Mike Majors - Vice President, Investor Relations Gary Coleman - Co-Chief Executive Officers Larry Hutchison - Co-Chief Executive Officers Frank Svoboda - Chief Financial Officer Brian Mitchell - General Counsel.

Jimmy Bhullar - J. P. Morgan Eric Bass - Autonomous Research Ryan Krueger - KBW Bob Glasspiegel - Janney Montgomery Scott Alex Scott - Goldman Sachs.

Good day. And welcome to the Torchmark Corporation Third Quarter 2017 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, VP, Investor Relations. Please go ahead..

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. Accordingly, please refer to our 2016 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 Web site for a 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 $153 million or $1.29 per share, a 30% increase on a per share basis. Net operating income from continuing operations for the quarter was $146 million or $1.23 per share, a per share increase of 7% from a year ago.

On a GAAP reported basis, return on equity as of December 30th was 11.7% and book value per share was $43.78. Excluding unrealized gains and losses on fixed maturities, return on equity was 14.4% and book value per share was $34.27, an 8% increase from a year ago.

In the life insurance operations, premium revenue increased 5% to $576 million and life underwriting margin was $153 million, up 7% from year ago. Growth in underwriting margin exceeded premium growth due primarily to favorable results at American Income and to a lesser extent Direct Response.

For the year, we expect life underwriting income to grow around 4% to 5%. On the health side, premium revenue grew 3% to $243 million, while health underwriting margin was up 5% to $56 million. Growth in underwriting margin exceeded premium growth due primarily to favorable claims experience.

For the year, we expect health underwriting income to grow around 3% to 5%. Administrative expenses were $52 million for the quarter, up 6% from a year ago and in line with our expectations. As a percentage of premiums from continuing operations, administrative expenses were 6.4% compared to 6.3% a year ago.

For the full year, we expect administrative expenses to be around 6.4% of premium. I will now turn the call over to Larry for his comments on the marketing operations..

Thank you, Gary. At American Income, life premiums were up 9% to $253 million and life underwriting margin was up 13% to $83 million. Net life sales were $57 million, up 10%, primarily because we have a higher concentration as other agents at a year ago.

The average producing agent count for the third quarter was 7,165, up 2% from a year ago and up 2% from the second quarter. The producing agent count at the end of the third quarter was 6,981. At Liberty National, life premiums were up 2% to $69 million, while life underwriting margin was down 6% to $19 million.

Net life sales increased 19% to $12 million, while net health sales were $5 million, up 9% from year-ago quarter. The sales increase was driven primarily by growth in agent count. The average producing agent count for the third quarter was 2,132, up 19% from a year-ago and up 6% compared to the second quarter.

The producing agent count at Liberty National ended the quarter at 2,123. We continue to be encouraged by the positive results at Liberty National. In our Direct Response operation at Global Life, life premiums were up 4% to $200 million. Although, net life sales were down 11% to $31 million, life underwriting margin increased 7% to $31 million.

The actions we have been taken that have resulted in reduced sales have increased margins in total dollars. At Family Heritage, health premiums increased 7% to $64 million and health underwriting margin increased 11% to $15 million. Health net sales grew 2% to $14 million.

The average producing agent count for the third quarter was 1,024, up 4% from a year ago and down 1% from the second quarter. The producing agent count at the end of the quarter was 1,030. At United American General Agency, health premiums increased 1% to $89 million. Net health sales were $9 million, down 8% compared to the year-ago quarter.

To complete my discussion of the marketing operations, I will now provide some forward-looking information.

We expect to producing agent count for each agency to be in the following ranges; at American Income for the full year 2017, 7,000 to 7,200; for 2018, 7,200 to 7,500; at Liberty National for the full year 2017, 2,050 to 2,150; for 2018, 2,100 to 2,300; at Family Heritage, for the full year 2017, 1,020 to 1, 060; for 2018, 1,090 to 1,150.

Approximate Life net sales are expected to be as follows; at American Income for the full 2017, 7% growth; for 2018, 6% to 10%; at Liberty National for the full year 2017, 16% growth; for 2018, 10% to 14%; in Direct Response, for the year of 2017, 10% decline; for 2018, 2% to 6% decline. Health net sales are expected to be as follows.

At Liberty National, for the full year of 2017, flat; for 2018, flat to 3% growth; at Family Heritage, for the full year 2017, 8% growth; for 2018, 4% to 8% growth; at United American individual Medicare supplement with full year 2017 flat; for 2018, 3% to 7% growth. I'll now turn the call back to Gary..

Thanks, Larry. I want to spend a few minutes discussing our investment operations. First, just to talk about excess investment income. Excess investment income, which we define as net investment income plus required interest on net policy liabilities and debt was $61 million, a 7% increase over the year ago quarter.

On a per share basis, reflecting the impact of our share repurchase program, excess investment income was up 9%. The higher than normal increase is due primarily the higher investment income, resulting from the decline and the negative impact of the weekly delays in receiving Part D reimbursements.

For the full year 2017, we expect excess investment income to grow approximately 8% and excess investment income per share to grow around 11%. Regarding the investment portfolio invested assets are $15.7 billion, including $14.9 billion in fixed maturities at amortized costs.

Of the fixed maturities, $14.3 billion are investment grade with an average rate of A minus, and below investment grade bonds are $661 million compared to $753 million a year ago. The percentage of low investment grade bonds to fixed maturities is 4.4%, down from 5.4% a year ago.

The decline is due primarily to upgrades the bonds of approves the class size low investment grades. With a portfolio leverage of 3.7% times, the percentage of low investment grade bonds to equity, excluding net underlying gains on fixed maturities is 16%, down from 20% a year ago.

Overall, the total portfolio is rated BBB plus to slightly under the A minus for the year ago. Regarding investment yield, in the third quarter, we invested $376 million in investment grade fixed maturities, primarily in industrial sectors. We invested at an average yield of 4.43% and average rating of BBB plus at an average life of 26 years.

For the entire portfolio, the third quarter yield was 5.64%, down 13 basis points from the 5.77% yield in the third quarter of 2016. As of September 30th, the portfolio yield was approximately 5.63%. The midpoint of our guidance assumes an average yield of 4.6% in the fourth quarter and a weighted average rate of 4.9% in 2018.

We are still hoping to see higher interest rates moving forward. R&D money rates will have a positive impact on operating income by driving up access investment income. We’re not concerned our potential unrealized losses that are interest rate driven, since we would like to realize them.

We have intent to more importantly the ability to hold our investments to maturity. However, if rates don't rise, a continued low rate environment will impact our income statement, but not the balance sheet.

Since we primarily sell non-interest sensitive protection products accounted for under FAS 60, we don't see a reasonable scenario that would require us to write-off DAC or put up additional GAAP reserves due to interest rate fluctuations. In addition, we do not foresee a negative impact on our statutory balance sheet.

While we would benefit from higher interest rates, Torchmark would continue to earn substantial excess investment income in an extended lower interest rate environment. Now, I will turn the call over to Frank..

Thanks, Gary. First, I want to spend a few minutes discussing our share repurchases and capital position. In the third quarter, we spent $80 million to buy $1 million Torchmark shares at an average price of $77.34. So far in October, we have used $12 million to purchase 144,000 shares at an average price of $80.91.

Thus for the full year through today, we have spent $255 million of Parent Company cash to acquire more than 3.3 million shares at an average price of $76.65. These purchases are being made from the Parent Company’s excess cash flow.

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 Torchmark’s shareholders. We expect the Parent Company's excess cash flow in 2017 to be around $325 million.

With $255 million debt on share repurchases thus far, we can expect to have approximately $70 million available for the remainder of the year from our excess cash flow, plus other assets available to the Parent. As noted on previous calls, we will use our cash as efficiently as possible.

If market conditions are favorable, we expect that share repurchases will continue to be a primary use of those funds. We also expect to retain approximately $50 million of Parent assets at the end of 2017, absent the need to utilize any of these funds to support our insurance company operations.

For 2018, we preliminary estimate that the excess cash flow available to the Parent will be in the range of $310 to $320 million. Now, regarding RBC and our insurance subsidiaries. We currently plan to maintain our capital at the level necessary to retain our current ratings.

For the past several years, that level has been around an NAIC RBC ratio of 325% on a consolidated basis. This ratio was lower than some peer companies, but is sufficient for our company in light of our consistent statutory earnings and the relatively lower risk of our policy liability and our rates.

We intend to target a consolidated RBC of 325% for 2017 and 2018. Next, a few comments to provide an update on our direct response operations. As Gary noted earlier, during the third quarter, we saw growth in the Direct Response underwriting margin, the first time in several quarters.

The margin, as a percent of premium was 15.6%, up from 15.2% in the year ago quarter. While higher claims will cause the underwriting margin to be lower for the full year of 2017 versus 2016, the increase in the quarter was fully in line with our expectations.

On previous calls, we noted that we anticipated the margins for the full year of 2017 to range between 14% to 16%. We still anticipate the margin for the full year to be the near the midpoint of this range or 15%. While it's still very early, we currently estimate the margin percentage for Direct Response will remain in the 14% to 16% range in 2018.

Now, with respect to our guidance for 2017 and '18. We are projecting the net operating income from continuing operations per share will be in the range of $4.77 to $4.83 for the year ended December 31, 2017. The $4.80 midpoint of this guidance reflects 7% increase over 2016.

The increase in the midpoint of our guidance is primarily attributable to the continued positive outlook to align an underlying income at American Income and in our various health insurance businesses.

For 2018, we estimate that our net operating income per share will be in the range of $5 per share to $5.25 per share, a 7% increase at the midpoint from 2017. 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. [Operator Instructions] And we'll go first to Jimmy Bhullar, J. P. Morgan..

I had a couple of questions. First, on Direct Response margins, I think they improved for the second consecutive quarter on a sequential basis. So if you could give us some insight on what's driving this? And then your 2018 margin guidance is consistent with '17, and I recognize it's a pretty wide range.

Do you expect to see improvement as we go through 2018, or should margins be roughly flat over the next year? And then I had a question on sales, on whether you have seen an impact from hurricanes, or do you expect an impact from the hurricanes, especially in Florida, Texas in the fourth quarter on sales?.

With respect to the Direct Response margin, really what you're seeing with what we had anticipated over the year, a little bit of seasonality. And that’s the expenses -- the claims were running a little higher, the first couple of quarters.

They were more closer to the bottom end of that range and then here from the second half of the year, we're really just we are seeing the policy obligation percentage may have more of the top end. That is the pattern that we were really expecting to see over the course of the year. And I think again it's probably just be some seasonality.

As we look into 2018, could be especially on a quarterly basis, fluctuating anywhere in that 14% to 16% range. But we really just see it flattening out here for the next year.

And as we move forward from that, too early to really see where we go on beyond ’18, but probably following somewhat of the same pattern again with the little seasonality in 2018..

Jimmy, this is Larry. I’ll address your hurricane question. Overall, the hurricanes slowed sales of recruiting in the three exclusive agencies during September. We think recruiting of sales should return to normal levels during the fourth quarter.

Before the Hurricane caused United American sales to be lower than expected in the third quarter, direct response sales were not affected by Hurricanes during the third quarter. But we think sales to be down about 1% to 2% in fourth quarter is a lag between circulation and direct response, and responses from applicants.

So the impact we feel a few weeks later than it was in the agencies..

And just following up on direct response margins, is it fair to assume that there is a block within the overall business, the block written in prescription revenue that that’s really was pressuring your margins, the rest of the business is higher.

So over the next several years, as that block becomes a smaller proportion of the overall enforce mix, then margin should naturally improve but they’re going to be depressed versus historical levels given lower margins on that part of the business?.

Jimmy, that’s exactly correct. The margins that we’re putting on the new business it's higher than what’s being reported today. So we do see that as we -- that business starts to blend in and the 2011-2014 block really starts to run-off that we would see eventually that margin increasing.

But there’s lot of different factors that work into that and it can just take a little bit of time for that to occur..

And we’ll next go to Eric Bass, Autonomous Research..

Frank, you mentioned estimated free cash flow for 2018 of $310 million to $320 million, which is a little bit below the $325 million effect for ‘17.

Is this just due to the strong sales growth, or is there any reason that you expect that to decline year-over-year?.

Really, the drop from that we’re looking to see from next year’s free cash flow really stems from. If you remember in 2016, which is driving the dividend that we have here in 2017 and the free cash flow in 2017. The 2016 statutory earnings had some Part D operations still in them, that has fallen-off.

And of course we don’t have the Part D income in our 2017 statutory income.

The after tax earnings that we had in ’16 and with the sale -- with the little over $20 million, so that’s really coming off the books that we’re not seeing again, I think looking forward than we should be at a low point if you will and we should be able to move forward after that after 2018..

And then your EPS guidance, so you’re assuming that that $310 to $320 million is proxy for share repurchases?.

Yes. .

And then just one question on health margins, which continue to come in a bit head of your expectations. And you mentioned favorable experience.

But should we infer that that business is more profitable than you initially expected? And I guess on that note, what are you assuming for health margins in your 2018 guidance?.

Overall, we really think that the differences -- primarily at Liberty National and American Income where we both had some favorable claims here in really the second and third quarter that we see continuing on through the remainder of the year.

Looking forward to -- and this just being a little bit more profitable than what we had anticipated, especially at American Income, it's just didn’t -- really the claims have been at the really very low end on quarterly basis of what we kind of normally see.

Looking forward into 2018, I think for Liberty National, continuing probably close to those same levels, maybe coming back to just a little bit over $50 million, overall margins probably be in that 23% to 25% range and then for American Income, probably still remaining in that 48% to 50% range..

This is Gary. The overall margin is going to be very similar in '18, as well as in '17 which is similar to '16. So we had some changes within in the mix but it's still going to be overall to be about the same profit margin..

[Operator Instructions] We'll next go to Ryan Krueger, KBW..

I just had a couple 2018 expectation questions.

I guess one can you just talk about your expectations for the overall life underwriting margin? Could you talk about your expectation for the growth in 2018?.

Ryan, as far as underwriting on the live side remember this is really early. What we’ll find is more we get to February but we're looking to somewhere 24% and 8% increase in life underwriting margins in 2018..

And can you, I guess same for excess investment income.

What are your expectations for the growth in 2018 there?.

There we're looking at somewhere between 2.5% to 4% growth. At the midpoint, a little over 3% and that would translate into about 7% increase on a per share basis..

And we'll go to Bob Glasspiegel with Janney..

My two of my questions. The last one I had was on American Income margin improvement that we saw this quarter. You seen those adjusted I think it's perhaps sustainable.

Anything specific, is that driven by better revenues or something on the expense side?.

At this point in time, Bob, there is really nothing that’s very specific with respect to the. We just are seeing some favorable claims here the past couple of quarters, clearly little bit better than what we've historically seem. If you look at that overall margin it's typically been in that 31% to 32% to 32.5% range.

We're looking at being, year-to-date we're close to 32 and at least for the remainder of the year, we do see what the favorable results that we’ve had so far, really continuing in through the remainder of the year, and probably being somewhere in that 32% to 32.5% range for that full year on that margin.

And at this point of time and Gary said, it's really early and difficult to say. We're really looking at probably still being in that 31% to 33% range for 2018 and probably at the midpoint still being right around that 32%..

Bob, the thing that is caused margins to be up a little bit is the policy obligations. Where last year policy obligations were 32% year-to-date that’s where we are, but the quarter was 31% and we look for that to be fourth quarter as well. Does that improvement continue we think it will. That’s not a big difference between 31% and 32%.

And if you go back in the past, we’ve been in that 31% to 32% range in terms of policy obligations. Right now, it looks like the 31% is going to hold but we’ll know more when we get to February after we’ve had another quarter’s experience..

So it's just favorable mortality or just more revenues?.

Well, I think its favorable mortality but also there is a set part of it that’s due to the conservation program providing more revenue. But I think the bigger part of it is improved mortality..

And that’s just through better underwriting or just luck, or maybe just try to extrapolation of that trend?.

Well, I think it's too early to determine if that trend is going to continue. We think there’s….

Maybe luck and maybe better underwriting, you’re not sure you haven’t picked it out.

I mean, did the defined -- you haven’t parsed the fine difference there?.

We’re continuing to take a look to make sure that we do better understand what’s really driving that..

And we’ll go to Alex Scott, Goldman Sachs..

Thanks for taking the question. I have one on RBC ratio, and I guess more specifically just given the denominators, the tax affected item.

What would you say would be expected impact of potential tax reform, and would it have any implications on your cash flow guide for 2018?.

Alex, you’re exactly right in that. If there is some tax reform that it can have some impact on that RBC factors itself as a tax, benefits that are tuned in getting those are clearly, we would end up having some reduction in our RBC percentage from that.

We’ve estimated that if the tax rates were to go down from about 35% to 25%, there probably would be an RBC reduction of around 50 basis points. And at this point in time, it's really difficult to determine how the regulators and rating agencies will react to that.

And what maybe an appropriate RBC percentage really should be targeted going forward with that. But at this point in time, we are comfortable that we could fund whatever additional capital might be required, either through the issuance of additional debt or the excess cash flow that’s necessary.

But at this point in time, we would think that we don’t see that we would need to or at least not anticipate that we would need to reduce our use of excess cash flows to fund any shortfall. You have to remember also that the tax reform is also going to be generate lower current taxes as well, so that’ll be replenishing that overtime as well..

And there appears to be no additional questions at this time, Mr. Major. I’ll turn things back over to you for any additional or closing remarks..

Okay, thank you for joining this morning and we’ll talk to you again next quarter..

And that does conclude today's conference call. We thank you all for joining us..