Globe Life Inc.
Q3 2011 Earnings Call Transcript

Published: 27 Oct 2011

[Operator:]

Good day and welcome to Torchmark Corporation’s Third Quarter 2011 Earnings Release Conference Call. Today’s call is being recorded. And for opening remarks and introductions, I would like to turn the call over to Mark McAndrew, Chairman and CEO of Torchmark Corporation. Please go ahead, sir.

[Mark McAndrew:]

Thank you. Good morning, everyone. And for those of you on the East Coast, good afternoon. 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 third quarter was $129 million, or $1.22 per share; and a per share increase of 13% from a year ago. Net income was $137 million or $1.30 per share, a 38% increase on a per share basis. Excluding FAS 115, our return on equity was 14.3% for the quarter, and our book value per share was $35.20, a 10% increase from a year ago. On a GAAP reported basis with fixed maturities carried at market value, book value grew 16% to $40.92 per share. In our Life Insurance operations, premium revenue, excluding United Investors, grew 3% to $430 million, and Life underwriting margins increased 5% to $121 million. Life net sales declined 1% in the quarter to $78 million. At American Income, Life Premiums were up 9% to $154 million, while Life underwriting margins were up 8% to $51 million. Life net sales increased 8% for the quarter to $36 million. The producing agent count at the end of the third quarter was 4,448, which was up 9% from a year ago and up 3% during the quarter. I believe that American Income is back on track. New agent recruiting was up 11% from a year ago. The number of new agents who achieved our top bonus level for the first time increased 40% from a year ago. And our mid-level sales management ranks have grown 23% from a year ago. American Income, I believe, is now in position to see renewed double-digit growth in sales during the fourth quarter and throughout 2012. In our Direct Response operation at Globe Life, Life premiums were up 3% to $145 million and Life underwriting margin was also up 3% to $37 million. Net Life sales were down 4% to $31 million. As a result of the changes in our underwriting which we previously discussed and improvements in our package design, we increased our insert media circulation by 22% in the third quarter. The responses received from these inserts increased 43% during the quarter. There is a significant lag from the time those responses are received until a net sale is recognized. However, we are confident that the increased responses will result in net sales growth in the fourth quarter as well as subsequent quarters. For the fourth quarter, we intend to increase our insert media circulation by 38% over last year. However, due to the uncertainty in the economy, our guidance projects only mid single-digit growth in Direct Response sales for the fourth quarter and full-year 2012. Life Premiums at Liberty National declined 2% to $72 million and Life underwriting margin was up 5% to $16 million. Net Life sales declined 23% to $9 million. The producing agent count at Liberty National at the end of the third quarter was 1,578, which was down 27% from a year ago. Health sales at Liberty National jumped 47% as a result of some new product offerings in our worksite payroll deduction market. Effective January 1 of 2012, all sales office and lead expenses at Liberty National will become the responsibility of our branch managers as we continue to move Liberty National to a model similar to American Income. Also as of November 1 of this year, all new agents will be hired on an independent contractor basis versus employee, again following the American Income model. While these changes may have some short-term effect on our sales, we believe they are necessary to preserve our profit margins and to put Liberty National in a position to achieve long-term growth. We continue to make excellent progress in our efforts to reduce our lapses in our Life Insurance businesses. As I mentioned on the last call during the second quarter, we were able to conserve $2.2 million of annualized premium through our new conservation initiatives. For the third quarter, we were able to conserve $5.8 million of annualized premium. These numbers will continue to grow as we expand our conservation efforts. For 2012, our guidance assumes $30 million to $35 million of annualized premium will be conserved next year. On the Health side, premium revenue, excluding part D, declined 6% to $177 million while Health underwriting margin was down 8% to $34 million. Health net sales grew 26% to $16 million. In addition to the previously mentioned growth at Liberty National, the United American Independent Agency sales grew 46% to $7.6 million for the quarter, reflecting improvement in the Medicare supplement marketplace in both individual and group. For 2012, we currently project 10% to 15% growth in our net Health sales. Premium revenue from Medicare part D declined 5% to $50 million while underwriting margin improved 18% to $7 million. For 2012, we have developed a new lower cost part D plan which will allow us to pick up 76,000 low income subsidized auto enrollees as well as grow our individual sales. This new product is priced with the same underwriting margin as our existing products. We do expect, however, for part D revenues to increase by 40% to 50% next year. Administrative expenses were $40 million for the quarter, up 4% from a year ago. They were roughly $800,000 over our projection, primarily as a result of additional salary expenses associated with our conservation efforts. For 2012, we anticipate a 1% to 2% increase in administrative expenses. I will now turn the call over to Gary Coleman, our Chief Financial Officer, for his comments.

[Gary Coleman:]

Thanks, Mark. I want to spend a few minutes discussing our investment portfolio, capital and share repurchases. First, the investment portfolio. On our website are three schedules that provide summary information regarding our portfolio as of September 30, 2011. As indicated on these schedules, invested assets are $11.2 billion, including $10.7 billion of fixed maturities at amortized cost. Of the fixed maturities, $10 billion are investment grade with an average rating of A-minus. Below-investment grade bonds were $734 million, down from the $863 million at December 2010. The $129 million decline this year is due primarily to $142 million of dispositions, offset partially by $12 million of downgrades. The percentage of below-investment grade bonds to fixed maturities is 6.8% compared to 8.3% at the end of 2010. That percentage may still be a little high relative to our peers. However, due to our significantly lower portfolio leverage, the percentage of below-investment grade bonds to equity, excluding OCI, is 20%, which is likely less than the peer average. Overall, the total portfolio is rated A-minus compared to BBB-plus a year ago. We had net unrealized gains in the fixed maturity portfolio of $942 million compared to gains of $306 million at the end of the second quarter and $572 million a year ago. The increase in unrealized gains in the third quarter is due primarily to treasury yields declining more than the credit spreads increased. Now regarding our investment yield, in the third quarter we invested $134 million in investment-grade fixed maturities, primarily in the industrial sectors. We invested at an average annual effective yield of 5.53%, an average rating of BBB-plus and an average Life of 29 years. For the nine months, we’ve invested $831 million at an average yield of 5.79% and an average rating of A-minus. For the entire portfolio, the third quarter yield was 6.54% compared to 6.56% in the previous quarter and 6.68% in the third quarter of 2010. The continual decline in the yield is due to the lower new money yields. As of September 30, the yield on the portfolio is 6.53%. Regarding RBC, we’ve planned to maintain our capital level necessary to retain our current ratings. For the last two years, that level has been around an NASC RBC ratio of 325%. This ratio is lower than some peer companies but is sufficient, for our companies in light of the consistent statutory earnings, the relatively lower risk of our policy liabilities and the level of our ratings. Regarding share repurchases and parent company assets, in the first nine months, we’ve spent $720 million to buy 17 million Torchmark shares. So far in October, we’ve used $14 million to buy another 400,000 shares. For the full year through today, we have used $734 million of parent company cash to acquire 17.6 million shares or 15% of the diluted outstanding shares at the beginning of the year. At September 30, the parent company had $166 million on hand and should generate approximately $6 million of free cash flow in the fourth quarter. As of today, after deducting the $14 million of October share repurchases, the parent will have approximately $158 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’d expect that share repurchases will continue to be a primary use of those funds. Now before I turn the call back to Mark, we would like to discuss the impact of two issues, the new accounting rules for DAC and the current interest rate environment. Regarding DAC, on January 1, 2012, the company will adopt ASU 2010-26, which changes the rules regarding deferred acquisition cost. This standard will change the timing of GAAP profits to the extent that certain expenses deferred currently will not be deferred under the new rules. However, it does not affect our overall profitability, cash flows or statutory earnings. We will elect to adopt the new rules retroactively, which means that DAC will be written down to the level as if the new standard had been in place in prior periods. Going forward, the earnings impact will the combination of the reduction in expenses deferred on newly issued policies, somewhat offset by the reduced amortization of DAC resulting from the retroactive write down. We currently estimate that the retroactive write down will be between 15% to 25% of the current DAC asset, which will result in a 9% to 15% reduction in GAAP equity, excluding OCI. In addition, we expect that 2012 earnings will be 1% to 2% or $0.06 to $0.10 per share lower than they would have been under the old accounting rules. And we also project that our ROE will rise from the current 14% level to somewhere between 15% and 17%. These estimates were included in our guidance for 2012. We will give more definitive guidance in the fourth quarter analyst call. Finally, I’d like to discuss the current low interest rate environment and the impact of a lower for longer rate scenario. Our concern regarding an extended period of low interest rates involves the impact on earnings but not the balance sheet. In response to lower interest rates, we plan to raise the new business premium rates on the majority of American Income’s Life products, and the Direct Response (inaudible) products by 5%. These increases will provide additional margin to help offset reductions to excess investment income on new policies without having a detrimental impact of sales. However, in an extended low interest rate environment, the portfolio yield will continue to decline as we invest new money at lower rates and thus, will pressure excess investment income. However, the decline will be slower than might be expected since on average, only 2% to 3% of the fixed maturities will run off each year over the next five years. To help quantify the impact of extended lower rates on excess investment income, we conducted a stress test assuming a new money yield of 4.75% for the next five years along with a GAAP reserve discount rate of 4.75% graded to 6.5% on policies issued during that time period. Under that scenario, our portfolio yield would drop to somewhere between 5.95% and 6.10% after five years, and the average GAAP discount rate for the entire in-force block would be around 5.6%. As such, we would earn a spread of 35 to 50 basis points over the net policy liabilities while earning the full 595 to 610 basis points on our equity. As you can see, we would still generate substantial excess investment income along with our high underwriting margins. Now, let’s switch to the balance sheet. Due to the nature of the products we sell in our higher underwriting margins, our DAC and benefit reserve balances will not be significantly impacted by an extended low interest rate environment. Unlike many of our peers, most of our in-force business consists of straightforward protection line policies that are not interest sensitive and they were accounted for in accordance to FAS 60. Under FAS 60, we will not increase amortization of DAC or put up additional benefit reserves due to interest rate fluctuations unless a loss recognition situation occurs. We have conducted loss recognition testing using our September 30 financial data. In order to have a loss recognition situation in all the Life business, we would have to believe that our overall portfolio yield would drop to 4% and remain there permanently. We don’t believe there’s a reasonable set of circumstance that this scenario would occur. As such, we’re not concerned about the low interest rate environment affecting our balance sheet through adjustments to DAC reserves or goodwill. The only block of business where extended low interest rates might affect the balance sheet is our fixed annuities, which were accounted for under FAS 97. However, due to the size of our annuity block, any impact would be insignificant. With regards to statutory financials, we performed the New York 7 cash flow testing scenarios at each year in accordance with the regulatory requirements. We updated this testing at the end of the third quarter to incorporate the lower treasury rates and determine that we still generate adequate surplus in each of those seven scenarios. Therefore, no additional statutory benefit reserves are required. Finally, a low interest environment can affect towards more RBC related to the fixed annuities. However, any impact there would not be significant. Those are my comments. I will now turn the call back to Mark.

[Mark McAndrew:]

Thank you, Gary. For 2011, we project our net operating income per share will be within the range of $4.65 to $4.69 per share. For next year, we are projecting our net operating income per share to be between $5.10 and $5.40 per share. I would like to reiterate that this guidance reflects the $0.06 to $0.10 reduction as a result of the changed NDAC accounting. Those are my comments for this morning. We will now open it up for questions.

[Operator:]

Thank you. (Operator Instructions) And we will take our first question from the side of Jimmy Bhullar with JPMorgan. Please go ahead. Your line is open.

[Jimmy Bhullar:]

Hi, thanks. I had a couple of questions. First one for Mark, if you could talk about your sales expectations at Liberty National. In the past when you’ve tried to make changes over adjust commission; there’s been generally more disruption than initially expected. So, I realized Liberty is smaller than it used to be, but it’s still about 10% of your Life sales. So I was wondering if the momentum at American Income and Direct Response next year would be offset by this weakness that Liberty National overall. And then secondly for Gary, you mentioned $158 million of cash at the parent company. How much do you think you’ll need to maintain in this type of an environment as a cushion and assuming that whatever that cushion is, anything above that would be used for buyback?

[Mark McAndrew:]

Okay, well first at Liberty National. You’re correct, Jimmy, that any major changes in the past, we have seen a disruption. And our guidance, we’re still assuming a mid single-digit decline in our Life sales at Liberty National next year, although we do expect to see some growth in our Health sales at Liberty National next year. On the other hand, we have announced these changes a couple of weeks ago. And they were well received. I will point out, a year-ago we had 165 offices at Liberty National. And today, we’re down to 75. We have closed or consolidated most of the underperforming offices there and I felt like these changes were very well received. I really believe that the branch managers that we have now have the desire to grow, the ability to grow, as well as the tools to grow. So I remain optimistic that we will see a turnaround at Liberty National next year although again, in our guidance, we have assumed a small continued decline in our Life sales.

[Gary Coleman:]

And Jimmy, as far as the cash cushion is concerned, I would think we would have a cushion somewhere between $50 million to $100 million. There’s not any specific need that we’re targeting but we feel like we do need to cushion it. It should somewhere be in that range.

[Jimmy Bhullar:]

Okay. And then just one more on med stuff. You mentioned you’re – part D you mentioned enrollment expectation. But what’s going on in terms of pricing in the med stuff market? We’ve heard of some of the major medical companies trying to expand further in that business. Can you talk about just pricing trends in the Medicare market?

[Mark McAndrew:]

Well, overall, our pricing trends have been very favorable. Again, we re-priced our products, I think, last year and the largest selling product – the high deductible plan F, I know, we have actually reduced our rate the last two years, which has made it more attractive. Really over the last several years, we haven’t seen – we’ve seen very small single-digit increases on all of our products. I’m not seeing – even though we’re seeing some activity there, it’s still a very small part of our business. And while we expect some growth there, we don’t expect it to get – we’re not projecting it’s going to get back to where it was 10 years ago. So it will continue to be a competitive marketplace. But again, we think in a competitive situation, we’re in better shape than we’ve been in a number of years.

[Jimmy Bhullar:]

Okay, thank you.

[Operator:]

The next question comes from the side of Steven Schwartz with Raymond James. Please, go ahead. Your line is open.

[Steven Schwartz:]

Hey. Good morning, everybody. Mark, first on the part D, I got – maybe this is terminology. You’ve lowered the costs. You’re going to pick up 76,000 auto enrollees, that’s going to lead to 40% to 50% increase in revenues. But you said the same margin. Now, do you mean by that the same profit margin like around 10% or whatever? Or are you talking about the ultimate earnings?

[Mark McAndrew:]

It has the same margin as the percentage of premium.

[Steven Schwartz:]

Okay. So...

[Mark McAndrew:]

As our other products. We basically came up with a product that has a little higher deductible and also a more narrow formulary as far as what prescriptions are covered which allowed us to bring – we still have the same products that we offered last year. But we added another product which has a lower cost which got us below that medium pricing level, which qualified us, I think, in 21 out of 34 regions for the low income subsidized people. So in addition to the 76,000 that we’re picking up immediately, we’ll start picking up about 2,000 additional people each month, people turning 65 as a result of that also. So yes, we feel very comfortable that we will see that kind of growth in our part D revenues next year.

[Steven Schwartz:]

Okay. And then if I may continue, on Globe, the discussion with regards to responses, those numbers sound huge yet the sales guidance I guess for conservative reasons isn’t there. I mean, what could go wrong between the responses and the sales?

[Mark McAndrew:]

Well...

[Steven Schwartz:]

Go wrong is probably the wrong word.

[Mark McAndrew:]

No. It’s an okay terminology. Again, you have to understand in the insert media, the whole process. And it’s a long process. We first put a very simple insert piece into some of the media, whether it’s a coupon pack or a newspaper or a DirecTV bill. That is what we increased, that volume by 22% in the third quarter. People then send us a response either most of those responses are reply cards that are mailed in, although they can also call in, or get on the Internet. But most of those people send back a reply card. Once we get the reply card in and the number of responses we got we’re up over 50%.

[Steven Schwartz:]

So they were big numbers.

[Mark McAndrew:]

Yeah, substantially. Once we get that reply in, we start sending a series of product offerings, really not just the next 3 months but 6 months, 12 months even out further than that. For example, historically, the first product offering we send out, we get 8% to 9% of those people to buy. The second one, it goes down in the 3% to 4% range. The third one, it goes down in the 2.5% to 3% range. But we continue to get people to reply to those product mailings, which include an application and rates for an extended period of time. But even after these people send the application in, it has $1 for the first month introductory offer. So after we issue the policy, we then have to, 30 days later, we send them a bill. And until they pay that renewal premium, we don’t treat it as a sale. So, in fact, I apologize. I should have better lag numbers for exactly how long after that insert media increases will we see those sales. And I will have better numbers for the next call. But again, the first step of that, the number of responses is up according to our plan. It just takes an extended period of time for that to be turned into what we report as net sale.

[Steven Schwartz:]

Okay. I appreciate all that. Let me just ask one little follow up to that. Is there anything about – I know the new underwriting that you’re doing that could lead to the ultimate hit rate, how long it takes to be lower than it has been historically?

[Mark McAndrew:]

Well, again, that’s one of the things we’re issuing a smaller percentage of the applications we’re getting in. So, that does offset somewhat.

[Steven Schwartz:]

Okay.

[Mark McAndrew:]

That we decline, I think its 5% to 6% more of the business that we’re getting in. So that does somewhat offset the growth in sales. If we weren’t doing that, our sales would be 5%, 6% higher although the profitability of those sales would be lower. So that is one of the factors that temper the growth in sales. But also, again, as I’ve mentioned before, the insert medias, the one aspect of our business that the response rates do tend to follow the consumer confidence index. And so again, we tempered a little bit because even though the inquiries are up, we could still see – if you say what could go wrong, we could still see those response rates for the fulfillment packages could go down or the percentage of the people who end up paying beyond the dollar introductory offer could go down as a result of economic conditions. So we’re trying to be on the conservative side there.

[Steven Schwartz:]

Okay. I appreciate that. Thank you.

[Operator:]

The next question comes from the side of Edward Spehar with Bank of America. Please go ahead. Your line is open.

[Edward Spehar:]

Thank you. Good afternoon, guys. Good morning, I guess. Mark, could you go over one more time the conservation numbers for – what they were in the second and third quarter and then what your expectation is for ‘12?

[Mark McAndrew:]

Okay, sure. In the second quarter, our new conservation efforts, in addition to what our agents are doing, we conserve about $2.2 million of annualized premium. In the third quarter, that number increased to $5.8 million. And I would point out, over 60% of that business is being conserved is that American Income, which again is our – it’s where we focus our initial efforts because it’s our highest margin business obviously. But in our guidance for next year, we have assumed somewhere between $30 million to $35 million of conserved annualized premium. Our goal is still to beat that number but that is what we’ve used in our guidance.

[Edward Spehar:]

And when we think about the earnings impact of a dollar of conserved premium given the fact that it’s more than 60% American Income. How should we think about what the dollar amount to the bottom line is of that?

[Mark McAndrew:]

Well, it’s one of those things, for example, the – it takes time. The $5.8 million that we conserved this quarter had almost no impact this quarter because those people – a vast majority of those of people are paying monthly. So it had almost unnoticeable impact this quarter. But as we continue to conserve business, that number will grow. In our guidance, the conservation added about $0.03 a share after tax next year.

[Edward Spehar:]

Okay. So it’s not a big number?

[Mark McAndrew:]

Not at this point. It’s something that will continue to grow over time as we continue to do this. And each quarter, it will continue to add more value.

[Edward Spehar:]

Okay. And I meant the part D, so you’re saying that the expectation is that the top and bottom line should be up 40% to 50% next year versus this year?

[Mark McAndrew:]

It should be very – yes, that would be a reasonable expectation. Yes.

[Edward Spehar:]

And then when we think about, I know you said that the sort of growth from those that will be turning 65, that’s a positive. But if we think about this business when you first had a big bump up and then it was sort of like it was a onetime thing, you got it and it just sort of stayed there. Would you think about this bump here as sort of we go to a new level on and it’s kind of another plateau?

[Mark McAndrew:]

Well, if we continue to stay below that median, it will be more of a growth. It will be more growth going forward. For example, we’re going to add immediately pick up 76,000 people, but we will be adding about 2,000 new people net each month. So it will be – by the end of the next year, we should have grown by about 100,000 people through the auto enrollees. Those new people turning 65 will continue to add to that. So I would expect it to contribute some growth going forward. Not as much as obviously it will make.

[Edward Spehar:]

Okay. And then the final question is your Life premium, I think, was up 3% this quarter. Your Health premium was down 6%. Given all of the sales numbers that you’re anticipating next year and the sales that have happened recently, are these numbers that should be relatively stable next year? I mean in terms of the growth rates, we don’t see any real pickup in those. Like is Health going to continue to decline mid single-digits, Life maybe grow a few percent and we won’t start to see growth until ‘13?

[Mark McAndrew:]

Well, hold on just a second here. I’ve got more detailed numbers. If I look at our total Life premium, I think we’re – at our midpoint, we’re expecting a little over 4% growth in our Life premium. So I think that’s slightly better than where it’s at today. On the Health side, we’re still expecting about 6% decline in our Health premiums for next year. So that’s at the midpoint of our guidance. So I think that’s a fair statement.

[Edward Spehar:]

Okay. And then I mean in buybacks, are we sort of assuming that like typically all free cash flow used for buybacks or is there any difference in what you’re assuming in the guidance?

[Mark McAndrew:]

Well obviously again, it’s something that we’ll continue to evaluate each quarter. But right now, we feel comfortable with really about $50 million cushion. We want to keep that for the end of the year just until we know for sure what our year-end RBC is going to be. And again borrowing acquisition potentials or if there’s anything else, we still believe that share repurchase is a good use for it. And right now I don’t see any reason to hold more than that for a cushion.

[Edward Spehar:]

So in terms – so, when you think about your guidance, you’re assuming that whatever free cash flow you generate in 2012 is used buyback stock.

[Mark McAndrew:]

That’s correct. In our guidance, we had assumed we would use basically our free cash. We’ve assumed at different price levels, but we have basically assumed that we would use it to repurchase stock.

[Edward Spehar:]

Can Gary remind us what that number – I don’t know if you’ve given us anything on that number expectation for next year.

[Mark McAndrew:]

Gary, free cash next year, we anticipate being about $360 million?

[Gary Coleman:]

Yeah, it should be around $350 million to $360 million. We didn’t just base on our preliminary estimate.

[Edward Spehar:]

Okay and that’s after dividends?

[Gary Coleman:]

Right.

[Edward Spehar:]

(inaudible) okay. Thanks a lot guys.

[Mark McAndrew:]

Sure.

[Operator:]

The next question comes from Jeffrey Schuman with KBW. Please go ahead your line is open.

[Jeffrey Schuman:]

Thank you. Hello. I think Ed got me started on this, but maybe we can continue. I’m struggling to contemplate the 2012 guidance particularly after you’re now telling us that it incorporates the impact of the DAC change. So the midpoint range is 525. If we back up the impact of the DAC change, it will be 530 to 535 and that’s against the consensus of 510. I’m kind of running out of ways to rationalize that because I think as you run through the premium numbers, I think probably most of us are too far off there. I think most of us know what to anticipate in share repurchase. Conservation is only (inaudible) issue. Part D sounds like some upside. Obviously, you don’t reconcile against our models. But I mean, what other thing should be on our list to think about?

[Mark McAndrew:]

Well, I guess that’s where no doubt the impact of share repurchase is a big item. And we don’t get to – we said at the beginning of this year, we wouldn’t get the full impact of the United Investors sale until first, second quarter of next year. It was actually dilutive by $0.05 to $0.10 per share this year and it will be accretive next year as we get the benefit of that. But other things, the expense reductions we’ve seen at Liberty National. Again, we’ve closed 90 offices in the last 12 months and those expenses are going to obviously expenses that would no longer be deferrable. Those expense changes will add about $0.11. But the part D we’ve increased will add about $0.05. The change in the underwriting and Direct Response, will add about $0.02 after tax. So, there’s a number of different factors adding to its. But still share repurchase at the current multiple if we would have been double-digit growth in earnings per share this year without the United Investors sale. So, and I’m not again, we don’t – you’re right, we don’t reconcile to your model but it’s even at the beginning of this year, it’s not far off where we thought we would be.

[Jeffrey Schuman:]

Okay. That’s all helpful. I mean the share repurchase is powerful although I think most of us probably can’t have that already worked in probably the Liberty expenses, the part D, a couple of the other things maybe not so much. So that’s our helpful thoughts. Thanks.

[Gary Coleman:]

You welcome.

[Operator:]

The next question comes from Colin Devine with Citi. Please go ahead your line is open.

[Colin Devine:]

Good morning. I have just, I guess, sort of gray areas I’d like to talk about. First on Liberty, Mark, I think we’re now at least 27 quarters in terms of the agent force shrinking and particularly the sort of not the first of your agents but the renewal agents which are similar in driving a lot of the sales here. Where do you think that finally bottoms? Is it going to be next year? You talked about I guess growing the number of managers, what does it take to sort of get that to finally turnaround, would be question number one. Question number two. Have you given any thought to changing the dividend policy to maybe doing a little more in dividends than buybacks? And then the last one, on the M&A front, certainly you mentioned in the past you’ve looked at some things. Is there anything else out there that you could do that might help to give Liberty sort of a booster side here?

[Mark McAndrew:]

Okay. Liberty National, that is still the biggest question mark that we have. And again, I feel good about the changes that we’ve made. I think they were received well. But the next, I would say 90 days, next three to four months is really going to really see how well those changes were received. We have made them much more businessmen, much more entrepreneurs versus just managing our offices. The one big thing, Colin, that you need to remember, regardless of the level of sales going forward, we have moved most of the fixed expenses at Liberty into variable expenses. So the least the margins on the business that we write at Liberty National will be predictable going forward. But again, I can’t – I believe that by the first of the year, we will be at our low point at Liberty National. But only – we’re really going to have to wait and see what that is. We’re still expecting a small decline, again, in our Life sales although we do expect our Health sales to pick up. But I think the next three or four months will definitely, we’ll have a better answer to that. As far as dividend goes and buyback, we definitely discussed that. We had been slowly raising our dividend each year for the last several years. But it still comes down to – at the current PE that we’re trading at, we still believe buyback is a very good use of the money. But it is something particularly if we get in a very low interest rate environment, we obviously could pay a much higher dividend. But at this point, there’s no definite plans to change our dividend policy. That might change if the PE comes up some. As far as M&A, I don’t – particularly right now, until we see some positive results at Liberty National, I would be, in fact, I would just say I would not be interested in buying another home service company. Even though the pricing maybe attractive on it. You’d almost have to look at it as a close block of business because particularly, the changes in bank accounting, it’s very difficult to show a GAAP profit in a home service business. So I don’t see anything on the short-term horizon there.

[Colin Devine:]

Okay. Well, Mark, and just sort of following up then. (Inaudible) you mentioned that obviously the change in the DAC accounting. With what you’ve been able to do now at Liberty, at the very least, have you made then Torchmark’s earnings less sensitive to the pace of improvement at Liberty under the new rules because you’ve moved to this variable comp system?

[Mark McAndrew:]

Absolutely, Colin. There’s no doubt. And the change in the DAC accounting, even though these were plans that we have been moving towards for a number of years, the change in the DAC accounting definitely sped up our plan to move it – to eliminate those fixed expenses and move them to more variable expense. So it does – when people wonder why we’re not more impacted by the change of the DAC accounting, the change at Liberty National is a big piece of that, that we have moved the bulk, not only the office expenses but the lead expenses we were picking up. We have eliminated those and moved them to the branch manager.

[Colin Devine:]

Okay. All right, thank you.

[Mark McAndrew:]

You’re welcome.

[Operator:]

The next question comes from the side of Randy Binner with FBR Capital Markets. Please go ahead. Your line is open.

[Randy Binner:]

Hey. Thanks. Just want to go back to the interest rate disclosures that Gary gave at the top of the call. Could you just cover again what the rate increase is going to be in your Life book? Well, first of all and then I have a follow up.

[Gary Coleman:]

Well, what I mentioned was is that for the American Income Life policies and our juvenile policies, we’re going to raise the premiums on newly issued policies by 5%.

[Mark McAndrew:]

Randy, I’ll just even – a year ago, we were talking and we talked about the impact of lower interest rate crediting on the profitability of our Life businesses. And we said 100 basis point reduction in our interest rate crediting had about 1% to 3% – it would take 1% to 3% increase on our rates to offset that. We did lower this year in 2011 our interest rate crediting on new business from like 6.75% down to 5.75% but we did not adjust our rates. Well, if the interest rates continue to decline the way most people think they will, we’re just trying to get ahead of the game. And assuming that we may have to lower our interest rate crediting again, next year, we are going ahead in January 1, we will have rate increases in effect roughly 5% of both American Income and some of the products in Direct Response.

[Randy Binner:]

Okay. And so the elasticity of pricing though is – I mean, you have fair amount of ability to change price on these target markets, right?

[Mark McAndrew:]

Yes.

[Randy Binner:]

I mean AI is a very strong controlled distribution. That’s a sold product. I mean, so do you have much competition you think about and how they’re changing pricing or do you just think about what’s best for Torchmark?

[Mark McAndrew:]

We think mostly about what’s – more so on the Direct Response. We do rate testing and determine optimum pricing levels. But for the most part, we price our products to achieve desired profitability. American Income is not in a highly competitive marketplace. We have looked in the past and it’s only been a handful of policies a month that are replaced by another company. It’s really not an issue at American Income. So I feel confident that it won’t have any negative impact. We raised rates slightly back, I guess, it was 1999 and it had no impact on sales there. In fact, actually the next three years, sales doubled.

[Randy Binner:]

That’s helpful. So I mean the takeaway here is that it’s the liability offset to the lower yields that we all model and so that keeps the margin. And then just really quick, if I could, because I just didn’t get followed up on. But Gary, on your interest rate scenario, I guess I just wanted to confirm that the takeaway there was a spread on underwriting. Is there a way to communicate your scenario just on kind of how much base, how many basis points the overall yield on the portfolio would lose in that scenario?

[Gary Coleman:]

Well, that’s what – I think I mentioned it.

[Randy Binner:]

And maybe we’re talking about the same thing and I misunderstood it.

[Gary Coleman:]

What I was saying, currently portfolio is at 653 and what I was saying is we invest at 4.75. All the cash flow each year for the next five years.

[Randy Binner:]

Five years, yeah.

[Gary Coleman:]

That’s 653 declines to depending on different scenarios but a decline to 595 basis points to 610 basis points...

[Randy Binner:]

At the end of the five-year period.

[Gary Coleman:]

At the end of the five-year period, that’s what the portfolio yield would be.

[Randy Binner:]

Okay. And so in that scenario that your overall portfolio would lose 35 basis points?

[Mark McAndrew:]

Yeah, 35 to 50, somewhere in that range

[Gary Coleman:]

Right.

[Randy Binner:]

Point to point over the five years or each year?

[Mark McAndrew:]

No, at the end of five years.

[Gary Coleman:]

Yeah, at the end of five years. Let’s just say that in between it’s gone from 6.53% to 6%. At the end of the fifth year, the portfolio yield would be 6%.

[Randy Binner:]

Okay.

[Gary Coleman:]

We would lose 50 basis points, but we’d lose that over a five-year period.

[Randy Binner:]

So 10 a year?

[Gary Coleman:]

Yeah.

[Randy Binner:]

And that would be step function down? That would be a linear kind of boost of 10 each year as your model ended up?

[Gary Coleman:]

It wouldn’t be 10 exactly but it would be something...

[Randy Binner:]

Yeah.

[Gary Coleman:]

...that’s around there.

[Randy Binner:]

No, that’s helpful. Thanks for the clarification.

[Gary Coleman:]

Sure.

[Randy Binner:]

Yeah

[Operator:]

The next question comes from Mark Hughes with SunTrust. Please go ahead. Your line is open.

[Jack Sherck:]

Thanks very much. It’s actually Jack Sherck in for Mark. I may have disconnected, I had hopped off for a second. But what I was wondering about was the increase in the response rate to 43% on the inserts were over 16% last quarter, I know you revamped your strategy there and the actual insert itself. When does that go into play and do you attribute that to anything else or just a better marketing or a better advertising fee?

[Mark McAndrew:]

Well, we really rolled out with that in the second quarter. And even though we saw improvement in our initial response rates in the insert media, which is why we increased our circulation in the third and fourth quarters as a result of the improvements we saw in the second quarter. And I do attribute it. It’s significantly – it’s a rather large change in the packaging in those inserts and that’s what has caused that increase.

[Jack Sherck:]

So...

[Mark McAndrew:]

It’s about a 17% improvement in the response rate.

[Jack Sherck:]

Right. So in your view, it’s more of the marketing piece itself rather than the change in the environment.

[Mark McAndrew:]

Yes.

[Jack Sherck:]

Okay, great. Thank you.

[Operator:]

The next question comes from Bob Glasspiegel with Langen McAlenney. Please go ahead. Your line is open.

[Robert Glasspiegel:]

First of all, good luck tonight and hope you guys pop some champagne.

[Gary Coleman:]

We’re planning on it.

[Robert Glasspiegel:]

Are you heading there to St. Louis or are you just going to watch it live?

[Mark McAndrew:]

Well, I might go up for game seven if it goes seven.

[Robert Glasspiegel:]

Yes. Good luck. I’m (inaudible). I’m with you. Tax rate came down a little bit (inaudible). Is the full nine-month rate a good sort of run rate? You had talked before about some tax things that you were doing. So I was wondering if could expand on that.

[Gary Coleman:]

Bob, the main reason of tax rate that came down is we got increased tax benefits from our investment and low income housing tax credits. And that brought the rate down to just about 32%, where it had been 33.7%. What we expect to happen is we’ll end the year at 32.7% and that should be about the rate we have in 2012. But it’s all due to getting increased tax expenses that we were expecting of those investments.

[Robert Glasspiegel:]

Such a little bit of help in Mr. Schuman’s answer for Jeff’s question for next year’s tax rate is left fielder positive going into next year.

[Gary Coleman:]

Right. Yeah, it’s going to be about 33.7% to 32.7%. So we’re picking up a percent there.

[Robert Glasspiegel:]

And I apologize, you were fading out on just the cash flow dynamics of the fourth quarter. Just to remind me, your cash is $168 million at the end of the third quarter.

[Mark McAndrew:]

I think it was $166 million.

[Gary Coleman:]

Yeah, $166 million.

[Robert Glasspiegel:]

And what dividends are you getting?

[Gary Coleman:]

We’re only getting the addition to the cash flow for the quarter will be $6 million. So that would give us $172 million available. But we’ve already spent $14 million.

[Robert Glasspiegel:]

Right, I got that. And you said you could take that to $50 million?

[Mark McAndrew:]

Yeah, (inaudible) cushion.

[Gary Coleman:]

Right.

[Robert Glasspiegel:]

Okay. That’s it. Thank you.

[Mark McAndrew:]

Okay, Bob.

[Operator:]

Our next question comes from John Nadel with Sterne Agee. Please go ahead. Your line is open.

[Mark McAndrew:]

John?

[Operator:]

John, your line is open. Please go ahead, John.

[Mark McAndrew:]

I think we lost him.

[Operator:]

(Operator Instructions) It looks like we have a follow up from Steven Schwartz with Raymond James. Please go ahead. Your line is open.

[Steven Schwartz:]

No. It has been answered. I didn’t know how to turn it off.

[Mark McAndrew:]

Okay.

[Operator:]

At this time we have no further questions.

[Mark McAndrew:]

Okay. Well, I want to thank everyone for joining us today and we will talk to you again next quarter. Have a great day.

[Operator:]

This does conclude your teleconference. Thank you for your participation. You may now disconnect.