Globe Life Inc.
Q1 2010 Earnings Call Transcript

Published: 29 Apr 2010

[Operator:]

Welcome to the Torchmark Corporation First Quarter 2010 Earnings Release Conference Call. Please note that this call is being recorded as also being simultaneously webcast. At this time, I'll turn the call over to the Chairman and Chief Executive Officer, Mr. Mark McAndrew. Please go ahead.

[Mark McAndrew:]

Thank you. Good morning everyone. Joining me this morning is Gary Coleman, our Chief Financial Officer, Larry Hutchison, our General Counsel, and Mike Majors Vice President of Investor Relations. 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 2009 10-K and any subsequent Forms 10-Q on file with the SEC. Net operating income for the first quarter was $127 million or a $1.52 per share, a per share increase of 2% from a year ago. Net income was $122 million or $1.46 per share versus $0.91 a year ago. Excluding FAS115, our return on equity was 13.6% and our book value per share was $45.37, a 12% increase from a year ago. On a GAPP reported basis with fixed maturity investments carried at market value book value was $44.13 per share. In our life insurance operations, premium revenue grew 4% to $430 million and life underwriting margins increased 5% to $116 million, life net sales were $85 million up 9% from a year ago. At American Income, life premiums were up 10% to $135 million and life underwriting margin was up 9% to $44 million. Net life sales at American increased 25% to $34 million producing agents in at American Income grew to 4,201 up 20% from a year ago. It was another outstanding quarter at American Income. During the quarter, we began implementation of a need based sales presentation via laptop computer. Initial results have been very encouraging. We will continue to expand introduction of this new sales process over the next three quarters, and we project sales growth at American Income to be in the 15% to 20% range for the full year. In our Direct Response operation at Globe Life, life premiums were up 6% to a $144 million and like underwriting margins grew 15% of $38 million, net life sales were better than anticipated up 8% to $37 million. As a percentage of life premium, like underwriting margin was 26% from the quarter, up from 24% a year ago. We expect this favorable trend to continue for the balance of 2010. We also expect to see improved sales growth in the 10% to 15% for the next three quarters as a result of successful test conducted in the second half of last year. Life premiums at Liberty National declined 1% to $74 million, and life underwriting margin was down 17% to $14 million. Net life sales for the Liberty National [office] declined 29% to $9 million, and the producing agent count was down to 1,535, 12% less than year end. The agents count at Liberty [harvest] was basically flat since the end of January, and net sales have also stabilized, sales should improve over first quarter levels going forward although, we now expect a small decline for the full year 2010. On the health side premium revenue excluding part D declined 10% to $203 million and health underwriting margin was down 13% to $35.5 million. Health net sales decreased 17% from a year ago to $17 million. Health care reform legislation will have an impact on some of our product portfolio. The effective products contributed $1.8 million of net sales in the first quarter and represented $109 million of enforced premiums at quarter end. New sales of these products will be discontinued prior to September of this year, but we don’t believe there will be an impact on a rapidly declining enforced block before 2014 which would make the impact immaterial. Premium revenue for Medicare Part D was $52 million for the quarter, a 14% increase while underwriting margin was flat at $5 million. Part D sales for the quarter grew 64% to $17 million. Underwriting margin from our annuity business was $140,000 during the first quarter versus a $4.1 million loss a year ago. Administrate expenses were $38 million, down 4% from a year ago. For the full year, we currently project administrative expenses to increase by 1%. I will now turn the call over the Gary Coleman, our Chief Financial Officer for his comments.

[Gary Coleman:]

Thanks Mark. I want to spend a few minutes discussing our investment portfolio and capital liquidity. First the investment portfolio. On our website are prescheduled to provide summary information regarding our portfolio as of March 31st, 2010. As indicated on the schedules invested assets are $11.4 billion including $10.6 billion of fixed maturities and advertise cost. Combined RMBS and mortgage loans are $36 million, and we no CMBS exposure. Now the fix maturities $9.7 billion our investment grade with an average rating of A minus. Below investment grade bonds are $891 million, 8.4% of fixed maturities compared to $824 million at 12/31/09 and $1.3 billion a year ago. The $67 million increase from the fourth quarter is due primarily to downgrade the certain trust preferred securities. We expect that the percentage of below investment grade bonds at 8.4% is still high relative to our peers. However, due to our significant lower portfolio leverage the percentage of below investment grade bonds or equity excluding FAS115 is 24% which is like to lessen the peer average. Overall, the total portfolio is rated BBB plus same as a year ago. During the quarter, we recognize and other than temporary impairment of $1.7 million pretax at $1.1 million after tax. In addition, we recognize $6 million of after tax, net gains on an asset dispositions. Thus for the quarter, we had net realized capital gains of $5 million after tax. Net unrealized losses is in fixed maturities portfolio were $173 million compared to $456 million at year end '09 and $2.2 billion a year ago. The decrease in the first quarter is due primarily to credit switch decline more than [trade] relate increased. Now, we’ll go to the asset types of [portfolio]. 7% to 4% as a fixed maturities portfolio is in corporate bonds and another 13% as redeemable preferred stock. All at $1.4 billion of redeemable preferred have a stated maturity date and other characteristics that make them more like debt securities, and today all scheduled interest payment have been received, none of these securities are perpetual preferred. Municipal bonds comprised 1% of the portfolio compared to 3% a year ago. Since the second quarter 2009, we have approached a $178 million of Build America Bonds. These are taxable debt securities issued by state or local governments who receive a federal subsidy equal to 35% of the required interest payment. Our BAB bonds are rated AA and have an average yield of 6.4%. Due to concentration considerations, we do not expect to make significant investments in BAB bonds in the remainder of 2010. The remaining 2% of the portfolio consists primarily of government related securities, our CDO exposures down to $54 million and two securities where the underlying collateral is bank insurance company, plus preferred securities. Now to conclude the discussion on investments I will cover the investment yield. We ended the fourth quarter 2009 with excess cash due primarily to the portfolio repositioning undertaken late in third quarter to reduce amount of loan investment grade bonds. Entering the year, we had approximately $590 million in cash and shorter term investments. In the first quarter, we invested $676 million at investment grade fixed maturities primarily in the industrial, municipal and utilities sectors. We invested at an average annual effective yield of 6% and average rating rate minus and average life of 23 to 26 years. For the entire portfolio, the first quarter yield was 6.79% compared to the 6.86% yield earned in the previous quarter, and the 6.97% earned in the first quarter 2009. The decline in yield is due primarily to the previously mentioned portfolio re-positioning and to the lower new money yield. As of March 31st, the yield [doing] portfolio is now 6.76%. We ended the quarter with $372 million cash and short term investments. A $178 million in the insurance companies and $194 million in the parent company. Regarding our RBC, in the past we maintained our RBC ratio at a 300% plus level. This ratio is lower than some of our peer companies that has been sufficient for our company in light our consistently statutorily earnings, relatively lower risk of our policy liabilities, and the level of our ratings. At year end 2009, the RBC ratio was 355%. As adjusted capital of $1.5 billion divided by the required capital of $416 million. Adjusted capital included approximately $70 million of additional deferred tax, assets allowed under 2009 change in regulatory accounting rule. As reported adjusted capital was approximately $225 million in excess of that required for the target 300% ratio. Excluding the additional tax benefits, the excess capital was a $155 million at [property] 109. In addition assuming no impairment are downgrades in the next week quarters, we estimate that excess capital will increase about $90 million during 2002 because of statutory income would exceed dividends paid to the parent company. As such excluding the $70 million for tax benefits excess cash with the insurance company level would grow to $245 million by the end of the year. Although we expect some level of impairments and downgrades over next three quarters. $245 million of excess capital should be more than sufficient to absorb them. Now looking at our liquidity, the available cash at the parent consists of cash on hand and the expected free cash flow from operations. Free cash flow results from dividends received by the parent from the subsidiaries, lesser dividends paid towards our shareholders and the interest paid on the debt. The parent company began the year with cash and short-term investments of $155 million. We expect that the parent's free cash flow from operations will be around $280 million for the full year at 2010. $84 million of that free cash was generated in the first quarter. Of that amount, we used $33 million to reduce commercial paper and $12 million to repurchase $220,000 TMK shares. The remaining $39 million was invested in short term. Thus at March 31st, the parent had $194 million of cash and short-term investments. In addition, we expect free cash flow from operations will provide approximately $195 million of additional cash over the next three quarters. So in summary regarding our liquidity and capital, first of all we expect to have more than enough excess capital and the interest comings to handle the impact of downgrades and impairment. In fact, excess capital levels at the insurance companies in 2010 would be more than sufficient to absorb even the extraordinary level of impairments in downgrades we experienced in 2009. As such we don’t expect to have to contribute capital from the parent companies down to the insurance companies as we did last year. Second we currently have $194 million in cash and invested assets of the parent company and it currently expect to maintain liquid assets at the parent around that level for the remainder of 2010. And finally as mentioned we expect the parent company to generate $195 million of additional free cash flow over the next three quarters. We will use this cash as efficiently as possible. If market conditions are favorable, we expect the share repurchases will be one that uses that excess cash. Those are my comments and I will not turn it back to Mark.

[Mark McAndrew:]

Thank you, Gary. We currently estimate earnings per share for 2010 will begin at $6.10 to $6.20 range assuming no additional share repurchase. We’ve not included repurchases in our guidance due to the uncertainties surrounding the timing and volume of shares acquired. Those are my comment for this morning. I will now open it up for questions, Mark.

[Operator:]

(Operator Instructions) Our first question from Randy Binner with FBR Capital Markets.

[Randy Binner:]

Hi, good morning and thank you everyone. Was the trend on 60% RBC, Gary is that correct?

[Gary Coleman:]

We are slightly lower than the first quarter but due to some timing our dividend in income but there will be at that in the second quarter.

[Randy Binner:]

Okay, so the truce is kind of re-bounce back up to 360 by the end of 2Q?

[Gary Coleman:]

Right.

[Randy Binner:]

With the timing of the subsidiaries stuff and then, on the parent cash, is that I heard right $194 million, is that correct?.

[Gary Coleman:]

Yes, that’s all we have on hand at March 31st.

[Randy Binner:]

Okay, and that was targeted to what at by the end of the year?

[Gary Coleman:]

With over another $195 million

[Mark McAndrew:]

Right, we’re going to have another $195 million of free cash and be generated over the next three quarters.

[Randy Binner:]

So those two numbers that are similar, got it, and then this is probably for Mark, back to Liberty National, obviously sales were weaker there as you acknowledged in the opening comments, but you do have confidence that that can kind of net out to a small decline for the full year which means that it's kind of got to turn the corner pretty quick, and so I just would like to kind get more color on how Liberty National turns the corner from what we saw in the last two quarters?

[Mark McAndrew:]

Again if I look at the trends, the agent count declined that we saw in the first quarter occurred in January, really since the end of January through today the count, the agent count is down less than 1%. So it's basically stable, and if I look at the trends of business being submitted and issued at Liberty it is trending upwards, it's still got ways to go. We do have some changes that we intend to make here this summer which we think will add to it, but again we are not projecting huge increases there. By the time we get to fourth quarter we have little easier comparisons. So I am saying that I expect sales, I think the first quarter level of sales and agent count will be the low point for the year , and we will see upwards trends from there but realistically it will be probably be fourth quarter before we actually see growth in our sales versus a year ago just because of the easier comparison. But right now we are still expecting somewhere in the 1% to 3% decline in sales of Liberty for the year.

[Randy Binner:]

Just one more clarification, in your opening comments the 10% to 15% sales growth outlook that was at Globe right the direct channel?

[Mark McAndrew:]

Yes.

[Operator:]

And next is Jimmy Bhullar with JPMorgan. Jimmy Bhullar - JPMorgan Thanks. I had a question on just your outlook for health insurance sales. You're down 17% in the first quarter. The agent count at American seems like it's declining even more so, and then you mentioned the modest impact from healthcare reform as well. As you go through 2010, would you expect your sales to get better through the year or should we expect a similar rate through the rest of the year?

[Mark McAndrew:]

We expect our health sales will improve as year goes on although our guidance right now expects second quarter sales to be roughly the first quarter level. Starting to see some improvement in the third quarter again, I first genuinely expected to introduce a new Medicare segment plan as well as have the repricing of our existing plans, and after that we are expecting relatively modest growth in the third quarter with better growth in the force assuming some one of our group sales are always better in the fourth quarter as well as we expect to see some benefits from the disenrollees from Medicare advantages plan. Jimmy Bhullar - JPMorgan And then secondly on just your share buybacks, if I look from 2005 through 2008 you're buying anywhere from $300 million to $400 million worth of shares each year. From here on out given where your RBC is how should we think about how much you can do in terms of buybacks later this year or into next year as well?

[Mark McAndrew:]

There are some uncertainties there, right now our current thinking is that $194 million of free cash as Gary said is probably about level of liquid assets we are going to hold with the parent just to provide some cushion. We still expect to see another $195 million of excess cash coming into the parent during the next three quarters based upon our current plan. We would expect to spend most of that probably on share repurchase borrowing on acquisition or some other better use for the money, whereas next year we may still well hold that cushion. Jimmy Bhullar - JPMorgan And the incremental cash should be used for buybacks?

[Mark McAndrew:]

Well again borrowing a better use for it, Jimmy. Jimmy Bhullar - JPMorgan And the better use would just be buying a block of business or an acquisition opportunity if one arises. Right?

[Mark McAndrew:]

I would prefer to make an acquisition versus just buy a closed block of business. Jimmy Bhullar - JPMorgan Is the environment getting better now or have you identified anything or is that something you've identified that you're looking at or are you just expecting things to improve?

[Mark McAndrew:]

I can say we are always looking Jimmy but that’s what I can say on that.

[Operator:]

Jeff Schuman with KBW is next. Jeff Schuman - KBW A couple of items. The annuity earnings I think were a bit lower than we would have normally expected in a decent equity market quarter. Is this kind of a new run rate or was that depressed a little bit this quarter?

[Mark McAndrew:]

No, we got a little bit of a loss normally as you noticed we usually have Rosemary Montgomery, our Chief Actuary, but Rosemary has elected to take retirement so I don’t have those numbers in front of me.

[Gary Coleman:]

Jeff, I don’t know if anything that’s really unusual in the quarter, if you compare sequentially, we had some unlocking in the fourth quarter last year that we have benefited from but its as in that, I don’t know if there is anything unusual in this quarter. Jeff Schuman - KBW Okay.

[Mark McAndrew:]

I can say that when we look at our guidance for the balance of the year, we are expecting pretty small really actually under 100,000 our quarter of annuity margins. Jeff Schuman - KBW Less than $100,000, okay. Okay, that's helpful. Next the American Income sales looking for 15% to 20% growth for the full year. To what extent is that do you think that would be driven by higher agent count versus productivity? I know you didn't mention that there's kind of new needs-based sales process that you sounded positive about. So is that part of the growth driver there or was it mostly just agent count?

[Gary Coleman:]

That’s primarily growth in agents. Again I think you’ll notice that our, I think somebody brought up that our first year agent count in American Income decline slightly in the quarter. That I’m not concerned with, in fact in retrospect there was big push put on in December to American Income to break to 4,000 agent mark and as a result we saw an increase in our terminations in January and February, but recruiting is still running at record levels, and the terminations came back to normal levels in March ,so we fully expect to see that type of continued growth in our agent count. We are not adding in much at this point for changes in with the laptop sales presentation.

[Operator:]

Next question will come from Ed Spehar with Banc of America.

[Ed Spehar:]

Gary and Mark I got question on capital, if we look at the numbers you gave us and we think about I guess how you used to look at funds available for share repurchase, would it be correct to add the $245 million of excess at the sub plus the $194 million in cash at the end of March plus the $195 million of free cash over the next three quarters.

[Mark McAndrew:]

Well Ed never really use, again the excess capital at the insurance companies is not going to be available for share repurchase and as we said just taking what we think is a cautious approach, what we think we believe that insurance companies are all very well capitalized, have more than enough capital to cover most any contingency we do intend to hold some liquid assets of the parent company for the time being.

[Ed Spehar:]

Okay then sort of a related question would be if we are thinking about potential share buyback over the next two years the $195 million of free cash over the next three quarters, it seems like that something you would be willing to use buyback stock this year, if we think about next year without touching the cash and short term at the parent, and the current the expected capital margin at the sub level, would it be correct to think about another assuming a reasonable benign realized investment loss experienced this year would it be reasonable to think about a $350 million or more type of number potentially next year.

[Gary Coleman:]

That might be a little high free cash flow for this year is going to be 280

[Ed Spehar:]

Gary, isn't that based on sort of what you would consider to be a depressed net statutory earnings number?

[Gary Coleman:]

Yes, you’re right. That’s true because we have the realized losses of about $100 million last year that impacted. So yes, that $280 million could go to $350 million. Unless we have impairment we only got $1 million to the first quarter, so and we are expecting ,we’re not going to have that level that we had last year so yes you could get up in the $350 million level free cash flow.

[Operator:]

Next question will come from Paul Sarran with Macquarie. Paul Sarran - Macquarie It’s a question on Direct Response, sales growth of 8% on the quarter was better than what you had guided to of low single digits in the first quarter. So I guess I have two questions related to that. One, is there anything specific you can point to that kind of explains that better than expected performance and two, do you still expect the same level of sales boost for the rest of the year when you rollout the new enhanced packaging in the second quarter?

[Gary Coleman:]

Well, primarily in the first quarter I guess the biggest surprise was in our insured media where we insured one of our offers and other media. Those response rates made a nice comeback in the first quarter and higher than anticipated and that contributed most of the improvement in our first quarter sales. We still do expect to see on the Direct Response side, the improvements that we talked about before, with the beginning for the balance of the year. We still expect to see some of that turn to 15% sales growth after the balance of the year. Paul Sarran - Macquarie Okay. Thanks. And then on Liberty National, you mentioned further changes going in place this summer. Can you just elaborate on that comment a little bit?

[Mark McAndrew:]

Really at this point I can't because they haven’t been finalized and they haven’t been announced so its something we are still in the process, by the next go I should have more details on that. Paul Sarran - Macquarie Okay and do you have an outlook for new agent recruiting at Liberty for the balance of the year? I mean should we expect first year agent counts to rebound quickly towards where they were the last couple years or with changes in comp and office closings and some better employment opportunities in the economy, should we expect a slower rebuilding process from current levels than we've seen in the past?

[Mark McAndrew:]

Again I think it will be a slower rebuilding process and mainly because we did have a significant turnover on our management ranks? So that’s our biggest challenge right now is rebuilding our management ranks, really before we see major improvement in our recruiting efforts, so we are projecting modest growth there in the agent count for the balance of this year. Paul Sarran - Macquarie Okay. And then how long does it take to kind of rebuild that management ranks? Is that a one year project, two year, three year? Do you have any sense?

[Mark McAndrew:]

Well, I would say it’s a one, two year together to where we needed to be. We should see significant improvement in 2011. But yes I would say it's fair to say it’s a one to two year project.

[Operator:]

Next question will come from Bob Glasspiegel with Langen McAlenney

[Bob Glasspiegel:]

Medicare Part D, the premiums were up double-digit, compared to sort of mid single digit last year. Was there more price or was this a better long-term versus lapses?

[Mark McAndrew:]

Bob, we saw an uptake particularly in the fourth quarter on our group sales, we did pickup some significant group Part D sales which improved not so much price although you noticed that our margins were flat when we priced our Part D for 2010 back in may of 2009. Basically the margin we are going to see this year is about one point less, and what we desire which we hope to make up next year, our price is still in a ballpark with most other people, but most of the uptake has been in our good side.

[Bob Glasspiegel:]

I thought when you went in this a couple years ago the thought process was great return on capital, but it's going to be sort of slow, gradual erosion sort of in the top line. Was that a misimpression or has this bills business held together more than you expected?

[Mark McAndrew:]

Well, prior to this year, it has been the track that it has been on, probably now I think our opinions changed with healthcare reform legislation and actually the expected cut in funding for Medicare advantage plans. Most of people had the Part D where they have there Medicare advantage. So, I would expect as we see an improvement on our Medicare supplement sales that we would also see similar improvement on our Part D sales, and again how we continue to see good market there, they are in a good size.

[Bob Glasspiegel:]

The (inaudible) [break rate] I was focusing on the Part D, and the bigger, your med supp on the health side, the things broke right with Obama care, when could we see sales and even being more optimistic premiums start to improve? Is this a year or two out or three to five years out?

[Mark McAndrew:]

I wish I had a crystal ball Bob I think we are going to have a much better idea between now and the end of the year. What to expect there again around the 1st of June we expect to have new product, with new pricing on addition products. We are seeing more interest particularly in independent agency world. We got lot more agents contacting us with renewed interest in Medicare supplement. But we at this point we really don’t know how many dis-enrollments are going to be at the end of this year although based upon CMS estimates over the next seven years, I expect roughly 7.5 million to this dis-enrollment. But we don’t know what the timing that was going to be. So there is a lot of big question mark there, and in our guidance we haven’t assumed anything as far as any significant growth in Medicare this year. But I think we will learn a lot during the course of this year. How much and how fast that really occurred.

[Bob Glasspiegel:]

Last question, has there been any buyback in April and could you quantify that if there has been?

[Mark McAndrew:]

Yes, we’ve spent $8 million in bought back another 150,000 shares.

[Operator:]

Eric Berg - Barclays Capital has a question.

[Eric Berg:]

My first question relates to the health business. What are the specific products that you expect to be affected most profoundly by the healthcare legislation and why?

[Mark McAndrew:]

We’ve been selling our products through United American really since the Medicare settlement marker place deteriorated. That is a broad benefit hospital search goal type power so it has internal limits for you but for example it would pay, if you go to the hospital it could pay after $3000 a day while you are in a hospital. More if you are in a emergency room, that's a broad benefit product I think our average premium on that was over $2000 a year for that product. But it has the lower mandate in loss ratio. But we are seeing in the healthcare legislation, and benefits do not meet the standards being set out. But that is the business that we have de-emphasized and basically gotten out over the last couple of years. That is what you are seeing run of the books. So it's only $1.8 million sales in the first quarter, we still have roughly 100 million on the books. But by the end of 2013, we would expect that block of business to be down another 70% of that business full of flat stuff like that so it would not be a significant portion of our overall business.

[Eric Berg:]

You're saying by 2013 what percentage of it will have gone away?

[Mark McAndrew:]

About a 109, we expect about based on current rates roughly 70% of (inaudible).

[Eric Berg:]

Over next three year

[Mark McAndrew:]

Yes.

[Eric Berg:]

Okay. My next question relates to agent recruiting. You have been busy in recent years restructuring your relationships with your agents not only at Liberty, but also at American Income and it's just striking that the agent count at American Income has been moving pretty steadily upward, whereas it has moved in the opposite direction at Liberty and at United American. Why is that? Help us understand the difference in the outcomes there?

[Mark McAndrew:]

Well, an explanation would take longer than I have in this call, I’d be happy to sit down with you sometime you’d like to more details, but there are significant differences between the two. One, American Income has a unique niche, they have, there are some things there. It was interesting that our newest board member happens to be chief operation officer, 7/11 and obviously talking to him is some is like the difference between a company-owned storey in a franchise. American Income is more of a franchise. These people, they are independent contractors, the SGAs, they manage all their own expenses. We pay them straight commission and they are much more entrepreneurs I guess versus at Liberty National, we rent the offices, all these people are employees. There are significant differences in the way the two operate.

[Eric Berg:]

Last question, I'd like to re-ask a question I asked in a prior call, which is understanding that there are important uncertainties here regarding healthcare and the future of your health business, and nonetheless like you to take a fresh crack at this question. What do you think three years from now the business is going to look like on the health side? And by that I mean specifically which distribution channels will most likely be selling your health products, and what will the complexion of the business be both and well, the new business. Where will the focus be in terms of new business, and who will be selling it when the dust settles, so to speak?

[Mark McAndrew:]

Well, as far as we are concerned, I think we continue be in the March, so again if I look at Liberty National, most of their health business is being written through favorable reduction on the work side. None of those supplemental health products are being affected by the legislation. We expect that to continue to be a growing market and obviously Medicare supplement. I fully expect that market to rebound, I think we will see a rebound in the independent agent market faster than we will in our captive of distribution. But three years from now, that’s a long way to look, but I do expect the bulk of our health sales, I would expect we wouldn’t be back with high percentage of our health sales would again be Medicare supplement three year from now.

[Eric Berg:]

So in summary, it sound like Liberty will remain an important distributor, United American, and you will be selling both Medicare supplement and [survive] busiest product?

[Mark McAndrew:]

Yes we will. Those two product lines are unaffected, at least have no negative impacts from healthcare legislation, and on the Medicare side, we think it will have a significant positive impact.

[Operator:]

Next question will come from Mike Grondahl with Northland Securities.

[Mike Grondahl:]

Mark, can you just kind of give us a quick overview of the new sales presentation? I think it's the laptop version that you're using in American Income, and just kind of how you expect that to roll out and kind of affect productivity and sort of sales levels going forward?

[Mark McAndrew:]

Okay, I’ll try to be again as brief as I can but in the past and Bernard Rapaport, founder of American Income, I think the world of he put the current sales presentation of American Income, he put together roughly 40 years ago, and it was targeting set premium for people to invest in their life insurance, he called it in hour of power, so they were trying to get people to take one hours pay a week and buy life insurance with. What we are trying to move to is more of a selling people what they need, first thing we do is take a survey, do you own a home? Do you have children? What is your income? What are your expenses? And gather financial information and look at with our current existing coverage is whether be group individual and the laptop then analyzes it and identifies both the amount of coverage that we believe they need, and the type of product that best fits that need. For there number of advantages to it. One we have consistency of sales presentation; it makes them far easier to train a new agent as far as sales presentation. We believe we will see a higher average face amount being sold as well as hopefully a higher average premium but a side benefit of that we hope that it will also improve our new agent retention because we think it will make it easier for a foreign agent become productive.

[Mike Grondahl:]

That’s good to hear, when do you think that surged the cycle in a little bit?.

[Mark McAndrew:]

Well again we just we have started with just a handful of agency, we want to control the training of this, we wanted to be done properly, and so I think we will see a trend in as the year goes along, but if its impossible at this point really project what that’s going to add, it's just too early in the process . Again we just started this quarter introducing our first agents on it. So just too early by next quarter I should have much harder numbers on what we could expect to add.

[Mike Grondahl:]

Great. We look forward to hearing that too. Thank you.

[Operator:]

John Nadel, Sterne, Agee has a next question.

[John Nadel:]

I joined a little bit late so I might have missed this but the sequential improvement in excess investment income if I think about first quarter versus fourth quarter, is most of that driven by the reinvestment of the proceeds from some of your portfolio repositioning that happened late last year?

[Gary Coleman:]

John, that's the main reason, if you remember in the third quarter, we sold almost $750 million of bonds and half of those were below investment grade bonds, but we did that in the last week of the quarter, and we ended the third quarter with $1.1 billion of cash and short-term money, we got that invested large part in the fourth quarter but some of those win over in the first quarter, we saw if you just look at invested assets in the fourth quarter or third quarter, you saw a good growth but we got that’s so late in the fourth quarter, we didn’t get the fall in income for the quarter’s revenue income. We finally got the first quarter’s full growth of income in the first quarter this year. So that’s just a delay.

[Mark McAndrew:]

Sorry Coleman, we have to come down, a yearend we were holding $590 million of cash, Gary and that was on the $375 million at the end of the first quarter which we had expected to coming down in the second quarter.

[John Nadel:]

Yes. What's the pace there that we should be thinking about it and, I saw the new money yield it was around 6% in the first quarter. I suspect it's relatively stable at this point still?

[Mark McAndrew:]

Yeah, we’re still around the 6% level and we are at $372 million of cash in short-term at the end of the first quarter. The $194 million will depend will probably, we are looking at different ways to invest and at this point there’s any short-term money, well the $178 million short-term at the insurance company, we’ll get that down a little bit but we’ll always just because of the timing we’ll do it near a $100 million. So we’re pretty much got the money fully invested at this point.

[John Nadel:]

So the net investment income level in the first quarter that goes into your excess investment income is a reasonably good level to think about going forward?

[Gary Coleman:]

Well yes, in other words it will grow. I think over prior grow about the same sequential levels it had in prior to this, the first quarter was little bit anomaly but where as last year investment income in total in 1% because of all the cash we have this in 2010 is going to be closer to a 10% increase.

[Operator:]

Next is Steven Schwartz with Raymond James and Associates

[Steven Schwartz:]

I'm going to admit I'm slightly confused here. It seems to me that you're suggesting that the $195 million of free cash flow that you're suggesting that you expect over the next three quarters is available and likely to be used for share repurchase. The guidance assumes no share repurchase. I just want to make sure that that is correct.

[Gary Coleman:]

The guidance does not include any additional share repurchase. The $195 million, currently we would expect to use most of that in the share repurchase assuming nothing else comes along that would be that we feel like it would be a better use for it.

[Steven Schwartz:]

Okay, great. I just wanted to make sure that I understood that. And then just following up on a couple of more that were asked, the block of business that will be affected by PPACA, just for information's sake, what's the underwriting margin on that? Would you happen to know, Mark?

[Mark McAndrew:]

Its less than 10%, normally we have to call in Rosemary but my recollection is that right around 8%

[Steven Schwartz:]

Right around 8%, okay. And then could you remind us, I remember what happened with the agent count at Liberty National. There was poor first year and even sooner persistency. You made some changes to improve that. That hurt your agent count. Did you do something in January or has this thing just leveled out and the people are going to make under the new commission structure are the people who are just going to make it?

[Mark McAndrew:]

I think most of the changes were made back middle of last year, and I think it was kind of finally reach bottom in January. Although on a plus side, our persistency is now back at the 2007 levels which is a plus although we hope we continue to improve on that. But, I think it just took that long for the replication to flow [okay for yourself]

[Operator:]

Our next question comes from Colin Devine with Citigroup

[Colin Devine:]

Good morning. If we look at the sales and I guess the growth in underwriting margin on the life side that you've been putting up in Direct Response and American Income, it's certainly substantially higher than probably what most of us have associated with Torchmark and also the markets you're in. What do you attribute to your success, because clearly there's other companies we're looking at that are struggling. Where are you taking this share from and what is it that you're doing so right that others clearly are not?

[Mark McAndrew:]

Well, Colin I think one of our big advantage is we for the most of our controller distribution. I think that one of reasons we have higher margins and we have higher underwriting margins in American Income and Globe. If I look at American Income we just kind of model there that works I don’t know how to explain that any other way, we had to make some changes over the years to get it where it is, but now we believe all the pieces are in place. We can sustain that type of sales growth gradually double digit sales growth and definitely going forward. The Direct Response, it's grown every year since 1985, so it just has long history, we have some extremely good people there and we are just keep finding ways to do things better and continue to achieve growth. So I don’t know if there any magic to it we have, we believing we have the best people with the knowledge, obviously our ability to control cost is a big plus for us one of the reasons we have very little competition there. Colin Devine - Citigroup I guess that also leads into we think of Liberty, in a sense, do you need to have perm agents and does that need to be a core part of what Torchmark does? I mean how long do you give it to get turned around and back on track before you start asking maybe some more difficult questions given that you've got the success in the other two channels?

[Mark McAndrew:]

Well I feel obviously believe we can and will grow Liberty National, Liberty Nationals grow it hasn’t seen growth rates similar to American Income in the 30 years as their own company but we do have to change the model, and we are changing the model at Liberty and as we are moving more towards what we have in American Income. I still believe in the next 12 to 24 months we will have the pieces in place at Liberty that we need. I look from 2003 to 2007 we saw decline in the EGM sales in American Income. We identify the problems. We knew it was going to take time to get changes in place that was needed to grow that company. But we did and now we are saving best for that, I believe the same will happen at Liberty National. Colin Devine - Citigroup So still going with the per agent force and that cost structure you think can be viable going forward versus going to a pure variable comp system?

[Mark McAndrew:]

I think there is somewhere between I know that is something we have release shift in that direction. We may not get all the reporting to what we are in American Income. But we got to do something or even just for some of the accounting little changes that will see. We will move to more than variable cost structure at Liberty National. Colin Devine - Citigroup And then turning directions, on the sort of cash flow numbers that you put up, the 350, how dependent is that or how tied is it to the very strong growth and that you're putting up at Direct and American Income? The sales continue certainly at their pace. Are you able to generate enough excess cash flow by continuing to shrink the health business to kind of fund the growth on the life and keep that 350 number or is there some sensitivity to it we should be thinking? If you're seeing the strong sales to sort of ratchet it down the expectations on buybacks or dividend increases?

[Mark McAndrew:]

Again we haven’t run our actual cash flow projection for next year. There’s no doubt that the more we increase sales, it does have some impact on what your stats are earnings. Although I would point out that at Globe we are continuing, for example on our insert media, I said the response rates were up but we still spend less money in the first quarter, then we did it in the first quarter a year ago, so that’s a nice thing in that particularly at Globe and Direct response where we are seeing growth in sales so that’s going to a growth and level our expenses.

[Gary Coleman:]

Well I would add is that Colin we have seen the growth in the statutory earnings in the past to be about 6% or 7% with the new sales of the American Income. It's not going to drive it down them that much. We are still be running in 5% range. Colin Devine - Citigroup Just a final one, we haven't talked about first command in a long time. Has there really been any change to your outlook there or it's just going to slowly continue to shrink for a while?

[Mark McAndrew:]

While we visited with them here this last quarter. They are optimistic that they will see turnaround in the military market place and we haven’t included any turnaround there. We are including in our guidance for sales continue to balance the first quarter level for the balance of the year

[Operator:]

Paul Sarran with Macquarie has a follow up question

[Paul Sarran:]

Two quick questions. A few years ago ran into some problems after floating too many agents and management pulled too quickly resulting in some lower productivity and higher agent turnover. Is there anything that you learned from that experience that will help you when you go to rebuild Liberty National now, is there any specific difference?

[Mark McAndrew:]

Okay, you are not coming across, perfectly clear but sure that we learn lessons from that absolutely, that's why when I talk about, will the turnaround there be dramatic, will it be quick, no it will take some time. That's why I think a year to two year timeframe is more reasonable, and because we did learned a lesson, we have standards for promoting people in the management which we are going to stick with, and as we turn that company around, we want the growth that we achieve to be sustainable.

[Paul Sarran:]

Okay. And then just I'll try and speak up. One unrelated follow-up question. Could you just run through the RBC numbers you gave earlier again, total adjusted capital and prior capital if you have it and the impacts of temporary changes?

[Mark McAndrew:]

Take that Gary?

[Gary Coleman:]

What I had mentioned earlier is its year in '09 our adjusted capital was $1.5 billion, [1.476 billion] and the required capital is $416 million which gave us the 355% ratio and that ratio would give us excess capital $225 million over the 300% that we have managed during the past also mentioned as a $225.70 million gain from the increase in deferred tax benefits was allowed this year so excluding that the growth in excess capital $155 million and I said that, that could grow another $90 million this year assuming no impairments, and downgrades over the last three quarters because our statutory income is going to exceed what we will dividend out and insurance companies to the parent

[Paul Sarran:]

And you don't have an update of required capital at first quarter?

[Gary Coleman:]

Well I do , the ratio was more to 340% level but I mentioned also earlier the reason for that is we had more in terms of dividends required to be paid of the companies then what we received in income in the first quarter but that will reverse in the second quarter and where the dividends will be lower than the income coming in, so we will be right back at the 355% level.

[Operator:]

Next we will take a follow up question from Ed Spehar, Banc of America.

[Ed Spehar:]

Mark, I was wondering back on the Medicare advantage dis-enrolment possibility and the CMF numbers which you cited which would say that there’s a $7 million plus seniors that could be coming into traditional Medicare, can you help us a little bit with how to think about that number versus what happened at the beginning of the 2000 I guess, 2000 may be 2001 period, and how to think about may be if I look at your med supp sales now, how many millions of how many seniors you are adding each year something to give us sense of how to think about that number?

[Mark McAndrew:]

Well, that’s something we had actually we went back and we looked at the last time that was significant number of Medicare, it's an old release because I had the same question Ed , back in around 2008, we were picking it up look like roughly 3% of the dis-enrollees was basically the share that we were picking up. That’s probably not an unreasonable number going forward. So, I guess that’s about as good as I need to hear. Now when those dis-enrollees will occur, it’s a still guess, but that’s where I’m kind of loving it. I don’t see any reason why we shouldn’t be able to pick up roughly the same percentage we picked up last time, we sent a significant number of dis-enrollees.

[Ed Spehar:]

Okay. So then Mark, I guess the follow-up would be if you look at your level of Medicare supplement sales now, how many seniors are you selling business to kind of today at an annual basis?

[Mark McAndrew:]

Ed, I don’t have numbers right in front of me, but we can get those numbers for you, right now, we’ve seen a little up-tick in our individual Medicare sales but nothing significant. I think there’s a number as far as premium item website as far as where the Medicare sales are. We can get you some insured accounts if you like to add.

[Ed Spehar:]

Yes. I guess just to try to put in perspective so if you were somehow able to pick up 210,000 people or something, what that would mean?

[Mark McAndrew:]

I don’t know what our average premium is today but the last I looked at it was something in excess of $2,000 per sale, so the average premium, so it's not going fall of that from number.

[Ed Spehar:]

What were your med supp sales kind of running at now?

[Mark McAndrew:]

I have got that here somewhere, well I don’t have it right in from of me Ed. Again its our Medicare segment sale, I will split out on an exhibit on website.

[Operator:]

At this time, we have no questions in the queue. I will turn the conference over to our host for any closing or additional remarks.

[Mark McAndrew:]

Well, that’s all of our comments for the day. Thanks everyone for joining us this morning and we will see it next quarter. Have a good day.

[Operator:]

And that does conclude our conference call. Thank you for your participation.