Globe Life Inc (GL) 2007 Q3 法說會逐字稿

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

Good morning.

Net operating income for the third quarter was $130 million, or $1.38 per share. A per share increase of 10% from $1.26 from the year ago quarter. Our return on equity was unchanged from a year ago at 15.8% and our book value per share increased just under 10% to $35.18. In our life insurance operations, premium revenue grew 3% to $393 million, and life underwriting margin increased 9% to $105 million. As a percentage of premium revenue, life underwriting margins were 27% versus 25% for the year-ago quarter. Life insurance net sales were $66 million, up 1% from a year ago. And life first year collected premiums were $49 million, a 5% decline.

In our direct response operation, life premiums increased 6% to $121 million, and life underwriting margin grew by 18% to $29 million. Life net sales declined 2% to $28 million, and life first year collected premiums were also down 2% to $18.7 million. While net life sales continued to show a slight decline in the third quarter, we expect to see a significant turnaround in the fourth quarter. As I mentioned on the last call, our insert media circulation during the third quarter was 27% greater than a year earlier. As a result, we saw 24% increase in our insert media responses during the quarter.

During the month of September, our gross life sales, which are policies which have been issued but have not yet paid beyond the introductory offer grew by 19%. We believe these increases will result in double-digit growth in total direct response net life sales beginning in the fourth quarter. With insert media circulation scheduled to increase 35% during the fourth quarter, we expect to see continued strong growth in net life sales to at least the first half 2008. At American Income life premiums grew to $111 million. Life underwriting margin grew 13% to $36 million. Net life insurance sales rose 10% to $24.4 million with first year collected premiums showing 2% growth to just under 18.5 million.

At the beginning of July, we implemented an improved compensation plan for new agents at American Income consisting of increased commission advances and reduced bonus thresholds in attempt to improve retention of new agents. While it is too early to tell whether retention has improved, the change had a positive impact. The number of producing agents at American Income hit an all-time high of 2,616 at the end of the quarter, an increase of 9% in just the past three months. New agent recruiting for the quarter was the highest in four years and the second best recruiting quarter ever. At Liberty National, life premiums declined 3% to $73 million with life underwriting margin down 9% to $18 million. Life net sales declined at 9% to $9 million, with life first year collected premiums down 18% to $7 million.

While the producing agent count grew 6% for the quarter, and now exceeds the count from a year ago, the decline of renewal year agents who have higher average production continues to have a negative impact on new sales. Effective October 1st, we have instituted agent compensation changes at Liberty National similar to those we made at American Income last quarter. On the health insurance side, premium revenue excluding Part D was flat for the quarter at $253 million with health underwriting margins up 1% to $45 million. Health net sales declined 4% to $57.5 million, and health first year collected premiums were up 1% to $48 million. For the independent agency operation at United American, health premiums dropped 8% to $93 million, and health underwriting margin was down 11% to 15 million. Net health sales fell 9% to 11 million. On the branch office side, health premiums grew 9% to $97 million while underwriting margin declined 1% to 12 million. Net health sales were down 2% for the quarter to 40 million while first-year collected premiums were up 12% to $32 million.

The decline in underwriting margin was primarily due to adjustments we made as a result of our annual review of the amortization of our deferred acquisition cost and the adequacy of our reserves. These adjustments were year-to-date adjustments, meaning that our year- to-date underwriting margins are our best current estimate of what we expect to see going forward. The decline in health net sales for the quarter was unexpected. Upon further review, it appears the loss of growth was actually caused by our rapid expansion. Since the end of July 2006, we have increased our branch offices from 110 to 149, or 35%. And growth to our field management from 471 to 662, which is 41% growth.

While it appears that our renewal year agent count has grown 23% in the past 12 months, in fact, the growth has been entirely in our management ranks. In the last year, we have promoted over 300 of our best producing agents into management. While we expect to see improved sales going forward as a result of our expansion efforts, we will have more moderate expansion goals in 2008, allowing our sales growth to catch up with our management growth. Premium revenue for Medicare Part D was $53 million for the quarter, an underwriting margin of $6.4 million. The reconciliation with CMS for 2006 experience should be finalized in the fourth quarter.

We have conservatively accounted for monies to be repaid to CMS as a result of favorable experience and expect the final reconciliation to have a positive impact on fourth quarter results. Administrative expenses were $40 million for the quarter, up $2.5 million from a year ago. Litigation expenses were up 3.2 million for the quarter, including the Mississippi judgment mentioned in the earnings release. In the third quarter of 2006, litigation expenses were reduced by $1 million for proceeds from a class action lawsuit to which we were a party. Other administrative expenses were in line with our expectations.

I will now turn the call over to Gary Coleman, our Chief Financial Officer for his comments on investment operations.

Thanks, Mark. I want to spend a few minutes discussing investments, excess investment income and share repurchases.

First, investments. Torchmark has $9.2 billion of bonds at amortized costs, which comprise 94% of invested assets. Of our bonds, 91% are corporate bonds and the hybrid securities. Less than 1% of our bonds are in mortgage-backed securities, and none of those are backed by subprime mortgages. Overall, the total portfolio is rated A minus, same as a year ago.

Regarding new investments, we invest almost exclusively in investment grade corporate bonds and hybrid securities. In the third quarter, we invested $226 million at an average annual effective yield of 6.84%, and average life to worse call of 22 years and average rating of A. This compares to the 7.17-year-old, 22-year life and triple B plus rating of bonds acquired in the third quarter of last year. The new money yield has increased in each of the last three quarters, but it's still slightly lower than the portfolio yield.

At September 30th, the average yield on the portfolio was 6.96%, nine basis points lower than a year ago. Now, turning to excess investment income, it was $81 million, up 1%. However, on a per share basis, excess investment income increased to 8%, which reflects effect of our share repurchase program. Excess investment income is net investment income, less the interest cost of the net policy liabilities and the financing costs of our debt. As mentioned in the earnings press release, both investment income and interest expense were $6 million higher than the usual in the third quarter 2006, due to the pre funding of debt that was retired later that year.

For the year-over-year comparison of the components of excess investment income, I will exclude the effects of the pre funding from the third quarter 2006 numbers. With that in mind, the comparison is as follows: First, net investment income was up $8 million. However, take into consideration the $256 million of municipal bonds acquired in March and April, total investment income on a tax equivalent basis was up $9 million. This represents a 6% increase in income, slightly lower than the 8% increase in average invested assets. Next, the interest cost on net policy liabilities increased $5 million or 9%, and that's due primarily to a 7% increase in the average liabilities. And finally, financing costs were up $2 million due to the higher average short-term debt outstanding during the quarter.

Now, regarding our share repurchase program, in the quarter, we spent $103 million to buy $1.6 million Torchmark shares. Year-to-date, we spent $401 million acquiring $6.1 million shares, which is more than the 5.6 million shares purchased in the full year of 2006. In the past, we have routinely just used the free cash flow at the holding company to fund stock repurchases. As mentioned, we have spent $401 million to date, which is $51 million more than the $350 million of free cash available this year. The additional purchases were made when the stock price declined significantly in August and September, and were funded through short-term borrowings. Since then our share price has risen, and if the remains at or above the current level, it is unlikely that we will purchase shares in the fourth quarter.

Those are my comments. I will now turn it back to Mark.

Thank you, Gary. We continue to expect full-year 2007 earnings per share to fall within the guidance range we provided last quarter. We will provide 2008 guidance on our next call. Those are my comments this morning. I will now open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] We will pause for just a moment to give everyone an opportunity to signal. We will take our first question from Jamminder Bhullar with JPMorgan. Please go ahead.

Hi, thank you. I just have a couple of questions. The first one, on Liberty National. Mark, if you can discuss your outlook for that channel and you're making some changes on agent comp.

It seems like you're going back to how -- how it used to be in terms of lowering productivity requirements but if you can discuss when these changes will result in an improvement in sales. And then if Rosemary is there, on Part D, if you can give us an idea on what you expect in terms of enrollment for next year. And that's all I have.

Okay. Jimmy, I wish I could accurately predict what's going to happen at Liberty National in the fourth quarter, and even into the first part of next year. It's very hard to predicts. Our agent count continues to grow. Again, the changes we made at American Income, we basically went from 1% growth to 10% growth the first quarter we made those changes. Will we see similar results at Liberty National? We hope so, but I can't say with a great deal of certainty that we'll see the same results. We obviously hope we do. Rosemary, you want to take the Part D?

Yes. In terms of the enrollment for next year, I really expect to see something of a stable population. We will experience some lapses on our existing population at the end of the year, but we will also write some new business, and so, I would say I expect to see stable numbers there. We are going to be offering two plans in 2008, and we have allowed for acquisition expense in both of those, which is different than what we had from the prior year.

And the other one, the lower premium plan that you were discussing, or is it --

It's slightly lower. It's one of our plans is an enhanced benefit plan, and the other one is really a plan that's equivalent to their standard plan. So, the premium is slightly lower, yes.

And then lastly, could you quantify the reimbursement reconciliation you're expecting in part D in the fourth quarter?

Well, we are still working on that. So, the numbers are not final. We had, as Mark mentioned, conservatively accounted for what we thought the numbers were going to be, so far, the numbers that we're seeing are going to be favorable to us, but it is not final. But we do expect to see a favorable impact in the fourth quarter because of this.

Okay. Thank you.

We will take our next question from Steven Schwartz with Raymond James. Please go ahead.

Thank you. Good morning, everybody. First, I'd like to follow up with Rosemary on Jimmy's questions on Part D. If I -- well, first off, Rosemary, could you give us a sense of how many states you've been approved in and how many states that you're approved for dual eligibles, compare that to last year?

We're approved in all regions. However, for dual eligibles we're only going to have one state going forward, or one region, which is Arkansas, and that's actually good news, because we lost Wisconsin, but we had experience that wasn't as favorable in Wisconsin, so that really is quite fine with us.

Okay, great. Now, if I remember correctly, the margin this year looks like it's, at least so far, through the nine months, it looks like it it's coming in around 10.7 -- 10.8%. I think -- do I remember correctly, you were disappointed in that, weren't you? Wasn't the original goal 15%?

Oh, no. No, I don't think our original goal was ever 15%. And actually, I think we've been pleased with the results in Part D. I guess the one issue that we did have was when we priced our business for 2007 originally, and we had to do that based on four months worth of experience, and so, the margin that we thought we had in our 2007 premiums actually didn't turn out to be quite as high as we had hoped, but we redid our projection at the beginning of the year, and our 2007 experience really all year-long has been in line with that projection.

We have had favorable adjustments come through in 2007 that really relate to the 2006 business, and also as a result of the reconciliation that will account for most of it in the fourth quarter. We expect to see another favorable result from that.

Okay. And then just on the changes in how you're compensating, continuing agents both in American Income and then looking at Liberty National, will that ultimately have an effect on margins? I don't know if those -- sounded like extra payments, would be that or not

Presumably they would come through in the earnings.

They would. They're not significant. The changes at American Income, most of the change is additional commission advances which were basically losing time value of money, which is not significantly going to affect margins. The lower bonus thresholds, we share that cost with the SGA, and if it is very successful it could result in anywhere from a half to one-point reduction in our margins. But again, when you look at the margins that we have there, if we can recruit or retain more agents from it, it's a great investment on our part.

Okay, great, that's what I wanted to know. Thank you.

We will take our next question from Tom Gallagher with Credit Suisse. Please go ahead.

Hi. Just one, first on Part D, then I have a couple of others. I just want to make sure I understand where this is likely to at least come out from a range of outcomes in 4Q. You had a 12% margin in 3Q. Can you just give even a broad range of where that might come out in 4Q? Are we looking at 12 or better?

I think we're actually looking at 13.5. So, yes, I think it's going to come out better than the 12.

Okay.

Strictly for that quarter. Rosemary, for 2008 on our pricing, what's our target underwriting margin?

11%.

So one-time positive adjustment in 4Q, and then 11% pricing assessment for '08?

Right.

Okay. That's helpful. I guess just overall on the health sales through the branch, I just want to understand a little bit more what's happening. That really has been a growth driver for you, and if I'm understanding you correctly, the decline in sales this quarter is viewed as kind of a one-time hiccup due to this transition of productive sales people into management. That fair to say?

That's fair to say. We were very aggressive, particularly in the last six months in opening new offices, promoting new managers, as well as middle managers, and again, if you look, the way it's reported, we put producing agent counts out on our website, but those renewal year agent counts include management. And it shows, if you look at those numbers, it shows a renewal year agent count as grown by 23% in the last year. That's really not the case, because of that 898 renewal year agents, it's -- hold on a second. It was 662 of those are in management. So, renewal year agent count really hasn't grown. And the fact that we've -- those agents that we've promoted into management are our best producers. They're averaging over $100,000 a year of production. Well, it hurts short-term sales every time you promote one of those people.

Now, it is an investment we're making in longer term growth, but it just says, we can't grow 35% a year in our branch offices. That's overly aggressive. About half of that is more manageable growth, and we just allowed our branch expansion to be a little too aggressive, and we've taken too much individual production out of it. So I'm not concerned about it it. I believe that investment in that expansion will pay off going forward. But we're going to have more moderate goals for 2008.

Okay. And just, Mark, as we think about the way this is likely to play out, you know, again, broad range of expectations, do you think, are sales likely to be flat to down near term, or do you think will you get a quicker bounce-back, just in terms of the next two, three quarters?

Well, again, I think that we'll start back up in the fourth quarter, and it may not be back to double digit in the fourth quarter, but by first quarter, it definitely should. Again, when we've grown our management staff by 40% in the last year, we sure expect to see strong double-digit growth next year as a result of that.

Okay. So, as we think about premium growth on the health side, we were roughly flat this quarter. Do you think we've bottomed out at flat and we'll see at least moderate growth next year?

Well, again, it should improve over where it is today. But again, it would be very moderate growth next year, possibly in 3 to 5, but we haven't done our models yet for 2008, so really I'm not in position to give you guidance on what I think those premiums will be next year.

Okay. But you wouldn't see them declining necessarily?

Not really, I wouldn't.

Okay, thanks a lot.

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

Good morning. Should the first life company I followed the report I just want to sort of go through the investment portfolio more carefully. If we look at page 11 of your handout, the balance sheet, your unrealized gains or losses of 20.6 million were up 3.5 million sequentially.

I realize you saw a little bit of gain, so that may overstate the decline in how the portfolio did, but with a portfolio that doesn't have exposure to subprime, and the average corporate bond yield went down 10 basis points, I would sort of expect a slight increase in your total portfolio marked to market this quarter. Am I missing something, or was there some dynamics in the portfolio where you had had a little bit of minor losses?

No, Bob, I can't think of anything where there were specific to securities problems that would result in losses. It's really the -- not much of a change in the net unrealized loss we had last quarter.

Right. So, you think for the life companies we're looking at with similar type portfolios no changes sort of what we should be thinking in terms of?

Well, I can't -- I don't know the other life companies' portfolios like I do ours but that seems reasonable.

Okay and where are your statutory earnings running through nine months, just as a guide post of what your free cash flow for next year might be that you'd have available?

We don't have the nine months earnings to date so I haven't been able to look at that.

Is your sense they're up, down, sideways? Is there something that could be some unusual items that can swing it?

I'm not aware of any unusual items through the six months. As I recall that they were up. And, you know, eye my thought is they will be up. I just don't have the numbers today.

Your short term is down sort of year-over-year and sequentially, even with the increased funding. Are you going to fund that out longer, than the buyback?

No, I don't think so. As I mentioned, I don't know that we'll buy back much, if any, in the fourth quarter, and, of course, we'll get into next year, our free cash flow, and even though I don't have the statutory numbers, I expect it to be at least $350 million we had this year. So, we'll be content to wait until that money starts coming in to buy back the stock, unless, as I mentioned earlier, if there's significant decline in the price, then we've got quite a bit of room to our short-term loan we could borrow if we needed to. I just don't expect that.

I was interested in your answer. I was actually asking a slightly different question, though. You're comfortable with where your short-term debt is right now? You don't have to extend that?

$200 million is all on commercial paper. Under our line we could borrow up to $470 million. So, the 200 million is really the lowest right now, about the level we normally run at.

Thank you very much.

As a reminder, if would you like to ask a question through your phone line, please press star 1. And we will take our next question from Ed Spehar with Merrill Lynch.

Thank you. Good morning, everyone. Mark, I was wondering if you could define successful, when you talk about the changes you've made in the bonus plans for American Income and now for Liberty National. If there was a half to one-point reduction in margins, how fast would you be growing the top line in those channels?

Oh, American Income is a little easier. I mean, if you look last quarter, prior to making those changes, Ed, our sales were up 1%, and the first quarter after we made the changes, our sales were up 10%. Well, that's roughly $2 million of additional sales. Which should translate into roughly that much additional premium going forward. Is that --are we willing to give up a half a point of margin when we're looking at in excess of 30% margins at American Income? To get 10% more business by giving up a half a point margin, that's a great investment, as far as I see it. You know, hopefully going forward we'll see that accelerate, but it's kind of early to say what impact we're having on the retention right now. But it sure has increased our recruiting since we made the change.

And then, Mark, how about for Liberty National? What would be considered -- given that the margins aren't as high there,.

True. There we're not -- we're changing the bonus more than increasing the expense. We really don't expect to be giving up any margin at Liberty National. One, our bonuses were being paid monthly. I think one of the big impact is we've gone to being paid weakly, which seems to have some benefit, but at Liberty National we're really not giving up any margin there. We're changing the compensation plan and not really increasing the money.

Okay, that's very helpful. Then on premium, I'm wondering, given -- it sounds like you're sticking with what you had said about direct response last quarter this quarter. So, I'm wondering, is there any more clarity in terms of when we see the first year collected life premiums year-over-year turn positive and maybe, you know, what kind of growth we might see in that number as we head through '08?

Oh, I haven't really -- again, really haven't put together our models for next year at this point, but right now we're running 2% decline in first year collected premiums. That should turn around into a positive, I would think even in the fourth quarter, it should stop the decline.

But if we start seeing -- again, if we start seeing double-digit growth, and I think fairly strong double-digit growth in the fourth quarter, it will take a full year for the first year collected premiums to catch up with that percentage growth in sales. But again, you can start with a 2% decline, and where we'll be a year from now, and it would just track quarter by quarter. It would be a gradual increase.

For example, if we can improve, get 15% growth each of the next four quarters in our direct response sales, I would expect a year from now to see 15% growth in our first year collected premiums. So, it would be more of about a 4% improvement each quarter over the next four quarters.

And how about just for the total life business, thinking about it? I was trying to get you for '08.

Yes, Ed, I'm going to have to put you off until next call on that. I just -- we just haven't gone through and made our sales projections, our premium projections for next year. It's just impossible for me to say right now what we expect our life insurance premiums to do next year.

Okay. Then just one last question. You said that the branch office growth that you've had had at United American is -- I think you said 35%, and that, you know, you think you can do half of that without sort of stretching the system, I guess. I mean, does that mean we should assume that branch offices are flat next year because you sort of have 2x the growth in '07?

No, I don't think they'll be flat. I think about half of that -- I think we would still look for somewhere in that 15 to 20% growth in both new offices, as well as our entire management. But we can't sustain 35, 40%. We've just got overly aggressive, and no, I would still expect that we can open -- we can grow by 15 or 20% our offices next year.

Thank you.

We will take our next question from Mark Finkelstein with FPK. Please go ahead.

Hi, a couple of questions. I guess, just to confirm, based on your comments on your comfort level with the short-term, can we infer that the higher buyback is additive and not borrowing in any way against 2008 excess cash flow?

Gary, you want to take that?

Yes. Mark, I'm not sure I understood the question. Can you repeat that?

I am just saying that you kind of levered up to buyback more stock, and I guess what I'm trying to make sure of is that the additional buyback in 2007 doesn't essentially go against what, you know, your excess cash flow would be for 2008, based on statutory earnings.

Oh, no, it won't. Again, at $200 million, short-term debt, that is -- if you go back over the last several years, that's what we've averaged at the end of each quarter. So, no, we actually are a little low. We were around 170 million coming into the year in short-term debt, so we haven't increased it that much. Now, if we -- if for some reason the stock fell, we borrowed more money in the fourth quarter, the way I would look at that is that we would be pre-funding purchases, with cash flow from the prior year, I mean, for 2008. But, again, I don't anticipate that happening, but that's the way we would look at it it, is we're just simply pre-funding our 2008 purchases.

Okay, thanks. Then, Mark, just going back to a comment you made on the second quarter, I think gross sales in direct response were up about 7%. This quarter, net sales direct response, down 2%.

I guess, can you just talk about that dynamic and how tightly correlated, you know, the gross sales and net sales have been historically in terms of thinking about that 19% growth that you talked about in September and how that should trend into the fourth quarter sales number at direct response?

Well, and I don't have it in front of me exactly what I said last quarter. Hold on a second. But they typically trend very closely. In fact, it's interesting that our third quarter gross sales were up 19% in direct response. And through the first three quarters, or the first three weeks of October we're running 16% ahead of net sales. We feel very comfortable that those -- that growth and gross sales that we saw in the third quarter will equate to something very close to that in the fourth.

Okay. And then I guess, I mean, the numbers are a little bit smaller, but one thing that I noticed was, looking at life sales at the U A branch, they've actually sequentially gone up pretty significantly, I think a million and a half for the third quarter. Is there a higher emphasis on selling life out of the UA branch, or is there anything different product going on there, and how do you expect that to trend going forward?

Well, yes, we have tried to encourage more life sales in the branch, and actually we made it easier for them to do it. One of the biggest things we did was, they can apply for both the health and the life in one application. So, we've significantly reduced the paperwork, plus it reminds the agent every time he's in that house selling a health policy, most of these people, if they don't have health insurance, they also have no life insurance. So, just a reminder to that agent that, oh, I need to ask about life insurance, and we are seeing additional life sales made at the same time of our health sale. And going forward, I think that will continue to improve.

Okay. Great. Thank you.

Once again, if you would like to ask a question through your phone line, press star 1 on the telephone keypad. We will take our next question from Eric Berg with Lehman Brothers. Please go ahead.

Thanks very much. Gary or Mark, I have a sort of a high-level question regarding the share repurchase program, and it is this. It looks like this year, basically reflecting the aggressive share repurchase program, the equity base, the shareholder's equity, didn't grow. It actually fell a little bit. You're actually -- no, it's probably about the same, if one -- roughly the same. It fell modestly from where it was in summary at the start of the year.

And my question is, if you continue to expand the size of this company, with a growing asset base and accordingly a growing liability base, a growing base of insurance liabilities, will you be able to continue to buyback stock, or is it possible that you will run afoul of rating agencies and regulators? Don't you have to have, just in general terms, don't you have to have, if you have a growing insurance company, and growing risk on the books, a growing equity base?

Well, I'll make a few comments, Gary, and I'll let you have it. One, regulators are concerned primarily about our statutory equity, which all we're dividending up to be used in share repurchase is our current year statutory earnings. So, our statutory equity is staying at least at the level it has been, which does not appear to be a problem with regulators. Gary, you want --

Why wouldn't it it be a problem, Mark, in the sense that if you're keeping your equity flat, as you grow your business, you're going to have a declining ratio, or a rising ratio of liabilities, insurance liabilities to your statutory surplus. So, I would think that event you eventually you would sort of bump up against the wall, but I'm eager to hear.

Eventually, that may well be true, but I don't see anything like that happening in the short term.

Eric, I agree with Mark. The one thing that you have to remember is that the type of product that we sell have fairly low risk capital requirements. As Mark said, the surplus is pretty much the same, but also our capital requirements have not grown a great deal, either, and that's what's allowed us to be able each year to take out the earnings, and I agree with Mark, theoretically at some point, can't do that but I don't see that anywhere near future.

And as Mark mentioned, too, when the rating agencies take a look at us, they're looking at our cash flow, not only statutory income but just the cash generated by our products versus the cash required by them. And I can tell you that we're -- where we're rated, we're in very -- we're in a higher range in terms of our capital that we have for our rating. So, I think we're in pretty good shape.

My second question, my final question, relates to direct response. Remind me when -- remind us when you took control of the Long Island company that does the -- media sort of thing

It was in January of this year, Eric.

In January of this year. So, do you feel like -- we're now into September, rather, we've just completed the September quarter, do you feel like you are where you wanted to be, and -- are these developing consistent with or not consistent with your expectations?

Well, my initial expectations were probably a little aggressive, but are they -- they're exactly where I should have expected them to be, because, again, you need to think back, in January, at the time we made that acquisition, if we had not made it, we were looking at a 30% decline in that insert media circulation this year. Well, we still saw an 11% decline in the first quarter, and we got it up to roughly flat in the second quarter. Now, in the third and fourth, we've been able to go in and find areas that we can increase that circulation. So, within six months after the acquisition we're increasing that circulation by 27% in third quarter, 35% in the fourth quarter. I'm pleased with that.

The only place that my expectations, and they were unreasonable expectations, that sales growth would occur too quickly, it's because now we fund some lag studies, and it's really -- there is a much longer tail to it. I can even give you an example, Eric. We increased the circulation in July. In July, 0% of our net sales from that circulation come in July. Only 28%. come in in August. Another 15%, we start to see it in September. But it's really, we get 18% in October, and 17% more in November, and 14% in December. 10% won't come in until January. So, it has a very long tail to it.

But I'm pleased with the circulation numbers and the response cards that we're getting back from that circulation are tracking exactly where they should be. We had 27% increase in circulation, and actually the last four weeks, our increase in response cards is 27%. It was 24% for the full quarter. So, it's tracking exactly where we think it should be. I just had unreasonable expectations on when those net sales would hit.

And you had just finished up here, one more, at the beginning of your prepared remarks you cited three statistics. A 24% increase in responses year-over-year in the quarter, then you went on to cite a statistic of 19% and 35%. Could we go over what those percentages were and what they sort of speak to in terms of the future?

Sure. Okay. Again, just looking at the insert media side, which is a little over half of our total sales, it's a two-step process, meaning, we put an insert in, first we get a response card back. We then, for the next three months, we send them six product packages. Then we continue to mail them once a month for the next nine months. So, they're receiving product mailings from us over the next year. The reply cards, the response cards that we get in come in very quickly. Just for example, for July circulation, we have 85% of those reply cards back in by the end of August. So, those come in very quickly. They're a very quick measure of what's happening.

Now, then when we've done these follow-up mailings with applications and product information, we get those applications in, we issue a policy. We don't treat it as sale. We don't count it as a sale at that time because of the introductory offer, which is a one month for an adult policy, and three months for a juvenile policy. But now, we're seeing that, okay, that's what we call gross sales. These are policies issued that have not yet paid beyond the introductory offer. Those sales were up 19%. It's just they haven't had time to be billed and pay the first full premium.

So, we feel very comfortable the responses, the -- first off, the circulation, which is a number of inserts we're putting in, was up 27% in the third quarter and 35% in the fourth. We're already seeing the reply cards, the responses, up 24% in the third quarter. In fact, the last four weeks, they're up 27%. We're seeing the gross issues, the policies that we're issuing, they're up 19% in the third quarter. We feel very comfortable that the net sales will track that in the fourth quarter. And into the first and second quarter of next year.

Thank you very much.

Okay.

We will take our next question from Colin Devine with Citi. Please go ahead.

Thanks very much. Mark, I appreciate, I was going to ask about if we're looking at the insert media on direct response, when does that start to turn into sales? But to follow up on that, direct response clearly is your big division today. How sensitive is that business and perhaps overall for Torchmark for a downturn in the U.S. economy, off a decline in the housing market, thinking of your customer base?

You know, Colin, I've been closely involved in direct response since 1985. And I've yet to see any significant impact on the direct mail side. The economy does not appear to impact our persistency. On the insert media side, it is somewhat. I mean, there's -- I think a couple of -- gee, it's been a year or so ago, actually prior to the time we acquired DMAD, they were seeing their response rates go down, and what they were telling me was that it was because of the economy. I don't have any facts to support that, but could it possibly impact it? I guess that's possible, but I just really don't have any hard statistics on the insert media side. We've never seen any impact of the economy on the direct mail side.

Okay. And then just to understand on direct response this quarter, if I think of net sales, okay, down, about 2.2% year over year, but now you've got the insert piece. So, if we split it up, if we're really comparing apples to apples, how much was it down? If we take out the insert media net sales for this quarter so we can compare really what's going on there this year for third quarter this year versus third quarter last year because third quarter last year you didn't have the insert.

No, we still had the insert media sales. It's just they were being produced by an outside party. We still had those sales and counted those sales.

I just wanted to be cleared.

Yes, we're apples to apples.

All right, thank you.

Yes

At this time, there are no further questions. Mr. McAndrew, I will turn the conference back over to you for closing comments.

Well, I want to thank everyone for joining us this morning, and we'll talk to you next quarter. Have a great day.

Ladies and gentlemen, this will conclude today's presentation. We do thank you for your participation. You may disconnect at this time.