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Executives

Mark McAndrew - CEO

Gary Coleman - CFO

Larry Hutchison - General Counsel

Analysts

Jimmy Bhullar - JPMorgan

Steven Schwartz - Raymond James

Bob Glasspiegel - Langen McAlenney

Sarah DeWitt - Barclays

Bob Glasspiegel - Langen McAlenney

Ed Spehar - Bank of America/Merrill Lynch

Paul Sarran - Evercore Partners

Steven Schwartz - Raymond James

Mark Hughes - SunTrust

Vincent Lowry - Morningstar

Jeff Schuman - KBW

Sam Hoffman - Nomura

Torchmark Corporation (TMK) Q1 2012 Earnings Call April 25, 2012 11:00 AM ET

Operator

Good day everyone and welcome to the Torchmark Corporation First Quarter 2012 Earnings Release Conference Call. Please note that this call is being recorded and is also being simultaneously webcast.

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

Mark McAndrew

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

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

Net operating income for the first quarter was $128 million or $1.27 per share, a per share increase of 22% from a year ago. Net income for the quarter was $119 million or $1.17 per share, a 39% increase on a per share basis.

Excluding FAS 115, our return on equity was 15.8% for the quarter and our book value per share was $32.70, a 9% increase from a year ago. On a GAAP reported basis with fixed maturity carried at market value, book value per share grew 24% to $38.19. In our life insurance operations, premium revenue grew 5% to $452 million, and life underwriting margins increased 13% to $126 million. Net life sales increased 9% to $88 million.

At American Income, life premiums were up 10% to $161 million and life underwriting margin was up 16% to $52 million. Net life sales increased 17% for the quarter to $39 million. The producing agent count at the end of the first quarter was 5,104, up 26% from a year ago and up 17% during the quarter.

The first quarter results at American Income far exceeded our expectations. The number of newly hired agents that produced business in the first quarter was up 52% from a year ago. The number of newly hired agents who achieved our top bonus level, which is our best indicator of agent retention, was up 76% in the quarter. Our middle management ranks grew by 12% in the quarter and are up 29% from a year ago. Every key factor indicates that 2012 is a stellar year for American Income.

In our direct response operation at Globe Life, life premiums were up 6% to $161 million and life underwriting margin grew 10% to $38 million. Net life sales were up 9% to $39 million. I am pleased with the results in direct response. While high gas prices and difficult economy continued to impact our response rates, through continuing innovation we've been able to grow our sales and maintain our margins.

I would also remind everyone of the change we made in our direct response underwriting in mid-2011. While improving our margins, it resulted in a 6% reduction in our net sales due to more applications being rejected for health reasons. Life premium at Liberty National declined 2% to $72 million, while life underwriting margin was up 21% to $18 million.

Net life sales declined 22% to $7 million, while net health sales grew 16% to $3 million. The producing agent count at Liberty National ended the quarter at 1,276, down 31% from a year ago and down 5% for the quarter. The underwriting margins at Liberty National had benefitted from the change in DAC accounting due to the significant reductions we have implemented in our non-deferrable acquisition cost over the last couple of years.

I'm also very pleased with the progress being made in turning around our declines in producing agents and sales. In mid-February, the agent count at Liberty National hit its low point of 1,228. Since that time, we have seen consistent growth, and as of Monday, the producing agent count has grown to 1,321, which is up 7.5% in the past two months. I'm very optimistic that this agent growth will continue going forward, which will result in improved sales at Liberty National for the balance of this year.

On the health side, premium revenue excluding Part D declined 6% to $181 million, and health underwriting margin declined 10% to $40 million. Health net sales grew 5% to $15 million. Premium revenue from Medicare Part D grew 50% to $74 million while the underwriting margin increased 54% to $8 million.

Part D sales for the quarter jumped 235% to $25 million. The new low income subsidized enroll leads continue to exceed our prior estimates and we have raised our Part D revenue estimates for 2012 to $319 million versus $197 million for 2011.

Administrative expenses were $41 million for the quarter, which were up 8% from a year ago, but in line with our expectations. Roughly half of this increase was caused by the elimination of the administrative fee which we were receiving on the United Investors business. The balance of the increase was due to increased cost in our Part D administration and conservation program.

I will now turn the call over to Gary Coleman for his comments.

Gary Coleman

Thanks Mark. I want to spend a few minutes discussing our investment portfolio, capital and share repurchases. First, the investment portfolio. On our website are three schedules provide summary information regarding our portfolio as of March 31, 2012. As indicated on these schedules, invested assets were $11.6 billion, including $11.1 billion of fixed maturities and amortized cost. There is no exposure to the European sovereign debt and there are no commercial mortgage backed securities or securities backed by subprime or Alt A mortgages.

Of the fixed maturities $10.4 billion are investment grade with an average rating of A minus. Below investment grade bonds are $723 million compared to $758 million a year ago. The percentage of below investment grade bonds to fixed maturities is 6.5% compared to 7.2% a year ago and with the portfolio leverage of three times, the percentage of big bonds to equity, excluding net unrealized gains on fixed maturities is 22%, which is less than most of our peers. Overall, the total portfolio is rated A minus compared to BBB plus a year ago.

We had net unrealized gains in the fixed maturity portfolio $873 million compared to $156 million a year ago. Regarding investment yield, in the first quarter we invested $232 million in investment grade fixed maturities, primarily in the utility and industrial sectors. We invested at an average annual effective yield of 4.76%, an average rating of A minus, and an average life of 30 years.

The new money yield of 4.76% has declined from the 5.65% yield for all of 2011 and the 5.22% yield in the fourth quarter. For this reason we have lowered the GAAP discount rate used to calculate the reserves and DAC for policies issued in 2012 to 4.75%, graded to 6.5% over seven years.

For the entire portfolio, the first quarter yield was 6.47% compared to 6.52% in the previous quarter and 6.62% in the first quarter of 2011. The continued decline in the yield is due to the lower new money yields. As of March 31, the yield on the portfolio is 6.46%.

Now turning to RBC we plan to maintain our capital at a level necessary to retain our current ratings. For the last two years that level has been around an NAIC RBC ratio of 325%. This ratio was 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, consolidated RBC was 336% and adjusted capital was approximately $46 million in excess of that required for the targeted 325% ratio.

Regarding share repurchases and parent company assets in the first quarter we spent $90 million to buy 1.9 million Torchmark shares. So far in April we have used $36 million to buy another 750,000 shares. So for the full through today we have spent a $126 million of parent company cash to acquire 2.6 million shares. The available liquid assets at the parent company consist of assets on hand and the expected free cash flow from operations as we've said before, free cash flow results from the dividends received by the parent from the subsidiaries less the interest paid on the debt and the dividends paid to Torchmark shareholders.

Assuming shareholders dividends at the current level, we expect to generate approximately $347 million of free cash flow for the entire year. This is less than the $350 million to $360 million projected in the previous call because we increased the dividend rate on Torchmark stock. Effective with the dividend paid in the second quarter, the dividend rate increased from $0.12 to $0.15 a share, which will result in 2012 dividends of approximately $56 million, $8 million more than they would have been.

In spite of the dividend increase, the 2012 free cash flow plus the $74 million of cash on-hand at the beginning of the year will provide a total of $421 million of available cash for the full year. As of today, after deducting the $126 million of year-to-date share repurchases, the parent will have approximately $295 million available between now and the end of the year. As noted before we will use our cash as efficiently as possible. If market conditions are favorable, we expect that share repurchases will continue to be a primary use of those funds.

Now, before I turn the call back to Mark, I would like to discuss the impact of the new accounting rules for DAC. On January 1st the Company adopted ASU 2010-26, which changed the rules regarding the deferral of acquisition cost. This standard changes the timing of GAAP profits to the extent that certain expenses deferred under the previous rules will no longer be deferred. However it does not affect our overall profitability, cash flows or statutory earnings. We adopted the new rule retrospectively, which means that DAC was written down to a level as if the new student had been in place in prior periods. The earnings impact of the new rule, is a combination of the reduction in expenses deferred on newly issued policies, somewhat offset by the reduced amortization of DAC resulting from the retroactive write-down.

The financial statement impact of the new rules is consistent with the estimates that we discussed on the last call. First, compared to the comparable balances at March 31, 2011 the retroactive write-down was 16% of the DAC asset, resulting in a 10% reduction in GAAP equity, excluding the net unrealized gains on fixed maturities.

In addition the earnings for the first quarter of 2012 were 1.2% or $0.016 per share lower than they would have been under the old rules and ROE excluding net unrealized gains was 15.8%, compared to 14.2% in the fourth quarter of 2011 under the old rules. All prior periods on the net operating summary and the balance sheet had been restated to reflect the retroactive adoption of ASU 2010-26.

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

Mark McAndrew

Thank you, Gary. For 2012, we continue to expect our net operating income per share will be in a range of $5.10 and $5.40 per share. Before I open it up for questions, I would like to comment on the upcoming transition. I'm the fourth CEO in the 32 year history of Torchmark, and every succession has been seamless. I want to assure everyone that this succession will also go very smoothly. While I am stepping down as CEO on June 1, I will continue in an executive position as Chairman until June of 2013.

I have the utmost confidence in both Larry and Gary, and have worked closely with both of them for over 25 years. I believe that either one of them would be an outstanding CEO on their own, but I also believe that together they will be better than either would be individually. I believe that the company is in the best shape it has been during my tenure as CEO and I know that Gary and Larry will only continue to make it better.

Those are my comments for this morning. I will now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will first go to the side of Jimmy Bhullar with JPMorgan. Please go ahead. Your line is open.

Jimmy Bhullar - JPMorgan

I had a couple of questions. First, Mark, maybe you can discuss the rationale for the Co-CEO structure and then once you are not the Chairman, should we expect the CEO and Chairman role to be with one person or would it be split?

And then on the business, just at Liberty National, the margins has actually been steadily improving, they were 24.5%, I think, this quarter, 22.9% first quarter last year. It seems like expense levels have declined, but what’s your expectation for margins there?

Mark McAndrew

Okay, well first on the Co-CEOs, and again you have to understand that Gary, Larry and I really have worked very closely together our entire careers. Even when I have been CEO, the three of us have really consulted on every significant decision made in this company and we always reach consensus and I do believe this is one of those cases that the two of them together because they do have very complementary skill sets, will be better than either one would be individually. So I feel very comfortable in this particular situation with these two individuals, it’s the best thing for Torchmark and it makes the most sense in this situation.

As far as Liberty National, yes, the margins have improved. I would expect they will stay at about the same level, at least for the balance of this year, Jimmy, somewhere in that 24% to 25% range. That’s what we have assumed in our guidance.

Jimmy Bhullar - JPMorgan

And then just comments on the Chairman and CEO?

Mark McAndrew

Well again, I am going to stay on at least through June 13. In fact I will intend to at least finish out my term, which will be April 14. Beyond that, it really hasn’t been decided at this point. So that’s something that we will continue to discuss.

Operator

Next we will go to the site of Christopher Giovanni of Goldman Sachs. Please go ahead. Your line is open.

Christopher Giovanni - Goldman Sachs

I guess a question just for Gary. When you made the comment about lowering the discount rate to 4.75% and then grading it up to 6.5% over seven years, if you have kind of decided to keep it at 4.75%, what impact would that have as we think about the balance sheet or the income statement?

Gary Coleman

These slightly higher reserves than say if were I think at 5.75% for 2011 issues, but I think the more of the impact you would see on the financial statements, if we kept this over time right now, the weighted average discount rate is right around 5.6%. If we kept we used a 4.75% for succeeding years you would see that rate come down. But remember this just applies to 2012 issues, so it takes a while for that rate to come down, but if you continue at 4.75% for several years, at some point it would start moving from the 6.6% down toward the 4.75%.

Mark McAndrew

Chris, I'll also point out too that when we analyzed before, for example, American Income, if we lowered 100 basis points our interest rate assumptions and kept them 100 basis points lower throughout the life of the business, it would take a 2% to 3% rate adjustment to maintain our profitability.

And again we did put through January 1 of this year, a 5% rate increase at American Income as well as most of the products at Globe Life. So while it will have a negative impact on our excess investment income that will also be offset by higher underwriting margins going forward as a result of the rate increases.

Christopher Giovanni - Goldman Sachs

Okay, that's where I was going to next. So at this point there is not a real need to adjust pricing any further. You kind of got what you needed you think currently in American Income?

Gary Coleman

No. Even if we had to go to 4.75% and maintain that, the rate adjustments we put through are more than adequate to maintain our profitability.

Christopher Giovanni - Goldman Sachs

In terms of the low investment grade. I guess the NAIC Class 3 and 4 buckets looked like they increased a bit sort of sequentially here. Can you talk a little bit about what drove that?

Gary Coleman

Well, most of that occurred in the bank converts that we have and I believe as Moody's downgrade us by one notch, which would not have pushed them into the below investment grade category normally, but under the new rules that were passed last year regarding the hybrid type securities, that one notch downgrade under those new rules moved them into a class that goes into the SVO class for low investment grade bonds. It's a little bit of an unusual item but the quality of those bonds are not impaired in any measure. As a matter of fact, just on a normal basis, just on a standard grading, they are not below investment grade bonds, they just are as SVO classifies them.

Christopher Giovanni - Goldman Sachs

Okay. And then just lastly on the succession. Is there a mandatory retirement age in terms of being an executive within Torchmark? And then lastly, I didn't know if Gary or Larry could comment at all; it might be a bit premature but a little bit in terms of some strategy, vision if they think there will be any kind of material changes, whether it's the operating businesses or are we thinking about capital deployment?

Mark McAndrew

I'll take the first part of that, Gary, and then I'll let you. I think the only position in the Company that has a mandatory retirement age today is the CEO, which currently is set at 65, but that always through Board action could be adjusted going forward. But right now there is a mandatory retirement for the CEO at 65. Gary?

Gary Coleman

I don't look for any major changes in our business model. Larry and I have been involved in this Company for many years, as Mark said and we care firm believers in the model. I think there will be changes as our insurance markets change and also as the financial markets change we will adjust them as we have over the years. So, I think there'll be changes but I don't think you will see major changes in the fundamentals of how we operate the business.

Larry Hutchison

Like what Gary said, I agree with that. Our immediate focus is to have a seamless transition and to continue the type of growth we have experienced in 2011 and 2012.

Operator

We will go to the site of John Nadel with Sterne Agee. Please go ahead. Your line is open.

John Nadel - Sterne Agee

A couple of quick ones. I'm just curious about, I know that we just talked about discount rates and I'm just curious. I saw on the release that the discount rate on the net policy liability is in the excess investment income segment were actually up year-over-year. I guess I'm just curious, just given what rates have done, why up and not down?

Mark McAndrew

Well John, you have to remember that it is truly a discount rate. We are not setting rates or crediting interest to policy order fronts. This is simply the discount rate we used to calculate the reserves with DAC. And although we’ve lowered the discount rate used last year, you got to remember that discount rate that we set each year applies only to policies issued in that year.

So at 4.75% now in 2012 issues over 90% of our reserves are for policies issued prior to 2011, and during that period of time part we were using a discount rate somewhere, at times 6% and at times it’s high as 7%, so between the 6% and 7%.

So when you rate all those issue years together that’s where you get to a little under 6% and over time, I think actually you will see that rate go up just slightly and it is going to level off and then as I mentioned earlier, if we continue at 4.75% in several years from now, you will see that trending down toward the 4.75%. Right now it is just the weighted average rate because of all of the many years of issue that we have out there is higher than what we are for the current year issues.

John Nadel - Sterne Agee

And so to Mark’s point earlier in response to Chris, pricing actions that you have taken, we should essentially see a shift in the profitability to more underwriting earnings and maybe excess investment income is a modest offset to that?

Mark McAndrew

Over the long term, John, that’s true.

Gary Coleman

It’s not the fact that we are not going to have a spread. We are still going to have spread over what we are earning on the assets over what that discount is on; it’s just going to be little bit smaller than it has been in the past.

John Nadel - Sterne Agee

Understood. And then just another quick one on excess investment income. I noticed the invested assets dropped about $300 million at the end of 1Q versus the end of 2011, so quarter-over-quarter. I was sort of surprised to see a drop at that level. Could you explain what happened there and then maybe an outlook for the remainder of the year? I assume it grows from here.

Gary Coleman

I don’t have a good answer for that at the moment, but our projection is that it will grow around the 4% range for the year.

John Nadel - Sterne Agee

And then lastly I know Mark, you updated us on Medicare Part D on the revenues for the year. Obviously, things going better than you originally expected a few months ago. What's your outlook for sales there for the remainder of the year? Obviously, we're through the biggest part of the seasonal sales cycle.

Mark McAndrew

Well again, we picked up a large number on January 1, but what's really exceeding our expectations is the number of new enrollees that we're getting each month from either people just turning 65 or people just qualifying for the low income subsidy, and that number, we have been averaging about 6,800 a month, where initially we were only assuming 2,000 to 3,000 of those new people each month.

So, we now expect to pick up over 75,000 during the course of the year and that will be pretty smooth through the year. So, if you look at the first quarter sales numbers we expect the ongoing sales to stay up at about that level.

Gary Coleman

John I might add, if you look at the assets with the picks at market value, one thing the unrealized gains or losses, as I mentioned earlier were at $873 million that were $964 million at the end of December 31. So, we had a $90 million drop just from that.

John Nadel - Sterne Agee

Okay. I thought I was looking at it on the cost basis, but I'll follow up with you offline.

Operator

Next we will go to the site of Sarah DeWitt with Barclays. Please go ahead. Your line is open.

Sarah DeWitt - Barclays

Could you update us on your outlook for sales in American Income and Direct based on the better than expected first quarter results? And then also given your positive comments on Liberty, when do you think sales in that business could turn positive?

Mark McAndrew

In our guidance there is probably still a little conservatism built in there. At American Income, we're assuming 14% to 15% growth in our sales this year, which again, we were at 17% in the first quarter. So, I think there is a good chance that we will beat what we've built in our guidance. At Globe, I think there also in our guidance we're just assuming mid to high single-digit growth in sales there. There is still some uncertainty there. So, I don't think we've being overly optimistic but as far as Liberty National, again I think we'll see sequential growth going forward but if I look back at last year, I feel confident that we'll have grown by the fourth quarter and sales year-over-year, I would expect the third quarter will be close to flat, but if I look a year from now, when we're comparing to the first quarter this year, I expect to see strong double-digit growth in sales a year from now at Liberty.

Sarah DeWitt - Barclays Capital

Okay great and then just on Globe, I think you had said partway through the first quarter, you were seeing introductory offers of about 30% year-over-year. Is that still the case?

Mark McAndrew

Well I think first quarter; it's running a little over 20%, the number of new enquiries coming in versus a year ago. So that is still going well, but again, that's why I mentioned we're starting with the 6% reduction just from the change in our underwriting. So, if I look at the 9% growth we had in first quarter, without that change in underwriting would have been more like 15% growth. So, that tampers it somewhat when we're comparing year-over-year. But I'm still very pleased with where it's at, and particularly if gas prices come down and the economy continues to improve, we may significantly beat that but at this point; we don't want to be overly optimistic in our projections.

Sarah DeWitt - Barclays Capital

Okay great and then just finally on the CEO transition, given your mandatory retirement age and I believe Gary and Larry are about the same age as you, should we consider this a long-term leadership structure?

Mark McAndrew

Well, Gary is actually older than me, but Larry, you are what, 58?

Larry Hutchison

58.

Mark McAndrew

So, Gary is 59.

Gary Coleman

Right.

Mark McAndrew

So, for the last six, seven years before they hit the current mandatory retirement age. That mandatory retirement age can easily be extended through the Board action. So Gary, Larry, I’ll let you put your two cents worth in.

Larry Hutchison

Well, certainly my concern is in the interim move, Gary and I committed to the company now that to be here at least for the next seven, eight years, Gary?

Gary Coleman

I agree to what Larry said. This is not an interim move; this is definitely something that we are committed to.

Operator

We will next go to the site of Bob Glasspiegel with Langen McAlenney. Please go ahead. Your line is open.

Bob Glasspiegel - Langen McAlenney

Mark, I heard a lot of better than expected trends, particularly on the sales and Liberty National margins and a view that's up and I didn’t hear anything that’s worse than you thought it was, yet you didn’t change your guidance. Is it just too early in the year to talk about changing the range or was there something that sort of offsets all these positives you highlighted?

Mark McAndrew

Bob, the only thing, if I look at our earnings per share for the first quarter, I know we missed the street by a penny, but we are actually about a penny ahead of where we thought would be. We do have a number of things that are doing better than we anticipated, but the only thing, Bob, that offsets that is the price we paid on our share repurchase was more than – when we originally came out with that guidance, the stock was at $38. So that has tampered it somewhat, it is reasonably left at where it is. Again, I expect we will narrow that range as the year particularly next quarter, but right now the improved results offset the higher share price.

Bob Glasspiegel - Langen McAlenney

And it sounds like the Liberty National margins are an ongoing plus, right, that we should factor in?

Mark McAndrew

Well I think where they are at today is I think we are going to try to maintain that. I wouldn’t expect continued upward movement in those margins.

Bob Glasspiegel - Langen McAlenney

But still year-over-year it’s going to be helped in your three more quarters, and you weren’t building that into your original?

Mark McAndrew

We were expecting better margins. When we did our guidance, we were expecting improved margins in the life business at Liberty.

Bob Glasspiegel - Langen McAlenney

To this extent?

Mark McAndrew

Well not too far off. We knew as a result of the DAC write-down that the margins at Liberty would go up as a result of the cost savings and the restructuring that we have done at Liberty. They have moved more of those costs to variable costs. So, that was by design.

Bob Glasspiegel - Langen McAlenney

I think you are following C.B's path. Didn’t he retire a bit early, around this similar age?

Mark McAndrew

He retired at 60 and I became CEO and he stayed on as Chairman for a year when he turned 59. So, you are very astute Bob, it’s basically exactly the same transition that we had with C.B.

Bob Glasspiegel - Langen McAlenney

Are you going to follow his path and play Blackjack tournaments too?

Mark McAndrew

Probably not, but one never knows.

Operator

The next question comes from site of Ed Spehar with Bank of America/Merrill Lynch. Please go ahead. Your line is open.

Ed Spehar - Bank of America/Merrill Lynch

Mark, I was wondering, I missed if you said something on the Medicare supplement business. How should we think about that over the next few years, and to what extent should we think about it differently if for some reason we get in a Supreme Court ruling that voids the health reform?

Mark McAndrew

Well, I'll talk to it and I'll also let Larry address some of that. Right now, Ed, especially in the independent agency side of United American, we're starting to see some growth there, but again, it's not going to be a major contributor to our growth. I still hope that that continues to improve over the next two, three years. Larry, you want to address the…?

Larry Hutchison

Ed, the health reform really didn't address Medicare Supplement, that was an exempted product. We're seeing lots of proposals right now in Washington that deals everything for benefit structures to loss ratios. Our information is there's no immediate change that restricts the Medicare systems. Probably the earliest will be 2014. There is a lot of uncertainty, we don't know which parties are going to be control with, we don't know who is going to really shape future changes of Medicare. We know there are going to be changes, of all depths of those changes, and we have played in that market. I can just say at this time, it's a little early to say exactly where Medicare will be in 2014, 2015, and 2016.

Ed Spehar - Bank of America/Merrill Lynch

Mark, hopefully now you'll have more opportunities to drive your car a quarter mile at the time.

Operator

The next question comes from the site of Paul Sarran with Evercore Partners. Please go ahead. Your line is open.

Paul Sarran - Evercore Partners

I wanted to ask first about the American Income agent growth. And I guess my question is how many new agents can you handle per middle management? The reason I ask is because you seem to be adding in a lot new agents at a lot faster rate than you're growing the middle management ranks. I'm wondering if that becomes a limiting factor at some point.

Mark McAndrew

Well, I don't see it as a limiting factor. Yes, the number of new hires was up over 50% in the first quarter versus our middle management ranks were up 29%, but one of the things that we were very successful in doing was, the number of middle management people that we have that hired and trained a new person increased significantly from a year ago. We did in the middle of last year put out a new incentive program to try to get more of our middle management involved in the recruiting and training and that appears to have been very successful. But not only did we increased the number of middle managers by 29%; we also increased the percentage of those that actually recruited and trained someone.

So, can we maintain 50%, 60% growth? That's going to be difficult. But can we continue to grow our middle management ranks by 30%, 40% a year? Yes, we can. I don't see it as a real limiting factor. Actually, the more new people that we're hiring and bringing on, those people – as our agent base gets larger, the candidates that move into middle management becomes larger.

Paul Sarran - Evercore Partners

Okay. You got a question about Liberty margins. I wanted to ask you about American Income, where margins improved somewhere around 100 to 200 basis points year-over-year, and it looks like it was mainly driven by lower expenses. How sustainable is that and is there any room to push expenses lower or is that about as large you can get it?

Mark McAndrew

Obviously, as we continue to grow, we do have some fixed expenses there such as management salaries and travel that will give us some improvement in our expense margins, but again at American income, the vast majority of our cost there are variable cost, they are commissions and those will grow as sales grows. So, I don't anticipate any major improvement in the margins there, although we did put through again 5% rate increase in the beginning of this year which over time will add a little bit to the underwriting margin, but we don’t anticipate it really improving from where it is but we expect to be able to maintain where it is at.

Paul Sarran - Evercore Partners

At Global you talked about 20% higher new increase and then if we offset that by the 6% impact from the new underwriting standards, that still would seem to suggest mid-teen sales growth, which is higher than what you're guiding to, so you mentioned uncertainty what’s causing you to getting that.

Mark McAndrew

You need to understand the inquiries is from our Insert Media segment, which is little over half of our total sales. The other half come from our direct mail program, it's been relatively flat in comparison. So the 22% does not pertain to all of the direct response business. So that’s what part of the reason why I get back to mid-to-high single digits in growth.

Paul Sarran - Evercore Partners

So, you said responses at the direct mail were pretty flat year-over-year?

Mark McAndrew

Right now our direct response sales a relatively pretty flat from a year ago.

Paul Sarran - Evercore Partners

Is that also impacted by the new underwriting?

Mark McAndrew

Yes it would be.

Paul Sarran - Evercore Partners

And then last question, you have a $53 million at the holding company, do you expect to drive down any further or is $50 million kind of where you think you will keep a buffer for the rest of the year?

Mark McAndrew

I still anticipate maintaining somewhere in that $50 million. Gary, do you have any...?

Gary Coleman

No, I think we will be right around $50 million.

Operator

The next question comes from the site of Steven Schwartz with Raymond James. Please go ahead. Your line is open.

Steven Schwartz - Raymond James

Gary, just to make sure that I am clear here, you are planning as of right now to spend the $295 million that you detailed before 21 less the $126 million spend so far?

Gary Coleman

That was a variable and I am sure we will spend most of that.

Steven Schwartz - Raymond James

Okay and then lot of questions has been asked, but I do want to go back to the ACA question for Larry. I believe Larry that there is going to be or supposedly whether it happens or not remains to be seen, but a lot of money going away from the Part C program, is that correct?

Larry Hutchison

I think that’s correct, but again, all this is proposed at this point. I think we are going to have a gridlock in Congress through the remainder of the year, but I think next year you will see that those proposals actually take shape and better able to predict exactly what the Medicare system is going to look like. I have seen everything from Class A and B together to changes to see and it's just, as we make proposals, it's hard to sort out and say exactly what the Medicare system looks like. We know it's going to change a little depth of those changes.

Steven Schwartz - Raymond James

Is there anything in the I haven't see it, but just to make it clear, is there anything in ACA to effect Part D?

Larry Hutchison

I haven't seen anything with respect to Part D, really the proposals are dealt with potentially Medicare systems.

Operator

The next question comes from the site of Mark Hughes with SunTrust. Please go ahead your line is open.

Mark Hughes - SunTrust

You had previously discussed some efforts to try to improve persistency in your policy retention. Did you had a lot of success on that front and is there more we might anticipate?

Mark McAndrew

It's actually going very well. I'm pleased with the results there. In the first quarter, we ran a little bit ahead of our goal. Our new initiatives on conservation, we conserved a little over $7.4 million of premium versus our target of $7.1 million. We still project that we'll conserve something over $31 million of life premium this year through our new conservation efforts. So, very pleased with where it's at and it's actually running about 4% of where we thought it would be.

Mark Hughes - SunTrust

How about the Medicare Part D margins, with good growth in policies? Is the mix similar? How should we think about profitability then going forward?

Mark McAndrew

Again, even with the low income subsidize and release, the product that we're selling there has the same underwriting margins as the product we were selling to individuals. So, we expect the current margin as a percentage of premiums to basically maintain that margin going forward.

Operator

The next question comes from the site of Vincent Lowry with Morningstar. Please go ahead. Your line is open.

Vincent Lowry - Morningstar

Most of my questions have been answered, the discount grade related to business and a way of new business. So, I just want to go back and talk a little bit about the direct response. I understand that, Mark you indicated there are more rejections to the applications due to the new underwriting standard, but do you see any change in demographic composition or how it's used in the markets that you serve in general?

Mark McAndrew

Well, no. I haven't really seen a lot of change in the demographics. Again, in our insert media side, our demographics are a little lower income and they are in the direct mail side. That's why it tends to have been more impacted by the economy. So, there is some pressure, but we haven't seen anything that's going to change in our demographics.

Vincent Lowry - Morningstar

So, you basically just string it from the underwriting stand as to sort of improve the mortality expense?

Mark McAndrew

Absolutely, yes. Again, the trick in our direct response is it has to be something that's low cost and efficient because of the large numbers we're dealing with, and utilizing that prescription drug records. It did point out that about 6% of the policies that we had been issuing were really people that were uninsurable. So, it definitely is improving our mortality and improving our margins. We're making more profit but we're issuing less business.

Vincent Lowry – Morningstar

Okay. Can you kind of comment on the current rejection rate versus the historical one in this direct response business?

Mark McAndrew

It varies by product and by market. I don't I have those, it's something we could provide for you, but I don't have those in front of me.

Operator

The next question comes from the site of Jeff Schuman with KBW. Please go ahead. Your line is open.

Jeff Schuman – KBW

I want to talk first a little bit more about Part D. The premium increase there this year is still large that actually changes the growth there of the entire Company, which is certainly great for 2012. You talked a little bit about 2013 last quarter, but I was wondering if you could just kind of update your thoughts on whether Part D is likely to go up, down or sideways next year?

Mark McAndrew

In fact we are doing our pricing right now for I think, by the 1st of June we have to have our pricing for 2013. Dealing with our pharmacy benefits manager, we think we've come up with some ideas to continue to have a positive impact on our pricing. It’s impossible to project at this point of what 2013 is going to look like, but right now we are optimistic that we’ll not only maintain, but hopefully see additional growth in 2013 from Part D.

Jeff Schuman – KBW

And in terms of the share that you have gained this year, did it come primarily at the expense of a couple of companies who could directly or did it come very broadly from the entire market?

Mark McAndrew

Well I’m not sure that I know, I don’t know exactly where those came from, but again it’s something that we’ll get back to you on.

Jeff Schuman – KBW

Okay and then with regard to the CEO transition, Mark you talked about Gary and Larry having some complementary skills, and I’m just wondering if they could share with us any preliminary thoughts about how they might organize themselves, for example, all of the lines and functions are going to report to both of them simultaneously or there will be some division to focus on how they are thinking about that.

Mark McAndrew

Gary and Larry, I’ll let you respond to that.

Larry Hutchison

Just a division of focus, on a day-to-day basis. I’ll be in-charge of the TMK Marketing, the CEOs report to me. I’ll continue with the legal compliance, the HR functions. Gary, why don’t you speak to your day-to-day reporting?

Gary Coleman

Jeff, I will continue with the investment’s financial reporting, investor relations and internal, all of those areas, but in addition to that, the actuarial area will report to me and also the administrative area, but I would like to in size we are doing that from the David's standpoint, helping the operations, but all material decisions will be made jointly by Larry and me.

Operator

(Operator Instructions). We will go next to the site of Sam Hoffman with Nomura. Please go ahead. Your line is open.

Sam Hoffman - Nomura

I want to ask a question about the initiatives underway at Liberty National. Can you talk about the leading indicators that you are seeing that indicate to you whether or not are those initiatives going to work and then in the worst case, if they don’t work, can you just go back to the $7 million of sales each quarter or there kind of downside case because you are undergoing an organizational restructuring that could unravel further?

Mark McAndrew

Sam, I will address it. I feel very confident that Liberty National is going through a turnaround and I am very confident that the initiatives will work. Again, we Steve to Charles, we moved him from American Income as well as Roger Smith as CEO, I think are doing an outstanding job. I think the attitudes at Liberty are better than they have been in quite some time. As far as the early indicators, our recruiting is growing and obviously, the agent count in the last eight to nine weeks has consistently grown. So, I don’t have a contingency plan because I don’t feel like I need one. I feel strongly that Liberty is on the right track moving forward and I think over the next couple of quarters it will be apparent to everyone.

Sam Hoffman - Nomura

And then one other follow-up question. You’ve obviously had an enormously successful run at Torchmark, outperforming every other company in the industry by a wide margin, and now as a large shareholder of the Company stock, do you intend to hold your stock in the Company through your retirement in 2013 and 2014 as well as your options. I'm not sure how the program works. Maybe you could comment a bit upon that, and then certainly your intentions to hold your stock through the turnaround of Liberty National and the continued growth of the other businesses which you're doing so well?

Mark McAndrew

I definitely intend to hold my stock, not just through the transition, but I intend to hold it, and definitely I think our stock is still undervalued by historic standards. I think our prospects for growth again I think are the best they've been in my 10 years as CEO. You may see, as far as options and in fact – because the change in the accounting rules on options, we can no longer do reload that we used to do in the past, but now every office here has options that expire each year. Even if we take the equity from those options and convert it into outright shares, it will still show up as Company stock. So, you may see some of that. In fact, you will see some of that because everyone has options that expire each year, but that does not mean that we're selling shares. In fact, typically most people are converting those to outright ownership shares.

Sam Hoffman - Nomura

Great and then the program that you have at this point, it doesn't like require you to exercise all of your options and sell them upon your retirement, you can basically rest and whatever you like.

Mark McAndrew

That's one of the nice things. At age 60, I have at least five years, Larry?

Larry Hutchison

That's correct.

Mark McAndrew

So on all the options, I have at least five years before I have to exercise those.

Operator

There are no further questions in queue, so I'd like to turn it back over to our speakers for any closing remarks.

Mark McAndrew

Thank you for joining us this morning. Those are our comments, and we hope you have a great day. See you next quarter.

Operator

That does conclude your teleconference. Thank you for your participation. You may now disconnect.

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