Globe Life Inc (GL) 2013 Q1 法說會逐字稿

Good day and welcome to the Torchmark Corporation first-quarter 2013 earnings release conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mike Majors, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good morning, everyone. Joining me today are Gary Coleman and Larry Hutchison, our Co-Chief Executive Officers; Frank Svoboda, our Chief Financial Officer; and Brian Mitchell, our General Counsel.

Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2012 10-K and any subsequent Forms 10-Q on file with the SEC.

I'll now turn the call over to Gary Coleman.

Thank you, Mike, and good morning, everyone. Net operating income for the first quarter was $132 million, or $1.39 per share, a per share increase of 9% from a year ago. Net income for the quarter was $120 million, or $1.27 per share, also a 9% increase on a per-share basis. With fixed maturities at amortized cost, our return on equity for the first quarter was 15.6%. And our book value per share was $35.98, a 10% increase from a year ago. On a GAAP reported basis, with fixed maturities at market value, book value per share grew 20% to $45.88.

In our life insurance operations, premium revenue grew 4% to $471 million. And life underwriting margins increased 6% to $133 million. The growth in underwriting margin exceeded the premium growth due to the lower amortization of our deferred acquisition costs. The lower amortization rate is a result of improvements in persistency attributable to our ongoing conservation program. And is incorporated in our guidance for the full year. Net life sales decreased 4% to $85 million.

On the health side, premium revenue, excluding Part D, increased 23% to $222 million. And health underwriting margin grew 25% to $50 million. Improvement in the health underwriting margin was due primarily to the addition of Family Heritage. Health sales increased 57% to $24 million.

I will now turn the call over to Larry Hutchison for his comments on the insurance operations.

Thank you, Gary. First, let's discuss American Income. At American Income, life premiums were up 9% to $174 million. And life underwriting margin was also up 7% to $56 million. Net life sales decreased 3% for the quarter to $38 million. The producing agent count at the end of the first quarter was 5,612, up 10% from a year ago, and up 8% during the quarter. While net sales decreased in the first quarter, we are very pleased overall with the progress that continues to be made at American Income. Trends have been very positive since the beginning of March. And we expect sales growth for the full-year 2013 to range from 10% to 14%.

Now Direct Response. In our Direct Response operation at Globe Life, life premiums were up 4% to $168 million. And life underwriting margin increased 1% to $39 million. Net life sales were down 5% to $37 million. However, the new business written in the first quarter of 2013 at a profit margin approximately 1% to 2% higher than the year-ago quarter. Response rates continue to be lower than normal in the first quarter. We believe this is possibly due to the state of the economy, as the expiration of the payroll tax credit had a significant impact on the pocketbook of the families in our target market. However, as we indicated on our fourth-quarter call, it is not unusual to have fluctuations like this from time to time in direct response. Based on positive test results, we are confident that our 2003 initiatives will help increase response rates in 2013. And we still expect mid single-digit sales growth in 2013. These initiatives include rate adjustments and higher face amount offerings on adult products.

Now Liberty National. At Liberty National, life premiums declined 2% to $70 million. While life underwriting margin was up 10% to $19 million. Net life sales fell 4% to $7 million. While net health sales declined 13% to $3 million. The producing agent count at Liberty National ended the quarter at 1,375, up 8% from a year ago, but down 3% during the quarter. While the agent count was down sequentially in the first quarter, we continue to be pleased with the progress being made in turning around Liberty National. As we've said many times, this is a slow process. And agency growth tends to occur in a stair-step pattern. We continue to work to change the culture of this agency. The implementation of the laptop presentation is occurring a little more slowly than we expected, but steady progress is being made. With respect to geographic expansion, we will be opening four new offices over the next 90 days. And we are optimistic that agent growth will continue going forward. Sales growth is expected to range from 48% for the full-year 2013.

Family Heritage. Health premiums were $46 million. And health net sales were down $11 million. As we've previously indicated, we intend to grow this agency through geographic expansion and implementation of our Internet recruiting program. For 2013, we expect premium income to range from $188 million to $196 million, with margins as a percentage of health premium of about 19% to 20%. We expect sales of approximately $48 million to $50 million in 2013.

Medicare Part D. Premium revenue for Medicare Part D grew 4% to $77 million. While the underwriting margin increased 2% to $8 million. Part D sales for the quarter fell 65% to $9 million due to the decrease in low income, subsidized enrollees for 2013. As we've mentioned before, we won't receive as many new auto enrollees under the low income subsidy program in 2013 as we did in 2012. We won't have the same type of sales and premium growth we had in 2012. We expect a decrease of approximately 5% to 7% in our Part D premiums for 2013 due primarily to price competition in the employer group market that we've discussed previously.

I'll now turn the call back over to Gary.

To complete the insurance operations, administrative expenses were $43.9 million for the quarter, 8% more than a year-ago quarter. The increase is in line with our expectations and is primarily due to the addition of Family Heritage. As a percentage of premium, administrative expenses in 2013 should be around the same level as 2012.

Now I want to spend a few minutes discussing our investment operations. First, excess investment income. Excess investment income, which we define as net investment income less required interest on policy liabilities and debt, was $56 million, a decline of $8 million or 13%. 6% on a per-share basis from the first quarter of 2012. Sequentially, excess investment income was essentially level with the fourth quarter. Due to lower new money rates and the possible calls of hybrid securities, we expect excess investment income in 2013 to decrease approximately 7% to 8%. However, reflecting the impact of share repurchases, we expect 2013 excess investment income per share to be down around 2% compared to 2012.

Now, regarding the investment portfolio, invested assets were $12.7 billion, including $12.1 billion of fixed maturities at amortized cost. Of the fixed maturities, $11.5 billion were investment grade, with an average rating of A-minus. And below investment grade bonds were $573 million, compared to $585 million at the end of last quarter, and $723 million a year ago. The percentage of below investment grade bonds to fixed maturities is 4.7%, compared to 6.5% a year ago. With a portfolio leverage of around 3.5 times, the percentage of big bonds to equity, excluding net unrealized gains of fixed maturities, is 17%, which is less than most of our peers. Overall, the total portfolio was rated A-minus, the same as a year ago. In addition, we have net unrealized gains in the fixed maturity portfolio of $1.5 billion, compared to $873 million a year ago.

Regarding investment yield, in the first quarter we invested $387 million in investment grade fixed maturities, primarily in the industrial and utility sectors. We invested at an average yield of 4.31%, an average rating of BBB-plus, and an average life of 27 years. Over the last five quarters, the yield on new investments has averaged 4.3%. For the entire portfolio, the first quarter yield was 6%, down 47 basis points from the 6.47% yield in the first quarter 2012. Of this decline in yield, 14 basis points is due to the addition of Family Heritage, and 8 basis points is due to the $300 million of bank hybrids called in the third quarter of 2012. On the last call we indicated that we held approximately $225 million of bank hybrids that we expect to be called in 2013. In the first quarter, $66 million were called, leaving $159 million of those securities in the portfolio as of March 31. As of today, we have not received a notice of intent to call on any of these securities. However, if all $159 million of these securities are called, and assuming a 4.25% reinvestment rate, the lost annual income related to these calls would be approximately $3 million after tax.

On past analyst calls, we have discussed in detail the current low interest rate environment and the impact of a lower for longer-rate scenario. As discussed, our concern regarding an extended period of low interest rates continues to be the impact on earnings, not the GAAP or statutory balance sheets. As long as we're in this low interest rate environment, the portfolio yield will continue to decline, and thus pressure excess investment income. However, the decline will be slowed by the fact that, on average, only 2% to 3% of fixed maturities will run off each year over the next five years. And that assumes the call of the bank hybrids as previously discussed. Assuming a new money rate of 4.25% for the next five years, we estimate that the portfolio yield at the end of 2017 would be around 5.55%. Assuming a 4% new money rate, the portfolio yield would be around 5 basis points lower, or 5.5%. At these rates, we would earn a small spread on the net policy liabilities while earning the full 550 to 555 basis points on our equity, less the interest required to service our debt. In either scenario, we will still generate substantial excess investment income.

Now I will turn the call over to Frank to discuss share repurchases and capital.

Thanks, Gary. I want to spend a few minutes discussing our share repurchases and capital position. First, regarding share repurchases and Parent Company assets, in the first quarter we spent $90 million to buy 1.6 million Torchmark shares. So far in April, we have used another $20 million to buy another 345,000 shares. So, for the full year through today, we have spent $110 million of Parent Company cash to acquire 1.9 million shares. The available liquid assets at the Parent consist of assets on hand plus the expected free cash flow from operations. As we said before, free cash flow results primarily from the dividends received by the Parent from its subsidiaries, less the interest paid on debt and the dividends paid to Torchmark shareholders.

The Parent started the first quarter with liquid assets of $147 million. Including $94 million that has been invested to redeem our senior notes that mature on August 1, 2013. This leaves approximately $53 million of liquid assets available for other corporate purposes. Assuming shareholder dividends remain at the $0.17 per share level approved by the board in its February meeting, we expect free cash flow for all of 2013 to be around $360 million. Along with the $53 million of liquid assets available as of the beginning of the year, the Parent will have around $413 million of available liquid assets for the full year. As of today, after deducting the $110 million of year-to-date share repurchases, the Parent will have around $303 million available between now and the end of the year. As noted before, we will use our cash as efficiently as possible. If market conditions are favorable, we expect that share repurchases will continue to be a primary use of the remainder of the funds. We also expect to retain approximately $50 million of liquid assets at the Parent Company.

Now, regarding RBC at our insurance subsidiaries. We plan to maintain our capital at the level necessary to retain our current ratings. For the last three years, that level has been around an NAIC RBC ratio of 325%. This ratio is lower than some peer companies, but it's sufficient for our companies in light of our consistent statutory earnings, the relatively lower risk of our policy liabilities, and our ratings. At December 31, 2012, consolidated RBC was 347%. And adjusted capital was approximately $95 million in excess of that required for the target of 325% consolidated ratio.

Now, before I turn the call back to Larry, I would like to briefly make just a couple of comments relating to the addition of Family Heritage. On our last call, we indicated our expectation for Family Heritage to contribute between $0.16 and $0.20 per share to our 2013 net operating earnings, after tax incremental financing cost. At this time, we believe Family Heritage contribution to our operating earnings per share should be close to the mid point of that range.

Those are my comments. I will now turn the call back to Larry.

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

(Operator Instructions)

Jimmy Bhullar, JPMorgan.

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

Jimmy, as you know, at American Income sales are directly related to the number of agents in the field. And if you look at the agent count at American Income at the end of the fourth quarter, it was 5,176. At the end of the first quarter, the agent count was up to 5,612. But the increase did not occur until the latter part of the quarter. What is driving the surge towards the end of the quarter is that we changed our mid-level manager compensation in the fourth quarter of 2012. And we did that to reward increased agent retention rather than simply agent recruitment. This changes those in both the focus and the compensation for our field managers. And while we've seen an improvement in agent retention in March, it's taken several months for that change to be embraced by the field. I guess in the short run the compensation change probably hurt our recruiting efforts in the fourth and the first quarter. Where with a longer period of time, we believe the compensation change will result in an increased agent count.

With respect to Globe Life, our confidence that we'll have single-digit growth this year is based on our initiatives for 2013. Those will include rate adjustments and higher face amount offering on adult products. Our testing results for the race and face amounts have been positive. And that's what we believe will drive the growth for Globe Life and Accident Insurance Company.

Okay. And then if I could just ask one more. On Liberty National, the agent count has actually been recovering a little bit in the decline this quarter. Anything specific that drove that?

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

And you still expect it to grow over the next few quarters.

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

Okay, thank you.

(Operator Instructions)

Sarah DeWitt, Barclays Capital.

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

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

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

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

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

On the Direct Response, in the second quarter we're looking for low single-digit inquiries, with double-digit increases in the second half year.

Great, thanks for the answers.

Steven Schwartz, Raymond James & Associates.

The question I want to ask is, on the Direct Response initiatives that you are taking, you mentioned premium rates. Larry, my assumption here would be that you're looking to lower them?

Yes. What we do with testing is we try different premium rates. And based on our experience we know that if we lower certain rates we'll have high response rates. And so would write a more profitable block of business.

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

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

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

We are adding on top of that. If you're talking about (inaudible), it's offered to the customer.

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

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

No, I meant, like the face value today is X, and you're going to Y, of the maximum face side.

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

Okay. Very interesting. Thank you.

Erik Bass, Citigroup.

Just a couple. On Liberty, just one thing. If you could give maybe a little bit more color on the reception of the changes that you've made over the past year to make the business more akin to American Income. And how you have seen maybe the productivity changing since making those changes.

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

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

I think it is less of a factor on the agent-sold business because the agent is sitting across the kitchen table explaining that need. But Direct Response, there's less contact. You are reaching simply through the mail. And we don't think in the long term it will have a negative effect upon those sales, but it may be more contacts are needed to complete the sale in the Direct Response system.

Okay. So you're not seeing the pressure on the wallet of the individuals leading to a tougher sales environment for the agents. It is still need driven.

It's need driven. As we look at our laptop data, I'm not saying a difference in closing rates that comes through that laptop data.

Okay, thank you. That is helpful.

Jeff Schuman, KBW.

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

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

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

Gary, do you want me to take that?

Yes, go ahead.

Yes, Jeff, as we do take out some of the dividends over the course of the year, that will tend to bring it down some. Our initial projections show the decrease in that excess, or shows a little bit of a decrease in that excess. At this point in time, we have no immediate plans to distribute any of that. As we take a look at the funding needs for the various growth initiatives that we have done at the subsidiary levels, we probably should have a little bit better idea on that later on here in the year.

Okay that's it for me. Thank you.

Randy Binner, FBR Capital Markets.

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

The change in compensation is to reward the middle manager for the length of service of the agents. So the compensation changes, part of that compensation is based on the retention of the new agents. We're trying to extend the agent life from three or four months to four, five, and six months. I think that changes the focus of the middle manager a little bit because you're not so concerned about an agent in the first three months. You are concerned about an agent in that first six, seven, or eight months. So that is the intent. But any time you change compensation at an agency, and change focus of the agency, it generally has a negative short-term impact on recruiting.

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

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

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

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

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

If you have more agents you have greater sales so that goes hand-in-hand. What we are really seeing in March is better retention of the new agents. And we're seeing a greater recruiting effort into middle management.

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

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

Yes.

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

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

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

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

Perfect, thank you.

Bob Glasspiegel, Langen Mcinerney.

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

I think what drove the sales down a little bit -- let's talk about sales activity first. Sales activity in the first quarter was less than projected because we had a decline in recruiting activity early in the quarter. If you look at the agent numbers actually, we ended the quarter with slightly higher agent numbers. We didn't see that in January, into early February.

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

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

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

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

Okay. So what you are saying is, the health margin in Q1, ex Family Heritage, was a little bit better than normalized, because of L&L, but still better than you thought it was going to be, too.

Right.

Somewhere in between where you thought and this quarter's, the rate underlying margin.

Yes.

I got it. And last question. A lot of noise and cross currents going on, on Medicare Advantage. And we're sitting around waiting for med submarket to improve as this gets depopulated. But we keep moving the ball down the field. Is there anything really important we need to know thinking about --?

Brian, why don't you try and answer Bob's question.

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

Okay. So we're at least a year away from an improving -- a dramatically improving med sub environment? Or could it be closer than that?

No, I think we think it will be a year way because the disenrollments would probably start next October. So between now and next October we don't see much movement. In the fourth quarter we should have a clearer picture as to what is going to happen with Medicare Advantage disenrollments.

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

Mark Hughes, SunTrust.

On the med sub sales, on that same topic, you had good momentum in the fourth quarter. Not quite as much momentum here in Q1. I don't know if you touched on this earlier in the call, but any meaningful changes there?

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

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

Sure. We expect the agent count at year end for American Income to be between 5,900 agents to 6,000 agents.

Thank you.

Paul Sarran, Evercore Partners.

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

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

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

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

All right, thanks.

Eric Berg, RBC Capital Markets.

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

Let's address the last part of the question first in terms of our future in health business. It depends on the segment. If you're talking about Part D, I think we see that as an opportunistic market. We currently (inaudible) for 2014. And it's hard to predict, or we don't plan on growth in Part D, necessarily. Our non-Medicare business, we certainly see growth there with the addition of Family Heritage. As we grow that agency, that business will grow. Additionally, as Liberty National grows in the worksite, we'll see a growth in those health sales. For Medicare supplement, as we talked earlier on the call, it's difficult to see what the future of Medicare supplement is. It's tied somewhat to Medicare Advantage disenrollments. When we have a clear picture of the actual disenrollments, it will be easier for us to predict how much our Medicare supplement business will grow in the individual market. Certainly a great deal of our growth for Medicare supplements come through our group business. And we continue to try and grow our group Medicare supplement business.

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

Great, thank you.

John Nadel, Sterne, Agee.

I just wanted to revisit the discussion on the bank hybrids. It went pretty quick on what was called, what hasn't been called, how much is left. And I just also wanted to see if you could just tie that into what is assumed in your guidance range.

Okay, John. Coming into the quarter we had $225 million of bank hybrids that were likely to be called. We have some more, but they are either not callable or they're May cold calls, which we are not considered about.

Got it.

There is $225 million that we are concerned about being called. During the quarter, $66 million of those bonds were called and that leaves us $159 million of exposure. And as I mentioned earlier, we haven't received any notice that these bonds are going to be called as of the current day. We are a little surprised that they haven't been, but we will wait and see. For guidance purposes, we are running different scenarios. And within the range we have considered all of them being called to none of them being called. But, as I mentioned, I think, if all of them got called, the after-tax impact on an annual basis would be $3 million. So built into the guidance is somewhere between $0 and $3 million.

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

Seth Weiss, Bank of America Merrill Lynch.

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

No. This is a variable cost model, so sales in those branches, the branch manager is responsible for the office, any leads. Any office expenses are borne by the agency not the Company.

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

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

Okay, great. Thanks a lot.

Chris Giovanni, Goldman Sachs.

Most addressed. The comments you made in terms of the potential to accelerate deployment if there is a softness in the price, would that be the same kind of mechanism that we saw last year, and then some in 1Q, in terms of the commercial paper borrowing and then getting the dividends up maybe in the subsequent quarters? Or do you have enough capital at the subs to do that on the quarterly basis?

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

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

We would like to find another Family Heritage, maybe a little bit bigger. Our approach has not changed. We have always been looking for a company that has controlled distribution, that is selling into the middle income market. Although Family Heritage sells health, we prefer life, but, still, we are very happy with Family Heritage. We will continue to look. But as we said before, there is just not many of these type companies out there. Family Heritage was a little bit of a surprise to us, and we're glad we were able to get it. We are looking, it's an ongoing process, but it's just tough because there's just not that many type of companies out there on the market.

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

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

I think -- this is Larry -- it was restated but as we got better information from the Company as to what are active agents -- and we've tried to have a uniform definition among the Torchmark companies how we define an active agent -- there was really no change. We haven't had departures from the agency. What really changes is the definition of an active agent.

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

We've changed the definition. So it's an agent that has sold in the last 60 days, that's consistent among the companies.

(Operator Instructions)

Vincente Lui, Morningstar.

Just a quick follow-up on Direct Response. If you look at the statistics, you basically achieved 40% of sales, [4 million] of that through mail and insert media piece, and then about 60% after six months. And it seems like pretty stable over time. Just curious to hear your thoughts in terms of the impact of the Direct Response initiatives you mentioned on the pace of sales generation. Any change to the statistics going forward, as you can see?

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

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

I'm not sure I understand the question.

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

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

Right.

Yes, I don't think this will change those lag times. These products aren't so different. It's just that, what I'm saying, it's going to provide additional production, because we're providing products either rights we had before or replace amounts. So it's incremental production. But as far as a lag, I think it will probably be about the same.

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

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

Thank you for joining us this morning. Those are our comments. And we will talk to you again next quarter.

And this does conclude today's Torchmark Corporation first-quarter 2013 earnings release conference call. Thank you for your participation.