Globe Life Inc. (GL) Earnings Call Transcript
February 12, 2020
Earnings Call Speaker Segments
Okay. Last one of the day. Hearty folks that've 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's CFO. Gary and Larry have held the CEO office for the past 6 years. Prior to their current roles, Gary served as CFO, and Larry served as General Counsel, and each have over 25 years of experience with the company. So 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, the most consistent company in terms of earnings, capital distribution and book value growth in the life sector. In the life sector, not overall. So maybe the bar is low, but you have been. So years ago, we had an analyst at Merrill, when I was there, a life analyst, who loved the old Torchmark. And he loved it so much, after the crisis, the stock took a big hit, and I wanted to buy the stock personally. So I went to compliance to see if I could buy it, and they said when you sit next to the life analyst, you don't remember this, but I remember it. And they said, "You can't buy the stock." I think the stock is up something like 9 fold since then. But I couldn't buy it. But 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. And I think it's a good place to start, and 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. So where is the uniqueness of the story?
Well, it's really several things. One is the market that we operate in, the products that we offer and also the way we distribute those products, it's 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 through distribution that we control and by being -- by doing that, we're able to control the cost and generate strong underwriting margins. The middle-income market is such a large market, but there's just not much -- but it's an underserved market. We know from studies that majority of the people in middle-income market are either uninsured or underinsured, but there's little competition there.
Gary, why is that? Hasn't -- it doesn't seem -- I mean, we know it's a big market. We know it's underserved, you're not the only ones that know that. How can no one has 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 more than -- at a greater rate than the premiums. Torchmark and 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. So having control of distribution through exclusive agencies in our direct response, it gives us a real advantage in keeping those costs down.
Got it. The pushback I get on the -- 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. But when you're talking with investors, is there something that you think is just -- 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. That's -- it has a positive impact on both profitability and capital. We're able to -- because 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. But 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. And so we're able to -- for example, we're able to operate at a lower RBC ratio than most other companies that have the same ratings we have from the rating agencies. So it's our ability to generate those profits at a lower -- and keep the capital low. It 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 time fall. Frank?
Yes. I think, historically, if you kind of look back over time, it's really been in that 70% to 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 to more around 60%. The large part because we did get a earnings bump. If you will, 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 that we're seeing some benefits still of that cash, but it's -- 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 lower retention, really talking about new agents. If we look at our retention, over the last 3 years in American Income and other exclusive agencies, 12-month retention and 6-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. I think what's unique about American Income is probably 70% of our recruits are Internet recruits. So their resume stays out on the Internet. With all the other work opportunities, they're constantly being contacted by other prospective employers and -- or other companies. I think with American Income, we've addressed it in 4 ways. In 2019, the first thing we did was increased our recruiting. We had more than a 10% increase in recruiting last year. So low unemployment hasn't affected recruiting. In fact, most of our recruits aren't 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've moved some of that sales commission off the back end of the renewal and moved it to the front to the point of sale, so the new agents have a greater income, and they stay with the company longer. And 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 and 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. And 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 to the company, they see that opportunity without the competition, lots of prospects, that you'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 and so their opportunity is immediate. And I think the other thing that helps American Income is we promoted 16 new agency owners over the last 2 years. I mean, when they just come in, they see a real opportunity. They decide if they go in the 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 you've been able to -- so that used to be 30 days or something?
No, it's -- 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, and you train that, it's really a needs-based presentation. Most of our sales presentation takes about 1 hour. And it's not about the right sale. It's making lots of presentations. On average, you'll close 1 out of 3 presentations. So the key success for an agent is not just being in the field quickly but making lots of presentations.
One out of 3 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 we an agent that's been in business more than 6 months, we'd expect to see about a 1 in 3 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 American Income. New agents are less productive. They don't -- they are not in the field as much, they're not as effective in terms of the average premium. That's how we define productivity. But veteran agents are pretty consistent that they'll close about 1 out of 3 sales. It's an agent -- it's really all the time you want to see an agent making 10 presentations a week, and you'll keep that agent if they have that level of activity.
Yes, yes. 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 agency is a union member in our home office in Waco. So 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. So these are -- getting labor are our best leads in terms of closing sales but also getting referrals. It's really a long history of really, that was the backbone, it's the core of the American Income business, has changed since about 2000. We recognized that unions weren't growing as quickly as we wanted the company to grow. So today, about 25% of new sales come from union members themselves, but the other 75% comes from other affinity groups or really just referrals for nonunion business.
Got it. Talk about Direct Response. This is a business that when I picked up the stock, it was just coming off a period where the profitability had not been great. It was 1.5 years ago, maybe 2 years ago now. And it seemed like you were getting the profitability right, and then you could start to grow again. But the growth really hasn't picked up. I guess you're guiding next year to, kind of, flattish sales.
That's right.
How have you 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 it back?
One was due to pricing, right, but we repriced the business. And when you think about pricing in our direct-to-consumer division, as you increase price, your response rates go down. So I'd expect over time, the higher the price, then the lower the response rate, the lower the sales are going to be. Now there are 3 drivers when you think about Direct Response. We look at our 3 channels, where we have our mail volume which we say, they will be stable in 2020. Insert media should be up about 2%. The fastest-growing channel has been electronic, which is really the Internet. [indiscernible] we have about 5% for this year. When we look at the total volume, I think the guidance is fair at negative 2 to plus 2, and we're doing a lot of testing. So literally 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 will be in that range. Our real focus now is on maximizing underwriting profit, not sales. As you think about the market investment, you want to make sure you have the right return on the market investment. As we go forward, I know we can increase sales in our direct response channel or direct-to-consumer channel. That's really come from better analytics, being creative. You can do some price testing. Sometimes, if you lower the price only to get a better response rate, you have better mortality because you're -- just an adverse selection should increase prices. So 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.
I mean on the auto side, you've seen the direct writers really gain share. I mean 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 3 to 5 years down?
I think the piece we missed is the support it gives our agencies. And we have a lot of leads that are generated out of the direct response that supports the Liberty and American Income. The second is the analytics, everything from voice analytics to attribution de novo in the case of the agencies, where the agent came from. Those are analytics we directly use. So the Direct Response or the direct-to-consumer is important to the agency as well as -- it's our second-largest file producer. I think it'll continue to be our largest direct-to-consumer producer. And again, there's a lot of innovation that comes out of that channel that we use across all the other 4 channels of the company.
Yes, yes. That makes sense.
And, Jay, over time, I would add that Direct Response, we generally haven't had as high sales growth as we've had in exclusive agencies. But it's been fairly consistent. And -- but we've had -- we've made some changes in pricing and even changes in the underwriting.
Right.
I think it'll stabilize. I think the quality of the earnings is generating now is better than it was. And the fact that, as Larry mentioned, it does provide a great deal of support to our agencies. So it's a valuable franchise.
And we had a fair number of questions. Why don't you try and maximize the margins again, produce or walk away for many sales, your total profit could actually decrease. I think where the margins are uncomfortable and more focused on for those total sales or the total profit underwriting dollars that we'll support or we'll generate with those sales.
Yes. 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. So 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, so we know what those lapse rates will be. We have a pretty good sense of the mortality. So 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 from the agency business until a policy is sold. Whereas in the Direct Response, all the expenses are upfront and paid for before we even generate a policy. So we have to be more careful in how we're allocating that spend.
And scale would be important there. As that gets bigger and you can cover those upfront expenses, the scale is obviously beneficial.
Yes, but 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. And so it's a -- it's a little more complicated than it is on the agency side.
I think what's more complicated, too, is that those channels have really changed over time. If we go back to 1995, it was almost all direct mail. In about 2000, we saw that the insert media became the dominant channel. But today, banks and others are going to digital billings as we don't have the insert volume which we you had say, in 2000. Really introduced the Internet as a marketing device in 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. So that channel is -- grows the fastest. That channel also changes quickly. Because as you think about the Internet, as you pay to be on different sites and trying to drive traffic, that's a quickly changing environment. And so it is a more complicated business than the agency business. Agency business, in my mind, is a lot easier to run. You're really focused on growing distribution. This, as you're trying to balance the 3 channels, you have to be careful too with the attribution because our fourth quarter, we had the increase in sales that surprised us because it really -- it was inbound phone call traffic that was driven by our insert media and our mail channel, and we didn't expect that. So there's kind of a general advertising effect across those channels. And so 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.
Yes. No, that's fair. I mean it does look like the margins for this channel have improved quite a bit.
Yes, yes.
Yes.
And 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.
Right.
As you kind of said, 2016, 2017, margins have dropped into that 16%, 17% range. It's improved during the last couple of years, and we've averaged right at 18% the last 2 years, a little bit of fluctuations on some of the quarters, but we think they are sustainable. We kind of expect them to be -- 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 this to be at 17% and 19% on a quarterly basis. Just kind of depending on how the seasonality hits.
Right. Yes. Let's shift to health. Talk about your strategy for growing supplemental health products for -- over the next several years.
It's really a different strategy. We have 3 channels we sell supplemental health policies through. The first is Family Heritage life. Family Heritage it sells -- is a return 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. They had about 700 agents. So we've increased that significantly. 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.
You did it about -- you said '12?
2012. That's when we took over Family Heritage. The other thing we do there is we do update products. There are different products we originally -- it was mostly return to premium cancer product. There's some other circulatory and other products we've introduced and had success with. So as we grow distribution, we change our products. We can certainly grow that line. Second is Liberty National. Liberty National is kind of interesting because it sells health, only about 25% of it is individual. The other 75% is the work site market. And work site, 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. So 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. So again, we want to increase, not only the agency. Our strategy there is open new agencies outside of traditional geography. So we're trying to sell across the U.S. and that health market, that work site 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 within the markets that we're in. The growth there is really dependent on market conditions. We've had really strong sales in individual Medicare Supplement in 2018 and '19. Those market conditions can change rapidly. These general agents have an ability to place the business via the 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. So our guidance this year, after 2 strong years, it's tough comparables, our guidance this year is to be flat. But 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.
Yes. How is competition in this market -- varies by channel, but...
It varies by channel. But if you look at Family Heritage, it sells primarily in rural areas and small cities. We're the only agent in that household. There is no competition for that. Liberty National are really our focus on work site, are smaller employers. And so for the other carriers for the work site usually have bigger employers. So it's not that competitive. It's really, again, growing your distribution and its 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? And looking forward, what can the margins look like?
Do you want to handle that?
So we did see higher utilization in 2019. I think that was pretty common from our Med Sup carriers. And we're, of course -- in that business, you're filing for rate increases every year, and we filed for rate increases that haven't fully taken into effect. I don't think that margins are going to vary that much. I think we'll be able to maintain the margins that we have.
Yes. I mean, rate increases help margins in the sense that with the rate increase, you don't pay a commission on the rate increase, you pay a commission on the original premium. So we should think about it, your margins are not hurt by rate increases. It's a bit of a misconception about that business.
Yes, yes. Do you see opportunity to offer new products on the health side?
All of our products are non-ACA. So we look to different co-insurance, different deductible gaps, can we fill those. And so we can add some new products to Family Heritage, and the other companies, it's really the same product. Our focus really is on a new product as far as we're growing distribution.
Got it. So I just wanted to shift to -- oh, by the way, any questions on sort of distribution, products? I wanted to shift to the investment side. Low interest rate is not a secret, everyone is dealing with it. How will you describe the ongoing pressure from interest rates on profit, on earnings?
Well, it's -- for several years now, we've been investing at a lower rate than the portfolio yield. And so the portfolio yield continues to come down. And for example, this year, we'll grow the invested assets around 4%, but our investment income will only grow 1% to 2%. Now 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. But it's -- 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 a DAC on the balance sheet, it's strictly on the income segment. But 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 business -- new money yields?
So it would be -- we've kind of done rough estimates for over 5 years, and this has been much longer than 5 years. I mean, my guess it would be more than 10 years.
So if rates stay where they are, every year, we'll see your portfolio yield gradually coming down?
Yes, it will. But one of the good things is that we've got very little turnover in our portfolio coming in the next 5 years. So less than 2% a year.
Less than 2% a year?
Yes. So that will help us a little bit, make it go a little bit longer.
Right.
And one of the things, Jay, we had quite a few calls here, especially the latter half of 2019, that's ahead by $600 million of Build America Bonds that we purchased back 10 years ago. And we have a few more of those that are going to be called, and we expect to be called here the first part of '20. But as Gary said, really, once we get past that, we really don't -- 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, maybe only decrease of it 4 or 5 basis points over the course of time. So it takes a lot -- it'll take quite a few years, even if the current rates stay, to get down to the 4% number.
No. That makes sense. On the credit side, that was the other pushback I would get on the stock. I call people up, love the stock, either one, it's too expensive, or two, "Yes, they've got credit risk." Everybody has credit risk. But they felt a little bit more than other companies. Therefore, when we get this eventual rollover and the credit markets look out, have you been managing that risk, reducing credit risk? Or are you just -- you're comfortable with where you are now?
Well, first of all, let me say, I agree with you, everybody has risk. And I think the question is, where is it? We have a higher BBB portfolio than most other insurance companies, and we're at 55%. I think the average is around 40% or little below. But 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 don't have -- we're not into equities. We're not into other high-risk type assets. So 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. So 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. And then in addition to that, we're also looking to diversify the portfolio, which, in the last 5 years, we're much better diversified than we were in the past. So the combination of the underwriting we do and then diversification, we also -- we can hold bonds to maturity, and we do hold bonds to maturity. We can weather -- I know people talk about the ratings migration. I think we can weather that. We did in 2008 and '09, and bonds -- they came back up. So because of the quality we think we have, I mean, the BBB bonds that we buy, we think, are better than some A bonds that we see in others. Not all BBB are the same. We're getting the better ones. But we think the qualities are -- we're more diverse than we were and ability to hold those bonds, we think that we can navigate any kind of a downturn without a significant impact on our operations.
Just from my perspective, too, if we did have worsening credit, arguably, equity markets are going down, and some of your tier companies, a much bigger exposure equity, some of the VA companies. So you could outperform in that sort of environment pretty easily. I don't think you would.
And probably one of the questions you get is if that happens, if we have a downturn and we have migration and impairments, is it going to -- are we going to stop our share repurchase program?
That is the question I got.
And as -- 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 that have -- I mean, we can't imagine even getting to where we would have to disturb the cash that we're using for share repurchases.
Yes. And you've been so consistent in buying back your stock. But in the past, you have made acquisitions. Is anything -- 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 that we're looking for companies that are in the middle-income market that sell similar products. And they're just -- there's not many of them out there anymore. And so for example, we looked at Gerber, and we just didn't see the value that the ultimate buyer did in it. But we're looking at other companies. But just to buy something to be bigger, it 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 to add to that, we really want to control distribution. We'd be happy to leave the business, let somebody else reinsure the business. But we know we can grow distribution. So I think our biggest priority is, can we find control distribution, that's just been impossible to find. It's in our segment of the market, we don't see that before us, what they bring to us, for our VA business, [indiscernible], long-term care, and there just haven't been the opportunities there. But what we do know is going to grow organically. So 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. And so if they're not available for sale or don't want to sell.
Right. Yes, this I'll give you an example, this Prudent family heritage, Jay, was probably owned. We didn't even know it existed until the owner decided to put it up for auction. So there's possibility of those kind of companies, but it's just not there's not as many as they were like 20 years ago.
Well, it's all family owned. You don't know which generation is going to say we're ready to leave the insurance business. That could happen tomorrow, or can be 2 more generations. So that's another unknown. We know all of our companies within the holding group. The founders started those company and then family at some point decided we're ready to sell the company. So it's a great unknown.
The past deals you've done have worked out well.
Yes.
So 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 that. But for us, it has to be the right strategic fit. I mean, we're not looking for something that's going to change who we are, the types of products that we're trying to sell. And so 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, and -- but fits within their overall strategy of who we are.
The other thing we're want to do is something we're just add the distribution, maybe not an insurance company. In 2006, we bought a company that really helped us kind of the insert media business. So as we look at that, something from an IT perspective, it's something that's really 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 and spending time with us.
Appreciate it.
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