Globe Life Inc.
Q1 2011 Earnings Call Transcript

Published: 27 Apr 2011

[Operator:]

Please standby we are about to begin. Good day, everyone and welcome to the Torchmark Corporation first quarter 2011 earnings release conference call. Please note that this call is being recorded and is also being simultaneously webcast. At this time, I will turn the call over to the Chairman and Chief Executive Officer, Mr. Mark McAndrew. Please go ahead, sir.

[Mark S. 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 2010 10-K and any subsequent Forms 10-Q on file with the SEC. Net operating income for the first quarter was a $129 million or $1.62 per share, a per share increase of 7% from a year ago. Excluding the $6 million of United Investors earnings from the year ago quarter, net operating income per share from continuing operations increased 12%. Net income was $106 million or $1.33 per share, down 13% from a year ago, primarily as a result of a $15.5 million dollar realized investment loss on the sale of our holdings in MBIA. Excluding FAS 115, our return on equity was 13.2% and our book value per share was $49.45 a 9% increase from a year ago. On a GAAP reported basis, with fixed maturities carried at market value, book value grew 15% to $50.70 per share. In our Life Insurance operations, premium revenue, excluding the United Investors grew 4% to $431 million and life-underwriting margins increased 7% to $119 million. Life net sales declined 5% in the quarter to $81 million, while life first-year collected premiums were down less than 1% to $61 million. I feel good about our potential for growth in our life premiums and underwriting margins. While we currently expect relatively flat life sales in the second quarter, we believe we will see high single-digit growth in life sales in the third quarter followed by double-digit growth in the fourth quarter. I am also very pleased with our initial efforts conserve our existing life customers. In 2010, we produced $330 million in net life sales, but we lapse $252 million at in force premium. As we are able to fully implement our conservation efforts over the next few months, we believe we can reduce our lapses in the 10% to 20% range. At American Income, life premiums were up 8% to a $146 million and life-underwriting margin was also up 8% at $48 million. Net life sales declined 5% for the quarter to $33 million. The producing agent count at the end of the first quarter was 4,039 down 4% from a year ago, but up 3% from year end. It is also up 8% from its low of 37, 24 at the end of January. I am very encouraged by the progress that we made at American Income. In addition to the growth and agents, the number of new agents achieving our top bonus level for the first time grew by 38% in February and March, which will have a positive impact on our new agent retention. Our mid level sales management ranks also increased 4% during the quarter. In our direct response operations at Globe Life, life premiums were up 5% to a $152 million, while life underwriting margins were unchanged at $38 million. Net life sales were down 2% to $36 million. The outlook for direct response is also very positive. For the past few months, we have been testing and analyzing an enhancement to our underwriting, utilizing applicants’ prescription drug records and the initial results are encouraging. For our insert media adult business, which represents 40% of our total Direct Response life sales, we estimate this change will reduce our mortality cost by roughly 17%, resulting in additional underwriting margin of 4% of 5% of premium on this block of business. This additional margin will in turn allow us to expand our distribution. This change will also impact our direct mail sales, but further analysis is necessary before we can quantify the effect. We currently expect mid single-digit growth in life sales in the second quarter with improving double-digit growth in life sales in the second half of this year. Life premiums at Liberty National declined 2% to $73 million and life underwriting margin was up 20% to $17 million. Net life sales declined 12% to $9.4 million. The producing agent count at Liberty National at the end of the first quarter was 1,844, down 17% from a year ago. As I’ve mentioned previously, the turnaround at Liberty National is not a quick and easy fix, but we are making progress. The underwriting margins have improved significantly. Through our conservation efforts, we should stop the decline in life premiums. On the marketing side, the number of new agents achieving the maximum bonus level for the first time was up 34% in the first quarter, which again will have a positive impact on our agent retention. We have, however, reduced our life sales estimates at Liberty National for 2011. We now expect to see a continued decline in the second quarter followed by roughly flat sales in the third and single-digit growth in the fourth quarter of this year. On the health side, premium revenue excluding part D declined 5% to $192 million. Our health underwriting margin grew 4% to $37 million. Health net sales declined 16% to $14 million. As a percentage of premium, we expect to help margins to hold at that 19% level for the balance of 2011. Premium revenue for Medicare part D was $49 million for the quarter down 5% and the underwriting margin was $5 million down 2%. Administrative expenses were $38 million up 2% from a year ago and inline with our expectations. I will now turn the call over to Gary Coleman, our Chief Financial Officer for his comments.

[Gary L. Coleman:]

Thanks Mark. I want to spend a few minutes discussing our investment portfolio, excess investment income, capital and share repurchases. First, the investment portfolio. On our website we are prescheduled to provide summary information regarding our portfolio as of March 31st, 2011. As indicated on these schedules, invested assets are $11.2 billion, including $10.5 billion of fixed maturities at amortized cost. As of the fixed maturities $9.8 billion are investment grade with an average rating of A-minus. Below investment grade bonds are $758 million down from $863 million at December 2010 and $891 million a year ago. The decline in the first quarter was due to a $82 million of dispositions and also $24 million of net upgrades of bonds to the investment grade. The percentage of below-investment great bonds to fix maturities at 7.2% is the lowest that it has been since the second quarter 2008. That percentage may still be higher relative to our peers, however, due to our significantly lower portfolio leverage, the percentage of below-investment grade bonds to equity excluding OCI is 19.6% which is likely worse than the peer average. Overall, the total portfolio is rated BBB-plus, same as a year ago. During the quarter, we recognized realized losses of $23 million pre tax or $15 million after tax. These losses resulted from the sales of the company’s entire holdings as NBIA bonds which had a presale book value of $63 million. We have net unrealized gains in the fixed maturity portfolio of $156 million, compared to gains of $108 million at year end 2010 and net unrealized losses of $185 million a year ago. The increase in unrealized gains in the first quarter is due primarily to the previously mentioned sale of NBIA bond. Regarding investment yield, in the first quarter, we invested $265 million in investment grade fixed maturities, primarily in industrial sectors. We invest at an average annual effective yield of 6%, an average rating of A-minus and an average life of 27 years. For the entire portfolio, the first quarter yield was 6.62%, compared to 6.65% in the previous quarter and 6.78% in the first quarter of 2010. The decline in the yield is due to the lower new money yields. As of March 31st, the yield on the portfolio is 6.61%. Now, turning to excess investment income, excess investment income is our net investment income less the interest costs on the net policy liabilities, and the financing costs of our debt. In the first quarter, it was $74 million, up $2 million or 3% from a year ago. On a per share basis, reflecting the impact of our share repurchase program, excess investment income was $0.93, up [17%] over the first quarter of 2010. As a component, net investment income was up $8 million or 5% in line with the 5% increase in average invested assets. Despite the lower yields in the bond portfolio, investment income increased at the same rate as the related assets because we held significantly more cash and short-term securities during the first three months of 2010 than we have in 2011. The interest costs on the net policy liabilities increased $6 million or 7% in line with the 7% increase in the average liabilities. Now regarding RBC, as we mentioned before, we plan to maintain our RBC ratio at or around the 325% level. This ratio was lower than some peer companies, but it is sufficient for our companies in light of our consistent statutory earnings, the relatively lower risk of our policy liabilities and our ratings. At December 31st 2010, consolidated RBC was 421% and adjusted capital was approximately $385 million in excess of that required for the target 325% ratio. The ratio and excess capital were higher than normal due to the impact of the sale of United Investors on December 31, 2010. Finally, regarding share repurchases and parent company assets, in the first quarter we spent $187 million to buy 2.9 million Torchmark shares. So far in April, we used $30 million to buy another 450,000 shares. For the full year, through today, we had spent $217 million of parent company cash to acquire 3.4 million shares. The available liquid assets of the parent consists of assets on hand and the expected free cash flow from operations, free cash flow results from the derivatives received by the parent from the subsidiaries less the dividends pay to Torchmark shareholders and the interest paid on the debt. The parent began the year with liquid assets of $205 million. We expect to generate approximately $655 million of free cash for the entire year. Thus the total free cash available for all of 2011 will be around $860 million, the same amount that we projected in our previous call. In the first quarter, we generated about $391 million of our free cash flow and that included the $305 million resulting from the sale of United Investors. As mentioned, the parent used a $187 million in the first quarter for Torchmark share repurchases. As a result, the parent ended the quarter with $409 million of available liquid assets. And that’s comprised with a $205 million ending asset plus a $391 million of free cash during the quarter less 187 million of share repurchases. Now along with the $409 million as on hand at the end of the first quarter, we should generate approximately $264 million of free cash flow over the next three quarters of the year. As of today, after deducting the $30 million of April share repurchases, the parent will have approximately $643 million available between now and the end of the year. As noted before, we will use our cash as efficiently as possible and if market conditions are favorable, we expect that share repurchases will continue to be a primary use of those funds. Those are my comments. I will now turn the call back to Mark.

[Mark S. McAndrew:]

Thank you, Gary. First quarter earnings were in line with our projections and our previous guidance and we are affirming our guidance for 2011 of expected earnings per share in the range of $6.75 to $7.10. Those are my comments this morning. [Nalini], we will now open it up for questions.

[Operator:]

(Operator Instructions) We’ll go first to John Nadel with Sterne, Agee.

[John Nadel:]

Thank you. Good morning, everybody. Couple of questions. Mark, I was interested in your comments on conservation efforts as it relates to some of the business that lapsed or that I guess in elevated level of lapse station, could you maybe give us a little bit more detail on exactly what you’re trying to accomplish, what – how you’re going about that?

[Mark S. McAndrew:]

Sure. And it’s not an elevated level. In fact our persistency of our life business is actually been improving over the last few years. So, it’s not an elevated level of lapses, but number of months ago, we decided that we were really going to focus on trying to conserve as much of that business as possible and we have spent a lot of time over the last few months analyzing and tracing back to the source what is causing the lapses in our different distribution systems.

[John Nadel:]

Okay.

[Mark S. McAndrew:]

And so – it’s not one single thing that we’re doing because there is a lot of different areas, but we have now identified where those lapses are originating and what the causes are and we’ve outlined plan for each of those areas on what we can do to reduce those. Some of those changes in our procedures will be pretty quick to implement. I think achieving a 10% reduction in our lapse rate – in our lapses is something we can achieve in the next few months. To get to the 20%, that’s going to take a little more time that things are need to test or people we need to hire and train as far as people who take phone calls and do some telemarketing. But I think over the next 12 months, I think something towards the high end of that 20% range is achievable.

[John Nadel:]

Okay. Okay. And then two more real quick ones. One is just on investment income the excess investment income, Gary, are you where you wanted to be as far as cash and liquid assets getting invested or is there still some marginal pick up we should expect?

[Gary L. Coleman:]

We are pretty much invested. One thing though, it took a little bit longer in the quarter.

[John Nadel:]

Okay.

[Gary L. Coleman:]

To get the money invested, the markets are – is still little hard to find the bonds. But as far as within the insurance companies, I think we are now about 150 million of short term money which is not unusual.

[John Nadel:]

Okay. Okay. And then finally, just an update since there is I guess been a little bit more news recently now on DAC accounting changes, the deferral of certain costs or lack of deferral of certain costs that used to be deferred. Can you give us a sense for what your plans are there and how should we think about potential retrospective charge?

[Gary L. Coleman:]

Well, we will definitely retroactively adopt and…

[John SecNadel:]

Okay.

[Gary L. Coleman:]

I really don’t have any much more add that we did last quarter, last quarter we talked about the fact that we think that are ride down to be somewhere between $300 million to $300 million dollars, which is after-tax, which is above 8% of our book value.

[John SecNadel:]

Okay.

[Gary L. Coleman:]

But going forward, as far as the impact on earnings, we will have a negative in terms of reduced expenses that we can defer, but we’re going to have a positive by the fact that we’ll have reduced amortization.

[John SecNadel:]

Yeah.

[Gary L. Coleman:]

And when you net those two, if we don’t do anything else, we’ll have a small positive, but there is about a $100 million of agency related non-commission expenses that meet the criteria for the deferral. We are in the process of looking at those expenses with first in mind to reduce those expenses, to cut what we can or reduce what we can. And then also there is a secondarily to that, is that we maybe able to recast some of those expenses to into commissions, which would be deferrable. To the extent that we can do those two things the deposit earnings will be even greater.

[John SecNadel:]

Okay. So the net impact here, at least, even if you can’t accomplish that sort of work, is we should see the write down of DAC will reduce your future amortization enough that this is a modest positive on the earnings side?

[Mark S. McAndrew:]

That’s correct.

[Gary L. Coleman:]

Yeah.

[Mark S. McAndrew:]

John we’ll have as Gary mentioned we have a reduction our book value, but corresponding increase on our return on equity, but also just want to reemphasize what Gary was saying. We are going just by each distribution system and taking a hard line by line and look at all of those expenses that are no longer going to be deferrable. And we will be very much concentrating on what we can do to reduce those expenses between now and the first year.

[John SecNadel:]

Okay. And adoption date would be the end of this year, I think, right?

[Gary L. Coleman:]

Yeah, it’s a January 1st 2012, adoption day.

[John SecNadel:]

Okay, terrific. Thank you guys.

[Operator:]

Our next question comes from Randy Binner with FBR Capital Markets.

[Randy Binner:]

Great, thank you. Mark, I just wanted to clarify on the sales kind of guidance you gave us quarter-by-quarter. I just wanted to clarify that effectively the AIA American Income guidance and the direct response guidance that we had previously, which was mid single-digit, I think, at American Income, and kind of high single-digit at direct response. It sounds like that guidance is in place and it’s only Liberty National that changed. Is that the correct interpretation?

[Mark S. McAndrew:]

Yeah, I think that’s right Randy. We still – when you look at the full year…

[Randy Binner:]

Yeah, yeah.

[Mark S. McAndrew:]

We still are expecting high single-digit growth and direct response and mid-to-high-single digit growth at American Income, but it’s one of things that it will be accelerating each quarter as the year progresses in both of those distribution systems. We have lowered our expectations at Liberty a little.

[Randy Binner:]

It’s fair enough. And then so what you mentioned you got your sales manager, middle manager count up 4%, and I think that was maybe the key focus at American Income. And that’s really the most important area to turn sales around. But what else is working there or is it all about sales managers? What else is working and giving you that confidence of the turnaround in sales there?

[Mark S. McAndrew:]

Well, there is two things there I mean growing the middle management is definitely important. And in fact we’ve got some new incentives coming out June 1st that I think will add to that growth in our middle management. The other key thing when I look at last year, the percentage of our new hired agents who achieve that maximum bonus level, the first time was declining. And that’s when I’m saying the last two months have been very strong there, up over 30%. A number of new agents were hitting that bonus level because those are the people we retain. We’ve seen agents who don’t achieve that bonus level, we basically retain none of those people for a year. We have very good retention of the agents who achieve that bonus level. So that is we’ve again we done some restructuring of our incentive compensation for management and really just have a renewed focus on doing a better job of training and working with agents to get them to that bonus level and that will pay dividend. Our new agent retention will improve.

[Randy Binner:]

That’s great. Very helpful. Keeping with sales real quick here, over to direct response. It sounds like the effective, the underwriting margin improvement that comes from using the prescription drug records, I guess that allows you to self-fund increased by distribution? Is that the way we should think of it? Just a little bit more color, too, on what's driving the more bullish comments at direct response?

[Mark S. McAndrew:]

That’s one of the number piece because that is an important piece. When we if on 40% of our sales where low in our mortality cost by 17%, it does allow more margin. One, we would do some additional rate test to again trying on the optimum pricing level. We know that it is very price sensitive. If that improvement in our mortality cost allow us to bring our rates down 10%, we seen from past experience that that will improve our response rates by something in that 20% range and also improve the persistency of the business resulting in higher profitability. So we’ve also had some very successful package test, you are in the last three or four months that will add to that but those are number of factors in that, but there is no doubt the change in underwriting is a big piece of it.

[Randy Binner:]

Yes, thanks for the responses.

[Operator:]

We will take the next question from Ed Spehar with Bank of America.

[Edward Spehar:]

Thank you, good afternoon. A few questions Mark. First, could you talk a little bit more about the health side. The first two collective premiums where down a lot more than I thought they would be, maybe that’s just because I was just have to launch on the forecast. But I am wondering if you could give me some sense of what’s going on in the health side and I have a couple of follow-ups.

[Mark S. McAndrew:]

Well Ed, there is a not a whole lot new to report from the last caller to you on the health side. Health sales were down a little more than what we anticipated and part of that was for example like American income and someone need to take a look at. We’ve by moving to a laptop sales presentation I don’t know that we’ve done a good job of trying to move some of the health products into that. Not something we can adjust but they come down to its pretty in line with where we thought we would be and borrowing we don’t see any big resurgence in medicare at this point in time. So it’s about in line with where we expected to be.

[Edward Spehar:]

So how should we think about that you know for looking at sort of the outlook over the next few years just generally, is that a business that continues to decline.

[Mark S. McAndrew:]

Well, again, Ed, you’ve been following as long enough its hard to predict what the medicare certain marketplace will do. I think the Liberty National sales, as total sales stabilize and start to move forward those should not decline or should turnaround and same way with the American Income we can bring those back up, but as far as the other, we basically discontinued those underage 65 products. Until there is a major change in the medicare advantage, then I don’t expect to see growth in our health premiums. I still think we’ll see some improvement in our health underwriting margins as some of that business continues to run off, but I don’t expect to see growth in our health premiums for the balance of this year or probably in the next year anyway.

[Edward Spehar:]

Okay. And then I guess it’s a good lead into my next question, you highlighting how long I’ve covered this company, because I wanted to talk about Liberty National. And I think for as long as I’ve covered the company, you guys have been trying to figure out how to turnaround that distribution channel in one way or another. And I’m just curious, at what point, or is there a point, where that business is more valuable as just a run-off book than trying to just sort of turn it around?

[Mark S. McAndrew:]

I don’t know that we ever get there Ed, I mean it’s still the business we generate, I mean if we ever got the point where the new business we generated was not giving us a reasonable return on investment then we would have to take a look at that, but we are not there and we don’t expect to get there. So I haven’t given up on Liberty, there is obviously a lot of challenges there, but again I think we can stop the decline through our conservation efforts and it will turnaround through the course of this year. Some of the things, well, it’s so different from American Income and we’re continuing to address the issues that arise, but I don’t see it ever becoming just a run-off block.

[Edward Spehar:]

Okay and just one final question. Could you just quantify, if you achieve a 10% reduction in lapse rates, what that equates to in terms of dollar amount of premium?

[Mark S. McAndrew:]

Well, again, you can look last year we lapsed $252 million of life premium, annualized premium. I think our projections for this year if we continue down with us – just the same path that we’ve been going, we estimate it be closer to $260 million of lapses for this year. So again achieving, if we can conserve 10% of that $26 million, 20% is a little over $50 million. So, this is really a big deal. It was probably one of the bigger things we’ve done in quite a number of years. If you look our total life in force premium last year in the last 12 months, I think we grew $58 million. So, if we are able to conserve $50 million of lapses, it will take our life premium growths to significantly higher level. And I will point out that the business we’re conserving, because we’ve already made the big upfront investment. We’ll have a significantly higher margin than the new business we’re writing. The $330 million that we wrote last year and we spent roughly $500 million to put that business on the books. To conserve this business if we are able to conserve $50 million, and I don’t think we’ll spend $5 million conserve that business. So, it will have although we haven’t included any of that in our current guidance hopefully by next quarter we will have a little better be able to have a more confidence and what impact that we’ll have for the balance of the year and reflected in our guidance for the balance of the year. But there would be in the margin on that conserved business, I mean how should we think about, is it almost all margin or is there. Well, no obviously you still have mortality costs and…

[Edward Spehar:]

Yes, beyond that though, in terms of expenses, do we just need to think about the margin being kind of the gross margin tax affected?

[Mark S. McAndrew:]

Pretty much I mean let’s take for example American income, we still would be paying renewal year commissions on that business. So there is still some commission expense, but its not that, we’ve already got the high first year expense definitely indirect response we’ve already spent the money upfront. So the cost of conserve that again I don’t think it will be 10% of premium versus well over a 100% that we spend on our new business.

[Edward Spehar:]

Okay. Very good, thanks a lot.

[Operator:]

We’ll take our next question from Jimmy Bhullar with JPMorgan.

[Jimmy Bhullar:]

Hi, thanks. I had a question, first, on just the agent count in American Income. It did rise a little bit this quarter. It went up in the first quarter of last year too but then it declined, so what your outlook is there? Secondly, on just what gives you confidence that Liberty National life sales will improve in the second half of the year, given that the agent count continues to decline and the actual results have been a little worse than what you’ve expected the last few quarters? And then, finally, just on share buybacks. I think Gary mentioned that you’ve got $643 million available through the rest of the year. If you don’t do any deals and maybe you could discuss the deal environment also, but if you don’t do anything there, then should we assume that most of that would be deployed towards buybacks some time over the next three quarters?

[Mark S. McAndrew:]

Okay. Well first half American income, I guess one of the big differences this year versus last year Jimmy as again and looking at the percentage of those new agents that are achieving that maximum bonus level for the first time. Even though our recruiting was up last year and we’re reporting on more agents that numbers of that agents hitting that bonus level was declining and it did result and higher turnover so even though we saw some growth in the first quarter, we couldn’t sustain and then it continue to decline throughout last year, which is where we are at today. Now with the renewed emphasis on spending more time with that agent better training and getting them to that bonus level, we are seeing a reversal of that trend. So again the last two months the number of new agents hitting that bonus level is up over 30% that’s the main thing give me encouragement that we are back on the right track. We did hit a low of 37 I think 37, 24 at the end of January. They have 8% growth in last two months is very encouraging to me. Liberty national a little bit same way there is Liberty National was different that because of the way its incorporated and state of those business and it is been able to use temporary agents licenses, so we are a number if it well throughout its history. And almost become like a better word addicted to the temporary licenses. And the turnover at Liberty National has been so poor even compared to American income they only retain about half number of agents at American income does, I think a lot of that is the fact that a lot of these people never pass their exam, so they can write business for 90 days but then they are gone, and that’s not productive. It’s not productive use of management’s time. So, I look into the first quarter, the number of agents who achieve, the new agents who got a permanent license who passed their exam, and now permanent is up 34% as well as the number of – it’s not coincidence, the number of new agents hitting their maximum bonus level is up 34%. We’re seeing a significant reduction as a result of changes in our incentive compensation and the number of temporary licenses has dropped almost in half the first quarter. So, I think we’re making the right choices as far as getting long-term growth, but it – by not having all those agents with temporary licenses, where it is having some short-term impact on our sales but I’m okay with that because we’re trying to make changes that will generate longer-term growth.

[Jimmy Bhullar:]

And then, the buybacks?

[Mark S. McAndrew:]

Well, as Gary mentioned, we do have a significant amount of cash. Right now, we’re going ahead with the M&A activity. We have looked, Jimmy, and right now I don’t see any really good prospects on the short-term horizon for an acquisition. So, we would expect to utilize most of that cash in the share repurchase although we do have a Board meeting tomorrow and that will be an item on the agenda.

[Jimmy Bhullar:]

Yeah. I should be assuming that that’s going to be front-ended more so if you – given the rates are pretty low, so would you front-end most of the buyback?

[Mark S. McAndrew:]

Well, again we’ve got – we received middle of March the United Investors dividend.

[Jimmy Bhullar:]

Yeah, yeah.

[Mark S. McAndrew:]

We’ve gotten a significant amount of cash sitting here. We – I would fully expect to accelerate our share repurchase in the second quarter from the first quarter level, but not really prepared this time to say exactly how much or when that will occur. Again that’s one of the reasons, why we do have as wide of guidance spread as we have, but that is definitely on the agenda for the Board meeting tomorrow.

[Jimmy Bhullar:]

Okay. Thank you.

[Operator:]

We’ll take our next question from Bob Glasspiegel with Langen McAlenney.

[Robert Glasspiegel:]

Good morning to you guys. Wondered if, Gary, you could refresh my memory. I thought you said, as soon as you had the money you’d be doing sort of the maximum volume per day in buyback. It seems like your April volume would be less than the maximum. Was my math wrong or is it just tougher to buy the shares or was there something tactically?

[Gary L. Coleman:]

Well actually (inaudible) remember saying we would know the maximum, but…

[Mark S. McAndrew:]

I was going to say. I’m not sure that I heard him say that, but and obviously we haven’t buying didn’t buying anywhere near close (inaudible). Since we received that and Bob again that’s about all we can say at this point is we will have a discussion at the meeting tomorrow. We could buy it back. I let Gary, we figure up the maximum would be somewhere in the $10 million or a day range.

[Gary L. Coleman:]

Yeah, it’s something.

[Mark S. McAndrew:]

So we’re nowhere near even at first quarter level. We were now were near buying the maximum.

[Robert Glasspiegel:]

Okay. Just trying to – in the last call I thought you said the environment, now that I misremembered the last, that I hate to try to remember the last call again, but I thought there was some comment that the environment for acquisitions had changed and you might consider something. Did I have that, Mark?

[Mark S. McAndrew:]

Well yeah, I mean and we’re still open to the thought of we’ll look at most any thing reasonable. It just Bob we have been talking to a number of different investment bankers, we’ve expressed our desire there, but even some of the potential candidates that we thought might be available. We basically have been told that they are really not. So definitely have changed a little bit in the last couple of months, it’s not that we’re not opened toward, it’s more, I just don’t see anything out there presently that is really on the market.

[Robert Glasspiegel:]

It just seems like the two questions are sort of linked, maybe you were a little slow on the trigger on the buyback if you thought the deals environment was finally more favorable?

[Mark S. McAndrew:]

And I think that’s a fair assessment, Bob. Part of the reason we didn’t, we could have spent more in the first quarter, but we really thought a couple of months ago that there were a couple of good potential acquisition prospects out there. But those candidates from what we know today are not anything that are going to happen in the short term. So yes our attitude is a little different than it was a couple of months ago.

[Gary L. Coleman:]

Yeah, Bob. I think on the last call what we talked about the environment for an acquisition is good from the standpoint we’ve got the cash, but also borrowing rates are so low that the right candidate came along, that it would be a good time to buy. But I agree with Mark. We've looked very hard and it’s just looking more and more like there's not anything that's anywhere near imminent.

[Robert Glasspiegel:]

Okay, last question. Your health premium actually increased sequentially for the first time in a bunch of quarters, which is probably a function of persistency as much as sales. But I was surprised. Could we be at a stabilization point? Your earlier answer was you look for it to continue to decline a little bit but the rate of decline is seems to be slowing?

[Mark S. McAndrew:]

Well, there is still some carryover Bob, our first quarter health premiums tend to be if you look historically tend to be stronger than the other three quarters. And lot of that still goes back to United American the Medicare Supplements business, we all seem to have strong first quarter sales and a lot of those people pay annually.

[Robert Glasspiegel:]

Gotcha.

[Mark S. McAndrew:]

We do have, the first quarter tends to be stronger than the balance of the year. So I don't think a sequential increase is any sign. We expect to see the margins hold pretty well constant to the first quarter level, but still a small decline through the balance of the year.

[Robert Glasspiegel:]

Thank you, very much.

[Operator:]

Our next question comes from Paul Sarran with Macquarie.

[Paul Sarran:]

The lapsed reduction efforts that you talked about, given that first year collected premium on the life side fell, which I think it’s the first time in a couple years at least, can you give us an update on what overall premium growth would look like over the next few years?

[Mark S. McAndrew:]

Well Paul, we’ve really don't provide guidance beyond the current year. And again without taking into account our conservation efforts which we have included in our guidance, I think we are just looking at somewhere in that 4% both in life premium range for this year. So I hopefully as the year progresses that will improve, as net sales results improve and results of some of our conservation improve, but again we haven’t included the conservation efforts in our guidance at this point.

[Paul Sarran:]

Okay. And then the conservation efforts, are those concentrated in any one business line or is that across all of the distributions?

[Mark S. McAndrew:]

Well, we’re taking a hard look at all of them, but right now from the analysis that we’ve done thus far, I think the biggest potential is at American Income, followed by Liberty National, and a little less at Globe in the direct response, and they find it because of the type of business. American Income, almost all of their business, a very high proportion of there is automatic deduction from people’s bank accounts each month. And there is more potential to conserve that versus Globe in the direct response. Most of that business is direct deal. We send people bill, they send it back in. So, from what we've seen, I think there’s a lot more potential for American income than the other distributions but that’s actually good because that is our highest margin business.

[Paul Sarran:]

Okay. And then just lastly, how are you looking now at the amount of capital you want to keep at the Holding Company? It was around $200 million but I think you've maybe backed away from that hard limit more recently.

[Mark S. McAndrew:]

Well, we haven’t. Again, that will be a topic of discussion in our Board meeting tomorrow. At this point, we haven’t changed that outlook, we – but that is something that we’re going to continue to look at and will continue to discuss. And I think hopefully we’ll get more comfortable of bringing that down.

[Paul Sarran:]

Okay, thanks.

[Operator:]

Your next question comes from Jeffrey Schuman with KBW.

[Jeffrey Schuman:]

Thank you good morning. I guess I would like to start with just following up on that last one. So just to be clear I mean in order to have $643 million available to redeploy you would have to heed into what had been the $200 million question, is my interpretation correct here?

[Mark S. McAndrew:]

For the balance of the year that would be correct. Yeah.

[Jeffrey Schuman:]

That would be correct. Okay.

[Mark S. McAndrew:]

If we hold the $200 million obviously the 443.

[Jeffrey Schuman:]

Right. Okay. So, clarified that. And then I guess like some others maybe I’m struggling to, correct me if I think in the last call, but I was thinking last call you had some optimism about actually having slightly positive growth in health sales this year, but now it sounds like you’ve described, you continued decline has been inline with your expectations. So am I not correctly remembering the comp sales in last quarter?

[Mark S. McAndrew:]

Well, we did. You are right. If I go back to quarter ago, we did expect a quarter ago to see small growth in our health sales this year. And that would be revision down. As far as the premiums we were not expecting. We were not expecting growth in overall premiums. We did say that we were expecting a small increase in our health sales, which we did not see in the first quarter. So in that regard, yes that is the change.

[Jeffrey Schuman:]

Okay and then once again just based on, just a reassessment of the Medicare manage situation basically?

[Mark S. McAndrew:]

Basically we hope to see more improvement on Medicare segment business and again American Income health sales and Liberty National health sales were all down a little more than what we had anticipated.

[Jeffrey Schuman:]

Okay and then on the Liberty National Life sales outlook, it is a pretty big change. I think against last quarter it was double-digit for the year, and I think based on your quarter by quarter comments of down first quarter, down second quarter, flat third quarter, and fourth quarter single digit, I mean is that nets to a decline for the year. You talked about the issues again this quarter you talked about last quarter but I'm just trying to understand. Is the key sort of delta? Is the key change from last quarter the issue around temporary licenses? Is that what changed the outlook over the last few months?

[Mark S. McAndrew:]

Well that is part of it, I won’t say that’s all its out there their sales results are less and what we’d anticipated in a quarter ago and again part of that was the shifting emphasis the permanently license agents and but in other their results in the first quarter were below our expectations.

[Jeffrey Schuman:]

Okay, and then one last area, if I may. A little bit of help maybe with Part D arithmetic. I think the premiums this quarter or revenues were down sort of 5% to 6% kind of consistent with, I think, the 7% you had talked about before. Sales are off by a much bigger percent. But I guess some of that is group business. I mean, so I'm not sure how to map between maybe just the big decline in sales and what we're seeing in the premiums. Are you had it, does the large decline in sales imply that this at some point it’s going to run-off pretty aggressively or is that not the right arithmetic?

[Mark S. McAndrew:]

No it really comes out to, a bulk of our sales come in the open enrollment period, which is in the fourth quarter and some of those carryover a little into the first quarter but both of our sales come in the fourth quarter. So we have a pretty good idea, while they have a real good idea by now what our revenues are going to be for this year. We see other than some people turning 65 we don’t see the revenues are very predictable there during the balance of the year. So yes, our group sales were down in the fourth quarter last year and a little bit carryover in the first quarter of this year, which accounts for the decline and premium revenues that we’re seeing, but that should be fairly consistent throughout the year.

[Jeffrey Schuman:]

Okay. So we really just need to focus on that fourth quarter enrollment?

[Mark S. McAndrew:]

Yeah, that’s correct. The sales that we see throughout the year, the other quarters are relatively insignificant.

[Jeffrey Schuman:]

Okay. That’s it for me. Thanks a lot.

[Operator:]

(Operator Instructions). We’ll go next to Steven Schwartz with Raymond James & Associates. Steven Schwartz – Raymond James & Associates, Inc. Hey, thank you, good morning guys. A couple, if I may. One Mark, you are doing the prescription drug thing and I guess others are, too, on insert. Would there be a reason to suspect there might be a difference in terms of results between insert and direct when you go to direct?

[Mark S. McAndrew:]

Well, I don’t think we’ll have quite as much impact on the direct mail side of that business, mainly because the average what we’re seeing is it has the older the age, the more impact it has, actually when you get about 50 years old, it has a much more significant impact in our mortality. And the average age that we’re issuing in the insert side is – I think it’s about seven years higher than it is on the direct mail side. So it will still have a – we expect it to have a significant an impact in our direct mail adult business, but not quite as much as it has on the insert media side.

[Steven Schwartz:]

Okay, that’s interesting. And then, if I may, going back to re-examine the question of temporary licensing and passing exams, Primerica has stated in the past that they’ve had some issues with actually getting temporary licenses, I think particularly with regards to the state of Georgia. Is that what’s affecting you there?

[Mark S. McAndrew:]

Well, not there have been a little issue with that, but that’s being more a conscious decision on our part in order to improve our agent retention and try to get more long-term growth to really change our financial incentives for management. To not reward as heavily people who just started working with a temporary license and I know it's been an issue for the Primerica. On the other hand, American Income doesn't use temporary licenses at all and their recruiting efforts are obviously very successful.

[Steven Schwartz:]

Okay. And in the same vein, are you guys part and parcel of this effort to try to get the entry level exams maybe a bit easier, particularly given the type of products that you saw?

[Mark S. McAndrew:]

Well, it's interesting. I read the Wall Street article there earlier this week. And I didn't realize at the delay time that Primerica was really pushing through them, but it’s definitely we would support, because again I look at our agency operations, the products that were selling are very simple. Whole life, term life products that I think in many states that the insurance exam is more difficult and it needs to be for the products that were selling, so I very much will support to them. And we look into what we need to do, what can we do to help support that.

[Steven Schwartz:]

Okay. And then one more, if I may. On the regulatory side, issues over the last week with regards to claims payments, California and Florida. Are you guys involved at all? Have you been named?

[Larry M. Hutchison:]

Mark, I'll address that. This is Larry. We haven't been named and I don't think will be named because Torchmark subsidiaries have a number of processes in place to address situations where an insured's died the formal claim has been filed. So we don’t see it as an issue for the Torchmark companies.

[Mark S. McAndrew:]

On the other thing I mentioned a different, I know there was number of companies when you sell whole life policy that generate cash value and when that policy stops paying the premium, you have to do something with that cash value and I know there are a number of large companies out there that use that cash value to buy a reduced paid up policy. For example you may have a $50,000 it generates ex-dollars of cash and what they will do with that if you stop paying the premium, they’ll buy a $800 policy that’s paid up for the rest of life. And those people, most of those people don’t even realize that they have that coverage. So you end up building up as huge block of paid up business. On the contrary we don’t use reduced paid up as a standard non non-forfeiture value in our products. For most part we use automatic premium loan or extended term insurance, so we don’t have the same problem that some of these other company sales.

[Steven Schwartz:]

Okay, all right. Thank you guys very much.

[Operator:]

We will take our next question from Chris Giovanni with Goldman Sachs.

[Christopher Giovanni:]

Thanks so much. Steve got most of my questions, I guess just one follow-up for the agent licensing can you guys commented at all in terms of what percentage of your agents that have temporary license ultimately turn to full time?

[Mark S. McAndrew:]

That I wish, I had that Chris. I don’t have that number in front of me. It is obviously a number at Liberty. Again the only place that use it is at Liberty National. And I know that number is improving. If I look at the total numbers our agents at Liberty now who have who are operating on temporary license, its down to a 100 out of that 1844 which is almost a 50% reduction since the end of the year. So it’s not something, it’s something that is definitely improving and but it’s not an issue American Income at all.

[Christopher Giovanni:]

Okay, and then if we, if the push was they are trying to get some of the licensing exams maybe a bit easier for people to pass would that adjust your strategy in terms of recruiting and incentivizing managers?

[Mark S. McAndrew:]

Well, that would be a huge plus for us if we’re able to do that, because even though our passing rates are significantly better than Primerica’s, but still they would be – if we can do our – and either I can’t even quote you what our passing rates are, that’s something I will definitely have by the next call. But if we can raise that by 25% obviously that will have significant positive impact in our distribution.

[Christopher Giovanni:]

Okay. And any way to quantify in terms of what your best guess would be for what that could mean on a, maybe, point basis for sales?

[Mark S. McAndrew:]

Well, Chris, I’d tell you, it’s something I look into, so that in the next call, it’d just be pure speculation on my part at this point. But it is something I intend to look into and I’ll have a little better – I’ll be able to better answer that on the next call.

[Christopher Giovanni:]

Okay. Thank you so much.

[Operator:]

We’ll move next to Eric Berg with RBC Capital Markets.

[Eric Berg:]

Thanks very much. Good afternoon to everyone. Mark just two quick questions, two questions. First, regarding the math, the arithmetic of this conservation effort, is one way to think of it as follows, that you have about $1.8 billion in annualized life insurance in force and that a $50 million addition would add roughly 2 to 3 percentage points to that, what is currently running at a 3% year-over-year growth in the in force?

[Mark S. McAndrew:]

I think that’s a fair way to look at it, Eric. We’re actually got to somewhere between $1.7 billion and $1.8 billion. If we can conserve $50 million, it would be close to a 3% additional improvement in our collected premiums. But again, it's something that if you project it out which we’ve been doing, and that will compound overtime and it actually in subsequent years it would add more than 3% to our growth in premium.

[Eric Berg:]

Why is that? Why would it compound? Why would it be the rate of growth in premium?

[Mark S. McAndrew:]

If I just look at our projections, if we continue to not only conserve. Okay, if we conserve $50 million on the first year and now $40 million of that will continue to be in force with the following year. Now if we can conserve another $50 million in year two. Now we haven’t set a $50 million of growth. We have $90 million of growth. And of that $90 million, okay its 10% of that lapse after there is $81 million from prior years efforts plus another $50 million as well for them following year we have $130 million. And again I’m just giving this as an example, but it does compound.

[Eric Berg:]

So the idea is that you conserve in succeeding years what you conserved in preceding years. Is that…?

[Mark S. McAndrew:]

Yes, I think it’s our enforce growth actually the amount that we conserve will continue to grow along with it.

[Eric Berg:]

Okay. Second question is more of a qualitative one, just deepening my understanding of the underwriting process at Torchmark. Is the idea that heretofore you have not asked people what medications they're on, or you have asked them but they conveniently develop amnesia?

[Mark S. McAndrew:]

Well see that’s the difference between our direct response our agency distribution. Our agency distribution we do much more underwriting. Even though we’re looking at using the prescription drug record it won’t have nearly the impact there and direct response the key is that is keeping the underwriting very simple. We ask really just something like five simple check the box yes, no questions.

[Eric Berg:]

Right.

[Eric Berg:]

And that’s the basis that we use. So this is to be able to see that someone is taking a drug that indicates a serious health problem. Yeah that’s a big step indirect response. So now we don’t ask them currently to list whatever prescription they take, because again we’re trying to keep that process very simple any time we’ve tested a longer form an application and more extensive underwriting it’s really hurt the response rate there.

[Eric Berg:]

And how does this work from a privacy point of view? Is the idea that when people apply, is this fairly straightforward in black and white that they agree? They give you authorization to consult with the pharmacy companies?

[Mark S. McAndrew:]

Yes they do, I mean on every application there was a stand there is an authorization one it allows us to check MIB…

[Eric Berg:]

Right.

[Mark S. McAndrew:]

And it – but there is a very explicit authorization that allows us to review their prescription drug history. So yes and we founded that really hasn’t at any significant impact negative impact on our response rates, it has increased the number. We’re rejecting 4% to 5% of the business that we use to issue. So that it has some short-term or it is having some short-term impact on our reported sales because of that, but those are people that we had issued previously that are not risk that we want to accept.

[Eric Berg:]

Thank you.

[Operator:]

We will take our next question from Thomas Gallagher with Credit Suisse.

[Thomas Gallagher:]

Hi, Mark, I wanted to come back to John Nadel’s question on the accounting change just to make sure I understood your response correctly. You talked about this $100 million of expenses that was an opportunity. Was that if you reduced those expenses? Was that if you restructured those expenses? And is that an annual earnings number that we could expect to potentially come back and be a boost of profits. Can you just dig into that little bit?

[Mark S. McAndrew:]

And that’s, if we just reclassify and that doesn’t affect the profitability. That just affects the timing of the profitability. But, no you’re right there is a $100 million or expenses there in distributions that don’t appear to be deferrable beginning next year. So that’s what I’m saying is it does give us an opportunity and we are going back and taking a very hard look at each of those. And what can we do to reduce those and yes if we can reduce those expenses even by 5%, $5 million that will now go straight to the bottom line versus be deferred to over the life of that business. So yes it is something, at this point I’m not really prepared to say what we think we can reduce those buy next year, but it is something that we are very focused on and taking a hard look at.

[Gary L. Coleman:]

And Tom, that would be annually.

[Thomas Gallagher:]

So that’s an annual $100 million to think about adjusting some percent of that?

[Mark S. McAndrew:]

Right.

[Thomas Gallagher:]

And now is there a chance and even I’m not asking to say what the probability is, but is there some chance you could get all of those $100 million reclassified if you change the nature of the expense?

[Mark S. McAndrew:]

I don’t think we can get all $100 million. Again things like some of those expenses there are management or HR even on direct response. We have overhead there that is not ties to the sale of the policy. And that, those expenses are not going to be deferrable. So we don’t have really option to reclassify those. There may will be a portion of 100 million that we can move into commission expense. I guess the biggest opportunity there is probably at Liberty National. But we’re not able to really quantify what that might be at this point.

[Thomas Gallagher:]

Okay. And so, there’s really two things to focus on here. One is there might be some percent of that $100 million that could be reclassified, restructured in some way, which wouldn’t be economic, wouldn’t change your cash flow, but might improve GAAP profits. But then there is also the opportunity to reduce those costs, which would affect both.

[Mark S. McAndrew:]

Yes, that’s true.

[Thomas Gallagher:]

Okay, that’s clear. The other question I had is just on, just wanted to get an update on, are you still for your life insurance policy’s crediting 6.5% plus, so your new money rate is about 6%. Where do you stand there? Any chance to reduce the cutting ratings to improve underwriting margins or rather investment margin?

[Mark S. McAndrew:]

And again that is something we have discussed and we have decided for this year our new business to lower the new business interest rate crediting to 5.75, which we’re going to grade up over five years to 6.75. And that has a little over $700,000 negative impact on our earnings this year, but that has been included in our guidance.

[Thomas Gallagher:]

And it’s going to grade up over five years to 6.75%?

[Mark S. McAndrew:]

I think that’s right.

[Gary L. Coleman:]

That’s just correct, yeah.

[Thomas Gallagher:]

Now, just the last question I have is just a follow-up to that. What is it – why should you be selling a policy that starts at 5.75 that grades up given current rate environment? Shouldn’t you be able to substantially reduce the crediting rate without a material impact or are there competitive implications if you went lower than the 5.75 grading uptake policy?

[Mark S. McAndrew:]

It doesn’t affect our policyholders, it doesn’t change – we’re not changing our pricing we are just changing an interest rate assumption. It doesn’t, we don’t have intra-sensitive policies, so we are not changing a crediting rate to cash values or some deposit fund. This is just changing our internal assumption on what interest rate we are going to credit reserves Garry you want to coming on that?

[Gary L. Coleman:]

Yeah, I was just going to say it’s really discount rate that we are using for the reserves. As Mark mentioned we haven’t changed our pricing as result of that.

[Thomas Gallagher:]

I’m sorry okay that is okay I thought you are changing pricing no and that’s was what embedded in the crediting rate within the pricing but this is simply a change in your accounting and, I should say your actuarial assumptions to set reserves.

[Mark S. McAndrew:]

That’s correct. That’s why it will have a negative impact of I think $740,000 is our estimate for this year.

[Gary L. Coleman:]

But Tom we, the impact is slightly weak. I think we talked about on either last call on the one before that should we change the interest rate to match this new gap discount rate. We’ll only be increasing our premiums about 1% to 3%. It wouldn’t be a huge increase.

[Mark S. McAndrew:]

And it’s, if it’s an election we make annually at the interest rate environment changes that we are not saying we might not change it back in subsequent years. But this year’s business that we issued that is the interest rate we’ve decided to go with. And if the interest rate environment continues to stay down we may again look at putting through some modest increases to maintain those margins.

[Thomas Gallagher:]

Got it. Thank you.

[Operator:]

And we have no other questions at this time. I’ll turn the call back over to Mr. Mark McAndrew for any final remarks.

[Mark S. McAndrew:]

Those are our comments for this morning and thank you for joining us and we will see you next quarter. Thanks again.

[Operator:]

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