I want to read a quick forward-looking statement comment. Why don't you do that?
Sure. Before we start, before every presentation, we read our forward-looking statement. 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 2017 10-K and any subsequent Forms 10-Q on file with the SEC. Thank you, Jay.
I want to start with maybe this big picture question. It was a question I was trying to answer a year ago, but I figure I'd just ask you right up front. Within the insurance market, what are the aspects of Torchmark that make you so unique?
I'd say that we're unique in that we operate solely in the middle-income market as contrasted to other insurers. We also sell very simple, basic protection products. We sell basic protection life insurance and supplemental health insurance products. We think those products are appropriate for our market. They're easy for our customers and for our agents to understand. We also distribute almost exclusively through our three exclusive agencies and our direct response channel. We like exclusive agencies. They sell only our products. We find there's less competition. We're not having to compete for either agents or customers within that market. Lastly, we generate great cash flow. We do that on a yearly basis, and those cash flows support our operations.
part of being unique is being in the middle-income market. That's a very large market, it has significant growth potential, but there's very little competition. Most of the life companies are in the smaller, higher-income market, where there's great competition for not only customers, there's great competition for agents. We just don't face that in the middle-income market.
Well, why is that? You guys have done so well over so many years. It seems very obvious that someone would You're a public company. People can see how well you're doing, yet people have not been able to attack that market. Why is that?
Well, a big part of it is being able to control the cost of distribution. Years ago, the bigger companies were in the middle-income market, Prudential and MetLife, and they had captive agents. The cost of those agencies escalated at a greater rate than the premium growth. One thing that we deal with is we're selling small face amount policies, which means that the premium revenue per policy is low. If we don't control our costs, we have no profit margin. I think that's the biggest hurdle for companies. If they want to go from the higher-income market down to the middle-income market, they're going to have to be able to control the cost to account for the lower revenues.
I want to talk about distribution. maybe sort of the key aspects of your different channels, if you could lay that out, and how they are different.
We have five distribution channels. The largest distribution is our American Income exclusive agency. It's a real advantage that we have an agency force of a union home office that helps us get leads, and it's been the core of that company since 1950. However, in the 1980s, we saw that there was a decline in union membership. Since 2015, we really changed the leads that are produced for that middle-income market. Today, 20% of those leads are union leads. The other 80% are the middle-income customers. Our second agency is Liberty National Life Insurance Company. It was started in 1900. It's the oldest of the companies. By 1910, it was a model that just didn't work. It was a fixed cost model that really operated in just four southeastern states.
We restructured the company and made it a variable cost model. Since 2012, we've doubled the agency force, and we're starting to open offices outside the four southeastern states as we build the middle management. Our third exclusive agency is Family Heritage Life Insurance Company. It sells supplemental health insurance policies as a return of premium product. This operates throughout the U.S., but it operates in smaller cities or rural areas. Our fourth distribution, and our second largest producer of life insurance, is Globe Life. It's our direct response operation. We have three channels. One is the internet, the second is the insert media, the third, of course, is our direct mail operation. The three really support each other. The advantage to our direct response operation provides leads and analytics to our three agencies. Our last distribution is United American Insurance Company.
It sells individual Medicare Supplement policies through general agents. It also sells group insurance through brokers.
On the direct response channel, that was a channel it seemed that you were, several years ago, growing quite a bit. The margins weren't what you wanted them to be. You retrenched. Where are you now? Are you at the margins that you hope to be at?
Yeah. The growth you mentioned, that was in the 2012 and 2014 period. We got a little aggressive with our marketing and the pricing during that period of time. The problems you're talking about with the margins came about because we had higher than expected claims. What we've done in the last two to three years is we've gone back and taken a look at the marketing, the segments we're marketing, also the pricing, our underwriting, in order to get the mortality back to the levels that we want, levels that we expect. This past year, 2018, we started showing the benefits of that. Where we are today with the margin, we think will continue onward.
You're at the levels that you find acceptable, and you can grow the business still?
Yes.
Okay.
It's not so much a %
Margin level is really we're at where we think we can maximize the profit dollars going forward.
One thing I'd add to that, Jay, is that, we really have seen the claims stabilize here over the last several quarters, which we're real optimistic about. I think as we're starting to see some of the inquiries and the response rates that we have from the various channels really stabilizing, that kind of gives us that indication that we can really start to grow some sales from here, still be able to retain the margins that we're anticipating in that line.
The growth rates won't be where they were in 2012, 2013, 2014. It'll be a little bit lower growth rate, but again, we think the profit dollars will be greater.
Yeah.
The stabilization of the claims, is that because of the actions you've been taking, or is that just a market phenomenon?
In part. We definitely made some changes over the last, really starting in late 2015 into 2016, in some of the underwriting and some of the marketing. That has had some impact overall. Some of it's just a little bit of the market as well, but a little combination of both.
Got it. With American Income, how do you retain agents in an environment where unemployment is really low? That's got to be a tougher challenge than it was several years ago.
Well, it's certainly a challenge in 2018. When we talk about low unemployment and retention, I want to be clear that we recruit the underemployed, not the unemployed. If you look at 2018, actually, we increased our appointed agents by 6%. Unfortunately, with low unemployment, we had an equal amount of terminations. Those were the agents in the first part of their career, and it's because there's many more work opportunities with low unemployment. We had two other factors that really affected the retention in 2018. One is we opened eight new offices. When you open eight new offices, you're taking the top trainers out of those existing offices, and that has a negative impact on retention in the short run. In the long run, it's necessary for growth in your agency.
Second factor is we introduced new technology that gives the agents and the agency owners real-time data about the sales activity within the offices. Again, that's important for long-term growth. In the short term, it hurts retention because you're changing your training for your new agents. The other thing we're doing in 2019 is we've restructured our compensation, the compensation's been restructured to really encourage the retention of new agents. When you think about American Income, it's always been a stair-step process to grow that company. Jay, we're confident that we can grow that company as we go forward.
As far as the number of agents go, is there a longer-term goal as far as annual growth rate in these agents?
Really, the sum of all the agencies would like to grow 10% every year. As the American Income agents have gotten bigger, it's hard to maintain that 10%. Currently, there are about 7,000 agents. Our immediate goal is to grow to 10,000 agents. At Liberty National, you have approximately 2,000 agents. At Family Heritage, you have 1,000 agents. In the next five years, we think we can double the size of those agency forces.
One of the questions that comes up more and more these days is credit. Given where we are in the credit cycle, can you talk about your portfolio and maybe some of the risks if we start to get more downgrades?
Our portfolio, 95% of it is invested in fixed maturities. The reason we do that long-term fixed maturities is those are the assets that best support our long-term liabilities. Because we invest long, in our underwriting, when we're looking at different credits, we're looking for companies that can withstand cycles over a period of time. One of the primary things that go in our selection process. We feel good about where we are in the portfolio today. I know we hear a lot of people saying, "Your BBB percentage is much higher than other companies." That's true. On the other hand, we don't have derivatives, equities, or other higher-risk assets that those companies have. Our risk is more in the BBBs, but we like that because, again, the underwriting that we do of those BBBs.
We understand we're late in the cycle, we think that we can handle any ratings migration or any defaults that come about.
I guess if there was a real credit problem, BBBs may have some impact, but equity-like securities could take bigger hits, and you guys don't have those. That's really.
Right
The point.
Also, if you go back to the 2008-9 period, we did have severe ratings migration. If you look at the ones where companies had defaults, their bonds are rated above BBB. You can't just say that high exposure BBBs puts you in jeopardy.
I guess it kind of dovetails into capital a little bit. Buybacks have been an important part of your strategy, if you will, for many years, and fairly consistently. Do you anticipate any changes as you invest in the business? Should you be buying back less stock? What's your outlook for buybacks?
Really, we don't anticipate any changes. This is getting back to what makes Torchmark unique. The type of products we sell, the traditional whole life and term products in the market we're selling in where there's a little competition. We generate a tremendous amount of cash. We have a very large in-force block of business, over $3 billion, that has generated consistently high statutory profits. Our first priority on those profits or the cash that we're receiving, the first priority is to fund the current operations so that we can grow the insurance business.
We can handle that, handle any other needs that we have, and still have excess cash. That excess cash is traditionally what we've used for the share repurchase program. We're going to put all the money we need to put in to grow the operations, but even after doing that, we're going to have excess cash. We're going to try to invest that cash to maximize the return. Absent better alternatives, we more likely will return that to the shareholders through dividends and share repurchases.
Jay, a question we get quite a bit is, do you think about M&A opportunities and those types of other options? Of course we do. We just have a very disciplined approach to how we think about that, and that it needs to be an opportunity that fits who we are, and we don't have a desire to grow just to grow. We feel comfortable in our ability to grow organically. If there were an acquisition candidate that sells protection products that has distribution, really foremost is that it does have distribution that goes along with it. With the right return, we would be more than happy to follow up on those types of opportunities.
Yes, your culture's pretty unique, so buying someone else, you certainly could dilute that potentially.
Right. Yeah, be careful about that.
What's the biggest deal you have done historically?
Size of an acquisition?
Yeah.
Probably American Income. At that time, I think it was about a $500 million deal, which was a real bargain. The deal size is not really an issue to us. Obviously, there's a certain limit, but we can certainly go above $500 million. To get back to what Frank is talking about, we're looking at companies that are available, but the things we've seen are in products and markets that we're not interested in. If we can't get in something that has good distribution in the middle income market, we think we're better off putting our efforts toward growing our own business.
Got it. American Income has historically marketed to labor unions. Maybe it's a basic question, but why labor unions? Why is this a good risk category to market to?
Well, I think it really helps in our recruiting because unionized agency force, it sets us apart, and that's easy to recruit to. Secondly, it produces lots of leads. Since 1950, that company's grown by leaps and bounds by using those union leads. As I said earlier, what we saw in the 1980s is there was starting to be a decline in union membership, we realized that we need to expand into non-union leads. We've done that successfully. Today, it's only about 20% of our business, the unions are still the core of American Income. It's our personality. It's just the culture at American Income.
Any risks to Unions are a bit under attack. Could be a court issue, it could be many different things. What are the risks you see?
Well, one risk that I think was really overblown was the Supreme Court decision. I know some people thought that that would really impact our persistency, it'd affect our ability to sell. The fact is that Supreme Court decision had almost no effect upon American Income. At most, it affected about half the states that have public unions, we're talking about 2% of our lead source. If it's only affecting 2% of your lead source, we can replace that with other lead sources. In terms of persistency, it's had no effect on our persistency. Another misconception, the premiums are not paid by the unions. They're paid by the individual union members. Our life insurance is portable, so people leave the union, they keep the insurance in force.
Got it. The life sales at American Income have moderated a bit the last couple of quarters. Can you discuss what's happening in the near term? Should that kind of rebound in 2019 and 2020?
Well, in the near term, it's an easy explanation. We didn't grow the agency force. As you know, there's a direct correlation between agency sales or agency growth and sales on all three of the exclusive agencies. The second factor was we had no productivity increases in 2018. By productivity, I'm talking about the percentage of agents that submit business each week, the average premium written by each agent. We think the new technology that we introduced in 2018 will help with that. Let's say real-time data at both the field agents and the agency owners. They can increase the activity, and they can increase the average premium by better training. The changes we made in our compensation will help with the retention of agents. I think we'll see growth in the agency force again.
I think it'll be a single-digit growth this year, we'll start to see growth in the agency again.
Got it. On the direct side, any changes there as far as how you're driving growth? It seems to be an evolving area.
Well, here's the change that I've seen is the, I think Gary talked earlier about the changes we made in 2014, 2015, and 2016. We repriced, we changed our underwriting, we changed our marketing strategies. I've really seen in the last six months, there's been a stabilization of response rates. If you can increase your volumes in your three channels, if your response rates drop, you're not going to increase sales. With those stable response rates, what we're going to see is growth, and I think the largest or the fastest-growing segment will be the internet business. That grew by 10% last year in terms of our inquiries. Direct mail still is important. It's important because it supports the internet sales. The insert media channel certainly is another one that can grow. We'll grow by increasing our volumes.
The way Globe does that is we do a lot of testing, and that testing determines our volumes. As we again increase the volume of direct mail, the insert media, we increase our presence on the internet, you'll see sales increase so long as those response rates stay constant.
Got it. Maybe this should've been the first question or the last question, but if you just think broadly about your sustainable long-term EPS growth, what do you peg that number at going forward?
Well, first of all, we don't project more than a year in advance. If you just look at where we've been and how things are changing. Over the last 10 years, we've grown earnings at about an 8%-9% range. During that 10-year period of time, though, we saw our portfolio yield decline from right around 7% to the current little over 5.5%. That's hampered our growth. We've grown the investment income portion of our earnings, but we haven't grown it at the same rate we've grown the investment asset. In the near term, that's going to level out. Our portfolio yield won't continue to decline, and so we'll start seeing growth in investment income at least equal to the growth in assets. I think that, plus the growth that we're anticipating in our different distributions, I think we can see going forward a higher growth rate.
Not to overstay, but probably 9%-10% range going forward. As you mentioned at the beginning, one of the things that's really good about Torchmark, that's fairly consistent. We don't have the highs and the lows. It's pretty consistent growth, and we expect that to continue.
Yeah, that's really from a multiple standpoint. As we think about things, that consistency should, all else being equal, mean a higher multiple.
Right.
Obviously part of your business mix. What could go wrong here, is the question. You guys seem to be doing well in many different environments. What's the risk that, I hate to use the phrase keeps you up at night, but that you really do get concerned about longer term?
Well, as I've just mentioned, investment income. Interest rates is always a little bit of concern for us. It's not from a liability side. We don't have any interest-sensitive business. We do, as I mentioned, generate a lot of cash. We invest a lot of money each year. If those rates can decline, like I say, over the years, they've stabilized. We've started to see a little bit of increase in rates, but if they decline again, that hurts our earnings. That's on the investment side.
I think on the mortality is where there's a risk in our business. The good thing about Torchmark is that we have over 50 years of experience with these products. In the downturn in 2008, we didn't see any change in the persistency with the business. Mortality's been fairly consistent. We had a surprise in direct response in 2014 and 2015, and that's because we didn't test as thoroughly as we should have when we introduced a restriction on guaranteed issue in 2010. There's always a risk with mortality, but I think it's a risk that I'm comfortable with given our history with our products.
Yeah. No, that makes sense. Maybe a question for Frank, the RBC ratio, kind of where it stands now, what's your targeted range for it?
Yeah. We've said that our target right now is in the 300%-320%, and I think we haven't finalized everything here for 2018, but we probably are toward the upper end of that range here for 2018. I think going forward, we feel very comfortable with being able to retain that particular RBC target range. We're really comfortable working within that range. I think our risk profile supports us being able to operate in a lower RBC. A question we get a lot is why should you have a lower RBC percentage than a lot of your peers? We still really have the same ratings that those peers have. I think one needs to really peel back that onion a little bit and look at the risk profiles of the organizations.
Given our fixed liabilities and the conservative nature of the statutory reserving, we just don't have the risk on the liability side. Our liabilities just don't move around, and you can do the testing. Our rating agencies have gotten comfortable with the testing that you have as far as the exposure on the liability side. You look at our asset side, and given the simpler nature of our products on the liabilities, we're able to invest in long-dated fixed maturities, and you can get your arms around some of the exposures around that a little bit better. They carry less capital charges than a lot of the equities or if we were in derivatives and those types of other instruments that a lot of companies may have.
Just the nature of our business and, as Larry mentioned, the experience that we have, our business risk is less, and it just all kind of really works together, along with the ability to generate substantial amount of consistent statutory earnings each and every year. We've had a lot of good discussions with our rating agencies, and they're comfortable, we're comfortable working within those. If we have some exposure from the C1 charges that may come out, or if there are some movements in the bond portfolio, feel very comfortable with our ability to recover from that and to replace whatever capital we might need to.
Yeah. With capital management, Frank, you guys obviously consistently have been paying dividends but buying back stock. On the share repurchase-
There has to be a stock price where you say it doesn't make sense if the stock went up a lot. I'm not asking you for the number, but how do you determine what price is too high to buy back stock?
We do. We take a look at what we think is an intrinsic value of the stock, and we're very cognizant of the fact that if we're buying back shares at a price that's greater than that intrinsic value, that that's a bad thing and that that's dilutive overall to our shareholders. We do look at what we think present value of future profits are, and of those cash flows, and value of our current asset and current equity that we have as well. We do a calculation, and we're taking a look to see what are we buying back in relation to that.
Yeah. Obviously, your view of intrinsic value is clearly different than the market's at this point.
Yeah. Of course we look at that and other alternatives, and we look at the same time, what other alternatives do we have with that? We've generated over $300 million of excess cash flows. That's after paying interest and dividends on our stock each and every year since 2011. Even in the 2009, 2010 timeframe, our excess cash flow was just a little bit under $300 million. So we see that cash flow excess each and every year.
Just see if there's any questions in the audience. Just raise your hand. We've got mics floating about. You obviously talk to a lot of investors. What's the misunderstood or overlooked aspect of the company that you consistently hear from investors, or where you think these guys just don't get it? If there is anything.
When you talk about investors, long-term shareholders, I don't think we face that issue. I think what we face with people that are new, either to the life industry like you are or really haven't looked at Torchmark before, I think there's too often trying to compare us to the companies that are in the higher end market, the companies that are selling variable products, interest-sensitive type products. The products we sell are so different, and because they're different, the earnings profile and the capital profile is different. That's where we spend a lot of time trying to explain those differences.
A couple just from me. We talk a lot about the life insurance products at Torchmark. Supplemental health, what's your strategy for growth there?
There's 2 types of supplemental health. The first is the Medicare Supplement, we sell that through the group business through brokers. We sell the individual business through general agents. Gee, it's really hard to predict what that growth's going to be because the market conditions have to be right to really grow that business. In Medicare Supplement, it's fairly easy to enter that market, your market conditions can change. We've had good growth over the last 2 or 3 years, we view that as really opportunistic. Within our exclusive agencies, we also sell supplemental health products. There's a return of premium product at Family Heritage, and we're in the worksite market with Liberty National. The worksite has been a good market for Liberty National. More than 50% of its sales now, health and life, do complement each other.
Really focus for growth there is smaller employers. Our niche there are employers with 50 to five employees. We don't see much competition in that market. In the individual side, we're generally the only agent in the home selling that. At Family Heritage, they call pretty much the rural areas and smaller cities. There just aren't other agents that work those areas.
Yeah. Any last-minute questions? Again, it's been a pleasure having you here.
Thank you.
It's great to have you here every year, especially now that I can actually listen to you and hear what you're saying. Please join me in thanking the team. Thank you.