the backbone, it's the core of the American Income business. That's changed since about 2000. We recognized that unions weren't growing as quickly as we wanted the company to grow. Today, about 25% of new sales come from union members themselves.
The other 75% comes from other affinity groups or really just referrals from non-union business.
Got it. Talk about direct response. This was a business that when I picked up the stock, it was just coming off a period where the profitability had not been great. This was a year and a half ago, maybe two years ago now. It seemed like you were getting the profitability right, and then you could start to grow again. The growth really hasn't picked up. I guess you're guiding next year to kind of flattish sales.
That's right.
I would have expected this, once you get the pricing right and the profitability right, I would expect this growth rate to be much higher. What's holding you back?
One was get the pricing right, but we repriced the business. When you think about pricing in our direct-to-consumer division, as you increase price, your response rates go down. I'd expect over time, the higher the price and the lower the response rate, the lower the sales are going to be. There are three drivers when we think about direct response. We look at our three channels. We have our mail volume, which we say I think will be stable in 2020. Our insert media should be up about 2%. The fastest-growing channel is in electronic, which is really the internet. The inquiries for that will be up about 5% for this year. I'll look at our total volume. I think the guidance is fair at -2% to +2%. We do a lot of testing.
This early in the year, we're not sure what that ultimate sales goal is going to be or what the final sales results. I think it'll be in that range. Our real focus now is on maximizing underwriting profit, not sales. As you think about the marketing investment, you want to make sure you have the right return on that marketing investment. As we go forward, I know we can increase sales in our direct response channel or our direct-to-consumer channel. That's really going to come from better analytics, new creative. You can do some price testing. Sometimes if you lower the price, not only do you get a better response rate, you get better mortality because you do some adverse selections, you increase prices. I think the guidance we're giving this year is fair guidance.
I think as you go forward, we'd expect to see continued growth in this channel.
On the auto side, you've seen the direct writers really gain share. GEICO's growth has been significant. Longer term, could this be a real growth driver? You said it would be better, but is this going to be a fast-growing piece of the business three to five years out?
As a piece driver, I think the piece we miss is the support it gives our agencies. We have a lot of leads that are generated out of the direct response that supports Liberty and American Income. The second is the analytics. Everything from voice analytics to attribution to know, in the case of the agencies, where the agent came from. Those are analytics we directly use. The direct response or the direct-to-consumer is important to the agency as well as it's our second largest life producer. I think it'll continue to be our largest direct-to-consumer producer. Again, there's a lot of innovation that comes out of that channel that we use across all the other four channels in the company.
Yeah. That makes sense.
Jay, over time, I would add that direct response, we generally haven't had as high excess growth in it as we've had in exclusive agencies. It's been fairly consistent, we've made some changes in pricing and even changes in underwriting.
Right.
I think it'll stabilize. I think the quality of the earnings it's generating now is better than it was. The fact that, as Larry mentioned, it does provide a great deal of support to our agencies. It's a valuable franchise.
We have a fair number of questions for when you try to maximize the margins again. To do so, you'd walk away from so many sales, your total profit could actually decrease. I think where the margins are, I'm comfortable and more focused on for those total sales, where the total profit underwriting dollars that we'll support or will generate with those sales.
I assume it is cheaper to sell it this way over time. Is that fair or no?
I don't know that it's a very different business than agency.
Right.
When you think about direct response, you have different lapse rates in the first year, you have different persistency, and what's predictable, but we sold those products for a long time, we know what those lapse rates will be.
We have a pretty good sense of the mortality. I don't know it's cheaper. It's just a completely different business than our agency business.
Well, it's more complicated, too, because we don't incur a cost on the agency business until a policy is sold.
Sure.
Whereas in the direct response, all the expenses are up front and paid for before we even generate a policy. We have to be more careful in how we're allocating that spend.
scale would be important there. As that gets bigger and you can cover those upfront expenses.
Yeah
Scale is obviously beneficial.
We also, in determining how much we're going to spend, we have to determine what the return on investment is going to be. We can expand the marketing, but it may be getting into areas where the return isn't enough to justify. It's a little more complicated than it is on the agency side.
I think it's more complicated, too, is that those channels have really changed over time. If we go quite back to 1995, it was almost all direct mail. In about 2000, we saw that the insert media became the dominant channel. Today, banks and others are going to digital billings, you don't have the insert volume.
Oh, yeah
Say, in 2000. Really introduced the internet as a marketing device about 2006. At that time, it was about 2% or 3% of our business. Today, that and the inbound phone calls are like 60% of our business. That channel grows the fastest. That channel also changes quickly. As you think about the internet, as you pay to be on different sites and try and drive traffic, that's a quickly changing environment. It is a more complicated business than the agency business. Agency business, to my mind, is a lot easier to run. You really focus on growing distribution. This is you're trying to balance the three channels.
You have to be careful, too, with the attribution because our fourth quarter, we had an increase in sales that surprised us because it was inbound phone call traffic that was driven by our insert media and our mail channel, and we didn't expect that.
There's kind of a general advertising effect across those channels. If you say, "Well, I don't think the return will be right for this insert piece or this mail piece," you have to be careful because you may be hurting your other channel in doing that.
Yeah. No, that's fair. It does look like the margins for this channel have improved.
Yes
quite a bit.
Yeah.
At the level they are now, do you view those as sustainable, or could you improve upon them a bit?
I think we're pretty pleased that they've really stabilized here around this 18% level that we've had.
Right.
As you kind of said, 2016, 2017, margins have dropped into that 16%-17% range. They've improved here over the last couple of years, and we've averaged right at 18% the last two years. A little bit of fluctuations on some of the quarters, but we think that they are sustainable. We kind of expect them to should continue to be around this range here in the near future. There's always a little bit of seasonality, so I think they'll vary in between that 17%, and we expect it to be that 17%-19% on a quarterly basis.
Right.
Just kind of depending on how the seasonality hits.
Yeah. Let's shift to health. Talk about your strategy for growing supplemental health products over the next several years.
Really different strategy. We have three channels we sell supplemental health policies through. The first is Family Heritage Life. Family Heritage sells a return of premium product, and the key there to increasing those sales is increased distribution. We need to grow the agency. Currently, Family Heritage has about 1,200 agents. We bought the company in 2012 and had about 700 agents. We've increased that significantly.
Yeah.
We need to increase the size of those agencies and that distribution. We're not trying to increase the number of agency owners. We're trying to get bigger agencies.
Year that you bought it, you said 2012?
2012. That's when we took over Family Heritage. The other thing we do there is we do update products. There are different products. Originally, it was mostly return of premium cancer product. There is some other circulatory and other products we've introduced and had success with. As we grow distribution, we change our products, we can certainly grow that line. Second one is Liberty National. Liberty National is kind of interesting because it sells health. Only about 25% is individual. The other 75% is the worksite market. In worksite, those are mostly small employers, and the initial sale typically is a health policy. We really like that market because on the re-enrollment, we sell a lot of life insurance. It's a bit of a lead for later life sales in that market. Again, there, it's not new products, it's growing our distribution.
When we restructured that company in 2012, it had about 1,000 agents. Today, it's at 2,500 agents. Again, we want to increase not only the agency. Our strategy there is open new agencies outside our traditional geography. We're starting to sell across the U.S., and that health market, that worksite, is a great lead for new agencies. That's great to start new agencies. Our third market is really a little more opportunistic. That's Medicare Supplement. We sell both individual and group Medicare. We do that through general agents and brokers. That's the most competitive of the markets that we're in. The growth there has really depended on market conditions. We've had really strong sales in individual Medicare Supplement in 2018 and 2019. Those market conditions can change rapidly, and those general agents have an ability to place the business with other carriers.
What we don't know is what new carriers are going to come into a state, have a lower rate. It's a standardized product, and they may place that business elsewhere. Our guidance this year, after two strong years, those are tough comparables. Our guidance this year is to be flat, sometimes we're surprised it's so difficult. On the group side, the size of the groups also can affect what the growth is in that market.
How is competition in this market? I know it varies by channel.
It varies by channel. If you look at Family Heritage, it sells primarily in rural areas or small cities. We're the only agent in that household. There is no competition for that. Liberty National are really our focus on worksite, are smaller employers. For the other carriers that do worksite usually have bigger employers, it's not that competitive. It's really, again, growing your distribution, it's activity to go out and call on those small employers. Competition, as I said, is really the strongest in the Medicare Supplement markets.
The margins on the health side have kind of flattened out a bit. Are you seeing higher than normal utilization for Medicare Supplement plans? Looking forward, what can the margins look like?
Do you want to handle that or
Well, we did see higher utilization in 2019. I think that was pretty common.
Yeah
among Med Supp carriers. In that business, you're filing for rate increases every year. We filed for rate increases that haven't fully taken into effect. I don't think the margins are going to vary that much. I think we'll be able to maintain the margins that we have.
Yeah. Rate increases help margins in the sense that with a rate increase, you don't pay a commission on the rate increase, you pay a commission on the original premium. As you think about it, your margins are not hurt by rate increases.
Yeah.
That's a bit of a misconception about that business.
Yeah. Do you see opportunity to offer new products on the health side?
All of our products are non-ACA, we look to different coinsurance, different deductible gaps. Can we fill those? That's where we have some new products to Family Heritage, and the other companies is really the same product. Our focus really isn't on new product, it's on growing distribution.
Got it. Oh, by the way, any questions on sort of distribution, products? I wanted to shift to the investment side. Low interest rates, not a secret. Everyone's dealing with it.
Yeah.
How would you describe the ongoing pressure from interest rates on profits, on earnings?
Well, for several years now, we've been investing at a lower rate than the portfolio yield, so the portfolio yield continues to come down. For example, this year we'll grow the invested assets around 4%, our investment income will only grow 1% to 2%. That's a little bit worse than what we've had in prior years because we've had some calls in the portfolio that we don't anticipate going forward. It has hampered our income growth. The positive thing about the products we sell, we're not selling interest-sensitive policy, so we're not having any impact on policy liabilities or the DAC on the balance sheet. It's strictly on the income statement. It has hindered our growth for several years now.
If rates were to stay where they are and your portfolio rolls off, how long before your portfolio yield matches new money yields?
We've kind of done a rough estimate for over five years, this will be much longer than five years. My guess it would be more than 10 years.
If rates stay where they are, every year we'll see your portfolio yield gradually coming down.
Yeah, it will. One of the good things is that we've got very little turnover in our portfolio coming in the next five years. Less than 2% a year.
Less than 2% a year?
Yeah. That'll help us a little bit, make it go a little bit longer.
Right.
One of the things, Jay, was we had like $600 million of some Build America Bonds that we purchased back 10 years ago. We have a few more of those that are going to be called, and that we expect to be called here the first part of 2020. As Gary said, really once we get past that, we don't have a lot that we expect to roll off. I think when you look at the change in the portfolio yield and kind of our just normal turnover, it maybe only decreases it four or five basis points over the course of time. It takes a lot. It would take quite a few years, even at the current rate, to get down to a 4% number.
Yeah. No, that makes sense. On the credit side, that was the other pushback I would get on the stock. I'd call people up, love the stock. Either, one, it's too expensive or two, yeah, they've got credit risk. Everyone has credit risk.
Right.
They felt a little bit more than other companies. Therefore, when we get this eventual rollover in the credit markets, look out. Have you been managing that risk, reducing credit risk, or you're comfortable with where you are now?
Well, first of all, let me say I agree with you. Everybody has risk, I think the question is, where is it? We have a higher triple B portfolio than most other insurance companies that-
Right
We're at 55%, I think the average is around 40 or a little below. We don't have other risk assets that the other companies have. Again, due to our policy liabilities, we don't have to have derivatives. We're not into equities. We're not into other high-risk type assets. To us, it's a matter of where the risk is. We're more comfortable with it in our bond portfolio. We have to be very careful about risk because we're investing long to match those long policy liabilities. When we're underwriting different bonds and looking at different issuers, we're looking for issuers that can withstand multiple cycles, that they're going to be there in the long term. In addition to that, we're also looking to diversify the portfolio, which in the last five years, we're much better diversified than we were in the past.
The combination of the underwriting we do and diversification. We can hold bonds to maturity, we do hold bonds to maturity. I know people talk about ratings migration, that kind of. We can weather that. We did in 2008 and '09, bonds came back up. Because of the quality we think we have, the Triple B bonds that we buy we think are better than some A bonds that we see and others. Not all Triple Bs are the same. We're getting the better ones. We think the quality's there. We're more diversified than we were, and ability to hold those bonds. We think that we can navigate through any kind of a downturn without a significant impact on our operations.
Here's from my perspective, too. If we did have worsening credit, arguably equity markets are going down and some of your peer companies have much bigger exposure to equity, some of the VA companies.
Right.
You could outperform in that sort of environment pretty easily. I don't think you would.
Probably one of the questions you get is if that happens, if we have a downturn and we have migration and impairments, are we going to stop our share repurchase program?
That is a question, yes.
We've got $100 million of excess capital within the insurance companies. We've got $50 million at the parent company, and we've got, what, a $700 million worth of borrowing capacity. We can't imagine anything getting to where we would have to disturb the cash that we're using for share repurchases.
Yeah. You've been so consistent in buying back your stock. In the past, you have made acquisitions. Are you seeing anything on the radar screen that's looking interesting to you from an M&A standpoint?
No. Well, we're constantly looking. The problem is we're looking for companies that are in the middle-income market that sell similar products. There's not many of them out there anymore. For example, we looked at Gerber, and we just didn't see the value that the ultimate buyer did in it. We're looking at other companies. Just to buy something to be bigger doesn't make sense to us because of the execution risk and the fact that it diverts the management's time to incorporate something. We don't want to do that unless that's going to build on our other businesses as well.
Right. Just adding, as we own control distribution, we'd be happy to leave the business, let somebody else reinsure the business, but we know we can grow distribution. I think our biggest priority is can we find control distribution? That's just been impossible to find.
Yeah.
In our segment of the market, we don't see that before us, our VA business, blocks or long-term care. There just haven't been the opportunities there. What we do know is we can grow organically, that's our focus.
You must know every single company that could fit in with your company. I mean, it's not a huge list.
Right.
If they're not available for sale or don't want to sell.
Yeah. I'll give you an example. Family Heritage was privately owned. We didn't even know it existed until the owner decided to put it up for auction.
Oh, wow.
There's a possibility of those kind of companies, but there's not as many as there were 20 years ago.
Well, some are family-owned. You don't know which generation's going to say, "We're ready to leave the insurance business." That could happen tomorrow.
Yeah
It might be two more generations. That's another unknown. All of our companies within the holding group, the founder started those company, and the family, at some point, decided, "We're ready to sell the company.
Yeah.
It's a great unknown.
The past deals you've done have worked out well.
Yes.
At least if you do find something, hopefully, the market will acknowledge that you have a track record, and you know what you like and don't like, and you're disciplined from a pricing standpoint.
I think that's what's just really critical is that for us, it has to be of this right strategic fit. We're not looking for something that's going to change who we are, the types of products that we're trying to sell. When the right one comes along, it will be something that we think is clearly accretive to our business and just additive from a distribution perspective, but fits within that overall strategy of who we are.
The other thing we're open to is something that would just add to distribution, maybe not an insurance company. In 2006, we bought a company that really helped us get into the insert media business. As we look at that, something from an IT perspective, something that's really, we generate leads. We look at that type of company as a possibility it might be a stronger acquisition than actually another insurance company.
Got it. Any last-minute questions? Otherwise, we can end it here. Fantastic. Guys, thank you so much for coming and being here, spending time with us.
Thanks. Appreciate it.