Globe Life Inc.
Q3 2010 Earnings Call Transcript

Published: 28 Oct 2010

[Operator:]

Good day, everyone, and welcome to the Torchmark Corporation third quarter 2010 earnings release conference call. Please note that this call is being recorded and is also being simultaneously webcast. At this time, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Mark McAndrew. Please go ahead, sir.

[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 third quarter was a $132 million or $1.63per share, a per share increase of 10% from the year ago. Net income was a $115 million or $1.41 per share, a 16% increase. Net income for the quarter was reduced by $31 million as a result of a GAAP loss on our pending sale of the United Investors. Excluding FAS 115, our return on equity was 13.7% and our book value per share was $47.92, a 12% increase from the year ago. On a GAAP reported basis with fixed maturities carried at market value, book value was $52.77 per share. In our life insurance operations, premium revenue excluding United Investors grew 5% to $417 million and life underwriting margins increased 8% to $115 million. Life net sales were $79 million, down 7% from a year ago, our first down quarter in two quarters. Life first year collected premiums however were up 8% to $61 million, significantly better than our 3% growth in year-to-date sales and reflected of improving persistency. At American Income, life premiums were up 11% to $142 million and life underwriting margin was up 9% to $47 million. Life net sales increased 5% to $34 million. The producing agent count was 4,065, up 3% from a year ago, but down 3% from last quarter. The renewed growth in our producing agents at American Income is taking longer than we previously anticipated. In addition to changes in our management incentive compensation, we are working on growing our middle management ranks as well as improvements in our sales lead volume inflow. We expect it will take another two to three months to see the impact of these efforts. We are also in the fourth quarter beginning to implement a centralized recruiting call center for both American Income and Liberty National, which we believe will significantly increase our recruiting activity at both companies. In our Direct Response operation at Globe Life, life premiums were up 6% to $142 million, and life underwriting margin grew 8% to $36 million. Life net sales declined 3% to $32 million. The sales in Direct Response were again less than anticipated as response rates in our insert media segment continued to fall during the summer months. For the June to August time period, the response rates were 14% to 17% less than a year ago. For the last 60 days however, we have seen some improvement with the response rate lagging only 3% from last year. Due to other positive developments in our testing and modeling, we expect to see mid-single digit growth in life sales in Direct Response for 2011, despite these lower response rates and our insert media. Life sales at Liberty National declined 2% to $73 million and life underwriting margin was up 10% to $16 million. Net life sales for the combined Liberty National United American agency declined 19% to $11.4 million. Although, first-year collected life premiums were flat at $8.6 million, again reflecting improved persistency. We are beginning to see an upturn in our recruiting activity at Liberty National as a result of our implementation of the recruiting call center which I previously mentioned. For 2011, we currently anticipate 10% to 15% growth in net life sales at Liberty National. On the health side, premium revenue, excluding Part D, declined 5% to $189 million, while health underwriting margin grew 2% to $37 million. Health net sales decreased 29% from the year ago to $13 million, but first year health collected premiums increased 11% to $20 million. While official numbers are not yet available, the contact person at CMS has resonated that roughly 900,000 Medicare Advantage participants will be disenrolled at the end of this year and which would be a 50% over last year. We believe we are in significantly better positioned than we were a year ago to capture a share in these disenrollees. Premium revenue for Medicare Part D was $53 million, a 10% increase, while the underwriting margin was $6 million, down 4%. Part D sales grew 128% to $7 million for the quarter and first year collected premiums were up 83% to $13 million. Our administrative expenses were $38.4 million for the quarter, up 5% from the year ago. This increase is primarily the result of continued high employee healthcare costs. I will now turn the call over to Gary Coleman, our Chief Financial Officer for his comments.

[Gary Coleman:]

Thanks, Mark. As disclosed, we entered into a contract in the third quarter under which Liberty National will sell its solely owned subsidiary United Investors to Protective Life. The sale was expected to close on or before December 31st, 2010 at which time the final sales process will be determined based on the advanced statutory capital and surplus of United Investors. Any numbers discussed here regarding the sale represented as if the sale had closed on September 30th. Prior to closing, United Investors will distribute approximately $327 million to Liberty in the form of dividends. At closing, Liberty will receive approximately $344 million from Protective, resulting in a statutory gain of approximately $190 million pretax or a $124 million after-tax. The $327 million of pre-closing distributions consist of a $188 million of Torchmark preferred stock, a $132 million of fixed maturities, and approximately $7 million of other assets and liabilities. The fixed maturities consisting primarily of the low investment grade bonds were excluded from the sale, because we did not want to sell them at a loss. We expect to hold them and receive full value and maturity for all these bonds. Although the sale generates a statutory gain, we are recognizing a GAAP loss of approximately $35 million or $31 million after-tax, and that’s due primarily to the BAC, goodwill, and the difference in GAAP and staff benefit reserves. We expect the sale to result in approximately $15 million of lost income after-tax in 2011, $25 million of foregone United Investors earnings, offset by $2 million of investment income on the sales proceeds, if all the proceeds are invested at 5.5%. However, due to the sale, Liberty National should be able to increase its dividends to the parent company by $250 million to $320 million in 2011, to the extent of sales proceeds, our dividend to the parent, [inaudible] investment income will be less than the $10 million. For the remainder of my comments, any reference to investments from continuing operations may include the bonds that will be received in the pre-closing distribution. Now, I want to spend a few minutes discussing our investments as well as excess investment income, capital and share repurchase. First, the investment portfolio. On our website, there are three schedules that provide summary information regarding our portfolio as of September 30th. As indicated on these schedules, invested assets are $10.9 billion, including $10.4 billion of fixed maturities at amortized cost. Of the fixed maturities, $9.6 billion are investment grade with an average rating of A minus. Below investment grade bonds are $822 million, 7.9% of fixed maturities compared to $832 million at the end of the second quarter and $946 million a year ago. Again, we expect that the percentage of below investment grade bonds at 7.9% is still high relatively relative to our peers. However, due to our significantly lower portfolio leverage, the percentage of below investment grade bonds to equity, excluding OCI, is 21% which is slightly less than the peer average. Overall, the total portfolio is rated BBB+, same as a year ago. During the quarter, we recognized $5 million of after-tax realized gains. For the nine months, we had net realized capital gains of $6.7 million after-tax. We had net unrealized gains in the fixed maturity portfolio of $572 million compared to net unrealized gains of a $143 million at June 30 and net unrealized losses of $4.2 million a year ago. The increase in the unrealized gains in the third quarter is due primarily to the decline in both treasury yields and credit spreads. Regarding investment yield, in the third quarter we invested $447 million in investment grade of fixed maturities primarily in the industrial sector. We invested at an average annual effective yield of 5.6%, an average rating of A-, and an average life of 23 years to 25 years. For the nine months, we invested $1.4 billion at an average yield of 5.9%. For the entire portfolio, the third quarter yield was 6.68% compared to 6.74% earned in the previous quarter and the 6.96% earned in the third quarter 2009. The decline in yield is due to investing a larger than normal amount money at lower yields. In the last 12 months, we invested over $2 billion at an average yield of 5.95%. This unusually higher amount of money invested in that period was due to the third quarter 2009 portfolio repositioning to reduce low investment grade bonds and investing money that was previously held as cash for liquidity purposes. As of September 30th, yield in the portfolio is 6.66%. Now turning to excess investment income. Excess investment income is the net investment income less interest cost on the net policy liabilities and the financing cost of our debt. In the second quarter, it was $75 million, up $9million or 14% from the year ago. The year-over-year comparison of each component is as follows. First, net investment income was up $13 million. This represents an 8% increase in income, slightly higher than the 7% increase in average invested assets. Despite lower yield in the bond portfolio, investment income increased at a higher rate in the related assets, because we’ve got significant more cash and short-term securities in the third quarter 2009 than we have in 2010. Next, the interest cost on net policy liabilities increased $6 million or 8% in line with the 8% increase in the average liabilities. And lastly, financing costs were down $1.6 million due primarily to the maturity of an $99 million issue in mid third quarter of 2009. Regarding RBC, we plan to maintain our RBC ratio at around 325%. This ratio was lower than some of our peer companies, but it is sufficient for our companies in light of our consistent and statutory earnings, the relatively lower risk of our policy liabilities, and our ratings. At yearend 2009, the RBC ratio was 355%, and adjusted capital was approximately $125 million in excess of that required for the targeted 325% ratio. We estimate that the ratio at September 30th is around 350%. However, we estimate that RBC at the end of the year will be somewhere around 400%, due to the impact of the sale of United Investors. Net of the proceeds from the sale will be dividend to the parent company until 2011. Finally, regarding share repurchases and parent company assets, in the third quarter, we spent $66 million to buy 1.3 million Torchmark shares. For the nine months, we have spent a $141 million to acquire 2.7 million shares. At September 30, the parent company had liquid assets of $220 million. In addition, we expect to generate another $50 million of free cash flow in the last three months of the year. Considering that we plan to maintain the liquid assets of around $200 million, this leaves $70 million of cash available for use in the fourth quarter. For 2011, in addition to the $200 million of liquid assets, free cash flow at the parent company was expected to be approximately $590 million to $660 million, assuming no more impairments in the remainder of 2010. This consists of approximately $340 million of free cash flow from normal operations along with $250 million to $320 million resulting from the sale of United Investors. Now free cash flow generated by the United Investor sale depends on how much cash will need to be retained in the insurance subsidiaries to maintain our consolidated RBC ratio at around the 325% level. As noted before, we will use our cash efficiently as possible. If market conditions are favorable, we expect that share repurchases will continue to be a primary use for those funds. Now, before I turn the call back to Mark, and we’d like to address a question that came up on the last call, the question was in light of low interest rate environment, what would be the impact on product processing if we lowered the assumed interest rate. As we discussed on the last call, we are not creating policy of our accounts on our live policies. The GAAP interest rate and the discount rate that we use to calculate the GAAP reserves and it’s also the rate that we use in our pricing. For most policies issues since 2000, the weighted average rate has 6.75%. However the weighted average discount rate on all policies for us is around 5.6%. The new money rate on third quarter investments was 5.6%. The lowest it has been in five years. If we felt that interest rates were going to remain at that level for a long period of time, we would likely reduce our GAAP and pricing interest rates. For illustration purposes, if we lowered our GAAP interest rate and processing rate to 100 basis points, we can maintain the current underwriting margins by increasing premiums on new business by just 1% to 3% for most of our product lines. To illustrate the magnitude of such a change, a 2% increase in premium on our due to the whole life business would average about $0.14 a month and a 3% increase in our American Income Whole Life business would average about $0.75 a month. We don’t think that such premium increases will have a significant impact on new sales. However, we don’t have any current plans to make changes to the GAAP interest rates as we don’t expect the new mid yields remain to this low for an extended period of time. Those are my comments. I will now turn the call back to Mark.

[Mark McAndrew:]

Thank you, Gary. As Gary mentioned, we are proceeding with the sale of United Investors and expect it to close by the end of 2010. Assuming we use between $250 million and $320 million of the proceeds from this sale to repurchase shares, we anticipate a small dilution of our earnings per share for 2011 of roughly $0.05 a share, followed by an accretion of $0.10 to $0.20 for 2012 with additional accretion in subsequent years. And our guidance first for the fourth quarter of 2010, we expect earnings per share to be between a $1.66 and a $1.70, so we are raising our 2010 guidance to a range of $6.38 to $6.42. For 2011, we expect earnings per share to be between $6.75 and $7.10 per share, assuming that we spend between $590 million and $640 million on share repurchase. This guidance is lighter than normal due to our uncertainty concerning the timing and price of this share repurchase. Those are my comments for this morning. I will now open it up for questions.

[Operator:]

Thank you. (Operator Instructions). And we’ll take our first question from Jimmy Bhullar with JPMorgan.

[Jimmy Bhullar:]

Hi, thank you. I had a question on your – just your comments on Liberty National Sales. I think you mentioned you expect sales to be up 10 to 15% in 2011. They’ve been 20% plus for the past several quarters, so I just wanted to get an idea of what gives you confidence that things will improve there? And then the other one just on the agent count at Liberty National and American Income as it’s down this quarter, wanted to see what was driving that, was it more changes in agent compensation and was there anything related to midlevel management, if you can just give us some detail on that?

[Mark McAndrew:]

Okay, well first we’ll start at Liberty National. One of the things Jimmy obviously we’re going to have a much easier year to compare again next year. If you look in 2009, we had $46 million of life sales of Liberty National where this year we expected to be down closer to $36 million. So even though we’re expecting to see growth going forward next year, it really doesn’t quite get us back to the level of sales we were in 2009, but we do expect to see 10% to 15% growth over the current levels. So I believe we are moving forward there. We have seen an improvement in our recruiting activity. So I mean those aren’t build increases. As far as the agent counts, at American Income, the plateau we’ve kind of hit in our agent count was a little more involved than what I had originally thought it was. Though, we have made some changes in management incentive compensation, but also and looking we really haven’t significantly grown our middle management, which for the people that are doing the training of these new hires. So the even though our recruiting activity was up, we really just had more people there to train those people, and also a late flow in some areas, really it hadn’t grown the support in the increased number of new agents. I am encouraged that we have started again this call center to actually be calling on Internet resumes. And the initial results we’ve seen there as we’ve gotten a very higher response as far as people wanting to come in and be interviewed. But it also involves – we’ve got have more people there to train and we’ve also got to do a little better job in some areas of increasing our lead flow. So we’re working on all those things. So I’m optimistic that – actually in September we started to see some turnaround there, but it’s – I really think it’ll be first quarter before we see the full impact of the things we’re working on.

[Jimmy Bhullar:]

And then you mentioned the potential for growth in Med Sup because of net advantage Med Advantage disenrollments. What’s your view if like could this reverse the Republican’s gain control of the House and/or the Senate?

[Mark McAndrew:]

Well, it’s – I will first say that in our guidance we haven’t assumed any significant increase in our Medicare Supplement business. It’s hard to say. We think if – obviously if the Republicans take control of the House, things will be a lot more just basically stagnation which isn’t all bad. But it’s just too early to say what impact it will have in some of the Healthcare Reform Legislation. I think the – I think it’s too early. You will see those disenrollees, they’ve already been filed with CMS, you will see those disenrollees this year, I don’t think you’ll see that change. But as far as what will happen down the road next year and the year after, it’s hard to say at this point. I think the number of disenrollees this year is pretty well been set.

[Jimmy Bhullar:]

And then lastly, you’ve had historically I think 2% or 3% shares that you have picked up when there have been disenrollees and we should – is that something consistent with that for next year?

[Mark McAndrew:]

Well, I would say – I have said in the past, in the last big round week, we picked up roughly 3% of the disenrollee. I don’t know whether we can expect to pick up quite many. In this round one, we have far fewer capital agents who are in that market place, even though we feel like our product pricing puts us in a better competitive situation. I think most of what we do pick up a bit more in the general agency side of the business, but I wouldn’t expect to pick up right now.

[Jimmy Bhullar:]

Okay, thank you.

[Operator:]

We will go next to Paul Sarran with Macquarie.

[Paul Sarran:]

Good morning. Just I guess first on guidance, can you share what the assumed new money yield is? And then also anything on margin and consistency in 2011 as compared to 2010 where both of those have been relatively strong metric so far this year?

[Mark McAndrew:]

Gary you want to – well, we’re assuming 5.5% in money interest rate on our guidance, Gary?

[Gary Coleman:]

That’s correct.

[Mark McAndrew:]

And as far as persistency, I don’t – we’re not. We’re expecting –

[Paul Sarran:]

Anything you’re seeing like stronger or weaker than what it’s been so far this year.

[Mark McAndrew:]

I’m sorry what?

[Paul Sarran:]

Just maybe directionally stronger or weaker about the same as 2010.

[Mark McAndrew:]

Well, in our guidance we’re not expecting any significant changes in our persistency. Although in most of our lines of business we are seeing improving trends in our persistency, we haven’t assumed any significant improvement in our persistency as far as our guidance.

[Paul Sarran:]

Okay. And then on American Income, if you’ve gave it, I may have missed it. But did you give you expected sales growth for next year?

[Mark McAndrew:]

I don’t think that I did. But in our guidance we are expecting 10% to 15% growth for American Income.

[Paul Sarran:]

And what kind of agent count growth would you need to see for that to be achievable?

[Mark McAndrew:]

Well, historically assuming that would be roughly the same. Over a year’s time, we would need to grow our agent somewhere in the – maybe a little bit higher because our first year agents are not quite as productive. So we will probably be more in the 15% to 20% growth in agents for the full year to achieve that.

[Paul Sarran:]

Okay. And then maybe one more, just on the recruiting call center, can you give any kind of maybe just grab a little bit more how that will work and how it interacts with the two companies?

[Mark McAndrew:]

Sure. We’ve done some testing where actually – well, I’ll give you just a little bit of history, we started 10, 12 years ago with Internet recruiting with Hot Jobs, Monster. And initially we just ran ads and we got responses to the ads. And that was a good source of recruiting inexpensively. We later a few years ago, I guess it’s been five to six years, we started a program where we started selecting resumes off of that database and sending emails to these people who are asking if they would be interested and coming to work for us. That increased our response and our potential candidates, I don’t have the numbers in front of me, but substantially. We got far more responses to that than we did to our ads. And now, recently, we’ve done testing doing automated phone calls to selected resumes in addition to the email, and again the response – what we’d do is we would send an automated phone calls from people to selected resumes and if they wanted to schedule an interview it was automatically transferred to a live person. Well in our tests, a live person was in the local sales office and in the offices that we use it for our both companies, we’d basically overwhelm them with calls. So actually what we’re working on now is a centralized place where those calls can come into to where we can schedule the interviews, so that we can better handle the volume and just have better control over it. But initial results are very encouraging and it’s something it’s going to take us a while to expand that nationally in both companies, but it has a lot of potential to take our recruiting to a significant higher level. But again we got to have the middle management place to then recruit and train those people.

[Paul Sarran:]

Okay. And then I guess maybe you’re commenting to suggest that the issue with the agent counts is more turnover of newer agents than slowing recruiting, but can you just confirm if that’s the case?

[Mark McAndrew:]

Well, again, American Income, it’s been basically flat since the first two years. We feel the level of recruiting that we haven’t been able to take it to the next level. And again that’s – and even though our recruiting has been up somewhat, we’ve seen a little higher turnover. But it’s – there were number of factors involved there. Again we got to significantly increase the recruiting, we got to have more people there in place to train those people. And with that all, we’ve able to generate a new source of leads for those people to work on. And again we’re working on all of those things.

[Paul Sarran:]

Okay. Thank you.

[Operator:]

And we’ll go next to Steven Schwartz with Raymond James and Associates.

[Steven Schwartz:]

Hi, good morning, guys. I think I got a couple here. First, Mark you made a statement in your prepared remarks that you thought you were in better position to capture the disenrollees this year than last year. I was wondering why that was, what has changed?

[Mark McAndrew:]

Well, again, midyear, we did is reprice our Medical Supplement products as well as introduce some new plan, which I think puts us in a better competitive situation particularly in the general agency world, which is driven by price. So in that regard, we are in better competitive situation in the general agency and the general agency distribution world with our current products and pricing what were a year-ago.

[Steven Schwartz:]

Okay, fair enough. And then just on direct response, I don’t know that you touched on this, you did mention that your response rates were much slower in June – in June and August again there is a little bit of a lag there. They had gotten better. What was – what do you think the issue was and did you do something to make them better or did they just trying to get that on their own?

[Mark McAndrew:]

That is – and I have mentioned this in the past, the insert media portion of our direct response is that all only a certain of our business that we’ve see any indication that the economy has had an adverse effect. And we were surprised by the decline in the response and there is no good reason for it other than the economy. And they have come back. But we’re always doing things to improve what we do. So again, even in our assumptions from next year, we’re expecting a mid-single digit growth in sales, but we’re not assuming that the economy is going to improve or that those response rates are going to improve on their own. If they do, we hope to see better growth than what we’re using in our guidance. But I think we’ve been fairly conservative in our estimates for next year as far as sales.

[Steven Schwartz:]

Okay, just as a follow-up to that, then the response rates that you are assuming in the guidance are kind of these slightly improved as opposed to the June to August numbers, is that correct?

[Mark McAndrew:]

Well, we’re not assuming as bad as that we were in the June to August period.

[Steven Schwartz:]

Okay, okay.

[Mark McAndrew:]

But better, still less than what we’ve historically I think.

[Steven Schwartz:]

Okay. And then, Gary if you can just confirm something for me, the – if you take the proceeds in capital that you’re getting out of UIL, and invested at – I think you said at 5.5%, the dilution from the sale would be $0.20, but then if it is used for share repurchase, the dilution would only be $0.05 for 2011, is that correct?

[Mark McAndrew:]

Yes, it seems that $0.05 is correct. What we were saying is that if we invested all the money, that the dilution would be $15 million and that’s roughly $0.20.

[Steven Schwartz:]

Yes, [that will get to this].

[Gary Coleman:]

(inaudible) Yes, that’s right. That would be – the higher side of the $0.20, if we invest (inaudible) as Mark indicated the $0.05 if we use it for share repurchases.

[Steven Schwartz:]

Okay, and then it becomes accretive in 2012, I haven’t done my 2012 numbers yet, but what is the driver there? I guess it’s – that will all be done? Is that the deal as opposed to maybe repurchasing over time?

[Gary Coleman:]

Yes, I think it’s a fact that in 2012 we will get the full benefit of repurchase because they will be done, you know, throughout the year, and we will get full effect in 2012. And also the amount of the income that United Investors would have provided in 2012 will be less than what it was in 2011.

[Mark McAndrew:]

That’s basically run-off like a business…

[Gary Coleman:]

Right. Each year that was earning a little bit less, then that revenues will be less going forward. So, that’s one reason that will continue to be accretive in years to come.

[Operator:]

And we will go next to Jeff Schuman with KBW.

[Jeff Schuman:]

Good morning. First of all, I just wanted to confirm, you talked about the share repurchase assumption, kind of guidance. Did you say 590-640? Is that recent?

[Gary Coleman:]

Yes.

[Jeff Schuman:]

Okay, and then I think Gary just touched on this, but given that much share repurchase, I guess the timing is pretty critical. Should we think about a big chunk early because of the United Investors cash and the rest to kind of [stay just] to the year, how should be think about timing?

[Mark McAndrew:]

Jeff, in our guidance, so we assume is the normal free cash flow, the $340 dollars that we expect. That will be spread throughout the year. The $250 million to $320 million (inaudible) that’s going to come, that will be able to be passed to the holding company in late March. And we are assuming that money will be spent starting like a last week of March through the month of April.

[Jeff Schuman:]

Okay. And if that’s the share repurchase budget, then I guess that contemplates that the $200 million cushion basically would remain in place. Can we think about that at some point potentially be drawn down?

[Mark McAndrew:]

You know as far as our guidance go, we did assume this is going to stay in place, but you know that’s our feeling now that we should have that cushion and that could change either – I am sure will have some migration that we might change the dollar amount, but as far as the guidance go we assume that it stay at the $200 million.

[Jeff Schuman:]

Okay great. That’s it from me. Thanks.

[Operator:]

We will go next to Edward Spehar with Banc of America.

[Edward Spehar:]

Thank you, good morning. You know, Mark and Gary, I think you’ve given a lot of information out on sort of what’s underlying the guidance. It seems like maybe more than you’ve given in the past. So, I guess I am going to push for a little more. Can you give us some sense of what type of premium growth – earned premium, not just sales, but what type of premium growth? I mean is this just sort of still kind of 2-3% type of premium growth type of expectation?

[Mark McAndrew:]

Well, again, I guess a little skewed because of…

[Edward Spehar:]

On an adjusted basis, I guess, adjusted for that.

[Mark McAndrew:]

Well, I’d have to – It’s – it would be similar – yes, hold on. Actually I have it with – I can say including United Investors – including it in the 2010 numbers, but pulling it out of 2011, we still expect to see United premiums roughly flat with 2010. So, I guess that would be maybe about 4% growth, if you pull United Investors out of the 2010 numbers.

[Edward Spehar:]

But in terms of – I guess when we are thinking about the overall, I understand that the life is more profitable than the health, but the health is coming down. So life is going up. If everything works as you would hope it would in terms of your marketing efforts and let’s say we get some benefit from the disenrollment over the next few years. What type of – what type of topline growth do you think you can get from your collection of businesses?

[Mark McAndrew:]

Well Ed, you know again if we can continue to grow our life sales, we should see – we are growing life premiums at 5% rate. Now we should be able to see some, gradual acceleration of that. You know, just think how long and how much we can – how fast we can grow those sales. You know, again the numbers I’ve been giving out, those are the numbers at the midpoint of our guidance. We’ve obviously calculated the range of sales and premium growth. You know, it’s – we have such a big [broad] life business here that new sales really has not been of much impact, as you are aware of. So, as far as next year, could we grow at 6%? Sure, we can grow from 5% to 6%. Can we grow from 5% to 10% growth in life premiums next year? No. Can we get there in three years? We could if we continue to – if we can continue to grow our life sales, but that takes [little] amount of time. But the other thing I would – I think we sometimes focus too much on sales, maybe as I mentioned in my comments and not the first year collected premiums. You know, our first year collected premiums – we have improved our first year – our persistency of the business. I think the first year collected premium is a much better indicator of what’s going to happen to your future premium growth and as long as we continue to improve our persistency, and continue to outpace the growth in sales, with growth in first year collected premiums.

[Edward Spehar:]

Just on the health side, Mark, is there any reason to think that the health business doesn’t continue to come down over time?

[Mark McAndrew:]

Well, I think we are getting close to. You know, our first year – even (inaudible) – okay the mix of the business is different. We put on a significant amount of group Medicare businesses here, which we expect to see that continue to grow, mostly in the fourth quarter and first quarter. But if you look at our first year collected premiums, on the health side, we have 11% for the quarter. I think we will continue to see – actually our new health premiums increased. Now, again it’s going to take us a little while to get the total back up to flat but again we are persistency of the business that continues to fall off, but very poor persistency business, and very low margin business. So, no I don’t think the health premium will decline much further than where it is now. I don’t think we are that far off from at least having it flat, but with margins increasing, we are already seeing improvements in margin.

[Edward Spehar:]

But you would think, I mean is that a 2011 event or is that beyond? What do you think…

[Mark McAndrew:]

We are still at our midpoint. We are still expecting mid-single digit decline in our health premiums, although we are expecting to see small growth in our health margins for next year, but the midpoint of our guidance.

[Edward Spehar:]

Okay, perfect. Thank you very much.

[Operator:]

And we will go next to Eric Berg with Barclays Capital.

[Eric Berg:]

Thanks very much. Pardon me. A number of questions. First, Gary, with respect to your comment about a possible albeit unlikely discount rate cut underlying your gap reserves. If you were to do that, would that be what’s called in the accounting literature a loss – the result of a loss recognition study? And if that were to happen, a discount rate cut, would that be just a direct hit to your book value as the liabilities on the right hand side of your balance sheet would all be restated upwards?

[Gary Coleman:]

No not at all. That will only affect new agents.

[Eric Berg:]

You are referring (inaudible) business.

[Gary Coleman:]

Yes right. That’s why again the total book of business, Eric, has only got a 5.6% overall interest rate, whereas the new businesses have higher rate. It would only affect new business and you know if interest rates continue where they are and if we continue to invest new money at below 6% in 2012, we very likely will make those rate adjustments then and change our interest rates, but we are going to give it a little more time before we make that decision.

[Eric Berg:]

Okay. My next question relates to sort of your guidance and this announcement about share repurchase or at least is seems to be an announcement that we are [buying] share repurchase. It’s actually unusual in the sense that most companies may when they tell us what their sort of authorization is and they say “Well if we’ve nothing better to do with the money, we will buy back stock.” But you have sort of, I don’t want to say, you’ve committed to it, you’ve expressed that this, I guess you are saying that this is your intent and am understanding that an intent is not a commitment. It’s you desire, it’s your intent. But why is this your approach to tell us that this is your intent? Is this another way of saying, for example, that you do not anticipate any acquisitions?

[Gary Coleman:]

Well, what..

[Eric Berg:]

Go ahead.

[Gary Coleman:]

Oh, I am sorry, I…

[Eric Berg:]

I just wanted to say you could have just as easily said, “We have this money. You know we have a history of buying back our stock if we think that’s the right thing to do, we’ll do it but like many other companies you could have been silent on the issue instead you took the unusual step of saying we’re going to take all this money from Protective Life and borrowing something extraordinary. We’re going to buying back our stock. I find it noteworthy.

[Mark McAndrew:]

Okay, one for us to give that guidance with the amount of cash that we’re going to have available next year. We felt like we should and where we thought our earnings would be, if we do use it for share repurchase. Now we are always looking at opportunities for acquisition, I guess I don’t – the way I look at it as any acquisition should be accretive to what certainly purchase would be. So that’s not to say that we’re not looking at acquisitions, while it means we’ve very much interested if the right acquisition came along and that was a better use of the money, we would absolutely do it. But borrowing that, we wanted to make it clear that we don’t intent to sit on $850 million of cash and invest it at 5.5%. We will find it better use for those funds than buying bonds, whether it be share repurchase or acquisition, but again the way we look at acquisitions is it needs to be accretive versus what buying back around shares would be.

[Eric Berg:]

And just explain the timing you provide into the sense that I believe you provided 2010 guidance in 2010’s first quarter, haven’t looked in the past where you’ve done it, but this early for you to be providing the next year’s guidance?

[Mark McAndrew:]

No actually we provided at the same time last year Eric.

[Gary Coleman:]

Right.

[Eric Berg:]

Okay, because I did see it in the first quarter as well.

[Mark McAndrew:]

In prior years we did, but last year we decided we would move it up a quarter and started doing it at this time of the year.

[Eric Berg:]

And so you did it in the last year…

[Mark McAndrew:]

Just because we got so much flak from analysts that we can now provide it earlier. So we bound to your wishes Eric.

[Eric Berg:]

Okay, I appreciate it. I wasn’t aware that to place it this time year. I thought it was a little later but in any case that was very helpful explanation. Thanks very much.

[Operator:]

And we’ll go next to Bob Glasspiegel with Langen McAlenney.

[Bob Glasspiegel:]

Good morning. Torchmark is better than (inaudible) last night.

[Mark McAndrew:]

Thanks for bringing us.

[Gary Coleman:]

Yes, you wanted to remind us that.

[Bob Glasspiegel:]

Sorry, Gary I’m full and (inaudible). On the proceeds, you said you get it end of March and will use it all in April or begin using in April?

[Gary Coleman:]

In our guidance we assumed that we would get it in late March. We would start in March buying back shares in our that we would buy the number of shares, there is a limit as to how much you can buy, so we would buy up to that limit and doing that, it would take us a full month, the last week of March, the full month of April to spend all that money.

[Mark McAndrew:]

Bob, again I understand that that is the midpoint of our guidance. Now we have used different assumptions obviously at the low-end and the high-end of our guidance as far the timing and price of the share repurchase.

[Bob Glasspiegel:]

This is the first time you’ve used buyback and gains. Is that sort of seismic change that we should expect in the future or just one time because investors proceeds are so significant?

[Mark McAndrew:]

It’s hard to say but there is no doubt that part of it is because of the amount of cash that we’re going to have available next year we felt that we should include it in our guidance.

[Bob Glasspiegel:]

I agree. On the United Investors divestiture, you haven’t spoken publicly on what drove the decision and believe me I think it’s a great move and I’m pleased with what you did but maybe you could articulate that why and specifically does this have any implications to your annuity block that’s been sort of volatile and a nuisance in the past deck and to continue to be as volatile in the future?

[Gary Coleman:]

No, not – obviously one of the big factors. Not just the annuities but there are some variable life business there that is really one of the profitability was definitely driven by how the equity markets performed and that was – that has been the most – the single most volatile piece of our business. So it was run off like a business, it was on a decline and has been on the decline for a number of years. It’s very volatile piece of our business. And that the value will just continue to decline on and we felt like when we put it out we felt like we got a mega price for it. So all of those things, we think it was a good deal for us.

[Bob Glasspiegel:]

Okay. You still had a little bit of annuities in the results, I mean the (inaudible) goes with it and just want to make sure you understand the..

[Mark McAndrew:]

Bob, we have some annuities that were not United Investors as.

[Gary Coleman:]

That’s a fixed annuities.

[Mark McAndrew:]

They are fixed annuities. And it’s sold through banks. It’s a very. It’s not the volatile type business that the variable annuities that we had not invested for.

[Gary Coleman:]

We have for some time written some fixed annuities, but.

[Bob Glasspiegel:]

What’s the size of the block Gary?

[Gary Coleman:]

Okay, I should we think we have about $900 million of reserves.

[Mark McAndrew:]

I was thinking, it was just under $1 billion of assets.

[Gary Coleman:]

Yes, I think that’s right.

[Bob Glasspiegel:]

And gains for administrative expenses for 2011?

[Gary Coleman:]

Let’s see. I have that here somewhere. Actually for administrative expenses we’re expecting just about 1% increase at our midpoint.

[Bob Glasspiegel:]

Okay.

[Gary Coleman:]

For next year.

[Bob Glasspiegel:]

You’re talking almost all the fund of being a Torchmark analyst for 2011 projections away but I appreciate it.

[Gary Coleman:]

Well yes, and those are our midpoints. We obviously allowed from both ways from that but that’s our best assessment right now.

[Bob Glasspiegel:]

Thanks, thank you very much.

[Gary Coleman:]

You bet Bob.

[Operator:]

And we’ll go next to Randy Binner with FBR Capital Markets.

[Randy Binner:]

Thank you. So just to change the topic from guidance. The 09-G issue was back. We had good commentary from Gary on the last conference call there that it was getting about 8% to 10% of book value. And I think there were still issues of kind of retrospective application of that and at least maybe some debate about how that affected Globe and so just was curious for any update on the 09-G in deck.

[Gary Coleman:]

Okay Randy, first of all as far as Globe now, I’m sure you’re referring to the growth response. The final rules did clarify that although it will be accounted for under SOP 93-7, it will still be considered deferred acquisition cost on the balance sheet. And there was some talk about that asset being amortized on a straight line basis, that was not put in to final guidance. So the DAC will for the Direct Response would still be able to defer what we’re deferring and the amortization will be on the same method that we’ve been using. So there is – the other good news is there is no change to the Direct Response.

[Randy Binner:]

Okay.

[Gary Coleman:]

There is one change that was favorable. There was a consideration that not allowing deferral commissions pay to employees that was put in the final document. So we and that could have affected us at Liberty National. So that should have an impact there. As far as the estimates that I gave last time, that we were applied retrospectively and we could have a 8% to 10% reduction in equity by the adoption, that’s we haven’t refined anyhow, we’re just in a positive sense – again started on getting the numbers together but as you remember we talked about the fact that on a go-forward basis, the earnings impact – whatever expenses that we won’t be able to defer going forward. It should be offset by the fact that we’ll have less amortization on the block and in addition to that we’re going to the write-down that we take at the beginning will be recovered overtime as well. That’s what we talked about last time and really nothing. We haven’t changed those numbers at all.

[Randy Binner:]

Okay, that’s very helpful. And then is the timing then 2012?

[Gary Coleman:]

Yes, 2012 which is really good because it’s going to take a lot of work for all the companies to be able to adopt us.

[Randy Binner:]

What do you – which would be Jan 1 2012, I mean what – is there any thought developing and that could slip again timing wise or is that still pretty hard date?

[Gary Coleman:]

No I think that’s hard date.

[Randy Binner:]

Okay, I just wanted, just back there is one other thing on guidance I wanted to clean up. Given the large buyback component of the guidance, can you get buy that at the $10 million offset in kind of the UIL dilution number. You wouldn’t get the $10 million offset because you wouldn’t be investing that money in bonds, right, because it would be going up to go to buybacks. Is that correct?

[Gary Coleman:]

That’s correct.

[Randy Binner:]

Yes, okay very good. Thank you very much.

[Operator:]

And we’ll take a follow-up from Steven Schwartz with Raymond James and Associates.

[Steven Schwartz:]

Hey guys, just wanted to follow-up kind of where I think Eric Berg might have been drilling. The – with regards to the what were (inaudible) you repriced the anything that you sell, if you decided to do that so obviously your all good there. On the in-force business, so are you getting premium monthly, quarterly, yearly, however you’re doing it. And the rate on that premium that you invested continues to go down. Is there any event, is there a reserve event or anything like that or is it just simply their reserves grow the way they’re scheduled to grow and your interest income gets lower.

[Mark McAndrew:]

Yes, Steven you’re right. Reserves would continue to grow as they would but as we talked about before you’re right we’re collecting premiums monthly and annually but we’re also collecting for a very long period of time. And that GAAP interest rate is again reserved for pricing, that’s based on what we think we’ll earn over 20 to 30 year period as we’re going to collect significant cash flow from the policies. So yes we’re low now, we have low interest rates at this point in time. But to use, we went back and looked at our 2000 – I think its 2005 issues, policies issued in 2005. The cash flow that we’ve earned in 2010 on policies issued 2005, we’ve only invested that 5.9% rate that we’ve invested money in this year. But if you go back all the way to 95 when they were issued in all the cash flow that we received then, we’ve invested that cash flow at over 7%. So we’re – even though we’re low this year, cumulative wise we’ve invested at higher than the rate that we – price of it. So it’s hard to look at one year. It’s really got to be quite a few years low interest rates before it has an impact.

[Steven Schwartz:]

Okay, let me ask you this then, we’re going along, we Q2, we’re sitting here at the same rate where we are today, nothing seems to be working. The economy is kind of punk. And Torchmark insurers decides that what this is Japan (ph) and this is where we’re going to be and this is where we’re going to be a long time. What happens then?

[Mark McAndrew:]

Well again as we were explaining there, take for example American income. For us to have even if lowered our interest rates.

[Steven Schwartz:]

No, I’m not talking about your new sales.

[Mark McAndrew:]

Okay.

[Steven Schwartz:]

I’m talking about the in-force.

[Mark McAndrew:]

Again.

[Steven Schwartz:]

So if anything happen does reserves have to be taken up or anything like that? Are you just hearing what you heard on the cash flows and the reserves keep on going?

[Gary Coleman:]

I think yes, that is not a reserve event.

[Steven Schwartz:]

Okay, that’s what I was asking.

[Mark McAndrew:]

Okay.

[Steven Schwartz:]

Okay, great.

[Operator:]

We’ll take a follow-up from Paul Sarran with Macquarie.

[Paul Sarran:]

Thanks. I just wanted to approach the interest rate question I guess one other way. If a 100 basis point drop in the yield you assume for pricing, that would cause 1% to 3% increase in premium. Is it valid to kind of flip that around and say that a 100 basis point drop in your new money yield suggests that premium on your existing in-force business is 1% to 3% too low so that that’s the maybe the long-term impact on profitability of your existing business?

[Mark McAndrew:]

And when you say too low. If you look at for example American income where we have even after administrative expenses we have a pretax profit underwriting profit margin of 25% or better. If we lowered our interest rate assumptions there would those underwriting margins come down couple of points.

[Paul Sarran:]

Maybe overtime as that.

[Mark McAndrew:]

They would overtime but that’s not that it would be unprofitable instead of a 25%, 26% underwriting profit margin. Again we may have 23% or 22% but it’s not that it would be but the business is not so highly profitable.

[Paul Sarran:]

Right, not unprofitable but that’s the, I guess the drag caused by lower rates versus if rates stay higher?

[Mark McAndrew:]

Well but again you had to understand that the entire block of business on the books we’re crediting 5.6%. So we’re – the yield on the portfolio is still substantially higher than that.

[Paul Sarran:]

Okay, yes I understand it. All right, thanks.

[Operator:]

And there are no further questions at this time.

[Mark McAndrew:]

Okay. Well thanks for joining us this morning everyone and we’ll talk to you again in next quarter. Have a great day.

[Operator:]

That concludes today’s conference. We thank you for your participation. Copyright policy