Torchmark's (TMK) CEO Gary Coleman on Q2 2014 Results - Earnings Call Transcript

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 |  About: Torchmark Corporation (TMK)
by: SA Transcripts

Operator

Good day and welcome to the Torchmark Corporation Second Quarter 2014 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mike Majors, Vice President of Investor Relations. Please go ahead sir.

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, good morning everyone. Please note that the share and per share information in our comments this morning has been adjusted to reflect the three-for-two stock split that was effective on July 1st.

Net operating income for the second quarter was $136 million or $1.02 per share, a per share increase of 7% from a year ago. Net income for the quarter was $131 million or $0.98 per share, a 2% increase on a per share basis.

With fixed maturities at amortized cost, our return on equity as of June 30 was 15.4% and our book value per share was $27.02, a 10% increase from a year ago. On a GAAP reported basis, with fixed maturities at market value, book value per share increased 24% to $33.93.

In our Life Insurance operations, premium revenue grew 4% to $492 million and life underwriting margins increased 4% to $141 million. Life sales increased 11% to $102 million. For the full year we expect the dollar amount of our life underwriting margins to increase around 3% to 4%.

On the health side, premium revenue, excluding Part D, declined 1% to $215 million and health underwriting margin also declined 1% to $50 million. Health filed increased 21% to $29 million and the full year we expect the dollar amount of our health margins to be about end of last year.

Administrative expenses were $45 million for the quarter 3% more than a year ago. For the full year, we anticipate that administrative expenses will be around 1% and be approximately 5.7% of premiums.

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

Larry Hutchison

Thank you, Gary. I would first like to discuss American income. An American income life premium was about 7% $190 million and life underwriting margin was up 6% to $60 million. Net life sales were $45 million up 9% to primarily to increase agent counts and the higher percentage of agent submitting business, that producing agent count at the end of the second quarter was 5,890 up 6% from the year ago.

The average agent count for the second quarter was 5,744 up 8% from the first quarter. We expect 8% to 11% life sales growth for the full year 2014 now direct response and have direct response operation on the life premium 5% to $177 million and life underwriting margin increased to 2% to $44 million. Net life sales were up 12% to $44 million. We expect 8% to 10% life sales growth for the full year 2014.

Liberty National, at Liberty National life premiums declined 2% to $68 million and life underwriting margin increased 6% to $18 million. Net life sales grew 7% to $9 million and net health sales increased 22% to $4 million.

The producing agent count at Liberty National ended the quarter at 1,500 up 17% from the year ago. The average agent count for the second quarter was 1,492 up 7% from the first quarter. For the full year 2014, sales growth is expected to be 4% to 6% for life and 12% to 14% for health.

Now, Family Heritage. Health premiums increased 7% to $51 million; our health underwriting margin increased 13% to $10 million. Health net sales were up 15% to $13 million, the producing agent count at the end of the quarter was 771 up 4% over a year ago. The average agent count for the quarter was 758 up 15% from the first quarter. We expect sales growth for the full year 2014 to be in the range from 3% to 8%.

Now, the United American General Agency, health premiums declined over 1% to $76 million, net health sales improved 34% to $9 million, of the Group Medicare supplement business is somewhat hard to predict. We expect general agency net sales growth for the full year 2014 to be in a range of approximately 25% to 35%. Medicare Part D, premium revenue for Medicare Part D grew 16% to $85 million and the underwriting margin increased to 6% to $9 million. The growth in underlying margin lagged behind premium growth due to the higher claims related to newly approved hepatitis C drugs. As a result we now expect Part D margin for the year to be in range of 8% to 11% rather than the 10% to 13% that was expected earlier in the year. R&D sales for quarter were $20 million up from $8 million a year ago.

I will now turn the call back to Gary.

Gary Coleman

Thanks Larry. I am going 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 $2.4 million or 4% over the second quarter of 2013. On a per share basis reflecting the impact of our share repurchase program, excess investment in income increased 10%. For the full year, we expect excess investment income to increase by about 3% to 5%. On a per share basis, the increase should be about 8% to 10% compared to 2013.

Now regarding the investment portfolio. Invested assets were $13.2 billion including $12.7 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 $563 million compared to $585 million a year ago.

The percentage of below investment grade bonds to fixed maturities is 4.4% down from 4.8% a year ago. With a portfolio leverage of 3.5 times, 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 $1.4 billion compared to $1 billion at the end of the first quarter. The increase in unrealized gains is due primarily to the recent decline in market interest rates.

As to investment yields, in the second quarter we invested $167 million in investment grade fixed maturities primarily in the industrial and financial sectors. We invested at an average yield of 5.7% and average rating of BBB at an average life of 21 years. While the BBB average rating is lower than the A-, BBB+ average recent years, the weighted average was just below BBB+. We haven’t changed our philosophy regarding credit quality the investment grade bonds we purchased in the quarter we had our long standing credit criteria.

The new money raise for the first quarter and second quarter for 5.4% and 4.7% respectively, the mid-point of our guidance assumes a new money rate of 5% for the remainder of 2014. For the entire portfolio the second quarter yields was 5.92% same as the first quarter of 2014 but down 3 basis points from the 5.95% yield in the second quarter of 2013. For the full year, we expect the portfolio to yield approximately 5.90%. And I would add, while we were benefited from higher new money rates, we’re confident that we can have sustained growth in investment income in the current rate environment.

Now we’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 second quarter, we spent $82.2 million to buy 1.5 million Torchmark shares at an average price of $52.86. For the full year through today, we had spent $210.1 million of parent company cash to acquire 4 million shares at an average price of $51.95.

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 plus 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 $210 million to purchase Torchmark shares leaving around $230 million of cash available for the remainder of the year. As noted before we will use our cash as efficiently as possible as for the better alternatives and if market conditions are favorable, we expect the share repurchases will continue to be a primary use of those spend. We also expect to retain a pricing $50 to $60 of liquid assets as the parent company.

Now, regarding RBC at our insurance subsidiary. As stated in our previous call we have maintained our insurance company capital level at or above an NAIC RBC ratio of 325% on a consolidated basis which has historically been sufficient to maintain our ratings. This RBC ratio is lower than some peer companies, but has been sufficient for our companies in light of our consistent statutory earnings and the relatively lower risk of our assets and policy liability.

At December 31, 2013, our consolidated RBC was 341% we deny currently anticipate any significant changes to a target 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 our net operating income will be within range of $4.05 per share to $4.15 per share to mid of $4.10 is $.30 lower than projected earlier in the year due primarily to the impact of higher Part D claims on underwriting and investment income. Those are our comments. We’ll now open the call up for questions.

Question-and-answer session

Operator

(Operator Instructions) And we’ll take the first question from Erik Bass with Citigroup. Please go ahead.

Erik Bass - Citigroup

Hi. Thank you. Just had a couple of questions on Part D. First, is it correct to assume that you're reflecting the higher drug costs related to the hepatitis C treatment in your pricing submissions for 2015? So therefore, should we think of this issue being only a meaningful drag on margins in 2014 and that your target margins would revert to the level you had guided to earlier in the year for 2015?

Gary Coleman

Yes, Eric for hepatitis C drug was included in our 2015 pricing

Erik Bass - Citigroup

Okay. So would you -- you had guided to 10% to 13% margins for part D earlier in the year. So is that a reasonable range to think about for 2015 at this point?

Gary Coleman

Erik I would say you look back historically, we’ve been in around 10% to 11% I think for sure is 10% to 11% it could be 10% to 13%, we still don’t know although we submitted our bids we still don’t know how they relate to others as how many lower income we will get. So I think you’re safe around 10% to 11%.

Larry Hutchison

Right, we’ll receive those results in August and I want to give guidance on three quarter call.

Erik Bass - Citigroup

Okay, thank you, and then one last thing to clarify. You mentioned the cash-flow timing issues being -- pressing investment income a little bit, because you have to pay the claims before you get reimbursed by the government. Does that have any impact on your expected cash flow to the holding Company?

Frank Svoboda

Eric this is Frank Svoboda. That will have a little bit of impact on the timing of the cash flow to the wholly commitment to the fact that again reduce some of our investment income. When you look at -- we anticipate for the full year 2014 that will probably incur somewhere in the range $45 to $60 million worth of additional claims, now the majority of that and maybe around 85% of that will be reimbursement CMS as you noted we don’t give reimburse from that until sometime in 2015 so we’ll have that drag, we’ll see the drag on investment income here in 2014 of course that last our investment income on 2014 now there is like capital for statutory earning.

Erik Bass - Citigroup

Got it, but in terms of the cash flow to the holding Company, your guidance for the year of the $380 million or so, that's unaffected.

Frank Svoboda

Correct.

Erik Bass - Citigroup

Okay. Thank you very much.

Gary Coleman

Erik I would add it’s not the $50 million to $60 million, it’s going to impact the cash flow to the holding company, its investment income on that $56 million to [Indiscernible] or whatever of investment income impact while we can do next year. So won’t have an impact on 2014 free cash flow or beyond 2015 free cash flow.

Operator

And we’ll take the next question from Randy Binner with FBR. Please go ahead.

Randy Binner - FBR

Thank you. I have a question about sales seasonality for life insurance and first of all I think that we’ve seen a pattern for at least the last few years were the second quarter has better sales across the board for Life, but American Income might be a little bit better in the second quarter. So the first part of my question is to confirm that that is something we should rely upon in the future and what is the cause of the better sales in the second versus the third quarter, generally speaking?

Gary Coleman

Randy I think is truly generally for the year, better agent activity, which is a higher percentage of submitting agents in the second quarter and the third quarter. If you look at American Income, we believe the increase of sales as a result of better recruiting and improved agent retention and the increase in agent activity.

Larry Hutchison

I would assume great response traditionally in second quarter has been a little bit higher than the first quarter.

Randy Binner - FBR

Can you remind us as of why -- what is it about the second quarter that is better?

Gary Coleman

One thing the second quarter your circulation is higher -- first quarter your circulation typically is little bit lower to the fourth quarter; there is some seasonality to that. So that would result in with the lag in sales of circulation, you’d see a mid-year increase in sales versus the beginning of the first quarter in direct response.

Randy Binner - FBR

So its mail issues in Direct, and then for AIA, it's just people are more receptive to buying in the second versus the latter part of the year of the first quarter?

Gary Coleman

The people are more receptive, I think it’s only expanding the agencies. We’re active on recruiting, and with those new recruits you have a higher activity level, you have more submitting agents into the middle of the first quarter to the second quarter and the third quarter. Usually the agent recruiting is strong in the fourth quarter.

Larry Hutchison

I think in part both sides of the industry is showing a great response. There is lots of activity around the Christmas and New Year’s holiday. And the activity first picking up in the first quarter is higher is going to the later part of the year.

Randy Binner - FBR

Okay. And that's helpful. And then just focusing on AIA, I think that explains why productivity peaks in the second quarter. So as far as AIA goes, this is a good sales result. There's not a lower comp, but it seems like it's turned the corner a little bit. So would be interested in your commentary. You mentioned you have a lot of recruiting efforts. I think you have technology efforts through CRM and laptop presentations and that kind of stuff. I'd be interested in what's working and what the follow through you think is on the momentum you've been able to build here at AIA.

Gary Coleman

I think the agency force of American Income has responded well to the changes we made in both our compensation and recruiting system. We don’t expect to see momentum drop significantly. I don’t think the agent count will increase this quickly as we did in the second quarter. But I think we continue to see increases in agent count to the third quarter and fourth quarter of this year.

Larry Hutchison

We’ve seen improvement in recruiting but also we’ve seen net increase in activity level. I know the words percentage of agents that we have that are submitting business. One thing we’ve talked about in the past is we’re working on retention and we’ve seen some impact types of retention, although we need to do more there. But I think for the second quarter is not increase in agent count but it also improved activity levels of the agents.

Gary Coleman

I think the other two factors the American Income; we really haven’t seen a change in agent productivity. That’s a project sign; we keep in mind how many new agents were there at American Income. We have good result; that we’re seeing at American Income is the increase in that middle management count. The middle management counts grown about 10% since January 1st and middle management is really who trains the new agents in the field? So it’s a very positive development at American Income.

Randy Binner - FBR

Sales managers you said were up 10% in the first half on the quarter?

Gary Coleman

The first half of 2014 our middle management count at American Income was increased.

Operator

And we’ll take the next question from Sarah DeWitt with Barclays. Please go ahead.

Sarah DeWitt - Barclays

Hi. Good morning. The 8% to 11% outlook for Life net sales growth this year is a very strong result. If we look out a bit longer term, do you think high single-digit; low double-digit sales growth is sustainable? And what would be the biggest driver that? Is that mostly just growing the agent count?

Gary Coleman

The biggest driver is driving the agent count and it’s also having a correct train system to keep your activity levels at levels that they are in the second quarter and we expect to be in the third quarter. Now for 2015 such guidance we’ll give on the next call, it’s a little early to give 2015 guidance. I would say generally with Direct Response that feature the agencies, results we saw in the second quarter are certainly sustainable through the end of the year.

Sarah DeWitt - Barclays

Okay. Great. And then secondly, the guidance you gave for the life underwriting margin to grow 3% to 4% this year, that's slightly down from the 3% to 5% you said before, and I think you were at about 5% year to date. So what's driving that slight decline?

Gary Coleman

Sarah we have a little bit higher declines than we anticipated at the beginning of the year. But we’re still probably down I think for our margin, under-writing margin for this year is around 28.7, we’re expecting it to be 28%, 29% for the year. But it’s not a big change.

Operator

And we’ll take the next question from Yaron Kinar with Deutsche Bank. Please go ahead.

Yaron Kinar - Deutsche Bank

Good morning, everybody. I look at the extra investment income guidance, and I think that's dropped slightly from the last guidance. And want to make sure; is that just by virtue of the new money rate having dropped a little bit? Or is there also a lower expectation of assets -- asset growth?

Gary Coleman

The effective new money rate is more minor factor, at the midpoint of our guidance our excess investment income is about $1 million less than it was previously, less than $1 million of that is from having ordinary money rate but over 1.3 million that is the impact of the cash flow as in Part D we talked about earlier, it is the remainder if the other cash flow timing of those cash flow, but it’s more something we might right add as the impact of the Part D that cause us to change the guidance.

Yaron Kinar - Deutsche Bank

That makes sense. And then I'm sorry if I missed that, but did you -- when you talked about the new guidance for excess investment income, did you say what the new money rate target or guidance was for the full year?

Gary Coleman

For the remainder of the year the guidance, the midpoint of guidance we use 5.0%.

Yaron Kinar - Deutsche Bank

Okay. And that seems to have dropped a bit more radically than at least what I seem to be seeing in the 30-year treasury rates, at least over the last quarter. Has anything else happened there?

Gary Coleman

No, I’m not sure but we’ve seen out in the market the year is all lower, the treasury rates have dropped and the credit spreads have offset rates, I think we dropped the 2.4% yield in the second quarter and we do think it’s going to get better in remainder of the year we started almost. So we think we can do at least 5% there we have the midpoint.

Operator

And the next question comes from Chris Giovanni with Goldman Sachs. Please go ahead.

Chris Giovanni - Goldman Sachs

Thanks so much. Good morning. A few follow-up questions on part D. My understanding is 47 states' Medicaid agencies are covering the hepatitis C drug, and wondering how much of your business comes from those 3 states that aren't covering it? And how should we think about future or potential risks to the margin, either up or downside?

Frank Svoboda

Chris this is Frank. I don’t have in front of me the actual number of states that we have where the state Medicaid is covering that I know that we’ve lost we’ve had some disenrollees with respect to both California and Illinois. So to the extent that there are some of family members that are having hepatitis C there that may help us to some degree. But I don’t really have that information with me.

Chris Giovanni - Goldman Sachs

Okay. And then, the repricing or pricing that you’re doing for the 2015 enrollment, you note that reflects the high cost of that hepatitis C drug. Just wondering if in that pricing you’re fully reflecting the current Gilead product, or are you assuming that the cost could go even higher if they’re successful in kind of getting the approval, kind of the companion hep C drug?

Gary Coleman

Yes, when we’re reflecting the best information we had today and what that pricing would be on our best estimate on utilization using our experience then competition the course of our consultant and what that pricing would be, and that pricing would include to the extent that there is a new drug that was come up and replace Sovaldi or -- the pricing will take into account that replacement type of a drug.

Chris Giovanni - Goldman Sachs

Okay. And within your pricing for ‘14, any sense of if or what was embedded within that, if anything?

Gary Coleman

Yes, for ‘14 pricing we really did not include anything specifically for either one of these two new drugs. We always include some type of an allowance and claim strength margin if you will from new drugs it will be they are in the pipeline or that will come up but the allowance that was built in here for 2014 was nothing would have accommodated the high price that’s associated with these new drugs.

Operator

And we’ll take the next question from Steven Schwartz with Raymond James. Please go ahead.

Steven Schwartz - Raymond James

Yes. Hey. Good morning, everybody. To follow-up on the hep C drugs and make sure I got the right numbers here, were you -- I think it was Gary. Gary, were you suggesting that the amount of total spend on these drugs would be $60 million for the year? And of course on a GAAP basis, you would recognize the reinsurance from the government, so it would be $45 million coming back, so the net FX would be $15 million, but the cash outflow would actually be $65 million, $60 million, $65 million?

Gary Coleman

Frank why don’t you comment on this.

Frank Svoboda

The total outlay that we’re estimating at this point in time is around $45 million to $60 million. And we’re anticipating it’s going to be getting back from TMS, their share of those total claims to be somewhere in that $43 million to $50 million range. So we’re anticipating that our impact on underwriting income for the full year will be somewhere in the range of $7 million to $10 million.

Steven Schwartz - Raymond James

Okay. Frank, how much has already been spent in the total outlay for this?

Frank Svoboda

Through June 30th, the total outlay is about $24.5 million of which our share was about $4 million.

Steven Schwartz - Raymond James

Right, but it's the $24.5 million that affects next year's cash flow. You get the money back at the end of next year.

Frank Svoboda

No next November. We’ll get the $20.5 million back, we won’t get the $4 million back but we’ll get the 20.5.

Steven Schwartz - Raymond James

Okay. All right. And then if I may, on recruiting in general, and then on Liberty National Life, recruiting in general, obviously first year up. Any sense that the economy is helping with that?

Frank Svoboda

I think the real change is our internal recruiting incentives and the implementation of our improved training systems at both Liberty and American Income.

Steven Schwartz - Raymond James

Okay. And then, Larry, can you touch on -- it's interesting the agent count has been growing. The new recruits have been growing at Liberty National, but the renewals have not, and actually have continued to come down. What's the reason for that, and how do you fix that?

Gary Coleman

You want to fix it?

Larry Hutchison

I don’t think it’s fixed so much it’s intentional that will change your compensation systems. Realize we’re going to lose some veteran agents as to move from away from service ally, but we think it will stabilize and they are just greater just on new recruits. So over time all the changes we have implemented that Liberty National last few years, things are settling down the culture is been accepted. And I think we’ll see the same percentage of better agents that we keep on Liberty, we see at American Income.

Steven Schwartz - Raymond James

So this decline is still left over from the competition changes?

Larry Hutchison

Yes.

Operator

And we’ll take the next question from Joanne Smith with Scotia Capital. Please go ahead.

Joanne Smith - Scotia Capital

Good morning. Most of my questions have been asked and answered, but on Family Heritage, did you give any guidance for agent recruiting -- or agent counts for the full year? I don't think I heard them, and if you did say them, I missed them.

Gary Coleman

No one has asked that question for any of the agencies. Looking at 2014 we expect the agent count of Family Heritage be between 775 agents and 800 agents. At American Income at the end of 2014 we expect the agent count to be between 6,000 agents and 6,100 agents. And Liberty National that increase between 1,550 agents to 1,600 agents.

Operator

And we’ll pick the next question from Eric Berg with RBC Capital Markets.

Eric Berg - RBC Capital Markets

Thanks very much. To a certain extent my question has been asked, but I'm hoping you can build on the answer to Steven Schwartz's question regarding Liberty. Where are you in the process of restructuring that Company to make it more like American Income? And do feel that you're getting the intended result? Are you are pleased with this effort to remake that Company?

Gary Coleman

I think the restructuring is completed at American Income and Liberty National. Over time we will change compensation and recruiting systems to expect the same and make the necessary changes as those agent counts grow. We’re seeing some new offices that are productive at Liberty National. We opened two new offices in second quarter. We’re planning to continue offices to the end of the year. If we look at the offices we opened last year we’re pleased they’re producing the expected levels that we hope to see. So I think at Liberty you’ll see continued slow and steady growth but it takes time to develop that middle management that you can promote into the agency ownership position at Liberty National, Eric.

Frank Svoboda

Eric also looking at -- we knew going into this process will take time and we’re starting to see positive, even more positive impact from before and we’re pleased with the progress there.

Operator

And we’ll take the next question from Bob Glasspiegel with Jenny Capital. Please go ahead.

Bob Glasspiegel - Jenny Capital

Good morning, everyone. Eric was on the same wavelength as I am. It seems like you've bumped up your sales outlook from low- to mid-singles across the board to approaching double-digit in all three segments. And I think this is after a few years of sales coming in disappointing. And clearly there's been a positive surprise to the sales momentum across the board and the pivots around agent count at both Liberty and American Income. So I'm a little surprised you don't have a little more bounce to your steps, Gary and Larry, in your pitch. You read it with the same level of intensity as you normally do. Am I right that you're pumped up about what's going on? And a little color on why direct is doing a little bit better than you thought going into the year?

Gary Coleman

I mean it is excited you use your term, we are pumped up and we are very pleased looking better recruiting, pushing better income intention while there are still factors as reducing more agent activity have made us and we are better finishers in place and expand your sales you have to have that higher level of agent activity. I think the sales growth that at direct response could explain by it will increase from electronic that in place about 20% for the full year. We’re seeing strong increases in our electronic media both the Internet and inbound phone calls are up quarter-to-quarter and we’re pleased with result set direct response.

Operator

And we’ll go next to Jimmy Bhullar with JPMorgan. Please go ahead.

Jimmy Bhullar - JPMorgan

Hi. On investment income, you mentioned you are expecting excess investment income to increase 3% to 5% I think it is in 2014. What's your expectation or your view on how much you can grow investment income next year if we actually stay at this type of environment, in terms of rates and your new money yield does not move up as you are expecting it to? And then how much do you think the portfolio yield will dropped next year if we are in this type of rate environment? So not necessarily looking for guidance, but just can you grow investment income at mid- to single-digit rate, if you actually see these types of rates? Or would investment income growth slow down dramatically next year?

Gary Coleman

Jimmy the current rate environment we feel like we can grow investment income next year to 3% to 4% range, it is more as a portfolio yield as you know with the cost we have as couple of years security results and dramatic deep climb in the portfolio yield. Now what we’re looking at over the next five years that the portfolio yield assuming current new money rates as money rate 5% we talked about earlier that the portfolio yield was stabilize, it may drop 2 to 3 basis points in a year. And because the portfolio yields will be fairly stable, and we’ll be seeing a growth in investment income that’s in line with the growth in interest that we can grow investment income for next year in the four the range and take those investment activity because our interest expense is going be flat in those years, we think kind of maybe 3.5 at the midpoint for next period we’re thinking it will be about 4% going forward.

Jimmy Bhullar - JPMorgan

And then on the share buybacks, obviously over the past year and a half, the stock has done really well and the buybacks have become less accretive over time. Have you thought about the balance between buybacks and dividends? Have you looked at deploying capital at all, like shifting that balance in one direction or another?

Gary Coleman

Yes, we have and that something that we discuss over quarter with our board and in the last three years we’ve increased our dividend rates, but to increase in further we still think buying back stock, we still think is good buy at this point. If things remain as they are, by now I think you will see as continue to increase our dividend rate but still the bulk of nine will be going to share repurchase program.

Operator

And we’ll take the next question from Colin Devine with Jefferies. Please go ahead.

Colin Devine - Jefferies

Good morning, gentlemen. I'm just wondering, I have a couple of follow-up questions, if we could focus on the Life side. First, with respect to direct and sales, just to follow-up on your other comments, do you think the pace we've seen for the first half here is going to be sustainable over the second? Second question, if we take a look at the enforced role-forwards, were there some reserve adjustments made at either American Income or direct response? I'm looking at the levels for the death and others seem to move around a little bit, more than I would have expected. And then finally, could you provide a bit of color on how you've been able to achieve what's been really quite a steady reduction in your first-year lapse rates, improving those at both American Income and Liberty. When I look back to where they were a couple years ago, obviously it's been dramatic. Has that gone about as far as it's going to go, and how much is that impacting your profitability?

Gary Coleman

We think we are going to have mid to high level sales growth in direct response in the third and fourth quarters as you recall, our standard [indiscernible] insurance products were rolled out fully in three quarter 2013 Colin, those accounted for a good portion or sales growth in the first and second quarter, we don’t think we’ll see the same increases on quarter-over-quarter things as going forward probably we will have steady sales growth.

Frank Svoboda

Colin, the improvement in the last (ph) rates I think we began in 2010 but really geared up in 2011. To give you example the impact of this year we expect to conserve about $40 million of last premium. And other words about 16, little over 16% of the last we will reinstate. The impact to that is that impact of those policies closed, what we’ve done in past years. We increased our premium income about little over $40 million; it will add $6 million to our underwriting income.

That deposit program, like I said we’ll say about 16% premium we think that percentage can go higher as we continue to find new ways to conserve the policies that but really have to attribute the improvements to conservation program.

Colin Devine - Jefferies

Now, in terms of, if I think of American Income or Liberty National, looking at the current levels, the bulk continued to improve this year. Are we getting towards where 8% is going to be the run rate for American Income, and maybe a little over 7% for Liberty National? Or have you still got room to go?

Gary Coleman

That’s a good question; we’re getting to the point where we may not see much encouragement. Just about the 8% American Income just 2011 was 9 a quarter and we’ve seen an improvement in Liberty National. But you get the point where that last rate is not going to improve that much more.

Operator

We’ll take the next question from Mark Hughes with SunTrust. Please go ahead.

John Myers - SunTrust

This is Rob Myers on for Mark Hughes. I had a question, if you had any perception about the demand difference between whole life and term currently? If there's any industry-wide dynamic that you are gathering from the market?

Gary Coleman

I don’t think we have a market internally. We don’t see a shift from term to whole, your basic retention products in those cases. And so we’re doing niche rate analysis in all of our agency sales, drives on a niche basis not whole versus a term product.

Operator

And we’ll go to John Nadel with Sterne, Agee. Please go ahead.

John Nadel - Sterne, Agee

I get that a lot. Good morning, everybody. So you've got this high-quality problem that continues, that your stock's valuation is roughly 2 times book. And I'm curious, it looks to me if I look at stock price daily during the quarter, it looks to me like you're -- and compare that to your average repurchase price, it looks like you were pretty strong on your buybacks in the first half the quarter, but tailed it off pretty significantly when the stock was in the $54 to $55 range, or roughly 2 times your 2Q book, XA-OSCI. Should we take anything away from that, or was it just a matter of the timing of your cash flow, the timing of putting the capital to work?

Gary Coleman

Frank you want to handle that?

Frank Svoboda

One thing I would probably note John is that we did have a significant portion of our purchases in the very first quarter when we had $210 million and an overall price there about $50.72. We did invest as we just looking at overall the timing will be a combination of both in that. And we did have as we normally would more purchases in the first part of the second quarter. As the price moved up probably is still down a little bit but we also clean off as we normally do, we’re looking at spreading our purchases out over the course of the year and we’re looking for about $190 million target for the first half of the year. And so that’s what we really kind are trying to push towards.

Operator

And it appears we have no further questions at this time. So I’ll turn the program back over to our presenters for any closing remarks.

Gary Coleman

Thank you for joining us this morning. Those are our comments and we’ll talk to you again next quarter.

Operator

This concludes today’s program. Thank you for your participation, you may disconnect at any time.

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