Globe Life Inc (GL) 2011 Q1 法說會逐字稿

Good day, everyone. Welcome to the Torchmark Corporation first quarter 2011 earnings release conference call. Please note that this call is being recorded and is also being simultaneously Webcast.

At this time, I will turn the call over to the Chairman and Chief Executive Officer, Mr. Mark McAndrew. Please go ahead, sir.

Thank you. Good morning, everyone. Joining me this morning is Gary Coleman, our Chief Financial Officer; Larry Hutchinson, our General Counsel; and Mike Majors, Vice President of Investor Relations.

Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2010 10-K and any subsequent Forms 10-Q on file with the SEC.

Net operating income for the first quarter was $129 million or $1.62 per share. A per share increase of 7% from a year ago. Excluding the $6 million of United Investors earnings from the year ago quarter, net operating income per share from continuing operations increased 12%. Net income was $106 million or $1.33 per share, down 13% from a year ago, primarily as a result of a $15.5 million realized investment loss on the sale of our holdings in MBIA. Excluding FAS 115, our return on equity was 13.2% and our book value per share was $49.45, a 9% increase from a year ago. On a GAAP reported basis, with fixed maturities carried at market value, book value grew 15% to $50.70 per share.

In our life insurance operations, premium revenue, excluding United Investors, grew 4% to $431 million. And life underwriting margins increased 7% to $119 million. Life net sales declined 5% in the quarter to $81 million while life first year collected premiums were down less than 1% to $61 million. I feel good about our potential for growth in our life premiums and underwriting margins. While we currently expect relatively flat life sales in the second quarter, we believe we will see high single digit growth in life sales in the third quarter, followed by double digit growth in the fourth quarter. I'm also very pleased with our initial efforts to conserve our existing life customers. In 2010, we produced $330 million of net life sales but we lapsed $252 million of in-force premium. As we are able to fully implement our conservation efforts over the next few months, we believe we can reduce our lapses in the 10% to 20% range.

At American Income, life premiums were up 8% to $146 million, and life underwriting margin was also up 8% at $48 million. Net life sales declined 5% for the quarter to $33 million. The producing agent count at the end of the first quarter was 4,039, down 4% from a year ago but up 3% from year-end. It is also up 8% from its low of 3,724 at the end of January. I'm very encouraged by the progress being made at American Income. In addition to the growth in agents, the number of new agents achieving our top bonus level for the first time grew by 38% in February and March, which will have a positive impact on our new agent retention. Our mid level sales management ranks also increased 4% during the quarter.

In our direct response operation at Globe Life, life premiums were up 5% to $152 million, while life underwriting margins were unchanged at $38 million. Net life sales were down 2% to $36 million. The outlook for direct response is also very positive. For the past few months we have been testing and analyzing an enhancement to our underwriting utilizing applicants for prescription drug records, and the initial results are encouraging. For our insert media adult business, which represents 40% of our total direct response life sales, we estimate this change will reduce our mortality cost by roughly 17%, resulting in additional underwriting margin of 4% to 5% of premium on this block of business. This additional margin will, in turn, allow us to expand our distribution. This change will also impact our direct mail sales but further analysis is necessary before we can quantify the effect. We currently expect mid single digit growth in life sales in the second quarter with improving double digit growth in life sales in the second half of this year.

Life premiums at Liberty National declined 2% to $73 million. And life underwriting margin was up 20% to $17 million. Net life sales declined 12% to $9.4 million. The producing agent count at Liberty National at the end of the first quarter was 1,844, down 17% from a year ago. As I have mentioned previously, the turnaround at Liberty National is not a quick and easy fix but we are making progress. The underwriting margins have improved significantly. Through our conservation efforts we should stop the decline in life premiums. On the marketing side the number of new agents achieving the maximum bonus level for the first time was up 34% in the first quarter, which again will have a positive impact on our agent retention. We have, however, reduced our life sales estimates at Liberty National for 2011. We now expect to see a continued decline in the second quarter followed by roughly flat sales in the third and single digit growth in the fourth quarter of this year.

On the health side, premium revenue excluding Part D declined 5% to $192 million, while health underwriting margin grew 4% to $137 million. Health net sales declined 16% to $14 million. As a percentage of premium, we expect the health margin to hold at that 19% level for the balance of 2011. Premium revenue from Medicare Part D was $49 million for the quarter, down 5%. And the underwriting margin was $5 million, down 2%. Administrative expenses were $38 million, up 2% from a year ago and in line with our expectations.

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

Thanks, Mark. I want to spend a few minutes discussing our investment portfolio, excess investment income, capital and share repurchases. First, the investment portfolio. On our website are three schedules that provide summary information regarding our portfolio as of March 31, 2011. As indicated on these schedules, invested assets are $11.2 billion including $10.5 billion of fixed maturities at amortized cost. Of the fixed maturities, $9.8 billion are investment grade with an average rating of A minus. Below investment grade bonds are $758 million, down from $863 million at December 2010 and $891 million a year ago.

The decline in the first quarter was due to $82 million of dispositions and also $24 million of net upgrades of bonds to investment grade. The percentage of below investment grade bonds to fixed maturities at 7.2% is the lowest that it has been since the second quarter of 2008. That percentage may still be higher relative to our peers. However, due to our significantly lower portfolio leverage, the percentage of below investment grade bonds to equity excluding OCI is 19.6% which is likely less than the peer average. Overall, the total portfolio is rated BBB-plus, the same as a year ago.

During the quarter, we recognized realized losses of $23 million pre-tax or $15 million after-tax. These losses resulted from the sale of the Company's entire holdings of MBIA bonds which had a pre sale book value of $63 million. We have net unrealized gains in the fixed maturity portfolio of $156 million compared to gains of $108 million at year-end 2010 and net unrealized losses of $185 million a year ago. The increase in unrealized gains in the first quarter is due primarily to the previously mentioned sale of MBIA bonds.

Regarding investment yield, in the first quarter we invested $265 million in investment grade fixed maturities primarily in the industrial sectors. We invested an average annual effective yield of 6% and average rating of A-minus and an average life of 27 years. For the entire portfolio, the first quarter yield was 6.62% compared to 6.65% in the previous quarter and 6.78% in the first quarter of 2010. The decline in yield is due to the lower new money yields. As of March 31, the yield on the portfolio is 6.61%.

Now turning to excess investment income. Excess investment income is our net investment income less the interest cost of the net policy liabilities and the financing costs of our debt. In the first quarter it was $74 million, up $2 million or 3% from a year ago. On a per share basis, reflecting the impact of our share repurchase program, excess investment income was $0.93, up 7% over the first quarter of 2010. Of the components, net investment income was up $8 million or 5%, in line with the 5% increase in average invested assets. Despite the lower yields in the bond portfolio, investment income increased at the same rate as the related assets because we owe significantly more cash and short-term securities during the first three months of 2010 than we have in 2011. The interest costs of the net policy liabilities increased $6 million or 7%, in line with the 7% increase in the average liabilities.

Now, regarding RBC, as we mentioned before, we plan to maintain our RBC ratio at or around the 325% level. This ratio 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, 2010, consolidated RBC was 421% and adjusted capital was approximately $385 million in excess of that required for the target 325% ratio. The ratio and excess capital were higher than normal due to the impact of the sale of United Investors on December 31, 2010.

Finally, regarding share repurchase, and parent Company assets, in the first quarter we spent $187 million to buy 2.9 million Torchmark shares. So far, in April, we've used $30 million to buy another 450,000 shares. For the full year, through today, we have spent $217 million of parent Company cash to acquire 3.4 million shares. The available liquid assets at the parent consists of assets on hand and the expected free cash flow from operations. Free cash flow results from the dividends received by the parent from the subsidiaries less the dividends paid to Torchmark shareholders and the interest paid on the debt.

The parent began the year with liquid assets of $205 million. We expect to generate approximately $655 million of free cash for the entire year. Thus the total free cash available for all of 2011 will be around $860 million, the same amount that we projected in our previous call. In the first quarter, we generated about $391 million of our free cash flow, and that included the $305 million resulting from the sale of United Investors. As mentioned, the parent used $187 million in the first quarter for Torchmark share repurchases. As a result, the parent ended the quarter with $409 million of available liquid assets, and that's comprised of the $205 million beginning assets plus the $391 million of free cash during the quarter less $187 million in share repurchases.

Now, along with the $409 million that's on hand at the end of the first quarter, we should generate approximately $264 million of free cash flow over the next three quarters of the year. As of today, after deducting the $30 million of April share repurchases, the parent will have approximately $643 million available between now and the end of the year. As noted before, we will use our cash as efficiently as possible and if market conditions are favorable, we expect that share repurchases will continue to be a primary use of those funds. Those are my comments.

I will now turn the call back to Mark.

Thank you, Gary. First quarter earnings were in line with our projections and our previous guidance. And we are affirming our guidance for 2011 of expected earnings per share in the range of $6.75 to $7.10.

Those are my comments this morning. Melanie we'll now open it up for questions.

(Operator Instructions) John Nadel with Sterne, Agee.

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

Sure. And it's not an elevated level. In fact, our persistency of our life business has actually been improving over the last few years. So it's not an elevated level of lapses. A number of months ago, we decided that we were really going to focus on trying to conserve as much of that business as possible. And we have spent a lot of time over the last few months analyzing and tracing back to their source, what is causing the lapses in our different distribution systems. And so it's not one single thing that we're doing because there's a lot of different areas. But we have now identified where those lapses are originating and what the causes are, and we've outlined a plan for each of those areas on what we can do to reduce those. Some of those changes in our procedures will be pretty quick to implement. I think achieving a 10% reduction in our lapse rate, or in our lapses, is something we can achieve in the next few months. To get to 20% that's going to take a little more time. There's things we need to test. There's people we need to hire and train as far as people who take phone calls and do some telemarketing. But I think over the next 12 months , I think something toward the high end of that 20% range is

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

We're pretty much invested. One thing though, it took a little bit longer in the quarter to get the money invested. The markets, it's been a little bit hard to find the bonds. But as far as within the insurance companies, I think we're now about $150 million of short-term money, which is not unusual.

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

We will definitely retroactively adopt. I really don't have any more, much more to add than we did last quarter. Last quarter, we talked about the fact that we think that our write-down will be somewhere between $300 million to [$300 million] which is after-tax, which is about 8% of our book value. But going forward, as far as the impact on earnings, we will have a negative in terms of the reduced expenses that we can defer, but we're going to have a positive by the fact that we'll have reduced amortization. And when you net those two, if we don't do anything else, we'll have a small positive. But there's about $100 million of agency-related non-commission expenses that don't meet the criteria for the deferral. We're in the process of looking at those expenses with first in mind to reduce those expenses, to cut where we can or reduce where we can. And then also there's, secondarily to that, is that we may be able to recast some of those expenses to commissions, which would be deferrable. To the extent that we can do those two things, the deposit to earnings will be even greater.

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

That's correct.

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

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

Yes, it's a January 1, 2012 adoption date.

Randy Binner with FBR Capital Markets.

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

I think that's right, Randy. When you look at the full year, we still are expecting high single digit growth in direct response and mid to high single digit growth at American Income. But it's one of those things that it will be accelerating each quarter as the year progresses in both of those distribution systems. We have lowered our expectations at Liberty a little.

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

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

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

That's one of a number of pieces but that is an important piece. If on 40% of our sales we're lowering our mortality cost by 17%, it does allow more margin. One, we will do some additional rate tests to again find the optimum pricing level. We know that it is very price sensitive. If that improvement in our mortality cost allow us to bring our rates down 10%, we've seen from past experience that that will improve our response rates by something in the 20% range. And also improve the persistency of the business, resulting in higher profitability. So we've also had some very successful package tests here in the last three or four months that will add to that. But there's a number of factors in that but there's no doubt that change in underwriting is a big piece of it.

Ed Spehar with Bank of America.

Thank you. Good afternoon. A few questions. Mark, first, could you talk a little bit more about the health side? The first year collected premiums were down a lot more than I thought they would be. Maybe that's just because I was just out to lunch on the forecast. But I'm wondering if you could give me some sense of what's going on in the health side. And I have a couple follow-ups.

Well, Ed, there's not a whole lot new to report from the last call or two on the health side. Health sales were down a little more than what we anticipated. And part of that was, for example, like American Income, and it's something we need to take a look at. By moving to a laptop sales presentation, I don't know that we've done a good job of trying to move some of their health products into that, and that's something we can adjust. It comes down to it's pretty much in line with where we thought we would be. And barring -- we don't see any big resurgence in Medicare at this point in time. So it's about in line with where we expect it to be.

So how should we think about that if we're looking at the outlook over the next few years just generally? Is that a business that continues to decline?

Again, Ed, you've been following us long enough. It's hard to predict what the Medicare supplement marketplace will do. I think the Liberty National sales, as total sales stabilize and start to move forward, those should not decline or should turn around. Same way with American Income. We can bring those back up. But as far as the other, we basically discontinued those under age 65 products. Until there is a major change in the Medicare Advantage, then I don't expect to see growth in our health premiums. I still think we'll see some improvement in our health underwriting margins as some of that business continues to run-off, but I don't expect to see growth in our health premiums for the balance of this year or probably in the next year anyway.

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

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

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

Again, you can look last year. We lapsed $252 million of life premium, annualized premium. I think our projections for this year, if we continue down with just the same path that we've been going, we estimate it to be closer to $260 million of lapses for this year. So again, if we can conserve 10% of that, that's $26 million, 20% is a little over $50 million. This is really a big deal. This is probably one of the bigger things we've done in quite a number of years. If you look at our total life in force premium in the last 12 months I think grew $58 million. So if we're able to conserve $50 million of lapses, it will take our life premium growth to a significantly higher level. And I would also point out that the business we're conserving, because we've already made the big up-front investment, will have a significantly higher margin than the new business we're writing. The $330 million that we wrote last year, Ed, we spent roughly $500 million to put that business on the books. To conserve this business, if we're able to conserve $50 million, I don't think we'll spend $5 million to conserve that business. So it will have, although we haven't included any of that in our current guidance, hopefully by next quarter, we'll a little better be able to have more confidence in what impact that will have for the balance of the year and reflect it in our guidance for the balance of the year.

But there would be, the margin on that conserved business, how should we think about it? Is it almost all margin?

No, obviously you still have mortality costs.

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

Pretty much. Take for example, American Income. We still would be paying renewal year commissions on that business, so there's still some commission expense but it's not, we've already got the high first year expense. Definitely in direct response. We've already spent the money up front. So the cost to conserve that again, I don't think it will be 10% of premium versus well over 100% that we spent on new business.

Jimmy Bhullar with JPMorgan.

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

Okay. First off, American Income. One of the big differences this year versus last year, Jimmy, is again in looking at the percentage of those new agents that are achieving that maximum bonus level for the first time, even though our recruiting was up last year and we were putting on more agents, the numbers of agents hitting that bonus level was declining. And it did result in higher turnover. So even though we saw some growth in the first quarter, we couldn't sustain it. And then it continued to decline throughout last year, which is why we're where we're at today. Now, with the renewed emphasis on spending more time with that agent, better training, and getting them to that bonus level, we're seeing a reversal of that trend. So again, the last two months, the number of new agents hitting that bonus level is up over 30%. That's the main thing that gives me encouragement that we're back on the right track. We did hit a low of, I think, 3,724 at the end of January. To have 8% growth in the last two months is very encouraging to me.

Liberty National, a little bit the same way. Liberty National is a little different. Because of the way it's incorporated and the states it does business in, it has been able to use temporary agent licenses for a number of -- well, throughout its history. And they've almost become, for lack of a better word, addicted to the temporary licenses. And the turnover over at Liberty National has been so poor, even compared to American Income, they only retain about half the number of agents that American Income does. I think a lot of that is the fact that a lot of these people never pass their exams. So they can write business for 90 days but then they're gone, and that's not productive. It's not a productive use of management's time. So I look in the first quarter the number of agents who achieve, new agents who got a permanent license, who pass their exam, is up 34%. As well as the number -- it's not coincidental -- number of new agents hitting that maximum bonus level is up 34%. We're seeing a significant reduction as a result of some changes in our incentive compensation and the number of temporary licenses. It dropped almost in half the first quarter. So I think we're making the right choices as far as getting long term growth. But by not having all those agents with temporary licenses out there, it is having some short-term impact on our sales. But I'm okay with that, because we're trying to make changes that will generate longer term growth.

And then on the buybacks?

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

And should we assume that that's going to be front ended, more so, given rates are pretty low? So would you front end most of the buyback?

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

Robert Glasspiegel with Langen McAlenney.

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

Actually, Bob, I don't remember saying we would buy the maximum.

I was going to say that. I'm not sure I heard him say that. But obviously we haven't been buying anywhere near close to maximum since we received that. And, Bob, again, about all we can say at this point is we will have a discussion at the meeting tomorrow. We could buy it back. But Gary, we figure the maximum would be somewhere in the $10 million a day range?

Yes, something like that.

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

Okay. The last call I thought you said the environment, now that I mis-remembered the last, I hate to try to remember the last call again, but I thought there was some comment that the environment for acquisitions had changed and you might consider something. Did I have that, Mark?

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

It just seems like the two questions are linked. Maybe you were a little slow on the trigger on the buyback if you thought the deals environment was finally more favorable.

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

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

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

There's still some carryover, Bob. Our first quarter health premiums tend to be, if you look historically, tend to be stronger than the other three quarters. And a lot of that still goes back to United American, the Medicare Supplement business. We always seem to have a strong first quarter sales and a lot of those people pay annually. The first quarter tends to be stronger than the balance of the year. So I don't think a sequential increase is any sign. We expect to see the margins hold pretty well constant to the first quarter level but still a small decline through the balance of the year.

Paul Sarran with Macquarie.

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

Paul, we really don't provide guidance beyond the current year. And again, without taking into account our conservation efforts, which we haven't included in our guidance, I think we're still looking at somewhere in that 4% growth in life premium range for this year. So I hope, hopefully as the year progresses, that will improve, as sales results improve and the results of some of our conservation improve. But, again, we haven't included the conservation efforts in our guidance at this point.

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

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

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

We haven't. Again that will be a topic of discussion at our Board meeting. At this point, we haven't changed that outlook. But that is something that we're going to continue to look at and continue to discuss. And I think hopefully, we will get more comfortable with bringing that down.

Jeffrey Schuman with KBW.

Thank you, good morning. I'd like to start by just following up on that last one. So just to be clear, in order to have $643 million available to redeploy, you would have to eat into what had been the $200 million cushion. Is my arithmetic correct there?

For the balance of the year that would be correct. If we hold the $200 million, obviously it would be $443 million.

Okay. So clarified that. And then, like some others, maybe I'm struggling to correctly remember certain things on the last call. But I was thinking on the last call you had some optimism about actually having slightly positive growth in health sales this year. But now it sounds like you've described the continued decline as being in line with your expectations. So am I not correctly remembering the commentary from last quarter?

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

And that's again just based on just a reassessment of the Medicare Advantage situation basically?

Basically. We hope to see more improvement in our Medicare Supplement business. And again American Income health sales and Liberty National health sales were all down a little more than what we had anticipated.

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

That is part of it. I won't say that that's all of it. Their sales results are less than what we'd anticipated a quarter ago. And again, part of it was the shift in emphasis, the permanently licensed agents. But no, their results for the first quarter were below our expectations.

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

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

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

That's correct. The sales we see throughout the year, the other quarters are relatively insignificant.

(Operator Instructions) Steven Schwartz with Raymond James & Associates.

Thank you, good morning guys. A couple, if I may. Mark, you are doing the prescription drug thing and I guess others are, too, on insert. Would there be a reason to suspect there might be a difference in terms of results between insert and direct when you go to direct?

I don't think it will have quite as much impact on the direct mail side of that business, mainly because the average, what we're seeing is that the older the age, the more impact it has. Actually, when you get up to about 60 years old, it has a much more significant impact in our mortality. And the average age that we're issuing on the insert side, I think it's about seven years higher than it is on the direct mail side. So it will still have a -- we expect it to have a significant impact in our direct mail adult business but not quite as much as it has on the insert media side.

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

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

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

It's interesting. I read the Wall Street article there earlier this week. And I didn't realize, up until that time, that Primerica was really pushing for that. But it's definitely something we would support. Because, again, I look at our agency operations. The products that we're selling are very simple. Whole life, term life products. That I think in many states that the insurance exam is more difficult than it needs to be for the products that we're selling. So I very much will support them and we'll look into what do we need to do, what can we do to help support that.

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

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

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

Chris Giovanni with Goldman Sachs.

Thanks so much. Steve got to most of my questions. Just one follow-up for the agent licensing. Can you guys comment at all in terms of what percentage of your agents that have temporary licenses ultimately turn to full time?

I wish I had that, Chris. I don't have that number in front of me. It is obviously a number at Liberty. Again, the only place we use it is at Liberty National, and I know that number is improving. If I look at the total number of agents at Liberty now who are operating on temporary license, it's down to 100 out of that 1,844, which is almost a 50% reduction since the end of the year. So it's something that is definitely improving but it's not an issue at American Income at all.

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

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

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

Chris, I'll tell you, it's something I'll look into between now and the next call. It would just be pure speculation on my part at this point. But it is something I intend to look into and I'll have a little better, I'll be able to better answer that on the next call.

Eric Berg with RBC Capital Markets.

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

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

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

If I just look at our projections, if we continue to not only conserve -- if we conserve $50 million in the first year, $40 million of that will continue to be in force the following year. Now, if we can conserve another $50 million in year two, now we have instead of $50 million of growth, we have $90 million of growth. And of that $90 million, if 10% of that laps off there's $81 million from prior years efforts plus another $50 million. So then the following year we have $130 million. And, again, I'm just giving this as an example, but it does compound.

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

Yes, I think as our in force grows, actually the amount that we conserve will continue to grow along with it.

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

See, that's the difference between our direct response and our agency distribution. Our agency distribution we do much more underwriting. Even though we're looking at using the prescription drug records, it won't have nearly the impact there. In direct response, the key to that is keeping the underwriting very simple. We ask really just something like five simple check the box, yes/no questions. And that's the basis we use. So this is to be able to see that someone is taking a drug that indicates a serious health problem. Yes, that's a big step in direct response. So no, we don't ask them currently to list whatever prescriptions they take because, again, we're trying to keep that process very simple. Any time we've tested a longer form application and more extensive underwriting, it's really hurt the response rate there.

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

Yes, they do. On every application, there is an authorization. One, it allows us to check MIB. But there is a very explicit authorization that allows us to review their prescription drug history. So yes. And we found that that really hasn't had any significant impact, negative impact, on our response rate. It has increased the number -- we're now rejecting 4% to 5% of the business that we used to issue. So it has some short-term, it is having some short-term impact on our reported sales because of that. But those are people that we had issued previously that are not risks that we want to accept.

Thomas Gallagher with Credit Suisse.

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

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

And Tom, that would be annually.

So that's an annual $100 million to think about adjusting some percent of that.

Right.

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

I don't think we can get all $100 million. Again, things like some of those expenses are management, overhead, salary. Even in direct response, we have overhead there that is not tied to the sale of a policy. Those expenses are not going to be deferrable. So we don't have really the option to reclassify those. There may well be a portion of the $100 million that we can move into a commission expense. The biggest opportunity there is probably at Liberty National but we're not able to really quantify what that might be at this point.

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

Yes, that's true.

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

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

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

I think that's right.

That's correct, yes.

Now just the last question I have is just a follow-up to that. Why should you be selling a policy that starts at 5.75% that grades up given current rate environment? Shouldn't you be able to substantially reduce the crediting rate without a material impact? Or are there competitive implications if you went lower than the 5.75% grading up type policy?

This doesn't affect our policyholders. It doesn't change, we're not changing our pricing. We're just changing an interest rate assumption. We don't have interest sensitive policies so we're not changing a crediting rate to cash values or some deposit fund. This is just changing our internal assumptions on what interest rate we're going to credit to reserves. Gary, do you want to comment on that?

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

I'm sorry. Okay, I thought you meant you were changing pricing. And this is what's embedded in the crediting rate within the pricing. But this is simply a change in your accounting, I should say your actuarial assumptions, to set reserves.

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

But Tom, the impact is slight. And I think we talked about it on either the last call or the one before that should we change the interest rate to match this new GAAP discount rate, our premium, we would only be increasing our premiums about 1% to 3%. It wouldn't be a huge increase.

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

We have no other questions at this time. I'll turn the call back over to Mr. McAndrew for any final remarks.

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

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