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Torchmark Corporation (NYSE:TMK)

Q3 2013 Earnings Call

October 24, 2013 11:00 am ET

Executives

Mike Majors - VP, IR

Gary Coleman - Co-CEO

Larry Hutchison - Co-CEO

Frank Svoboda - CFO

Brian Mitchell - General Counsel

Analysts

Jimmy Bhullar - JPMorgan

Yaron Kinar - Deutsche Bank

Sarah DeWitt - Barclays

Randy Binner - FBR Capital Markets

Mark Finkelstein - Evercore

Christopher Giovanni - Goldman Sachs

Vincent Lui - Morningstar

Bob Glasspiegel - Janney

Erik Bass - Citi

Mark Hughes - SunTrust Robinson Humphrey

Operator

Good day, ladies and gentlemen. Welcome to the Torchmark Corporation Third Quarter 2013 Earnings Release Conference Call. As a reminder, this call is being recorded. At this time, I would like to turn the conference over to Mike Majors, Vice President of Investor Relations. Please go ahead.

Mike Majors

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

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

I will now turn the call over to Gary Coleman.

Gary Coleman

Thank you, Mike, and good morning, everyone. Net operating income for the second quarter was $133 million or $1.42 per share, a per share increase of 11% from a year ago. Net income for the quarter was $132 million or $1.43 per share a 5% increase on a per share basis.

With fixed maturities at amortized cost, our return on equity as of September 30 was 15.6% and our book value per share was $37.60, a 9% increase from a year ago. On a GAAP reported basis, with fixed maturities at market value, book value per share was $40.97, a 9% decrease due to the impact of higher interest rates and the valuation of our fixed maturity portfolio.

In our Life Insurance operations, premium revenue grew 4% to $471 million and life underwriting margins increased 7% to $139 million. The growth in underwriting margin exceeded the premium growth due to lower amortization on a deferred acquisition cost and the deferral of certain direct response Internet acquisition cost that had not been deferred prior to the second quarter 2013.

The lower amortization rate is a result of improvements and persistency attributable to our ongoing conservation program and is incorporated in our guidance. Net life sales decreased 4% to $80 million.

On the Health side, premium revenue, excluding Part D, increased 23% to $209 million and health underwriting margin grew 19% to $50 million. Improvement in health premium and underwriting margin was due primarily to the addition of Family Heritage. Health sales increased 54% to $23 million also due primarily to the acquisition of Family Heritage.

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

Larry Hutchison

Thank you, Gary. First, let’s discuss American Income, which generates approximately 46% of our net life sales. American Income's life premiums were up 8% to $181 million and life underwriting margin was also up 4% to $59 million. Net life sales decreased 10% for the quarter to $37 million. The producing agent count at the end of the second quarter was 5,449 approximately the same as a year ago but down 2% during the quarter. We are disappointed with results for the third quarter at American Income.

While the real driver of growth in this agency is going to be the development SGAs opening new offices, we did expect that the compensation changes made earlier this year would have had a more positive impact on sales and agent retention. We continue to modify and tweak the compensation systems and are confident that these changes, which are scheduled for January 1 implementation, will eventually generate improvement but our primary focus will be on opening new offices and the continual development of middle management to help ensure that we maintain a large pool of highly quality SGA candidates.

We expect a net life sales decline for the full year 2013 within a range from 2% to 3%, but we expect sales growth in 2014 to be within the range 3% to 7% as the SGAs added in 2013 make an impact.

Now, Direct Response, which generates approximately 42% of our life sales. In our Direct Response operation at Globe Life, life premiums were up 4% to $164 million and life underwriting margin increased to 13% to $42 million. Net life sales were up 6% to $33 million.

Response rates continue to improve slightly during the third quarter. We are seeing positive results on rate adjustments and higher face amount offerings on adult insurance products implemented during the second quarter. We expect low to mid-single digit net life sales growth for the full year 2013 and mid-single digit sales growth for 2014.

Now, Liberty National. At Liberty National, life premiums declined to 2% to $69 million while life underwriting margin increased 3% to $19 million. Net life sales decreased 9% to $8 million while net health sales declined 6% to $4 million. Producing agent count at Liberty National ended the quarter at 1,320, down 6% from a year ago but 3% during the quarter.

The turnaround at Liberty National has been a bit more difficult than we anticipated and we were disappointed with results for the quarter. While the transition to the new operating model and new mindset have been more challenging than expected of our traditional southeastern rural offices, we are pleased with progress of our geographic expansion.

We opened four new offices in the second quarter, another in the third quarter and we plan to open two more this year. We are confident that expansion into more heavily populated, less penetrated areas will generate long term agency growth at Liberty beginning in 2014. We expect sales to decline within a range of 6% to 8% for the full year 2013, but expect to see low single-digit sales growth in 2014 as we start to see the benefits of geographic expansion.

Now, Family Heritage. Health premiums were $48 million and health net sales were $11 million. Although results were slightly less than expected, we are still pleased with the integration of Family Heritage. We continue to implement our Internet recruiting system across the agency and believe that this will generate long-term sales growth as it becomes full incorporated.

For 2013, we expect health premium incomes to range from $191 million to $192 million with margins as a percentage of health premium of about 18% to 20%. We expect sales of approximately $40 million -- $43 million to $45 million in 2013 and a mid-single-digit sales growth in 2014.

Medicare Part D. Premium revenue for Medicare Part D declined 6% to $77 million while the underwriting margin increased 25% to $9 million. Part D sales for the quarter fell 58% to $9 million due to the decrease of low-income subsidized enrollees for 2013.

We expect a decrease of approximately 4% to 5% in our Part D premiums for 2013 due primarily to price competition in the employer group market that we discussed on previous calls. However, we expect an increase in Part D sales and premiums in 2014 as we have qualified to receive new auto-enrollees in 15 regions in 2014, as compared to 7 in 2013. We will be better able to quantify that increase on our next call.

I will now turn the call back over to Gary.

Gary Coleman

To complete the discussion of insurance operations, administrative expenses were $45 million for the quarter, 11% more than a year ago. The increase is in line with our expectation and is due primarily to the addition of Family Heritage and an increase in pension cost. As a percentage of premium, administrative expenses for full year 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 $54 million, a decline of $1 million or 2%; but a 2% increase on a per share basis from the third quarter of 2012. Decline in dollars is due to lower new money yield and the call of $467 million of hybrid securities since June 30, 2012.

For the full year 2013, we expect the decline in excess investment income to be approximately 7% to 8%. However, reflecting the impact of share repurchases, we expect the decline in 2013 excess investment income per share to be around 3% compared to 2012.

Now regarding the investment portfolio, invested assets were $12.9 billion including $12.3 billion of fixed maturities at amortized cost. Of the fixed maturities, $11.7 billion were investment grade with an average rating of A- and below investment grade bonds were $586 million, compared to $685 million a year ago.

The percentage of below investment grade bonds to fixed maturities is 4.8%, compared to 6.3% a year ago. With a portfolio leverage of 3.5 times, the percentage of below investment grade bonds to equities, excluding net unrealized gains on fixed maturities is 17%, which is less than most of our peers.

Overall, the total portfolio is rated A-, compared to BBB+ a year ago. In addition, in the portfolio, we have net unrealized gains of $489 million, compared to $1.6 billion a year ago. The decrease in net unrealized gains is due primarily to the recent increases in market interest rates rather than credit concerns.

Regarding investment yield, in the third quarter we invested $133 million in investment grade fixed maturities, primarily in the industrial and utility sectors. We invested at an average yield of 5.2%, an average rating of A and an average life of 30 years.

For the entire portfolio, the third quarter yield was 5.91%, down 42 basis points from the 6.33% yield for the third quarter of 2012. The decline in the yield is due primarily to the addition of lower yielding Family Heritage portfolio and the calls of the bank hybrid securities since the second quarter of last year.

As of today, we still hold approximately $76 million of bank hybrids that we expect to be called at some point. However, we have not yet received the notice of intent to call on any of these securities. If all $76 million of these securities are called the lost annual income related to these calls would be less than $1 million after tax.

We are encouraged by the higher treasury rates due to the positive impact that higher interest rates would have on our excess investment income. Even at the current new money rate we would expect to see only modest declines in the portfolio yields over the next five years compared to the larger declines in recent years.

This development is due primarily to the hybrid calls being behind us and the expected maturities coming from bonds with lower interest rates than in the past. Even sudden interest spike could be beneficial as we have very little The Center mediation risk and we are not concerned about the potential interest rate driven unrealized losses in our fixed maturity portfolio. As we have said many times, we have both the intent and, more importantly, the ability to hold our bonds to maturity.

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

Frank Svoboda

Thanks, Gary. I want to spend a few minutes discussing our share repurchases and capital position.

First, regarding share repurchases and parent company assets. In the third quarter, we spent $85 million to buy 1.2 million Torchmark shares at an average cost of $70.45 per share. For the full year through September 30, we had spent $265 million of parent company cash to acquire 4.2 million shares at an average cost of $62.44 per share.

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 entered the second quarter with liquid assets of $117 million. Assuming shareholder dividends remain at their current level, we expect free cash flow for the remainder of 2013 to be around $38 million. Along with the $117 million of liquid assets available as of September 30, the parent will have around $155 million of available liquid assets for the remainder of the year. Of this amount, we expect to retain approximate $55 million to $60 million of liquid assets at the parent company.

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 the primary use of the remainder of the fund. So far in the fourth quarter, we have spent approximately $20.4 million to repurchase 284,000 shares at an average cost of $71.97.

Now, regarding RBC at our insurance subsidiaries. We plan to maintain our capital at the level necessary to retain our current rating. For the last three years that level has been around an NAIC RBC ratio of 325%. This ratio is lower than some peer companies, but is sufficient for our companies in light of our consistent statutory earnings, the relatively lower risk of our policy liabilities and our ratings.

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

Larry Hutchison

Thank you, Gary. For 2013, we expect our net operating income within a range $5.68 per share to $5.72 per share. For 2014, we expect that our net operating income be within a range $6 per share to $6.40 per share.

Those are our comments. We will now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Jimmy Bhullar from JPMorgan.

Jimmy Bhullar - JPMorgan

I had a question first for Larry. May be if you can discuss the driver of the decline in the agent counter American Income during the quarter and what gives you comfort that the results are going to improve? And then, secondly on Part D expectations obviously you are approved in more regions for auto-enrollees next year than this year. But I don't think you should see a commensurate increase in like premiums in the business because I think the regions are going up to 15 from 8 but may be you could discuss how much of a pickup you should -- you are expecting?

Larry Hutchison

Jimmy, in the third quarter the agent count didn't grow as you believe it would because the SGAs, our managers and agents have not responded as quickly as we had hoped to the compensation changes we initiated in the first or second quarter. We do believe we're going to have growth in 2014. In the first quarter we're going to have a new senior life product and a change in our compensation payment system, which should have a positive effect on agent activity. This compensation system change will result in agents being pretty more quickly, which should also help with agent retention. We also have a change in management compensation to tie bonuses to recruiting results and the senior product will allow agents utilize more of their leads. Part D if I heard your question correctly Jimmy I think you were asking for the guidance and what's going to happen.

Jimmy Bhullar - JPMorgan

Or just expectations because I think the number of regions already you enrolled is up almost twice as much next year versus this year but I think last year you had declined a lot but your premiums actually held up relatively well. So how it should be like -- should we expect a huge jump in premiums because of the increased number of regions that you had already enrolled in?

Larry Hutchison

I think the guidance we give at this time is we would expect the premiums for 2014 for Part D between a range of $330 million to $340 million as compared to approximately $300 million in 2012. We expect the margin of that business certainly to be between 9% and 11%

Operator

And we will take our next question from Yaron Kinar from Deutsche Bank.

Yaron Kinar - Deutsche Bank

I wanted may be starting off with another question on American Incomes headcount and how it pertains to sales growth and if I understood correctly and in the past you talked about how the bottleneck been middle management there. And yet when I look at the how to say renewal agents those with at least one year experience that number has been actually been growing at a nice pace every quarter this year. So I'm wondering what else is going on there that's creating pressure on sales today?

Gary Coleman

Let's talk about middle management development first. Our middle management numbers really hasn't changed just beginning of the year because we haven't experienced growth in new agents. We just had fewer candidates to promote -- for promotion to management positions, that's slight decrease at the MGA level is in part because we opened eight new offices and we call that Florida MGAs and to open offices. So we would think we'll see the change next year as we pick up our agent recruiting that begins to increase.

Also I'm going to add as far as the middle agents growing, that is the pattern that we expect when we talk about retention the fact that our retention is not as in the first year items especially the first six months that they are involved in and that's the retention figure that we're trying to improve.

Yaron Kinar - Deutsche Bank

Okay. So is the focus then more on these first year agents or is it still about growing the bench above potential middle management agents?

Larry Hutchison

It's both. We know we need to grow middle management; we have more SGAs to enlarge our offices or to expand our offices.

Gary Coleman

And it's also important to have the middle management to train the new agents properly. So I agree with Larry it's both the agents and the middle management.

Larry Hutchison

We talked about the compensation changes we initiated in the first and second quarter, those compensation changes you directed towards first your agents, what we're trying to do is get an agent that normally would have left in the third month who would may be leave in the fifth, sixth, or seventh month. So we get that additional production agent that cascades through those numbers. Your fourth, fifth, six month agents; so hopefully with these compensation changes they receive a bonus as they stay longer that will have more production from those first year agents.

Yaron Kinar - Deutsche Bank

Okay. So when you talk about these being somewhat disappointing results from your perspective is it disappointing on the first year agent growth or is the disappointment on the middle management? Thanks.

Gary Coleman

I'm disappointed at both levels. We have not had the first year agent growth we've expected because of lack of retention, which is not responding to these compensation changes. Likewise, we doesn't have the activity levels that we would expect from our managers in terms of recruiting and causing activities as they train those agents. That's why we changed the compensation, effective January 1st. So different compensation change, it ties, that managers bonuses to the activity of those first year agents and it also ties that bonus to recruiting new agents in the office.

Yaron Kinar - Deutsche Bank

And then, Liberty National. So if you're forecasting 1-6/8th [ph] sales declines for the full year that implies, call it 10%, 12% may be sales declines in the further quarter. So that seems like its still going the wrong direction. And I was curious a) why we're still moving in the opposite direction from the desired direction and b) how you get from there to a more positive environment in '14?

Gary Coleman

We get there in two ways. First of all, agent productivity we think will come up in 2014. Agent productivity is slightly down as we just opened four offices in the last quarter, and we opened one this quarter and we opened seven more. We have more experienced agents. As those agents become more experienced with a higher level of productivity. The other change we've had at Liberty this year has been the limitation of a laptop. That rollout will be completed by the end of November and following that rollout, the laptop directors will begin to follow to make sure that all the officers are using the laptop effectively. I think we talked about in last call that change in that system actually is a little bit of a step backward.

I would say that the other change is that as we've changed the culture we've changed the recruiting methodology of Liberty, some of the more experienced agents have liked the system and we think that downturn is now complete. We will start to build that agency count.

Gary Coleman

The other thing that I would add, you're right fourth quarter was -- is projected to be about 11% decrease but that's one it's a bad comparison. The fourth quarter of 2012 is by far their highest quarter from the issued standpoint. Well actually, it will be slight but we will see sequential increase in sales of Liberty in the fourth quarter, may be 1% to 2%.

Operator

And we will take a question from Sarah DeWitt from Barclays.

Sarah DeWitt - Barclays

American Income. Can you just elaborate on what were the compensation changes you made previously that have caused so much disruption this quarter and how does the new changes differ from the old ones and why does that give you so much confidence that that will be effective and we won't have an ongoing issue there?

Gary Coleman

Well again, we were disappointed in third quarter because as I stated earlier, the SGAs, the managers and agents didn't respond as quickly we had hope to these compensation changes. You've to think about agency, it takes a while to institute a compensation change and have that flow through an agency. We will make a compensation change, as based on trends, we've seen six or eight months ago. We -- our sales management has experienced they were former SGAs, as they changed their management they first discussed that with field, we then test those management changes and then we have to see the implementation for retention bonuses, to see what effect as you all have retention bonus in the third quarter, it takes three, four or five months to begin to see the effects of that.

And we're confident that there is only a positive impact, this has been slower to hit that agency. Early in the year, we have reduced some management bonuses. And you've to change your bonuses from time-to-time to keep the compensation system as an incentive to the direct behavior. There was a negative reaction to those reductions. And as we introduced the new management bonus system in January of 2014, Sarah we believe that will have an impact and will bring the activity and enthusiasm of that agency back to a normal level.

Sarah DeWitt - Barclays Capital

And then, just switching share -- switching gears to share buyback. Is there a -- how do you think about the valuation there on buying back your stock? And is there a level at which you have to slow or sought share buyback?

Frank Svoboda

Yeah, Sarah we -- I think we talked about in the past. We all calculated intrinsic value what we think intrinsic value of the stock is and we monitor the actual price to that intrinsic value and that's a very important consideration as to whether we buy shares. If we felt we were fully valued, we would stop share repurchase and use that cash for other millions, but although, our intrinsic value is closer to -- or excuse me, our share price is closer to what we think fair value is, it's still not there yet. And we still think that the stock price or the stock is a goodbye, especially when you consider the risk adjusted return we get on share repurchases versus other alternatives that we can invest in.

But we continually watch that and if we -- if the price gets to the point where we think it is fairly valued, we will look at other uses of the cash and part of it may -- our purpose is return the cash to the shareholders and we would -- it would be a board decision, but we might consider special dividend or whatever. But we just do not feel like we have gone to that point yet.

Sarah DeWitt - Barclays Capital

Okay. And how do you measure intrinsic value?

Frank Svoboda

Well, the method we have used for years is just without going into a lot of detail where you value the current equity and divide present value of future premiums or future income and I think we're fairly conservative with it. But we also talked to other people as to what bankers and all what they think the value is and we're -- and again we're not saying our values that we come up with is the best value. But what we do is we're constantly we've done this for years, compare the what tiers are actually trading to do it what that intrinsic value is has always been the less in net value and it hasn't gone to the point where the share price is at that value that intrinsic value. So that's what we still consider the stock repurchases the best use of cash.

Operator

And we'll take a question from Randy Binner from FBR Capital Markets.

Randy Binner - FBR Capital Markets

I'm going to hit sales again but just from a different angle and with Torchmark we talk a lot about very kind of granular details on agents, recruiting, compensations, et cetera which I appreciate. But just kind of thinking mere more broadly AFLAC, U.S. CNO Financial two names I cover have seen, lower sales than what we thought would be over the last few quarters. And so I guess moving away from the specifics especially America Income more broadly is there something going on out there that's making it harder for agents to be successful. Is it the economy, gas prices? Is there kind of an external environment change that you're seeing in your business that might be part of the explanation for some of these sales challenges?

Gary Coleman

I don't think there is an overall trend of returning sales. I do think it's more difficult for agents today to set appointments and with the advent of the onset of do not call us as people moved away from landline phones to cell phones, it's hard for an agent to make appointments. But we've overcome that as we introduce new software that helps set appointments be more efficient in these calls.

Larry Hutchison

I think if you look at -- just look broader at American Income and if you go back and look at historical trends it's really unusual for American Income to have two very strong years in a row. If you go back in the last 10 years there are four years we have double-digit growth 17%, 18%, 18%, 12% growth. There's also years where we have negative growth. I can see years in that 10-year cycle we were down 9%, we were down to 8%, we were down this year projecting 2% to 3% following a double-digit growth year. What we do know is the accumulative growth is very strong and that your agency grows and your sales grow on a stair step pattern. So I think that's really what's going on in our mechanism.

Randy Binner - FBR Capital Markets

And I guess would the same comments by I was kind of talking probably about the dynamic to your Liberty, I mean same thing or to me that's a little bit different, right it's a more narrow, geographic set?

Gary Coleman

I would say Liberty is quite different. We restructured Liberty at the end of 2010 to a variable cost model. The current restructuring of Liberty is twofold. One is changing the culture of Liberty. There is a growth culture, not a production culture. The second change is what we talked about is geographic expansion. We know that we try to expand offices in the Southeast is probably not going to work based on the last 20 years experience. But we do know as we look at these new offices we can expand Liberty and say adapt the new systems for recruiting, for selling. We're seeing positive results in these new offices. So the future of Liberty is really a different future, which is expand outside of Southeast and to adopt these new systems.

Operator

And we have a question from Mark Finkelstein from Evercore.

Mark Finkelstein - Evercore

Direct response. I guess, we'll go through sales again. I guess I was also surprised that were up 6% pretty easy comp, you have a new product with a kind of higher face value that should attract the different audience, what is going on there and what gives you the confidence that that should improve?

Gary Coleman

What we're thinking the fourth quarter growth the strong growth has to come from our adult insurance product rate implementation and our continued introduction of higher face offers, we have the internet inquiry fulfillments, some new packaging coming out. I remember at Globe when we talk about a rollout? There's not a single rollout. As we rollout the adult product we're doing further testing on packaging on rates and we see some further growth not just from the rollout as we tweak the packaging and the pricing that products will go forward. We feel very good about it worldwide and in 2014 sales results are projected.

Mark Finkelstein - Evercore

Is there anything in these response rates that kind of has changed fundamentally?

Gary Coleman

No, as we said we saw a slight improvement in response rates in the third quarter. We saw noticeable increase in price of electronic campaigns, and all electronic circulation enquiries were about the same. But part of the response relates are tied to the economy. We're pleased that we're seeing some progress in economy on jobs; gas prices have been stable. So we think those are other improvements that help response rates.

Mark Finkelstein - Evercore

And then just on Family Heritage I guess I was surprised by the agent decline I was also surprised by the sales decline sequentially. Obviously this is a recent acquisition you're focused on changing the recruiting dynamics and focused on geographic expansion. Is this just part of the kind of the ongoing integration or there are anything that we need to be worried about on this?

Gary Coleman

Well I think that's part of the ongoing integration and you need to remember Family Heritage has just completed its first year under Torchmark after spending its first 23 years as a private company it takes some time for them to aciculate to our new recruiting system, You have different incentives. There are cultural changes. We think this is going to be a temporary adjustment and part of our optimism was based on the fact that Family Heritage has not lost as a single owner of any other agency, since been acquired by Torchmark. In fact we have had several agency owners this year; we think one of the positive impacts on 2014.

The other change at Torchmark is we're going to provide Family Heritage with some additional product and marketing support through the fourth quarter of '13 into 2014, which should further help the results. But we're optimistic about some growth of Family Heritage in 2014.

Operator

And we have a question from Christopher Giovanni from Goldman Sachs.

Christopher Giovanni - Goldman Sachs

Just wanted a follow-up on direct response. So there, any I guess numbers you can give us in terms of may be percentage of new sales that are above kind of the original 50,000 limit. So I guess sort of how should we be tracking the penetration of the higher face amount policy?

Larry Hutchison

Just so I don't have those specific numbers in front of me. I can tell you it's reflected in our guidance for the fourth quarter and for the full year 2013 and the 2014.

Christopher Giovanni - Goldman Sachs

And then I guess at this point how should we thinking about Liberty I think midyear, I think you talked about sort of being the most optimistic you've been in sometime around there and clearly the point to a laptop there's an opportunity. Has it just been just a slower implementation of the laptop strategy or I guess what's kind of derailed the stories as you know clearly restructuring took place during '12? And then do you still have the confidence that kind of 10% to 12% growth longer-term setting aside may be '14 still being a transition year, do you still feel like that's a metric you can achieve ?

Gary Coleman

I don't think the story Liberty has changed. I think we're still optimistic. As I stated it has taken longer to implement the changes in the system and remember the laptop is only for the individual life sales, which is about half of the sales at Liberty National. It's taking -- so it will take until November to fully roll that out. Once it's rolled out you have to go back to inspect that system and its always not an instantaneous change or improvement if we will see results of the laptop and individual sales through 2014.

Remember at Liberty about half of those sales are in the workplace, and there is a new system introduced for workplace sales in terms of how you recruit to that, how you prospect on that, so it's taken most of 2013 to implement also the new work site selling system and we should see the benefit of that into 2014. And I probably have been too optimistic about Liberty. I'm optimistic about the long-term results as just it takes longer than we anticipate to change systems, change improving, and change culture in the company.

Christopher Giovanni - Goldman Sachs

And then lastly just the over six month retention rate in American Income where do we stand on that today?

Larry Hutchison

Are you talking about 13 months retentions for agents or?

Christopher Giovanni - Goldman Sachs

Yes.

Larry Hutchison

I don't have the numbers in front of me. We look retention from first month to 13 month retention. And we're trying to convey that as you see the agency gradually grow or not grow. Off the top of head I can't tell you what that numbers for six month retention.

Gary Coleman

Well the 13 month retention is down a little bit but it I don't have the exact numbers in front of me. But we -- what we do know is that it's down because of we're losing in the third to sixth month at a greater rate than we had in the past.

Larry Hutchison

What I see, what I talk to Scott Smith, the President of the Company, and Rogers as the CEO, they're somewhat optimistic what they see is some uptick in recruiting numbers and the uptick in the recruits come through that pipeline those recruits turn into coded agents that are selling business. As you have more agents that are selling business your retention rate should do up. Generally optimistic based on the testing that they have done with the compensation changes I think we will see retention gradually increase starting in the first quarter of 2014.

Christopher Giovanni - Goldman Sachs

So the six months, is certainly being critical because I think just over half the sales come from agents that have been there longer than six months. So that's your focus and you think this commission structure will help address that kind of lower retention rate?

Larry Hutchison

If the commission structure addresses the retention remember there is two changes in the compensation system. The first is a bonus system that rewards longer retention. The second is a change in bonus levels that increases activity. As you increase activity of agents and you increase activity of managers it reflects on a higher retention rate.

Operator

And we have a question from Vincent Lui from Morningstar.

Vincent Lui - Morningstar

Just want to go take a look at the investment portfolio. I notice that you've been gradually increasing the duration of bond portfolio from about 26 years to 29.7 years this quarter. Could you give some general comments on that? Is that -- is it a change in the strategy? Are you trying to position in some ways for rising rates in the future?

Gary Coleman

Vincent, there really hasn't been a change in strategy. A lot of it depends on what's available in the market. We do invest long as we talked about before because our policy liability is long. If you go back and look at the last -- really last four, five quarters, it varies because third quarter of last year we -- I think it was 23 years and it's been around 25, 26 I think 29.

Vincent Lui - Morningstar

May be the highest --

Gary Coleman

It's just -- I think it's -- we haven't changed the strategy I just think that was what was available.

Operator

And we have a question from Bob Glasspiegel from Janney.

Bob Glasspiegel - Janney

Question, it seems like some of the tweaks that you're making trying to get sales going or offering the agents are little bit more of the or the customers a little bit more and there's a tradeoff between margins and sales that you're balancing all the time. I mean, with margins very strong and sales a little bit disappointing. Now the changes you're making margin neutral or margin negative recognizing that new sales don't move the aggregate needle that much?

Larry Hutchison

Changes are margin neutral, Bob.

Bob Glasspiegel - Janney

Margin neutral?

Larry Hutchison

Yes, margin neutral. The changes aren't just compensation. We recognize compensation as the biggest driver of agent activity and retention. There is also system changes. Now the lead mapping system I talked about makes those agents more effective so they have more presentations they can make in a week. Another positive we see within American Income they've increased their leads whole by 10% this year. That's a positive. We know that agents have more leads to set more appointments, have higher sales, that increases their income, they're going to stay with the company longer, hopefully transition in that management role. So there are systems, there are lead changes besides the compensation and we think are positive signs going towards the higher growth rate in 2014.

Gary Coleman

Well, Bob, we allowed -- we've always had bonuses and we allowed for bonuses in setting our pricing, our margins. It's really, what we're talking about is moving that margin money to incentivize different behavior; it's all part of our normal margin.

Bob Glasspiegel - Janney

And I didn't hear did you give your estimate for statutory earnings for 2013 and what the free cash flow for 2014 might be?

Frank Svoboda

Yeah, Gary, I will go ahead and take that. We did not give an estimate as far as statutory earnings was concerned for '13. We had not yet completed our third quarter statutory results. We do think that our RBC as of the end of the year should be roughly in line with where we were at the end of 2012. As far as our -- what's built into the kind of midpoint of our guidance for 2014, we are estimating free cash flow, stock buyback in the range of $360 million to $370 million.

Bob Glasspiegel - Janney

It's fair to say this would be a going statutory earnings year given the lack of credit issues that have hit the portfolio, is that a fair assumption?

Frank Svoboda

Yeah, I mean investment income, there is still a drag on investment income just in general on the statutory just as you've seen GAAP side. So --

Bob Glasspiegel - Janney

Right. I'm talking about credit losses aren’t giving like what you're modeling, I mean you allow for certain credit losses a year in your modeling --

Frank Svoboda

Yes, from a credit loss perspective, yes, it's been a very good year.

Gary Coleman

Bob, we will give better estimates when we do the full quarter call; we will have statutory information by then to give a better estimate.

Bob Glasspiegel - Janney

Okay. So a little guesstimate on how nine months is running versus a year ago, just a percentage increase?

Frank Svoboda

Yes, I really don't have that.

Bob Glasspiegel - Janney

Ballpark?

Frank Svoboda

I really don't have that at this point.

Operator

(Operator Instructions) We will take a question from Erik Bass from Citi.

Erik Bass - Citi

Just a question on productivity at American income. It looks like you just look at sales versus agent growth over the past year or so, the sales have lagged suggesting that productivity has declined, and can you just talk about what's driving this nearly some of it is probably mix of new hires. And so may be if you have any data on sort of how productivity is trending for agents with different amounts of experience?

Gary Coleman

Well, on overall if you look at per agent production in 2013 versus 2012, the per agent production has decreased in 2012 but only about 3% as compared to 2013. And as I stated earlier, I think part of that it's more difficult to set sales appointments from the telephone. To offset that difficulty we are making system changes. And productivity is tied to agent activity. As we see more agent activity we will see our productivity slightly rise.

Erik Bass - Citi

Okay. And maybe just another question on just how you view some of the new initiatives that competitors are rolling out to try to reach more middle income consumers, things like kiosks at Wal-Mart and whether you view that as a competitive threat? And I guess, just be interested in your opinion on kind of how much potential you think alternative distribution models have been in the lower-to-middle income segment of the market?

Larry Hutchison

We do not see as a treat. What we know is we serve an underserved market and when we look across our distribution, what we are not seeing as any replacement activity from competitors. Also, we are the only agents in the home and we are a niche, I think of our union business. So there is not a competition issue for us as people try and seek the middle income market. Well, life insurance is something you have to sell across the kitchen table. So we will take a look at what (inaudible) kiosks but it not a product that sells itself. And so we are more comfortable to make sales projections looking at agency growth as the driver of production rather than bringing that new products for the completion. We are really a sales organization. Our focus is more in that sales organization to reach more of that middle income market.

Operator

And we have a question from Mark Hughes from SunTrust.

Mark Hughes - SunTrust Robinson Humphrey

Can you give us an estimate for excess investment income either on a absolute bases or per share basis for next year?

Gary Coleman

Yeah, Mark, we are -- we guided declined in excess investment this -- income this year 7% to 8%, we are going to reverse that next year. And in dollar amount the excess investment should increase in the 7% to 8% range. And a good part of that is because we are going to see growth in investment income. The $467 million of hybrid calls had a tremendous impact reduction-wise on the 2013 income. As I mentioned earlier, that is behind us. So now the growth in -- and with the higher new money rates, the growth in investment income will not be as high as the growth in asset, but it's going to be much closer. So we will see growth in the income and our policy obligations, interest on policy obligations will grow in about the same range. And actually our interest on the debt calls will be lower. When you add all that together you will get to about a 7% to 8% increase in the midpoint of our guidance.

Operator

And we have a follow-up question from Yaron Kinar from Deutsche Bank.

Yaron Kinar - Deutsche Bank

I had just one question on the 2014 sales guidance. Since a lot of it depends on the initiatives and the tweaks of existing initiatives, should we expect to the sales growth to be back-weighted next year or is it roughly even throughout the year?

Larry Hutchison

I think it will be a little bit back loaded because if you put in initiatives in the first quarter, you will see those pull through more in the second, third and fourth quarter and the first quarter, that would be our expectation. That's not true to direct response because those initiatives were started in the second and third quarter this year to do additional testing. We think we will see the same kind of road, kind of Globe Life in action that we saw this quarter and projected in the fourth quarter, so that is in our guidance.

Operator

(Operator Instructions).

And it appears we have no further question.

Gary Coleman

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

Operator

Once again, ladies and gentleman that concludes today's conference. We appreciate your participation today.

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