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Torchmark Corporation (NYSE:TMK)

Q1 2014 Earnings Conference Call

April 23, 2014 11:00 AM ET

Executives

Mike Majors - VP, Investor Relations

Gary Coleman - Co-Chief Executive Officer

Larry Hutchison - Co-Chief Executive Officer

Frank Svoboda – EVP and Chief Financial Officer

Brian Mitchell – EVP and General Counsel

Analysts

Jimmy Bhullar - JPMorgan

Eric Bass - Citigroup

Yaron Kinar - Deutsche Bank

Ryan Krueger - KBW

Christopher Giovanni - Goldman Sachs

Mark Finkelstein - Evercore Partners

Steven Schwartz - Raymond James & Associates

Mark Hughes - SunTrust

Eric Berg - RBC Capital Markets

John Nadel - Sterne, Agee

Bob Glasspiegel - Jenny Capital

Joanne Smith - Scotia Capital

Operator

Good day, ladies and gentlemen, and welcome to the Torchmark Corporation First Quarter 2014 Earnings Release Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Mike Majors, Vice President of Investor Relations. Sir, you may begin.

Mike Majors

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

Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2013 10-K and any subsequent Form 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 first quarter was $137 million or $1.52 per share, a per share increase of 9% from a year ago. Net income for the quarter was $133 million or $1.48 per share, 17% increase on a per share basis.

With fixed maturities at amortized cost, our return on equity as of March 31 was 15.5% and our book value per share was $39.68, a 10% increase from a year ago. On a GAAP reported basis, with fixed maturities at market value, book value per share was $46.85, a 2% increase.

In our Life Insurance operations, premium revenue grew 4% to $489 million and life underwriting margins increased 6% to $141 million. The growth in underwriting margin exceeded the premium growth due to lower amortization on our deferred acquisition cost and the deferral of certain direct response Internet acquisitions cost that had not been deferred prior to the second quarter of 2013.

The lower amortization rate is a result of improvements and persistency attributable to our ongoing conservation program and is incorporated in our guidance. For full year, we expect life underwriting margin to increase approximately 3% to 5% over 2013. The growth rate for the year will be less than the first quarter growth rate primarily because the direct response Internet cost will be on a comparable basis for the remainder of the year.

Net life sales were $89 million, up 5% compared to first quarter of last year and up 7% over the fourth quarter of 2013.

On the health side, premium revenue, excluding Part D, declined 1% to $219 million and health underwriting margins declined 1% to $49 million. For the full year we expect health underwriting margin to decline from 2% to 4%. Health sales increased 34% to $32 million due primarily to the increase in group Medicare supplement sales.

Administrative expenses were $44 million for the quarter, 1% more than a year ago. For the full year we anticipate that administrative expenses will be up around 1% and be approximately 5.7% of premium.

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

Larry Hutchison

Thank you, Gary. Before we get into the market operations, I would like to point out that the agent count information on our website now includes an average agent count for the first quarter of 2014, in addition to the quarter end counts we have historically provided. Due to significant fluctuation that can occur from week to week, we believe that adding an average agent count for the quarter will provide more meaningful information regarding agent trends.

Now let's look at the results of our marketing operations for the first quarter. First, let's discuss Direct Response which generates approximately 35% of our life premiums. We are pleased with the Direct Response results. Life premiums were up 6% to $178 million and life underwriting margin increased 15% to $45 million. Net life sales were up 9% to $40 million. We are continuing to see significant production growth generated by our lower rates adult insurance offerings and electronic media. We expect life sales growth for the full year 2014 to be in the range of 6% to 9%.

Now American Income which generates approximately 38% of our life premiums; American Income's life premiums were up 7% to $186 million and life underwriting margin was up 7% to $60 million. Net life sales increased 1% for the quarter to $38 million. The producing agent count at the end of the first quarter was 5,500, down 2% from a year ago, but up 4% during the quarter. The average agent count for the first quarter was 5,298. On our last call, we indicated that we expect the sales to be flat for the first half of the year and then ramp up in the second half as changes in the compensation system kicked in. Despite significant weather related difficulties around the country, life sales increased slightly. We believe the changes implemented early in 2014 began to have a positive impact during the first quarter. We are seeing improvement in the percentage of agent submitting business and the average premium per application. While the average agent count for the quarter was lower than the count at the end of the fourth quarter we saw strong and steady growth during March. While it is still early we believe that agent retention will be positively impacted by the compensation changes. We opened a new office in the first quarter and we plan to open five more during the remainder of the year. We expect that life sales growth for the full year of 2014 to be within a range of 3% to 6% with most of the growth coming in the third and fourth quarters.

Now, Liberty National. At Liberty National, life premiums declined 2% to $69 million. Our life underwriting margin declined 10% to $17 million. Net life sales grew 4% to $7 million; our net health sales increased 25% to $4 million. The producing agent count at Liberty National ended the quarter at 1,451, up 6% from a year ago and up 1% during the quarter. The average agent count for the full quarter was 1,400, while this is lower than the count at the end of 2013 we saw a steady increase to the last half of the quarter. The first quarter sales increases were higher than we had anticipated due obviously to improvements in agent productivity and activity levels.

We opened another new office of Liberty in the first quarter and we expect to open four more new offices of Liberty during the remainder of 2014. We will continue to expand into more heavily populated and less penetrated areas to generate long-term agency growth of Liberty. We expect to see total life and health sales growth for the full year 2014 in the range of 3% to 6%.

Now, Family Heritage. Health premiums increased 7% to $49 million, our health underwriting margin increased 16% to $11 million, and health net sales declined 8% to $10 million. The agent count also declined during the first quarter. We believe these disappointing results were due in large part to weather related issues that affected Family Heritage to a greater extent than other distribution channels. On a positive note, we saw improvements in agent counts throughout March and we are seeing positive sales momentum during March and April. We still expect growth in health sales of Family Heritage for the full year of 2014 to be in the range of 2% to 6%.

Now, United American General Agency, health premiums grew 1% to $78 million in our General Agency; net health sales grew 116% to $14 million. The increase is due primarily to a large group Medicare supplement case; we also continue to see strong growth with our individual Medicare supplement sales. Although it is difficult to project Medicare group Medicare supplement sales activity, our guidance for the full year assumes General Agency net health sales growth of approximately 25% to 35%.

Medicare Part D. Premium revenue from Medicare Part D grew 8% to $83 million while the underwriting margin grew 19% to $10 million. Currently sales for the quarter were $31 million compared to $9 million in the year ago quarter due to the increase on low income, subsidized enrollees for 2014 and a large employer group case. The midpoint of our 2014 guidance assumes an increase of 16% to 17% in Part D premiums for the full year.

I'll now turn the call back to Gary.

Gary Coleman

Thanks, Larry. 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 $57 million, an increase of $1 million or 2% over the first quarter of 2013. On a per share basis reflecting the impact of our share repurchase program, excess investment income was up 7%.

For the full year, we expect excess investment income to increase by about 4% to 6%. On a per share basis, the increase should be about 9% to 11% compared to 2013. The growth rate expected for the full year 2014 is higher than that of the first quarter so the excess investment income in the first quarter of 2013 was the highest of any quarter in 2013 due to the impact of [calls of] [ph] higher yielding securities during the first and second quarters.

Now regarding the investment portfolio. Invested assets were $13.2 billion including $12.6 billion of fixed maturities at amortized cost. Out of the fixed maturities, $12.1 billion are investment grade with an average grade of A minus. And below investment grade bonds were $552 million compared to $573 million a year ago.

The percentage of below investment grade bonds to fixed maturities is 4.4% compared to 4.7% a year ago. With a portfolio leverage of 3.6x, the percentage of below investment grade bonds to equity, excluding net unrealized gains on fixed maturities is 16%. Overall the total portfolio is rated A minus same as a year ago.

In addition, we have net unrealized gains in the fixed maturity portfolio of $1 billion compared to $390 million at the end of the fourth quarter. The increase is due primarily to recent declines in market interest rates.

Regarding investment yield, in the first quarter we invested $158 million in investment grade fixed maturities primarily in the industrial and financial sectors. We invested at an average yield of 5.4% and average rating of BBB+ at an average life of 25 years.

For the entire portfolio, the first quarter yield was 5.92%, down eight basis points from the 6% yield in the first quarter of 2013. For full year of 2014, we expect the portfolio to yield approximately 5.9%.

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

Frank Svoboda

Thanks, Gary. I want to spend a few minutes discussing our share repurchases and capital position. First, regarding share repurchases and parent company assets.

In the first quarter, we spent $108 million to buy 1.4 million Torchmark shares at an average price of $76.09. So far in April, we have used $33 million to purchase another 427,000 shares. So for the full year through today, we spent $141 million of parent company cash to acquire 1.8 million shares.

The parent started the year with liquid assets of $60 million. In addition to these liquid assets, the parent will generate additional free cash flow in 2014. Free cash flow results primarily from the dividends received by the parent from subsidiaries less the interest paid on debt and the dividends paid to Torchmark shareholders. We expect free cash flow in 2014 to be around $380 million. Thus including the $60 million available from assets on hand as of the beginning of the year, we currently expect to have around $440 million of cash and liquid assets available to the parent during the year.

As previously noted to date in 2014, we have used $141 million to purchase Torchmark shares leaving approximately $300 million available to the parent for the remainder 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 those funds. We also expect to retain approximately $50 million to $60 million of liquid assets at the parent company.

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

At December 31, 2013, our consolidated RBC ratio was 341% and adjusted capital was approximately $70 million in excess of that required for the targeted RBC ratio. We do not anticipate any changes to our targeted RBC levels in 2014.

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

Larry Hutchison

Thank you, Frank. For 2014, we expect that our net operating income will be in a range of $6.08 per share to $6.32 per share. Those are our comments. We'll now open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Jimmy Bhullar with JPMorgan. Please go ahead.

Jimmy Bhullar - JPMorgan

Hi, good morning. Just had a couple of questions. First, Larry you mentioned weather a couple of times. So maybe talk about if you did see an impact on your sale? Any delay for health or direct response from weather and whether that affected recruiting as well? And then secondly on the agent count, you saw a nice entries at American Income but if I look over the past couple of years your agent count in the first quarter increased a decent amount I think up 17% in the first quarter of 2012, 8% in the first quarter of 2013 and then last year it actually declined in the other quarter. So are there seasonality and what your expectations are for the agent count at American Income through the rest of the year?

Larry Hutchison

For Liberty National and for American Income, the severe weather did have a slight negative impact on both sales and recruiting. And at Family Heritage, the agencies were primarily in rural areas for a majority of the sales involved travel of large distances to market the product, it was challenging to overcome the setbacks and in addition at Family Heritage the inclement weather coincided with the company's major sales incentive weeks. With respect to the agent retention, we are not expecting a drop in agent retention at American Income later this year. We believe we will continue to see the positive impact from the changes and compensation we introduced in January, we will have better information regarding agent retention trends later in the summer. Well, primarily we are seeing three positive trends in agent productivity at American Income. Our total bonus earners increased in the first quarter, [the signs] [ph] of agents submitting new business on weekly basis increased, and the average premiums submitted also increased. Those three indicators would tell us that we believe our retention is going to better over the next quarter and through the remainder of the year.

Jimmy Bhullar - JPMorgan

And with Direct Response, any disruption or any effect on your sales with the disruption in mail delivery and stuff over -- and actually at Liberty and American Income, have you seen better trends in April as the weather has gotten a little better or not?

Larry Hutchison

We are seeing the same trends in April at American Income and Liberty. Direct Response is also affected by the bad weather particularly in the insert media, now some of the delivery of the insert media was delayed and that's lost because when you have bad weather, when the next mailing goes out it’s on top of the first mailing, but at the go get Direct Response had a strong first quarter and so they had fairly minor impact upon the Direct Response operation.

Operator

Our next question is from the line of Eric Bass with Citigroup. Please go ahead.

Eric Bass - Citigroup

Hi, thank you. I was hoping you could discuss current trends in the med sub business a little bit more. Are you seeing any pickup in demand for individual policies or any increase in disenrollment from Med Advantage at this point?

Larry Hutchison

The Medicare Advantage disenrollment did not have a major impact upon the company. It was our estimate that in the first quarter, our production increased by approximately 10% to 15% because of Medicare disenrollment. The growth we are seeing in 2014 in the general agency really comes from the individual sales which is a result of strong recruiting and its implementation of new e-application and the group Medicare supplement we benefited from a the large case within the first quarter and that business tends to be little bit lumpy. We are hopeful of seeing more large cases during the year. But our guidance does not reflect that.

Eric Bass - Citigroup

Okay, and maybe what are some of the dynamics in the group market in terms of competition or its margin trends in that business? Do you have had some relative good sales in recent periods?

Larry Hutchison

This is lumpy, it is a competitive market. And they are continually holding different large group cases and medium group cases. If we price to a profit margin and we either receive the business or we do not receive the business.

Eric Bass - Citigroup

Okay, and then just one on Part D. You had pretty strong margins there. Can you remind us whether you are expecting or what's assumed in guidance for Part D margins for the year and should we expect that they can hold up at first quarter level?

Larry Hutchison

It's pretty early in 2014 to really measure our claims experience but we expect margins in Part D for the year 2014 to be in the range of 10% to 13%.

Operator

Our next question is from the line of Yaron Kinar with Deutsche Bank. Please go ahead.

Yaron Kinar - Deutsche Bank

Hi, good morning, gentlemen. I have a couple of questions. First on Liberty National's margins which I noticed were off a little bit this quarter. And seemed to be a little -- going maybe the wrong direction certainly relative to other segments. So I was curious just to what was causing that and if you thought that would correct itself as the year progresses?

Gary Coleman

Well, the impact of - the first quarter was really in a decline so we had higher claims in the first quarter. And also the claims for the first quarter of last year were little bit low. At Liberty the claims are high in the first half of the year than it’s - higher than they are in the second half, and it just so happen that is the first quarter was high - this year last year the second was over 40%, as a percentage of policy obligation, so it's little bit of seasonality here, for the year though we expect the policy obligation at Liberty be around 38% to 39% and that's compared to a little over 38% for the last year.

Yaron Kinar - Deutsche Bank

Okay. And then on the excess investment income side. With yields pulling back a little bit kind of beginning of the year, are you still comfortable with the initial guidance you gave for the full year I think it was 5% to 7% growth?

Gary Coleman

Yes, I feel comfortable with the guidance we gave earlier. We did lower though our new money rate from 5.5 to 5.25. 5.5 is what we used in our previous guidance. As we have seen that market rates decline somewhat, though we feel confident that we can hit the prior quarter and at that -- again we will see increase in growth as year goes on.

Yaron Kinar - Deutsche Bank

Okay. And if I could just may be a quick numbers question something I missed. Larry, I think you talked about 25% or 35% sales growth guidance for the year. I missed through, what segment that was?

Larry Hutchison

That's for the United American General agency; we said health sales from the United American Independent Agency to be up approximately 25% to 35%, group count Medicare supplement sales we said to be up about 35%.

Operator

Our next question is from the line of Ryan Krueger with KBW. Please go ahead

Ryan Krueger - KBW

Hey, good morning, thanks. I guess first I want to follow up on the med sub discussion. So you have a pretty good outlook for the year. It sounds like there were a lot of dissimilarities in med advantage but I am just curious is the competition increasing in med sub just based on this idea that med advantage funding pressures could go on over time?

Larry Hutchison

I think med sub is really market if you look at the demographics certainly there are many people turning 65, so we are growing market over time. Our sales really are depended upon assumption of any disenrollment from Medicare advantage. What we are focusing on these recruiting agents to sell Medicare supplement business and we have implemented a new e-application system to makes easier for the agents to write the business to United American Insurance Company, so their growth is really driven here by strong agent recruiting and e-application process.

Ryan Krueger - KBW

Okay, have you seen any changes in the competitive environment over the last year or so?

Larry Hutchison

I think it is really the same environment, as I said we saw net increase disenrollments in the first quarter. As we look at the replacement forms is our estimate that those first quarter Medicare this Medicare advantage disenrollment led to an increase in production of about 10% to 15%.

Ryan Krueger - KBW

Okay and then I just have a couple of quick weather related one. You noted a little bit higher claims at Liberty which I know is typical of the first quarter from a seasonal perspective but wondering if you thought the bad weather had caused any uptick in mortality rates in the first quarter.

Larry Hutchison

I don't think the bad weather affected the mortality rate. And Gary said about the seasonal pattern, as we looked back at Liberty over the many years the claims tend to be higher in the first half of the year than the second half of the year.

Gary Coleman

If you may be the first quarter so our -- and may be second quarter it was last year but I don't think there is anything surprising here.

Ryan Krueger - KBW

Okay and then just last one on Family Heritage, the sales weakness from the weather. And do you think that uniquely impacted that business because of its rural focus? So do you think that was more of an industry issue for kind of all supplemental health --?

Larry Hutchison

I think uniquely affected Family Heritage. Again most of our agency forces for Liberty and typically for American Income in urban areas. And Family Heritage, those agencies were primarily at rural areas as for the sales force travel long distances to market products, given the bad weather in the upper Midwest and the East and even the South, it really had a negative impact upon Family Heritage. In addition, the Family Heritage, they have major incentive weeks and it so happen that the bad weather coincided with several of those major sales incentive weeks. So the impact was greater at Family Heritage and other two agencies.

Operator

Our next question is from Christopher Giovanni with Goldman Sachs. Please go ahead.

Christopher Giovanni - Goldman Sachs

Thanks so much, good morning. I guess first question is just over the past several years. We've heard from several competitors the talk about moving down market. Maybe not all the way down to your target customer were met suddenly, rolled out its partnership with Wal-Mart in some states, others are seemingly working with -- we looks like another big box in department store, retailers as customers seemed to be more willing to purchase through retail channels. So wondering if you are seeing any signs of increased competition or any comments you can make around those strategies and impact it could have on your distribution?

Larry Hutchison

If you look at our Direct Response operation and we also looked for the each of the agency operations and we have not seen any evidence of increased competition that field in our direct marketing.

Christopher Giovanni - Goldman Sachs

Okay, any comments just in terms of may be that direct through kind of the retail distribution versus mail or internet?

Larry Hutchison

Oh, quite a chance of a product that doesn't sell itself, they need to sold to an agency so we believe in the agency system but we think we have had great success with Direct Response in all three channels, in Direct Response, through the direct mail, the electronic media, fastest growing segment is electronic media. And part of the reason I can see we are not seeing an increased competition, if you look at the electronic media in the first quarter; our inquiries were up 40% compared to same period a year ago. And we don't think that will continue for the full year, we are expecting electronic media inquiries to be up at least 20% for the full year. And so electronic air and electronic media as we focus on different areas. We are comfortable that globe will continue to grow and it supports the other two segments, other two channels in its distribution.

Christopher Giovanni - Goldman Sachs

Okay and then last question. Just wanted to get some perspective in terms of sort of how much runway you think you have with the higher face amount policies you guys are telling selling direct.

Larry Hutchison

Before answering (inaudible) it is an excellent question, the actual numbers of course the issue is higher face amount has increased , by offering the higher face amount we are also seeing even bigger increase and policies issue across all policy face amount. So we are continuing to explore higher face amount, what we are finding it that helps our sales and the other smaller face amounts that remains more offer, that we really rolled out in the third and fourth quarter different rates and different real products with testing started all products now sometime at runway, we will try to addressing that in the third and fourth quarter that we are seeing result of those additional tests.

Christopher Giovanni - Goldman Sachs

And when you talked about test, are you talking geographically even exploring further increases in the face amount or both?

Larry Hutchison

It is geographic, it is different packaging, it is different writers doing -- there is lot of different testing we do with these all products.

Gary Coleman

We have talked about in the past digital $30,000 maximum face amount, so we have increased that up to around $100,000, if your question is, are we going to further up from $100,000, that's I am not sure that happens, it is little bit hard in Direct Response because we can't do greater deal of underwriting, it would be difficult to go higher face amount than that.

Christopher Giovanni - Goldman Sachs

Understood, great, thanks, appreciate the comments.

Operator

Our next question is from the line of Mark Finkelstein with Evercore Partners. Please go ahead.

Mark Finkelstein - Evercore Partners

Hi, good morning. Broader question on Family Heritage. You did talk about weather impact in the quarter and expecting a better March and April, you've also talked about in the past improving some of the kind of recruitment tools of that business but I guess what I am really curious about is if you look at a level of sales and if you look at the level of recruiting generally, I assume it is probably been a little disappointing and I am just curious to how you think about the performance of that business broadly relative to how you originally thought about it when you bought it?

Larry Hutchison

I don't think it has been disappointing. I think we made some adjustments in the system from recruiting last year. So you look at this year, year-to-date it was disappointed first quarter because it was hit by the bad weather, if you go to the second quarter we are seeing some positive indicators for both recruiting and sales. Our sales projections for 2014 are in range of 2% to 6%. We think the agent count at the end of the year for 2014 in a range of 600 to 725 agents. Now the growth at Family Heritage is going to come from the increased in the sales force. And so that's our focus and we believe that it is sales force grows and significant growth in production follows that sales growth.

Gary Coleman

Mark, it is really-- it is the case when we bought the company, we knew we are going to-- there will be significant changes made to the way recruiting was done, we expected this would take a little time to because they may (inaudible) jumping on, so we are not disappointed with it, we excepted this time, as a matter of fact it will be little air space.

Mark Finkelstein - Evercore Partners

Okay, that's helpful. And then just one follows up on the American Income agent count. You had a very strong first year improvement but you did see a little bit of fall off in renew year. Is that just fluctuation or anything else going on there?

Larry Hutchison

I think the fall off is an indication of the retention issues we had over the last 15 to 18 months. As we see better retention first year agents would expect to see in the third, fourth quarter, and those veteran agents numbers will grow. When you think about it, in any quarter you are going to loose certain veteran agents. If you are not adding new agents that entered that 13 month that number will be flat or slightly drop.

Gary Coleman

Mark, on price I think that the -- when you look at total agent count and the management count is pretty much flat of last year but the growth is come in the writing agents, that's a good indicator because as we grow the number of agents, writing agents, that is the ones who will go into management so we think that's leading indicator that we will see increase in management as well.

Operator

Our next question is from the line of Steven Schwartz with Raymond James & Associates. Please go ahead.

Steven Schwartz - Raymond James & Associates

Hey, good morning, everybody. Couple of numbers first. Frank, I think you typically talked about how you expect yield I mean you said that the yield should be about 5.9% for the year on average. But how should that develop quarterly? Could you give us that?

Frank Svoboda

Yes. I think it drops towards 592 for the first quarter and we really think dropping probably just 1% to 2% basis point sequentially over the course of the quarters.

Steven Schwartz - Raymond James & Associates

Okay and then one of the things that I noticed on Part D, there seemed to be significant changes in PBM fees? And anything up with that?

Gary Coleman

Yes, Steven, including the PBM fees is a new fee that we have stayed under the Affordable Care Act with over 1% of premium and in addition to that we negotiated a contract, there is additional calls for an option that we agreed to where we could renegotiate the drug (inaudible) in 2014, so that add that as well.

Steven Schwartz - Raymond James & Associates

Okay, great and then just a more general question. Exchanges, group-- probably a bit overwrought all the discussion about exchanges with regards to active employees but it definitely seems to be making headway in the retiree market. Given the big group sale you made any, does United American plan that, are you on these exchanges through the agencies, does this affect you at all?

Larry Hutchison

No, we are not in exchanges currently, and we are not exploring opportunities in the supplemental health market, and so as we look at the exchanges of Obama care, we look at those opportunities we know there going to be gap, there will be product, need to be filled so that's our focus but to be on exchanges to --

Steven Schwartz - Raymond James & Associates

Larry, I was talking about the private exchanges like (inaudible) or somebody like that.

Larry Hutchison

And we are not on those exchanges. I thought (inaudible) probably big exchanges, okay

Steven Schwartz - Raymond James & Associates

Will those developed, will those affect the market that you entered?

Larry Hutchison

We don't think so. Certainly that going to affect our individual market and then the group those are courted individually and so those groups it could be competition but we think also be competitive in those markets.

Operator

Our next question is from the line of Mark Hughes with SunTrust. Please go ahead

Mark Hughes - SunTrust

Thank you, good morning. Have you got more flexible perhaps open up the top end in terms of the size of the group that you are willing to quote in the med sub business? Should we look for more big lumps perhaps in the future?

Larry Hutchison

It is possible. We do hope it grew so that's possible. It is almost impossible to predict that business so it is an opportunistic business and we are going to maintain our profit margins so we don't have proper margin basically size of the group. We maintain that this is a profit margin or this medium in a very large group.

Mark Hughes - SunTrust

Are they more prospects so you quoting more for those very large group?

Larry Hutchison

I don't think it is more or less. I think they looked across the market and that's what that marketing group does is they go out and they are trying contacts and make groups and brokers as possible. And they are willing to write any size group, obviously there will be less competition. If you have a group it has 2000 members versus 20,000 members.

Operator

Our next question is from the line Eric Berg with RBC Capital Markets. Please go ahead.

Eric Berg - RBC Capital Markets

Thanks very much and good morning to everyone. I have a general question about the health business and then a narrow one about the health business. My first question is as follows, it feels like it wasn't terribly long ago say within the last one to two years-- that two years ago that the health business was well in decline and with premiums falling sharply and now they are falling a lot less sharply, indeed they were essentially flat. It seemed back then at least to me that Torchmark was heading towards becoming overwhelmingly a life company and much less of a health company than it had been in the past. My question is as we look forward given the strength that you are enjoying now in Medicare supplement and elsewhere in health insurance, do you anticipate - is the health business turning around really is what I am asking and do you anticipate a more balanced mixed between life and health perspectively and then what you would have said a year ago?

Larry Hutchison

I guess if you remember if you look at 2010, 2011 and 2012, the decline you saw in health line were largely the result of the larger block of business that we wrote, it would have been subject to the Healthcare Reform Act, we decided to exit that line of business in 2010, as you see (inaudible) client, I think what you are seeing is a stabilization our healthcare business because a large part of America supplement business is growing in individual and also growing in a group. Long term, our focus remained on life insurance, we certainly like the health insurance business, we find the life insurance business to be more predictable and so vis-à-vis is sales growth and it is easy to maintain and captive agency force in a life insurance business than is in the health insurance business.

Gary Coleman

I would agree with Larry. We do prefer the life business because normally the high margin and that's where our excess investment income come from, I think there is a point also in the niche that we have in the health insurance side. But for example this year we look at the premium income being flat, that's actually an improvement over the years you talked about Larry but we expect to see some growth there but it is not going be such growth that it has on life side and that's staying with us.

Eric Berg - RBC Capital Markets

My second question is similar but more focused and it is focused on the Medicare Part D business. Again, my -- if my memory shows me correctly when Medicare Part D first began several years ago, you had a burst of business and then there was sort of uncertainty as to whether this drug related business, drug insurance related business would continue at the pace that it had been. It was suggested that it might pulled out sharply and now it seems to have stabilized. My question, do you see Medicare Part D remaining a meaningful growing, a meaningful and growing part of the business?

Gary Coleman

I think where we stand now I think it is a meaningful part of our businesses but to say whether it is going to grow or how big is it going to be in the future is difficult because it is such competitive market. In addition to that, there is a difference between the order of time market and non auto zone market, there are different levels there, uncertainty there and also when you take a look at it we like the business but the profit margin there is lower than say it is on our health business and life business. So it is less more competitive, it is lower margin. We are glad to have the business but it is hard to predict in the future how big it will be or it will be -- even it will be there.

Larry Hutchison

In fact as Gary said we look at Part D, it is an opportunistic market, every year we have been to achieve our target profit margins, every year we are going to gain regions or we are going to loose regions. Now currently we have about 20 to 25 regions and 35 possible regions. We hope to maintain that level of regions but competitors decide about the business and we could loose regions in that competitive business, if the auto assign market becomes extremely competitive, we could lose most our auto assigns but we still have our regular market, group market to rely on.

Operator

Our next question is from the line of John Nadel with Sterne, Agee. Please go ahead.

John Nadel - Sterne, Agee

Hey, good morning, everybody. I just have two -- I think everybody, everything is pretty much being covered. I am just curious how big was the large group case that was written this quarter in United Agency on the Medicare supplement just to give us a sense, how many lives?

Larry Hutchison

On the Part D case it was large case. I think it was approximately twenty hundred new lives, and the annual premium amounts about $ 7 million.

John Nadel - Sterne, Agee

That's helpful, thank you. And then I just have, just a quick numbers question. Option compensation expense grew on year-over-year basis the level that you have seen in the 1Q probably about we should expect to see going forward?

Frank Svoboda

Yes, actually John it will be Q1 although little bit higher it will grade down just slightly over the remainder of the year but I think on an annual basis and midpoint of our guidance you should probably expected to be around near 4% of our net operating income before the stock option expense.

John Nadel - Sterne, Agee

Okay and I think I sneak one more in. When you think about the range for your guidance, the 10% to 13% range for the margin expectation for Medicare Part D, is that contemplated in the low and the high or is there something more midpoints built in there?

Frank Svoboda

Yes, the midpoint as you get closer to the midpoint you will be looking at relayed at around expectation it might be 11.5% to 12%.

Operator

Our next question is from the line of Bob Glasspiegel with Jenny Capital. Please go ahead

Bob Glasspiegel - Jenny Capital

Good morning, Torchmark. I love your annual report letter, kudos to whoever is in charge of writing it. I noticed that towards the end when you talk about use of free cash flow for the first time you talked about the special dividend should the stock get at above your proprietary definition of intrinsic value. And with the stock bouncing to a new high -- let me step back you did your active in the first quarter as the stock was down, I was wondering if the caveat for that would drive the special dividend in that sort of-- if you had another rocket shape year for the stock or is it -- would the stock hitting sort of all time high or we are getting in the neighborhood where the special dividend becomes a more reasonable option? You guys have been so good on capital management and investment management that I respect your judgment a lot.

Gary Coleman

Well, Bob, first of all as we said in our letter our first priority is to return the excess cash to shareholder. And we over the years we have-- the share repurchase have outweighed our dividends that this last year saw the first year we really hit at our share price, is gotten close to what we think intrinsic value and so that's how we mention the possibility of special dividend and that would be something we would have to discuss with our Board about but absent of an acquisition or absence of other cash we provided at the strong return to shareholders we would consider that if we felt we needed to send share repurchase because of valuation, but we are not there yet and we forget about this share repurchase to the first quarter but as you said we have another 30% increase in share price that we still not expect but we did -- we don't want to -- we recognize the fact that we buyback the shares at prices -- we can't just buy and just buy for the shareholders, so that's what we have to conversation about the special dividend, it has been possibility.

Bob Glasspiegel - Jenny Capital

I applaud your logic and it is very sound and so you are somewhere in between closing not near the point where you would consider it, I guess that was the bare that was the sort of rough --

Gary Coleman

From a historical standpoint we are closer to the intrinsic day or what we feel the value of stock is than we have been in past years. But we don't -- we are not close enough that we think we should suspend the repurchase.

Larry Hutchison

And it is not fixed point It is an ongoing analysis, we look at that every quarter, discuss that with our board of directors and again we will make a decision we think is in the best interest of the shareholders.

Operator

Our next question is from the line of Joanne Smith with Scotia Capital. Please go ahead.

Joanne Smith - Scotia Capital

Yes, most of my questions have been answered but I just want to go back to Medicare income for a minute because you quoted some metrics in the Q&A regarding the fact that bonuses were up and the weekly submission were up as well as total submission and I am wondering if you could give us a little bit of feel as to how that spread out through the quarter and if you think that all of the changes that you have made are really starting to hit the stride now or if there is still kind of on the cost. Thanks.

Larry Hutchison

We have better sales in the first quarter than we expected, we had American Income Life insurance company and that should be driven by the percentage of agency new business on repay basis, we didn't really see the increase in the agents until about mid February. We are seeing positive trends with a new competition program, from mid February on not just new current agents; we are seeing the number of recruits and positive trends. It is little bit early to see what the effect of that new compensation system is going to be. I think it will be probably mid July, probably August and we have enough data from January, February and March that we can look at their third, fourth, fifth month retention to see the real effect of that is having.

Joanne Smith - Scotia Capital

Okay, great, then I will check out on that front, thanks very much.

Operator

(Operator Instructions)

We have a follow up question from the line of Mark Hughes, please go ahead.

Mark Hughes - SunTrust

Thank you. How much of the Globe Life inquiry volume or new policy volume is coming by electronic media?

Larry Hutchison

I think we asked, I am trying to understand question, you are asking the four percentage of the Direct Response sales come from electronic media.

Mark Hughes - SunTrust

Exactly.

Larry Hutchison

That's 40% of our sales comes from electronic media and that will be in multi media, I am including incoming total calls, the internet, social medium, mobile search ads. Mark, it is hard to give an exact percentage because as we have more of electronic internet traffic, we see a greater presence for social media and also supports our Direct Response and answer media operations for -- so they three work in tandem but we will give rough estimate of about 20% of new sales come from electronic media.

Operator

I'm showing no further questions at this time. Now, I would like to turn the call back over to Mr. Major for closing remarks.

Mike Majors

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

Operator

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.

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