Globe Life Inc.
Q1 2013 Earnings Call Transcript

Published: 25 Apr 2013

[Operator:]

Good day and welcome to the Torchmark Corporation First Quarter 2013 Earnings Release Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mike Major, Vice President of Investor Relations. Sir, you may begin.

[Mike Majors:]

Thank you. Good morning, everyone. Joining me today are Gary Coleman and Larry Hutchison, our Co-Chief Executive Officers; Frank Svoboda, our Chief Financial Officer; and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2012 10-K and any subsequent forms 10-Q on file with the SEC. I’ll now turn the call over to Gary Coleman.

[Gary Coleman:]

Thank you, Mike, and good morning, everyone. Net operating income for the first quarter was $132 million or $1.39 per share, a per share increase of 9% from a year ago. Net income for the quarter was $120 million or $1.27 per share, also a 9% increase on a per-share basis. With fixed maturities at amortized cost, our return on equity for the first quarter was 15.6%, and our book value per share was $35.98, a 10% increase from a year ago. On a GAAP reported basis, with fixed maturities at market value, book value per share grew 20% to $45.88. In our Life Insurance operations, premium revenue grew 4% to $471 million, and Life underwriting margins increased 6% to $133 million. The growth in underwriting margin exceeded the premium growth due to the lower amortization of our deferred acquisition costs. The lower amortization rate is a result of improvements and persistency attributable to our ongoing conservation program and is incorporated in our guidance for the full-year. Net Life sales decreased 4% to $85 million. On the Health side, premium revenue excluding Part D increased 23% to $222 million, and Health underwriting margin grew 25% to $50 million. Improvement in the Health underwriting margin was due primarily to the addition of Family Heritage. Health sales increased 57% to $24 million. I will now turn the call over to Larry Hutchison for his comments on the insurance operations.

[Larry Hutchison:]

Thank you, Gary. First let’s discuss American Income. At American Income, Life premiums were up 9% to $174 million and Life underwriting margin was also up 7% to $56 million. Net Life sales decreased 3% for the quarter to $38 million. The producing agent count at the end of the first quarter was 5,612, up 10% from a year ago, and up 8% during the quarter. While net sales decreased in the first quarter, we are very pleased overall with the progress that continues to be made at American Income. Trends have been very positive since the beginning of March, and we expect sales growth for the full-year 2013 to range from 10% to 14%. Now Direct Response. In our Direct Response operation at Globe Life, Life premiums were up 4% to $168 million and Life underwriting margin increased 1% to $39 million. Net Life sales were down 5% to $37 million. However the new business written in the first quarter of 2013 at a profit margin approximately 1% to 2% higher than the year ago quarter. Response rates continued to be lower than normal in the first quarter. We believe this is possibly due to the state of the economy as the expiration of the payroll tax credit had a significant impact on the pocket book of the families in our target market. However as we indicated on our fourth quarter call, it’s not unusual to have fluctuations like this from time to time in Direct Response. Based on positive test results, we are confident that our 2003 initiatives will help increase response rates in 2013, and we still expect mid single-digit sales growth in 2013. These initiatives include rate adjustments and higher face amount offerings on adult products. Now Liberty National. At Liberty National, Life premiums declined 2% to $70 million, while Life underwriting margin was up 10% to $19 million. Net Life sales fell 4% to $7 million, while net Health sales declined 13% to $3 million. The producing agent count at Liberty National ended the quarter at 1,375 up 8% from a year ago, but down 3% during the quarter. While the agent count was down sequentially in the first quarter, we continue to be pleased with the progress being made in turning around Liberty National. As we’ve said many times this is slow process, and agency growth tends to occur and a stair step pattern. We continue to work to change the culture of this agency. The implementation of the laptop presentation is occurring a little more slowly than we expected, but steady progress is being made. With respect to geographic expansion we will be opening four new offices over the next 90 days, and we are optimistic that agent growth will continue going forward. Sales growth is expected to range from 4% to 8% for the full-year 2013. Family Heritage. Health premiums were $46 million and Health net sales were down $11 million. As we previously indicated, we intend to grow this agency through geographic expansion and implementation of our Internet recruiting program. For 2013 we expect premium income to range from $188 million to $196 million with margins as a percentage of Health premium of about 19% to 20%. We expect sales of approximately $48 million to $50 million in 2013. Medicare Part D. Premium revenue for Medicare Part D grew 4% to $77 million, while the underwriting margin increased 2% to $8 million. Part D sales for the quarter fell 65% to $9 million due to the decrease in low income subsidized enrollees for 2013. As we’ve mentioned before, we won’t receive as many new auto enrollees under the low income subsidy program in 2013 as we did in 2012. We won’t have the same type of sales and premium growth we had in 2012. We expect a decrease of approximately 5% to 7% in our Part D premiums for 2013, due primarily to price competition in employer group market that we discussed previously. I’ll now turn the call back over to Gary.

[Gary Coleman:]

To complete the insurance operations, administrative expenses were $43.9 million for the quarter, 8% more than a year ago quarter. The increase is in line with our expectations and is primarily due to the addition of Family Heritage. As a percentage of premium, administrative expenses in 2013 should be around the same level as 2012. Now I want to spend a few minutes discussing our investment operations. First, excess investment income. Excess investment income, which we define as net investment income less required interest on policy liabilities and debt, was $56 million, a decline of $8 million or 13%, 6% on a per-share basis from the first quarter of 2012. Sequentially, excess investment income was essentially level with the fourth quarter Due to lower new money rates and the possible calls of hybrid securities, we expect excess investment income in 2013 to decrease approximately 7% to 8%. However, reflecting the impact of share repurchases, we expect 2013 excess investment income per share to be down around 2% compared to 2012. Now regarding the investment portfolio, invested assets are $12.7 billion, including $12.1 billion of fixed maturities and amortized cost. Of the fixed maturities, $11.5 billion are investment grade, with an average rating of A minus, and below investment grade bonds are $573 million compared to $585 million at the end of the last quarter and $723 million a year ago. The percentage of below investment grade bonds with fixed maturities is 4.7% compared to 6.5% a year ago. With a portfolio leverage of around 3.5 times, the percentage of big bonds to equity excluding net unrealized gains of fixed maturities is 17%, which is less than most of our peers. Overall, the total portfolio is rated A minus, the same as a year ago. In addition, we have net unrealized gains in the fixed maturity portfolio of $1.5 billion, compared to $873 million a year ago. Regarding investment yield, in the first quarter, we invested $387 million in investment grade fixed maturities, primarily in the industrial and utility sectors. We invested at an average yield of 4.31%, an average rating of BBB plus, and an average life of 27 years. Over the last five quarters, the yield on new investments has averaged 4.3%. For the entire portfolio, the first quarter yield was 6%, down 47 basis points from the 6.47% yield in the first quarter 2012. Of this decline in yield, 14 basis points is due to the addition of Family Heritage and 8 basis points is due to the $300 million of bank hybrids called in the third quarter of 2012. On the last call, we indicated that we held approximately $225 million of bank hybrids that we expected to be called in 2013. In the first quarter, $66 million were called, leaving $159 million of those securities in the portfolio as of March 31. As of today, we have not received a notice of intent to call on any of these securities. However, if all $159 million of these securities are called and assuming a 4.25% reinvestment rate, the lost annual income related to these calls will be approximately $3 million after-tax. On past analyst calls, we have discussed in detail the current low interest rate environment and the impact of a lower or longer rate scenario. As discussed, our concern regarding an extended period of low interest rates continues to be the impact on earnings, not the GAAP or statutory balance sheets. As long as we are in this low interest-rate environment, the portfolio yield will continue to decline and thus pressure excess investment income. However, the decline will be slowed by the fact that, on average, only 2% to 3% of fixed maturities will run off each year over the next five years, and that assumes the calls of the bank hybrids previously discussed. Assuming a new money rate of 4.25% for next five years, we estimate that the portfolio yield exiting the 2017 would be around 5.55%. Assuming a 4% new money rate, the portfolio yield would be around 5 basis points lower or 5.5%. At these rates, we would earn a small spread on the net policy liabilities while earning the full 550 to 555 basis points on our equity, less the interest required to service our debt. In either scenario, we will still generate substantial excess investment income. Now I will turn the call over to Frank to discuss share repurchases and capital.

[Frank Svoboda:]

Thanks, Gary. I want to spend a few minutes discussing our share repurchases and capital position. First, regarding share repurchases and parent company assets. In the first quarter, we spent $90 million to buy 1.6 million Torchmark shares. So far in April, we have used another $20 million to buy another 345,000 shares. So for the full year through today, we have spent $110 million of parent company cash to acquire 1.9 million shares. The available liquid assets at the parent consist of assets on hand, plus the expected free cash flow from operations. As we’ve said before, free cash flow results primarily from the dividends received by the parent from its subsidiaries, less the interest paid on debt and the dividends paid to Torchmark shareholders. The parent started the first quarter with liquid assets of $147 million, including $94 million that has been invested to redeem our senior notes that mature on August 1, 2013. This leaves approximately $53 million of liquid assets available for other corporate purposes. Assuming shareholder dividends remain at the $0.17 per share level approved by the Board in its February meeting, we expect free cash flow for all of 2013 to be around $360 million. Along with the $53 million of liquid assets available as of the beginning of the year, the parent will have around $413 million of available liquid assets for the full year. As of today, after deducting the $110 million of year-to-date share repurchases, the parent will have around $303 million available between now and the end of the year. As noted before, we will use our cash as efficiently as possible. If market conditions are favorable, we expect that share repurchases will continue to be a primary use of the remainder of the fund. We also expect to retain approximately $50 million of liquid assets at the parent company. Now regarding RBC at our insurance subsidiaries. We plan to maintain our capital at the level necessary to retain our current ratings. For the last three years, that level has been around an NAIC RBC ratio of 325%. This ratio is lower than some peer companies, but 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 31, 2012, consolidated RBC was 347% and adjusted capital was approximately $95 million in excess of that required for the target of 325% consolidated ratio. Now before I turn the call back to Larry, I’d like to briefly make just a couple of comments relating to the addition of Family Heritage. On our last call, we indicated our expectation for Family Heritage to contribute between $0.16 and $0.20 per share to our 2013 net operating earnings after tax incremental financing costs. At this time, we believe Family Heritage’s contribution to our operating earnings per share to be close to the midpoint of that range. Those are my comments. I’ll now turn the call back to Larry.

[Larry Hutchison:]

Before I give guidance I went to be sure that I correctly stated the Health premiums and Health net sales for Family Heritage. The Health premiums were $46 million and Health net sales were $11 million. For 2013, we expect our net operating income will be within a range of $5.50 per share to $5.75 per share. This guidance incorporates the underwriting improvements Gary discussed earlier. Those are our comments for this morning. We will now open it up for questions.

[Operator:]

Thank you. (Operator Instructions) We will hear first from Jimmy Bhullar with JP Morgan.

[Jimmy Bhullar:]

Hi. Good morning. I have a couple of questions. First on American Income, if I look at life insurance sales, they’ve actually gotten weaker the last few quarters, even though the agent count has actually been growing. So wanted to just get an idea on what’s been driving that and what drove the decline this quarter. And Direct Response, I think you mentioned you expect mid to single-digit sales growth for this year. If we look at the last several quarters sales even there have, over the last five quarters, gotten progressively worse and the economy is still the way it was two or three months ago. So it doesn’t seem like – it seems like it’s trended in the wrong direction. But what gives you the comfort that sales for this year will be within what your range is?

[Larry Hutchison:]

Well, Jimmy, as you know, at American Income, sales are directly related to the number of agents in the field. And if you look at the agent count of American Income at the end of the fourth quarter was 5,176. At the end of the first-quarter the agent count was up 5,612 but the increase did not occur until the latter part of the quarter. What’s driving the surge towards the end of the quarter is that we changed our mid-level manager compensation in the fourth quarter of 2012. And we did that to reward increased agent retention rather than simply agent recruitment. This change resulted in both the focus and the compensation for our field managers; that’s why we’ve seen an improvement in agent retention in March, it’s taken several months for that change to be embraced by the field. I guess in the short run the compensation change probably hurt our recruiting efforts in the fourth and the first quarter; over the longer period of time, we believe the compensation change will result in an increased agent count. With respect to Globe Life, our confidence that we’ll have single-digit growth this year is based on our initiatives for 2013. Those will include rate adjustments and higher face amount offering on adult products. Our test results for the rates and face amounts have been positive and that’s what we believe will drive the growth for Globe Life and Accident Insurance company.

[Jimmy Bhullar:]

Okay, and if I could just ask one more, on Liberty National, the agent count had actually been recovering a little bit and then declined this quarter, anything specific that drove that?

[Larry Hutchison:]

I think what drove it this quarter is that at the end of the fourth quarter, beginning of the first quarter middle management’s focus was on year-end open enrollments on our worksite division; that takes their focus off recruiting in the fourth quarter and created a slight decline in the agent count.

[Jimmy Bhullar:]

And you still expect it to grow over the next few quarters, though?

[Larry Hutchison:]

Yes, our guidance for agent growth for the year is we believe at the end of 2013 at Liberty National the agent count should be between 1,750 and 1,850 agents.

[Jimmy Bhullar:]

Okay. Thank you.

[Operator:]

(Operator Instructions) We’ll hear next from Sarah DeWitt with Barclays.

[Sarah DeWitt:]

Hi, good morning. I’m just following up on Liberty National, could you just elaborate on what gives you the confidence that you can hit your updated full year sales target there and then longer-term when do you think you get back to double-digit sales growth in that channel?

[Larry Hutchison:]

I think double-digit sales growth at Liberty National will come fairly slowly. I think it would be another 16, 18, 20 months before we have that kind of sales growth. Two changes occurred at Liberty National this quarter. The first is a systems change and we just changed the work week, business is now turned on Monday for the previous week rather than Friday afternoon. This encourages our agent to sell products over the weekend. We find at American Income about 40% of our new business is written on the weekend; although we don’t anticipate a 40% increase in sales at Liberty, we do think this will have a positive response. But secondly, we’re looking at some geographic expansion. We’re planning in the next 90 days to open 4 new offices in areas outside our traditional markets, Sarah. Virginia, Louisiana, Texas, Oklahoma are likely to be expansion sites for these offices.

[Gary Coleman:]

Sarah, I might add that we’ve given guidance of 4% to 8% growth for the year in sales at Liberty and we had a 4% decline in the first quarter. We’ll see double-digit growth in the second half of the year, but that’s based on low comparisons from the prior year. I agree with Larry, for us to sustain 10% growth it’s going to take a longer period of time. But a key to that was just what Larry mentioned, the opening of new offices in more urban areas where there’s more – a higher population where there’s more opportunity to recruit agents as well as have customers.

[Sarah DeWitt:]

Okay, great, thanks. And then just on American Income and Direct sales, how should we be thinking about the trajectory of those sales as we go through the rest of the year, particularly given your comments about some of the changes of manager compensation at American Income?

[Larry Hutchison:]

I think the trajectory of the sales at American Income would be high single digit in the second quarter. And you’d probably see double-digit sales growth in the third and possibly into the fourth quarter. But for the year, again, our guidance is we’re going to see sales of 10% to 14% and we’ll see agent growth continuing throughout 2013.

[Gary Coleman:]

Direct Response, in the second quarter we’re looking for low single-digit increase with double-digit increases in the second half of the year.

[Sarah DeWitt:]

Great. Thanks for the answers.

[Operator:]

Thank you. And we’ll hear next from Steven Schwartz with Raymond James & Associates.

[Steven Schwartz:]

Hey, good morning, everybody. Question I want to ask is, on the Direct Response, the initiatives that you’re taking. You mentioned premium rates, Larry, my assumption here would be that you’re looking to lower them?

[Larry Hutchison:]

Yes. What we do with testing is we try different premium rates and based our own experience we know that if we lower certain rates we’ll have higher response rates and so you’ll write a more profitable block of business.

[Steven Schwartz:]

Okay. Does that – well, that’s an interesting thing. So would we assume that – obviously it’s lower rates, you would think that the margin would be lower than what you wrote in the first quarter. But then you just said more profitable business, that’s a little bit confusing?

[Larry Hutchison:]

Well, the lower rates, we get a better response rate and so we issue more policies. So we – although the premium rate for policy is down, the issue of a greater number of policies gives us more revenue to spread our acquisition costs over.

[Steven Schwartz:]

Okay. So lower loss ratio, but better expense ratio. And then on the higher face values, is that a – are you raising the minimum or are you just adding on top of that?

[Larry Hutchison:]

We’re adding on top of that.

[Steven Schwartz:]

Okay.

[Larry Hutchison:]

Talking about a larger face amount that’s offered to the customer.

[Steven Schwartz:]

And where are you now, that ceiling, and where you going?

[Larry Hutchison:]

We’re planning to roll this out at the end of May, if I understand your question, you’re asking where we’re going? This will be rolled out at the end of May, the first part of June. Is that your question, Steven?

[Steven Schwartz:]

No, no. I meant like the face value today is X and you’re going to Y, the maximum.

[Gary Coleman:]

On the high side for us today it’s about $50,000, so here we think we can move up toward $100,000.

[Steven Schwartz:]

Okay. All right. Okay. Very interesting. Thank you.

[Operator:]

Thank you. And we’ll hear next from Eric Aboaf with Citi.

[Eric Aboaf:]

Hi, good morning. Just a couple things, I guess. On Liberty, just one thing, if you could give maybe a little bit more color on the reception of the changes that you’ve made, kind of over the past year to make the business more akin to American Income? And kind of how have you seen maybe the productivity changing since making those changes?

[Larry Hutchison:]

Well, the change at Liberty to make it more like American Income is a variable cost model. Starting in 2012, all the agents we hired are independent contractors. As we promote agents through the system, they become middle management, they become branch managers, they’re paid strictly on commission. And so it’s quite a different system, Eric, but they are really entrepreneurs and they’re running their business. And the other system change is certainly the recruiting systems have changed, they’re like American Income. Another big change has been the introduction of the laptop and we’re installing the entire process into Liberty National agencies. It’ll take all of 2013 to install that laptop system. The laptop is not just the technology of you’re selling with a laptop, it changes your recruiting systems, your lead systems, it changes your training systems. So it’s quite a system change that you’re introducing into that agency. At the end of the process we think it’s a much stronger process; you have better data to manage with, you have stronger sales presentations by the agents, and because they’re better trained, it helps productivity because you’ll have a higher face per sale at the end of the process.

[Eric Aboaf:]

Okay. And then just one other general question. You’ve mentioned the impact of the economy and the payroll tax credit specifically related to Direct Response. But given your target customer base kind of across channels, do you think there’s any impact from the economy more broadly on sales trends through your agent sold business as well?

[Larry Hutchison:]

I think it’s less impact on the agent sold business because the agent is sitting across the kitchen table explaining that need. With Direct Response there’s less contact; you’re reaching simply through the mail. We don’t think in the long-term it’ll have a negative effect upon the sales, but it may be more contacts are needed to complete the sale of the Direct Response system.

[Eric Aboaf:]

Okay, so you’re not seeing the pressure on the wallet of the individuals leading to a tougher sales environment for the agents, is it still need driven?

[Larry Hutchison:]

It’s need driven – as we look at our laptop data, I’m not seeing a difference in closing rates that comes through that laptop data.

[Eric Aboaf:]

Okay, thank you. That’s helpful.

[Operator:]

And we’ll take our next question comes from Jeff Schuman with KBW.

[Jeff Schuman:]

Thanks, good morning. I was hoping you could talk a little bit more about conservation. You started these initiatives a few years ago, it’s clear that you’re realizing some results. I was wondering if you can give us a sense of – have you kind of fully at this point achieved what you thought you would have achieved or is there still maybe more upside there? And then I’m also wondering whether the economy negatively is impacting conservation, just as it is in sales in some channels and whether, if that eases at some point, whether that could provide some upside?

[Larry Hutchison:]

Well, first of all, Jeff, this year, we will have about $250 million of lapsed premium; we’ll conserve around $36 million of that premium, and I think last year was around $30 million, and the year before that, when we first got started, it was less than $15 million. I don’t think we’ve reached the max. We, as a matter fact, in looking forward, we see it increasing. I don’t know if it will increase a great deal more. At the $36 million this year, we’re conserving 14% of the lapses and we may see that percentage go up, but not a great deal. As far as from the economy side, I would think an improving economy would help in the program, but we really don’t have any feel for right now what the impact of the economy is.

[Jeff Schuman:]

Okay. And then on the risk-based capital, you’re somewhat above your 325% target. As you pull ordinary dividends, will that tend to draw you down towards the 325% or is there may be at some point the potential to contemplate a small extraordinary dividend?

[Frank Svoboda:]

Gary, you want me to take that?

[Gary Coleman:]

Yeah, go ahead.

[Frank Svoboda:]

Yeah, as we – Jeff, as we do take out some of the dividends over the course of the year that will tend to bring it down some. Our initial projections show a decrease in that excess or shows a little bit of a decrease in that excess. At this point in time, we are not – we have no immediate plans to distribute any of that as we take a look at the funding needs for the various growth initiatives that we have down at the subsidiary levels. We probably should have a little bit better idea of that later on here in the year.

[Jeff Schuman:]

Okay. That’s it for me. Thank you.

[Operator:]

Thank you. And we’ll hear next from Randy Binner with FBR Capital Markets.

[Randy Binner:]

Great. Thank you. I just wanted to follow up again on sales, just a couple more details. First, American Income, I just want to make sure I understand this correctly – with the middle management kind of disruption, I guess, or distraction that happened with the compensation shift in the fourth quarter. Is that a situation where you changed the way they were paid and that caused them to not focus as much on recruiting or it caused them to leave and now that you’ve kind of solidified that base of middle managers they can focus on recruiting again, or is it just they’re now more focused on recruiting because that’s how they’re getting paid?

[Larry Hutchison:]

Well, the change in compensation is to reward the middle manager for the length of service of the agent. So the compensation change is that – part of that compensation is based on the retention of the new agent – we’re trying to extend the agent life from 3 or 4 months to 4, 5, and 6 months. I think that changes the focus of the middle manager a little bit because you’re not so concerned about an agent in the first 3 months, you’re concerned about an agent in the first 6, 7, or 8 months. So that’s the intent, but anytime you change compensation of an agency and change focus of the agency, it generally has a negative short-term impact on recruiting.

[Randy Binner:]

Okay. So it wasn’t that you lost these individuals, it’s just that they weren’t as focused on kind of near term recruiting and that kind of hit sales because there weren’t as many?

[Larry Hutchison:]

Randy, the real issue we’re trying to address is we’re not concerned with losing middle-management so much as losing entry-level agents. And since we changed compensations, we changed our systems. We’re trying to encourage better training and better retention of the agents.

[Gary Coleman:]

Yeah in addition to that, another change to go along with that is that we were probably promoting agents too early in the past. And so now we’ve lengthened the time from which an agent, a new agent, can get promoted to entry-level management. And that’ll make them a better manager and that will help in the training and recruiting of the new agents and the bonus we have will help with the retention of new agents. But again the key is not only recruiting agents, but getting them to stay longer.

[Larry Hutchison:]

Right. Great. And Randy, specifically what we did is in the past we were picking agents and putting them into entry level management sometimes early as 15 to 30 days. In the fourth quarter we corrected that and it’s now – they’re not promoted until a 90 day period. That allows a new agent to focus entirely on sales field experience in their first 90 days. And we’re seeing a positive result of that. In March we saw a greater number of managers that were successfully recruiting and supervising new agents when we compare that to March of 2012.

[Randy Binner:]

Okay. So the March trend that’s better is the recruiting effort, not necessarily the sales effort yet.

[Larry Hutchison:]

Well if you have more agents you have greater sales so of course that goes hand-in-hand. What we’re really seeing in March is better retention of the new agents, and we’re seeing a greater recruiting effort in the middle management.

[Gary Coleman:]

And it didn’t translate into production. I think Larry mentioned earlier, the agent growth came late in the quarter. 70% of the agent growth in the first quarter really came in the last two to three weeks of the quarter. So we should see the impact starting next quarter.

[Randy Binner:]

You said 70% of it was in last two or three weeks?

[Gary Coleman:]

Yes.

[Randy Binner:]

Seven zero, okay, wow, okay. And then just one more on Globe. Can you just remind us of the test? The test results you run in Globe like, how broad are those? And how good a predictor have those been in the past of how those are going to perform?

[Larry Hutchison:]

Very good predictors. At any point in time, Chuck Hudson and his group are testing five, six, seven different tests. And based on those test results, they have a high confidence level that when they roll out that full program, that the full program will have the same results as the test results. What’s been a little different is some of these response rates have been lower in the fourth quarter and the first quarter. We think those response rates will return to normal and be reflective of the test results that we’re seeing.

[Randy Binner:]

Okay. One more if I can, the short-term debt is going up on the balance sheet. And this is unrelated to sales, but are you all using a little bit more commercial paper. Is that what we’re seeing with short-term debt?

[Frank Svoboda:]

Yes during the first quarter we did have an increase in the commercial paper, which is not atypical for the first quarter of the year, as we’re awaiting for the dividends to be able to come in from the insurance subsidiaries. So we do need some of the – an increase in the short-term. At the current time, it’s back down to $233 million as of today. Was just kind of a little bit of a timing thing there at the end of the quarter as far as the actual balance is concerned.

[Randy Binner:]

Perfect. Thank you.

[Operator:]

Thank you. And we’ll hear next from Bob Glasspiegel with Langen McAlenney.

[Bob Glasspiegel:]

Good morning, McKinney. Wanted to talk about Family Heritage, it looks like you lowered your premium assumption for the year, but raised your margin, what are the dynamics that are going? These weren’t big changes and it looks like if you multiply it out it’s $0.5 million more of underwriting income if you take the midpoint of the ranges. But what’s driving the premiums down a little bit and the margin up?

[Larry Hutchison:]

Have to drill the sales down a little bit. Let’s talk about sales activity first. Sales activity in the first quarter was less than projected, because we had a decline in recruiting activity early in the quarter. If you look at the agent numbers actually we ended the quarter with slightly higher agent numbers. We didn’t see that in January into early February.

[Gary Coleman:]

Yeah and Bob I think really, as far as the premiums, the bigger thing is, is that I think our projection was a little higher in the fourth quarter than it should’ve been. We just have better numbers to work with. Frank, why don’t you talk about the changes in the margin or the premiums?

[Frank Svoboda:]

Yeah and part of that, Gary, goes hand-in-hand, part of the decrease in the premiums was a improvement if you will in the modeling, given that the newness of the block of business and the acquisition still looking at getting the modeling of that business out so it resulted a little bit in a lower premium. At the end of the day, we have a little bit of a lower obligation margin on it as well. So the margin we expect to still be slight improvement in that, even though the net underwriting income is approximately the same as what we had originally projected. You’re seeing that margin move from a little under 19% to somewhere in between 19% and 20%.

[Bob Glasspiegel:]

Okay.

[Frank Svoboda:]

Fairly stable going forward.

[Bob Glasspiegel:]

I guess I understand that. It looks like the underlying margin in Health widened 100 bps year-over-year, this has been a trend that’s been in place despite the fact you had more 20% margin in the mix for the Family Heritage, which while it’s more than we thought it was going to be it’s less than your total. So it looks like there’s something positive going on in the rest of the book on the margin front. Anything worth noting or just a blip in the quarter?

[Gary Coleman:]

Well, I think one thing worth noting is in the Liberty National Health side, if you compare first quarter this year to last year, the claims were down significantly. First quarter 2012, we had – the ratio was 58.4%; that was the high for the year. We ended the year at policy obligations of 57%, but still the first quarter this year is low at 55.5%. Part of that is maybe seasonal, but the major part of that is that we’ve got a large cancer block that we’re having improving claims experience. So for the year, it looks like that ratio should hold somewhere between 55% and 57%, which is lower than last year, which means that for Liberty we could pick up 1 percentage point in the margin for this year for Liberty Health. There was – on the American Income Health, there was – we had lower claims there, but that’s something that was mainly because we had a high first quarter last year. It’s really the Liberty National Health where we saw the biggest improvement in the margin.

[Bob Glasspiegel:]

Okay. So I guess what you’re saying is the Health margin in Q1 ex-Family Heritage was a little bit better than normalized, because of LNL, but still better than you thought it was going to be, too.

[Gary Coleman:]

Right.

[Bob Glasspiegel:]

Somewhere in between where you thought and this quarter’s the right underlying margin.

[Gary Coleman:]

Yes.

[Bob Glasspiegel:]

I got it. And last question, a lot of noise and crosscurrents going on in Medicare Advantage and we’re sitting around waiting for Med submarket to improve as this gets depopulated, but I guess we keep moving the ball down the field. Is there anything really important we need to know thinking about...?

[Larry Hutchison:]

Brian, why don’t to try and answer Bob’s question?

[Brian Mitchell:]

Yes, sir. We’re looking at numerous proposals that are – that come out, it seems like almost weekly from Washington from both sides of aisle as to how to change, restructure Medicare. There’s so many proposals that have come about that it’s really been difficult to project what they’re likely to settle on. One week it seems like the two sides are merging together and then the next they’ll be farther apart. It is something that we’re tracking, along with the funding constraints for Medicare Advantage. I think there’s been some noise and news on that in the last week or so as well. So it’s something we look at regularly, but at this point it’s just not pinned down on what’s going to happen.

[Bob Glasspiegel:]

Okay, so we’re at least a year away from an improving – a dramatically improving Med sub environment, or could it be closer than that?

[Larry Hutchison:]

No, I think we think it’d be a year away because additional enrollments would probably start next October.

[Bob Glasspiegel:]

Right.

[Larry Hutchison:]

Between now and next October we don’t see much movement. And in the fourth quarter we should have a clearer picture of what’s going to happen with Medicare Advantage enrollments.

[Bob Glasspiegel:]

Right. Okay. I want my candy now but I guess I can wait a little bit. Thanks a lot.

[Operator:]

And we’ll take our next question from Mark Hughes with SunTrust.

[Mark Hughes:]

Thank you. Good morning. On the Med Supp sales, on that same topic, you had good momentum in the fourth quarter, not quite as much momentum here in Q1. I don’t know if you touched on this earlier in the call, but any meaningful changes there?

[Larry Hutchison:]

Mark, I think what drives the Med Supp sales in the first quarter and somewhat in the fourth quarter are the group sales. If you look at the individual sales in the first quarter, I think those had strong growth, it was the group sales that were off. And I think in prior calls someone described it as kind of lumpy events, that we tend to either get groups or we don’t get groups, so it comes in bunches or it comes in lumps. I think for the year we’re projecting a 10% increase in Med Supp sales. And we’ll have a better idea of that actually in the fourth quarter, because that’s when most of those group sales come through for Med Supp.

[Mark Hughes:]

Got you. And then you had provided an estimate for the year-end head count at Liberty National. Can you provide the same sort of a forecast for American Income?

[Larry Hutchison:]

100 agents to 6,000 agents.

[Mark Hughes:]

Thank you.

[Operator:]

And we’ll take our next question from Paul Sarran with Evercore Partners.

[Paul Sarran:]

Hi good morning.

[Larry Hutchison:]

Morning, Paul.

[Paul Sarran:]

Think you mentioned at Direct Response the margin on your sales this quarter was 1% to 2% better than the margin on sales in the quarter a year ago. How does that compare to margin on the overall in-force?

[Larry Hutchison:]

I don’t think I have that number in front of me. It was higher than the overall in-force but I can’t tell you how much.

[Paul Sarran:]

Okay. And then just a quick questions on buybacks. How does the stock price or the valuation of your stock influence your thinking in terms of use of cash for buybacks or timing?

[Frank Svoboda:]

Yeah Paul – go ahead, Gary.

[Gary Coleman:]

Well first of all – okay I was going to say, Paul, first of all, on an overall basis we’re constantly looking at what the shares are trading for versus what we think the value of the stock is. And although our PE is improved, especially over the 2008-2009 period, we still think – buy. Now as far as on a quarterly basis, as far as our share repurchases, I know years ago we used to concentrate more on the first part of the year. Our thoughts over the last couple years is really to spread it out over the year. We spent $90 million the first quarter this year versus $90 million last year. One example I’ll give you is we went to second quarter of 2012, we doubled up and spent $180 million, that’s because there was a softness in the market price during the quarter. Our present plans are concerned with the stock price as it is today. We’ll spread the rest of our share repurchases fairly evenly over the year. However, we have the ability to react quickly, and if the share price does fall at any point in time, we can step in and buy more.

[Paul Sarran:]

All right. Thanks.

[Operator:]

And we’ll take our next question from Eric Berg with RBC Capital Markets.

[Eric Berg:]

Thanks very much. I just had one question regarding your Health business. I hear or I’ve heard that the Health business margins were modestly better than you expected in the quarter, but premiums are not growing and it seems that the in-force is not growing, at least that’s what appears to be the case. Would you agree with that characterization or disagree? And more importantly, what is the future of your Health business? Do you see it as a growing business over time? That’s my one question. Thank you.

[Larry Hutchison:]

Let’s address the last part of the question first. In terms of our future in the Health business, potentially in this segment we’re talking about Part D. I think we see that as an opportunistic market. We are currently strong for 2014. And it’s hard to predict or we don’t plan on growth in Part D necessarily. Our non-Medicare business, we certainly see growth there with the addition of Family Heritage; as we grow that agency, that business will grow. Additionally as Liberty National grows in the Worksite we’ll see a growth in those Health sales. For Medicare Supplement, as we talked earlier in the call, it’s difficult to see what the future of Medicare Supplement is. It’s tied somewhat to Medicare Advantage disenrollments. And if we had a clearer picture of the actual disenrollments, it’d be easier for us to predict how much our Medicare Supplement business will grow in the individual market. Certainly a great deal of our growth through Medicare Supplement has come through our Group business, and we continue to try and grow our Group Medicare Supplement business.

[Gary Coleman:]

Eric, also I’ll add that one thing that’s contributed to the decline in premiums over the last 4 or 5 years, we had a very large hospital block in Liberty National that we stopped selling business, that business has been running off and it’s just about gone. So that drag won’t be there going forward.

[Eric Berg:]

Great, thank you.

[Operator:]

Thank you. And we’ll take our next question from John Nadel with Sterne, Agee.

[John Nadel:]

Hi. Good morning. I just wanted to revisit the discussion on the bank hybrids. It kind of went pretty quick on what was called, what hasn’t been called, how much is left. And I just also wanted to see if you could just tie that in to what’s assumed in your guidance range?

[Gary Coleman:]

Okay, John, we – coming into the quarter we had $225 million of bank hybrids that were likely to be called. We have some more, but they’re either – they’re not callable or they’re may call calls which we’re not concerned about.

[John Nadel:]

Got it.

[Gary Coleman:]

Yeah. There’s $225 million that we’re concerned about being called. During the quarter, $66 million of those bonds were called...

[John Nadel:]

Okay.

[Gary Coleman:]

And that leaves us $159 million of exposure. And as I mentioned earlier, we haven’t received any notice that these bonds are going to be called as of the current day. We’re a little surprised that they haven’t been, but we’ll wait and see. For guidance purposes, we’re running different scenarios and within the range we considered all of them being called to none of them being called. But as I mentioned, I think, if all of them got called, the after-tax impact on an annual basis would be $3 million. So built into the guidance is somewhere between $0 and $3 million.

[John Nadel:]

Perfect. Everything else has been asked and answered. Thank you.

[Operator:]

Thank you. And we’ll take our next question from Seth Weiss from Bank of America Merrill Lynch.

[Seth Weiss:]

Yeah. Hi, thanks a lot. Just one quick question on Liberty and the margins there. In terms of the new office expansion, is this going to have any impact to margins that we should watch out for in the second quarter or is it all passed along to the branch offices?

[Larry Hutchison:]

This is a variable cost model, so as we open those branches, the branch manager is responsible for the office rent, the leads, any office expenses are borne by the agency, not the company.

[Seth Weiss:]

Okay, great. Thanks. And just in terms of the 4% to 8% of sales expansion, how much do you attribute to these – to this new expansion versus more organic growth?

[Larry Hutchison:]

More of the growth will be organic growth because it takes a few months for a new office to recruit and build up its sales force. But it’s really long-term growth we’re talking about as the need to expand geographically outside our traditional markets.

[Seth Weiss:]

Okay, great. Thanks a lot.

[Operator:]

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

[Chris Giovanni:]

Thanks. Yeah, most addressed. I guess, the comments you guys made in terms of the potential to accelerate deployment if there’s a softness in the price, would that be the same kind of mechanism that we saw last year and then I guess some in 1Q in terms of the commercial paper borrowing and then getting the dividends up, maybe in the subsequent quarters?

[Larry Hutchison:]

Yes...

[Chris Giovanni:]

Or do you have enough capital at the subs to do that? I guess on the quarterly basis.

[Gary Coleman:]

Well, the thing is, what we’re – the dividends that are coming up to the companies or – are coming through the companies are based on last year’s earnings. We know we’re going to get those dividends. We also know the timing, if we want to accelerate repurchases, you’re right, we would probably use commercial paper, but that would be very short term because that paper would only be outstanding until we got the dividend money up to pay that off. And that’s what we did last year is we borrowed a little extra in the second quarter to expand our share repurchases and then the latter part of the year we didn’t buy as much and we used the funds to pay back the short-term debt.

[Chris Giovanni:]

Yes, okay. And then the Family Heritage acquisition. I mean, from an M&A standpoint, can you comment at all in terms of kind of appetite and if there’s anything else out there or are you kind of just focused really on this acquisition now?

[Gary Coleman:]

Well, we would like to find another Family Heritage, maybe a little bit bigger. We’re – our approach hasn’t changed. We’ve always been looking for a company that has controlled distribution, that’s selling in the middle income market. And although Family Heritage sells Health, we prefer Life. But still we’re very happy with Family Heritage. We’ll continue to look, but as we said before, there’s just not many of these type companies out there. And Family Heritage was a little bit of a surprise to us, and we’re glad we were able to get it. We’re looking, but it’s an ongoing process, but it’s tough, because there’s just not that many type of companies out there on the market.

[Frank Svoboda:]

Yeah Chris, one thing I would just add to that is that it really is key for us to be looking for somebody with that captive distribution, and that’s – a lot of the opportunities that come across to us do not have that type of distribution. They’ll have an independent distribution associated with them and not something that we’re trying to expand into.

[Chris Giovanni:]

Okay. And then the last question, just in terms of – I guess the Supplement last quarter within Family Heritage, you guys had a different agent count, you guys had 1,160 versus kind of the restated number for year-end this year of 702. Can you just talk a little bit about what the difference is and why the restatement of agent count?

[Larry Hutchison:]

I think it was – this is Larry, it was restated because we’d gotten better information from the company as to what are active agents and we try to have a uniform definition among the Torchmark companies how we define an active agent. There was really no change. We haven’t had departures from the agency. What’s really changed is the definition of an active agent.

[Chris Giovanni:]

Okay. So that kind of 40% difference is just agents that are actively selling the Family Heritage product?

[Larry Hutchison:]

We’ve changed the definition so that it’s an agent that’s actively sold in the last 60 days. That’s consistent among the companies.

[Chris Giovanni:]

Okay, all right. Thank you very much.

[Operator:]

And at this time, we do have one question remaining the queue. (Operator Instructions) We’ll take our next question from Vincent Lui with Morningstar.

[Vincent Lui:]

Hi, good morning. Just a quick follow-up on Direct Response. If you look at the statistics, you basically achieved like 40% of sales form and out mailer and insert media piece. And about 60% after six months. And the 60% stayed pretty safe over time. And just curious to hear your thoughts in terms of the impact of the Direct Response initiative you mentioned on the pace of sales generation? Any change to the statistics going forward as you can see?

[Gary Coleman:]

If you’re asking about our new initiatives and the pace at which it’ll increase production, we’re really – as far as the rate adjustments and the higher pace, now so it won’t be rolled out till mid to late second quarter. So it’ll be the second half of the year before we see an impact on the sales.

[Vincent Lui:]

Okay. But does the pace really matter from an accounting standpoint or just – I mean just some interesting statistics you keep track of?

[Gary Coleman:]

I’m not sure I understand the question.

[Vincent Lui:]

Well so the distribution here is about 40% in four months, 50% in five months and then 60% after six months, right? And then I would assume the 40% in the second half of the year, as the effectiveness of the insert basically loses effectiveness over time. When you have this new initiatives, you probably change the distribution somewhat. And – but from a sales and from a sales recognition standpoint, if you look at the whole year, doesn’t really change a thing, does it?

[Gary Coleman:]

As far as adding the new initiatives, I don’t think it would change. I think you’re talking about the percentages of the lag time on which we receive new business.

[Vincent Lui:]

Right.

[Gary Coleman:]

Yeah, I don’t think this will change those lag times. I mean these products aren’t so different. It’s just that what I’m saying is it’s going to provide additional production just because we’re providing products either right when – before or we’re replacing them. So it’s incremental production, but as far as a lag, I think it will probably be about the same.

[Vincent Lui:]

Okay, great. That’s helpful. Thank you very much.

[Operator:]

And it appears there are no further questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

[Mike Majors:]

Thank you for joining us this morning. Those are our comments and we’ll talk to you again next quarter.

[Operator:]

And this does conclude today’s Torchmark Corporation First Quarter 2013 Earnings Release Conference Call. Thank you for your participation.