Good day, everyone. Welcome to the Torchmark Corporation first quarter 2015 earnings release conference call. Today's call is being recorded. At this time, I'd like to turn the conference over to Mike Majors, Vice President of Investor Relations. Please go ahead, sir.
Thank you. Good morning, everyone. Joining the call 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. Please refer to our 2014 10-K and any subsequent Forms 10-Q on file with the SEC. I'll now turn the call over to Gary Coleman.
Thank you, Mike. Good morning, everyone. Net operating income for the first quarter was $134 million, or $1.04 per share. A per share increase of 3% from a year ago. Net income for the quarter was $122 million, or $0.95 per share. A 3% decrease on a per share basis. With fixed maturities and amortized cost, our return on equity as of March 31 was 14.7%. Our book value per share was $28.44, a 7% increase over a year ago. On a GAAP reported basis with fixed maturities and market value, book value per share increased 22% to $38.17. In our life insurance operations, premium revenue grew 5% to $513 million. Life underwriting margin was $141 million, up 1% from a year ago. Growth in underwriting margin lagged premium growth due to higher claims, primarily in direct response.
For the full year, we expect life underwriting margin to increase 3%-5% over 2014. In the quarter, net life sales increased 17% to $104 million. On the health side, premium revenue grew 4% to $229 million. Health underwriting margin grew 4% to $52 million. For the full year, we expect health underwriting margin to increase 2%-4%. Health sales increased 2% to $32 million. Excluding group business, individual health sales increased 22%. Administrative expenses were $47 million for the quarter, up 7% from a year ago. In line with our expectations. The primary reasons for the increase in administrative expenses are higher pension and IT costs. As a percentage of premium, administrative expenses were 5.7% compared to 5.6% a year ago. For the full year, we anticipate that administrative expenses will be up around 6%-7% and around 5.8% of premium.
I will now turn the call over to Larry Hutchison for his comments on the marketing operations.
Thank you, Gary. We are pleased about the sales activity at Torchmark. We have had year-over-year increases in net life sales in each of our major life distribution channels for five quarters in a row. Now I will go over the results for each company. At American Income, life premiums were up 9% to $202 million, and life underwriting margin was up 4% to $62 million. Net life sales were $47 million, up 24%, due primarily to increased agent counts. The average agent count for the first quarter was 6,317, up 19% over a year ago, but approximately the same as the fourth quarter. The producing agent count at the end of the first quarter was 6,541. We expect life sales growth for the full year 2015 to be within a range of 9%-13%.
At our direct response operation at Globe Life, life premiums were up 5% to $187 million. Life underwriting margin declined 5% to $43 million. Net life sales were up 11% to $45 million. We expect 4%-7% life sales growth for the full year 2015. At Liberty National, life premiums were $68 million, down 1% from a year ago. While life underwriting margin was $17 million, same as the year ago quarter. Net life sales grew 16% to $9 million, while net health sales increased 8% to $4 million. The average producing agent count for the first quarter was 1,464, up 5% from a year ago, but down 7% from the fourth quarter. The producing agent count at Liberty National ended the quarter at 1,544. Life net sales growth is expected to be within a range of 6%-9% for the full year 2015.
Health net sales growth is expected to be within a range of 4%-7% for the full year 2015. At Family Heritage, health premiums increased 8% to $54 million, while health underwriting margin increased 6% to $11 million. Health net sales were up 18% to $12 million. The average producing agent count for the first quarter was 784, up 19% from a year ago, but approximately the same as the fourth quarter. The producing agent count at the end of the quarter was 881. We expect health sales growth to be in the range from 7%-10% for the full year 2015. At United American General Agency, health premiums increased 6% to $83 million. Net health sales declined from $14 million to $12 million. Excluding our group business, net health sales grew 30%.
For the full year 2015, we expect growth in individual sales to be around 15%-20%. As we discussed last quarter, we expect lower group sales in 2015 due to the unusual number of large group cases we acquired in 2014. Premium revenue from Medicare Part D declined 4% to $79 million, while the underwriting margin declined from $10 million to $5 million. The decline in underwriting margin was in line with our expectations was due to the increase in Part D drug cost discussed our previous call. We expect Part D premiums of $310 million-$320 million for the full year 2015, we expect margin as a percentage of premium to be approximately 6%-8%. I'll now turn the call back to Gary.
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 the required interest on policy liabilities and debt, was $55 million, a decline of 3% from the first quarter of 2014. On a per share basis, reflecting the impact of our share repurchase program, excess investment income increased 2%. We have discussed on previous calls the effect of Part D on excess investment income. Excess investment income was negatively impacted by Part D to the extent of $2 million in the first quarter of 2015. Excluding the negative impact of Part D, excess investment income would have been flat with year-ago quarter, but up about 5% on per share basis. For the full year 2015, we expect excess investment income to decrease by about 1%-3%.
However, on a per share basis, we should see an increase of about 2%-3%. At the midpoint of our 2015 guidance, we're expecting a drag on excess investment income from Part D of approximately $7 million. Regarding the investment portfolio, invested assets were $13.5 billion, including $13 billion of fixed maturities and amortized cost. Of the fixed maturities, $12.4 billion are investment grade with an average rating of A-minus and below investment grade bonds are $604 million compared to $552 million a year ago. The percentage of below investment grade bonds to fixed maturities is 4.7% compared to 4.4% a year ago. With a portfolio leverage of 3.6 times, the percentage of below investment grade bonds to equity, excluding net unrealized gains on fixed maturities, is 17%. Overall, the total portfolio is rated A-minus, the same as a year ago.
In addition, we have net unrealized gains in the fixed maturity portfolio of $1.9 billion, approximately $256 million higher than at the end of the fourth quarter. To complete the investment portfolio discussion, I'd like to address our investments in the energy sector. We believe that the risk of realizing any losses in the foreseeable future is minimal for the following reasons. Over 96% of our energy holdings are investment grade. At the end of the first quarter, our energy portfolio had a net unrealized gain of $173 million. Less than 8% of our energy holdings are in the oilfield service and drilling sector. We have reviewed our energy holdings and have concluded that while we may see some downgrades, we believe that the companies we've invested in can withstand low oil prices for an extended duration.
Regarding investment yield, in the first quarter, we invested $292 million in investment-grade fixed maturities, primarily in industrial sectors. We invested at an average yield of 4.5%, an average rating of BBB+, and an average life of 29 years. For the entire portfolio, the first quarter yield was 5.87%, down five basis points from the 5.92% yield in the first quarter of 2014. At March 31, 2015, the portfolio yield was approximately 5.86%. The midpoint of our guidance for 2015 assumes new money yields of 4.5% for the second quarter and 4.75% for the last two quarters of the year. One last thing. On past analyst calls, we have discussed in detail the impact of a lower-for-longer interest rate environment. As a reminder, an extended low interest rate environment impacts our income statement, but not the balance sheet.
Since we primarily sell non-interest sensitive protection products accounted for under FAS 60, we don't see a reasonable scenario that would require us to write off DAC or put up additional GAAP reserves due to interest rate fluctuations. In addition, we do not foresee a negative impact on our statutory balance sheet. While we would definitely benefit from higher interest rates, Globe Life will continue to earn substantial excess investment income in an extended low interest rate environment. Now I will turn the call over to Frank to discuss share repurchases of capital.
Thanks, Gary. First, I'd like to briefly discuss a few items impacting our 2015 earnings guidance. As Gary mentioned, growth in the life underwriting income lagged behind the growth in premium in the first quarter, primarily due to higher policy obligations in our direct response operations. In the first quarter this year, policy obligations at direct response were 49.1% of premiums, versus 46.9% in the first quarter of 2014. Looking back, the first quarter of last year was low, as the policy obligations for the full year 2014 ended up at 48.1%. As we discussed on our last call, this percentage was trending higher than prior years, primarily due to actual claims coming in higher than our expectations on policies issued in the early 2000s.
We also noted that we expected the policy obligation percentage for 2015 to be around 48%. Based on the additional claims experience we saw in the first quarter and further review of the emerging claims trends, we now believe the direct response policy obligations for the full year 2015 will be in the range of 48.5%-49% of premiums. This increase in the expected policy obligations of direct response is the primary driver of the $0.02 reduction in the midpoint of our guidance. In addition, we revised our expectations for the Canadian foreign exchange rate, which will cause the earnings from American Income Life to be somewhat lower than previously anticipated. On a positive note, we do anticipate our premium income will be higher than previously estimated, primarily at American Income, due to the strong first quarter sales.
The net effect of these three items results in the reduction in the midpoint of our guidance from $4.30 to $4.28. Regarding our share repurchases and capital position. In the first quarter, we spent $90 million to buy 1.7 million Torchmark shares at an average price of $53.20. So far in April, we have used $18 million to purchase 328,000 shares. For the full year through today, we have spent $108 million of parent company cash to acquire 2 million shares at an average price of $53.57. The parent started the year with liquid assets of $57 million. In addition to these liquid assets, the parent will generate additional free cash flow during the remainder of 2015.
Free cash flow results primarily from the dividends received by the parent from the subsidiaries, less the interest paid on debt and the dividends paid to Torchmark shareholders. We expect free cash flow in 2015 to be around $360 million. Including the $57 million available from assets on hand, we currently expect to have around $417 million of cash and liquid assets available to the parent during the year. As previously noted, to date, we have used $108 million of this cash to buy 2 million Torchmark shares, leaving around $309 million of cash and other liquid assets available 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-$60 million of liquid assets at the parent company. Regarding RBC at our insurance subsidiaries. We plan to maintain our capital at the level necessary to retain our current ratings. In the last 2 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. As of December 31st, 2014, our consolidated RBC was 327%. We do not anticipate any significant changes to our targeted RBC levels in 2015. Those are my comments.
I will now turn the call back to Larry.
Thank you, Frank. For 2015, we expect our net operating income to be within a range of $4.20 per share to $4.36 per share, a 6% increase over 2014 at the midpoint. Those are our comments. We will now open the call up for questions.
Thank you. If you would like to ask a question, press the star key followed by the digit 1 on your touch tone telephone, also make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one for a question. We will take the first question of day from Brian DiRubbio . Please go ahead.
The margins in the life business, you had addressed your direct response margins, but as I look at American Income, the margins there were a lot weaker than they've been in a while as well. Maybe talk about what caused that and what your expectations are. Then secondly, on growth in the agent count, the average agents were down, but the ending number was actually higher across all channels. Just wondering if you could describe a little bit what you're doing in each of the channels and what your expectations for growth in the agent count are.
Okay, Jimmy, I'll go first on the American Income margins. The margins in American Income, the underwriting margin was a little lower than anticipated, but it's because we had, as we mentioned, higher claims. If you look at the, it's more of a timing thing. If you go back and look at the fourth quarter of last year, the claims were low, and they were 31% of premium. This quarter, they're 33%. We're expecting 32% for the year. We think that is just the timing. We think that the margin, we had 31.7% underwriting margin in 2014, and we're expecting about that same margin for 2015.
Okay.
Jimmy, with respect to the agency counts, we saw an increase in agent recruiting and better agent retention in each of the distribution units as we moved through the first quarter. The trend after the first quarter has been positive. We're continuing to see strong agent recruiting and better retention in each of the distribution units.
Just one more on capital. Your RBC obviously is lower than other companies, but the business mix is different as well. A while ago, S&P had raised issues about just preferred stock and how they potentially might change the treatment of those. Have you had any discussions with them, and what are your views on the potential for that, and how that would affect your capital management strategy?
Sure. Yeah, Jimmy, we have not had any recent discussions with them with regard to that. At the time that we had, last fall when we had our initial discussions, there was a contemplation that there would be some time to address the situation, then really looking at within a couple of years. As we've kind of really talked about on some of the prior calls, we're really taking a look at our various options. Really don't have any update as far as what we're going to do or how we're going to address that going forward. I think the bottom line is we don't think at this point in time that we need to, or that any resolution to the issue would impact our stock buybacks. We think we can address the issue through other forms of financing and other options that we would have available.
We probably would look maybe toward the latter part of this year or the first part of next year to really get some resolution to that.
Okay. Thank you.
Our next question comes from Erik Bass with Citigroup.
Hi, thank you. I just wanted to touch first on direct response margins, I think when you've talked about it in the past, you said that I think the pressure point on margins was sort of isolated to an older block. If you could just maybe size what the size of that older block is and if there's anything that you're seeing there that you think might also be relevant to other pieces or other vintages of the direct response business.
Yeah, Erik, on the last call we discussed, it's a block of business that was written over 10 years ago, the claims are coming in a little bit higher than expected. As far as the size of that block, it's currently about, if you look at total direct response premiums, that block is about 18% of premium, but it's declining about 6%-7% a year. As it continues to decline and as we add new business, the combination of those two things will make the impact of that block on the policy obligations going forward. It'll be less impact as we go forward.
Got it. Is there anything unique about that block that you've identified that would cause the margin profile to be different?
Not anything in particular. It is in our adult products that we sell, we've taken a look at that. We haven't seen anything that is troublesome there. I will say this, our current pricing, our pricing for the last few years is we feel is adequate to the point we won't have this problem going forward.
Great. Thank you. Just one last question on your sales guidance changes. Are those mainly just to reflect sort of where you've seen stronger recruiting at American Income than you'd expected? I think that was probably the biggest change where you raised the sales guidance there.
Yes. In American Income, we had stronger agent recruiting and agent retention than we'd anticipated, that's reflected in our guidance.
Got it. Thank you.
We'll now go to Seth Weiss with Bank of America Merrill Lynch. Please go ahead.
Hi, good morning. Thank you. Just a question on margins again. Did you see any weakness due to a more severe flu season? If you have any comments on that'd be helpful.
No, we really haven't seen any impact of that.
Okay, great. Thanks. To follow up on Erik's question in terms of American Income increased sales guidance, the agent recruiting obviously has a go-forward benefit. Your sales seemed particularly strong. Was that significantly higher than what your expectations were? How much did that lead to the increased sales guidance?
To recall, we had strong recruiting and the increase in agent count in the third and fourth quarter. We think sales will improve in part because the agents recruited in the last half of 2014 have gained experience and have become more productive.
Okay. Thank you.
Randy Binner with FBR Capital Markets is next.
Hey, good morning. Thanks. I guess just a couple on the agent count. One would be, you mentioned agent retention improving a couple of times. I was wondering if it's possible for you to kind of quantify how that got better than wherever it was before. On the data that's being provided now on the average producing agent count, I'm just curious, it was flat on a linked quarter basis, meaning Q1 2015 relative to Q4 2014. Is that a normal first quarter versus fourth quarter dynamic if you look back at that data set historically?
Let's talk about the agent increase. First of all, I think the strength at American Income Life is we've increased our agent activity through better training and new technology. As you have higher agent activity, you have a better retention rate because the agents are making more money, and they stay with the agency longer.
Randy, as far as the average agent count, we really only started putting that information together first quarter last year. Based on past trends, I think what we would have seen is actually the average agent count for first quarter might be lower than the fourth quarter in prior years because the latter part of the fourth quarter in past years has been pretty light in terms of recruiting. As Larry mentioned, we had a strong third and fourth quarter in recruiting, to stay at about the same level, I think, is an improvement. I don't have the exact numbers, but that's I think where the trends will-
I think, Gary, that there's those holidays in each of the distribution units recruiting.
No, that was my question because we don't have the data either. That helps explain it. It's just normal seasonality recruiting. Back to retention again, any quantification there on how much better it is now versus before however you guys measure that internally?
We measure it internally, and we check it on a monthly basis as we check retention. It's for third month through 13th month retention. It's one of the factors. We've had higher agent activity, which means we have more submitting agents. It's not just agent retention. Greater activity leads to a greater percentage of agents that submit every week, and that results in higher retention. I don't want to mislead. It's just retention is driving increased sales. It's a combination of better training, better recruiting, a focus on retention. It's changing our compensation models to drive those behaviors.
Okay. Just on-- Oh, sorry. Go ahead, Gary.
No, go ahead, Randy.
Yeah, sorry. Just one more just on the yield assumption for the second half, the 475 basis points. How long can you stick with that before having to revisit it?
Well, we'll keep looking at it as we go forward. That's not something we're just sticking to because we want to. We're looking at all the projections as to what treasury rates are going to be. We're looking at the consensus of the treasury rates and where we think spreads will fall. Right now we're comfortable with the four and three quarters, but that's something we revisit constantly.
All right. Fair enough. Thanks.
We'll now go to Yaron Kinar with Deutsche Bank.
Good morning, everybody. I had a couple of questions. One on the revised sales guidance. Seems like in Direct Response Life and also in Liberty National, you're actually lowering the top end of guidance despite very strong first quarter sales. I was wondering if you could maybe give us a little more color as to what was behind that.
Well, we did have a strong first quarter in Direct Response, but we're starting to come against stronger quarters in the second, third, and fourth quarter of 2014. I think that reflects the sales guidance for the whole year being in the range of 4%-7%.
Would that mean that initially you had expected an even stronger quarter in the first quarter?
I think the first quarter came in a little stronger than we thought with the growth in the first quarter. For each of these agencies and for Direct Response, if you go back to 2014, you saw that there's a significant increase in our net sales in the second, third, and fourth quarter. We'll be measuring against those quarters as we go forward.
Okay. With regards to agent growth, Family Heritage clearly showed a very significant improvement in first-year agents. Was there anything in particular that drove that?
We didn't have a recruiting push. It's just a focus on recruiting. We're seeing the benefit as they use our internet recruiting. That's now about 25% of the recruits, where before 100% was just personal recruits. That's been a plus at Family Heritage. We've added some new agencies at Family Heritage, and we're seeing the positive impact of an increased number of agencies in the Family Heritage system.
Okay. A quick numbers question. I noticed on the balance sheet, the cash number was actually quite low, about $3 million. Was there anything in particular going on there or should we expect that to increase?
Yeah, I think that is just a quarterly fluctuation in that and just kind of a timing issue with respect to the end of the particular quarter. I do think that it, on a normal basis, would be a little bit higher than that. Just happened to hit both right there at the end of the quarter.
Got it. Thank you very much.
We'll go to John Nadel with Piper Jaffray.
Hey, good morning. Just a question about the level of life insurance sales production in particular, maybe health sales too, but I guess it's sort of an issue that we haven't really had to grapple with for some time, and it's a high-quality issue, of course. How strong do life sales have to be before it actually does negatively impact your expectation for free cash flow generation, i.e., you need more capital to support the fact that you're growing faster than you might have otherwise expected to grow?
John, this is Larry. Your question was a little hard for us to hear, but I think your question was, as we see higher life sales, what impact does that have on our capital requirements in turn on our free cash flows? Was that your question?
I'm sorry if I was a little bit difficult to hear. It's essentially right along those lines, Larry.
Frank?
You are seeing a drag on One of the reasons why the statutory income is actually down from 2014 and 2013, you're seeing a little bit of a decrease in our free cash flows in expectations for 2015 versus 2014 really is a result of some of those strong sales that we had in 2014. Those do create a statutory drag. At the current levels, we're very happy to have those strong sales and that current drag. I think that with the level of sales that we're seeing, you will see kind of a flattening of that free cash flow for as long as we continue to have those sales, then you'll kind of see that really filtering in, just kind of having on a flat free cash flows.
John, I would add to that is that our products do have a first-year drag, but as soon as they get into second year, we start turning into not only a statutory positive but cash positive. I agree with Frank, it can be a temporary drag, but we want to put as much business on the books as we can. We want to grow the in-force and, of course, because of the high underwriting margins that we have, that also grows the free cash in future.
Oh, yeah. Don't get me wrong. Like I said, high-quality problem, right? Can you remind us how fast on a statutory basis your life insurance sales, let's say, sales in year one, at what point do you get back to sort of a cumulative break even on a statutory basis?
Yeah, John, I think it's in about somewhere in that 6 to 8 year time frame.
Okay. Maybe another high-quality issue that we've talked about in the past. Given the stock price to book multiple, price to earnings multiple, I guess there's been one or two occasions over Torchmark's publicly traded life where you felt like the share price was approaching your own internal view of embedded value or whatever it is exactly that you guys calculate. Are there any sort of updated thoughts along those lines? I know you've talked about shareholders really liking the buyback over a significant increase in your dividend yield as an example.
Well, John, what we've said in the past is if we think that the stock is fully valued, we will more than likely stop the share repurchasing. Our objective is to get cash back to the shareholder, so we would probably move that into something of a dividend, special dividend or whatever. Yes, we're trading it toward the high side of price to book for Torchmark. Still, as we've talked about before, we calculate what we think the intrinsic value is, and we look at that in relation to the market value, and look at trends over a period of time. We still don't think we're at a point where we're buying the shares at too high a price. We'd anticipate continuing to buy the shares. That's something that we're committed to returning the cash to the shareholders.
We're not going to dilute the shares. We don't think we're there yet. We'll continue to follow. If we get to that point, we would consider doing probably a special cash dividend.
Thank you. Appreciate the comments.
We'll go to Steven Schwartz with Raymond James & Associates.
Good morning, everybody. Frank, do you know the effect of the Canadian dollar, both on the change in premium and force for the life business between year-end and quarter-end? Maybe talk about how that might be playing into the new sales guidance.
Yeah. Not sure if I have quite the breakdown exactly the quarter versus the year-end, but if you recall, it's the average rate that works in over time that impacts the actual amount of reported premium as well as the reported underwriting from those premiums. In 2014, we had an average exchange rate of about 90.7%, and we're anticipating now that the average rate for all of 2015 would be around 80%. That's based upon, we have Canadian premium of around, in Canadian dollars, of a little over CAD 90 million.
Okay.
You've got, roughly for the full year 2015, roughly a $10 million impact on American Income's reported premiums.
Okay.
For the first quarter of the year, the average exchange rate was around 88%.
That's one of the things that, kind of a continuing impact. We didn't really see that much of a drag on first-quarter earnings as a result of the lower foreign exchange rate. You'll see a continuing drag over the course of the year, assuming that the existing and the current rates stay there, the exchange rates stay in place for the remainder of the year.
Okay, thank you. That'll be useful. A little bit of a one-off, maybe. The doc fix for Medicare. This is a few years away, but the doc fix includes a proposal to do away with first-dollar MedSup. I'm wondering if that's important product for you all.
Brian, do you want to address that?
Larry, let me take that. This is Brian.
Sure.
Yeah. That's really going to kick in with regard to the MedSup policies in 2020. What they're looking at right now is the reduction in spending on first-dollar coverage, but primarily with the possible elimination of the Part B deductible. We still maintain that it's not affecting our current policyholders, and it's hard to estimate, it's hard to know exactly what other changes there might be going down the road in future budget talks or further Medicare reform. That is something that we are watching very closely.
Is it a large part of your business currently or sales currently?
The Medicare Supplement? I mean, Larry, do you want to comment on that?
First-dollar MedSup.
Well, that's going to be what our MedSup products are.
All your MedSup products are first dollar.
Larry, do you want to comment on that?
Well, yeah, high-deductible plan. When you define first-dollar MedSup, I'll be careful how we define that because there's different levels of coverage in MedSup. We tend to sell the higher deductible MedSup products. It's so far out, Brian, that it's really difficult to give guidance at this in 2015 for something that might be enacted in 2015. Between now and 2015.
Well, between now and 2020.
Right. Yeah. I know it's a ways away. All right. I mean, that's all I had.
When we were considering first-dollar coverage plans, generally that means plans that cover almost all deductibles and co-pays.
If that's what you're referring to.
Yeah, I can't remember which plans they were talking about, but it was two special plans that they were referencing, but I don't remember what the letters were. All right, I'll leave it there.
I'm sorry on that. Yeah. I'd have to look into the specifics more closely, but reading that act, the MACRA, it references the first-dollar coverage and specifically the Part B deductible. Again, that's not going to take place for five years, we're not anticipating any effect now, although.
Sure
That is something that we're monitoring and looking at very closely.
Okay. All right. Fair enough. Thanks, guys.
We'll go to Colin Devine with Jefferies. Please go ahead.
Good morning. I had a couple questions. First, with respect to the average policy size you're selling now, clearly, you've been very successful with the recruiting, frankly, much stronger than I think most of your peers. Are you starting to move up the average policy size? I'm thinking, I guess on average, it's, what, about $30,000, and in the business around $17. Is that starting to trend up? Is the first question. Second question, if we can come back on the capital issue. Unless I'm mistaken, I do believe S&P, with the changes to the capital model, has Torchmark on criteria watch. If you can perhaps elaborate on what the issue is that they're looking at, and how that may impact potentially on buybacks. The next one would be, as you're well aware, the NAIC is changing the risk-based factors on fixed income securities this year.
I had heard that on average, RBCs are going down about 50 points from the NAIC. I would think that's probably about a fair estimate for Torchmark, and I would assume, based on what you said, that you don't want your RBC sort of really dropping much below 325. Again, what are you going to be doing to sort of address that? Thank you.
This is Larry. I'll address the agency question first. In terms of the size of the policy, we've seen some impact at American Income. We talked last year about introducing our new senior life sales, and the average premium for a senior life product is $740 versus the average premium for a non-senior life product is about $470. There's a significant difference. As a percentage of our sales, senior life has increased from about 15%-20% of American's business. We've seen a positive impact from that size. I think the real change in agency, it's not in the size of the premium level or the face amount. I think really what's impacting is the strong leadership we have in our agencies. From home office perspective, we have very strong leadership at American Income, Liberty National, and Family Heritage.
We also have strong leadership in the field and the owners of those agencies, the SGAs, the sales directors, provide us with the ideas for better training, the better technology, and they work with our home office staff. I think that's been the impact is as they worked together in 2014, we're seeing the benefit of those actions in 2015.
Colin, you're asking about average face amounts. It varies by company, but American Income is a little over $40,000 average face amount. Where we're seeing an increase really in the face amounts is direct response. The direct response has been lower than the $40,000 in the past, but we're starting to sell some higher face amounts up to $100,000. It hasn't been a dramatic increase yet, but we are seeing an increase there. Still, when you compare us to other companies, our face amounts are pretty low. You can get American Income a little over $40,000, and Globe is under that.
Yes, I thought Globe was about 17 for the 10-K, but I was just trying to get at if the success you've had in recruiting, and I think we got the answer to that, is also sort of flowing through to success in higher face amounts, higher premium amounts. It's not just you're adding more agents, but you really are adding more productive and I assume more profitable agents, if that's a fair way.
The other effect at the start of 2014 was growth in middle management. We saw growth in middle management in each of our sales systems, each of our agencies. As you grow your middle management, you have better training. Those middle managers are better recruiters. That's another positive impact from 2014 that's flowed through to 2015.
Thank you.
Frank, you want to handle the RBC question?
Yeah. You're right, the S&P had placed us on negative outlook last fall, and it's really based upon their view of certain intercompany preferred stock that is part of our insurance company's capital structure. This preferred stock has been in place since 1998, and has not really changed any substantial levels since that period of time. The S&P, they don't look at RBC, they have their own capital models. Basically, there was just a change in view on their part on how much credit they wanted to give us with respect to that preferred stock. With respect to it, and again, they want to give us a little bit or some less credit than what we're getting under our RBC models.
We're taking a look at different options that we have with respect to address the additional capital that they would like to see within the insurance companies. We're taking a look at whether we want to. While we're interested in keeping our S&P rating, we also do recognize that the S&P is not that critical or isn't critical at all from our marketing efforts, and that we'll probably tend to be one notch above many of our peers with respect. At least a one-notch downgrade, should we have one, really wouldn't be that costly from our perspective. We are looking at different methods to cure that, and it might take different forms of financing. Maybe we end up having a little bit more external financing and replace some of that preferred stock, intercompany preferred stock that's currently down the insurance companies.
Really don't see that having any impact on the RBC within the companies, it may in fact improve it to some degree. With respect to the bonds and the initiatives going on at the NAIC, it is something that we have been watching. The information that I have is that it's really not going to, for the most part, be fully implemented until 2017 or 2018. Once it's fully implemented, it definitely could have some meaningful impact on how we think about the capital and at some of our RBC levels. We don't see it having any impact on us in 2015. I don't have any numbers in front of me here that would indicate exactly what that would be other than it's definitely something that we'll have to watch a year or two down the road.
Okay. Just to come back on S&P for a second. What I had seen is you did go on criteria watch, not just the negative outlook, but criteria watch when they announced the capital model changes towards the end of March.
Okay.
My understanding of that process, it's somewhat mechanical, but it's got to get resolved in the next six months, or else they could take some rating action. You mentioned on the preferred, I guess what might be helpful for all of us is how much are they actually talking about in terms of dollars? Because I do appreciate on the criteria watch thing, it is something that's got a dollar cost to it, right? They're looking for X amount that if you add that to the capital structure, I assume the rating stays where it is. If you could just maybe put a number on it, because it does seem to me this is something that's got to get resolved by the end of the third quarter.
Well, I don't think that it's something that we have to have as far as the additional amount of capital resolved by the end of the third quarter. We will have discussions with them that are kind of our normally scheduled discussions, sometime in the latter part of the second or likely the third quarter, that we'll be talking about that. The total amount of preferred stock that is in the insurance companies is around $300 million. That is not an amount that we believe that has to be replaced in its entirety. The numbers that we think we would have to do to address the situation is much less than that. Again, as we're looking through the options, I'm not really at a point to say exactly what we think we would have to replace that with.
Okay. Just some final clarifications, just to be certain. Does Torchmark use any sort of captive reinsurance to fund redundant reserves and/or bank LCs?
Not of the latter. We do have an offshore captive insurance company that does cede some redundant reserves. They're not XXX or AXXX reserves. They're just non-economic reserves that we are required to hold at a couple of our companies. We do reinsure $200 million of that.
Okay. Thank you. I suspect that's the criteria watch issue, thanks very much. Okay.
We'll now go to Eric Berg with RBC Capital Markets. Eric, your line's open. Please go ahead. We're unable to hear you. If you could check your mute button.
Sure. Thanks. I'm sorry, I was on mute. I wanted to start with Globe. Are you in effect saying that the business was effectively modestly more underpriced than you had thought it was when you first broached this topic last year?
I'm sorry, Eric, could you just repeat the question?
Sure. You've discussed the fact that underwriting profitability, I believe they're saying at Globe Life, please correct me if I don't have that right, is not as great as you thought. In particular, are you saying that it's just modestly worse than you thought it would be when you first broached the topic of this older block of business several quarters ago?
Yes. As Frank mentioned, looking at trends, instead of being the total policy obligations for the entire direct response unit, instead of it being 48%, we're expecting it to be more 48.5%-49%. Again, it's due primarily to this older block of business, the way that the claims are coming in on that block.
My second question relates to Family Heritage. It's clear that you've had a sharp increase in recruiting. As we think about all the measures that look quite good, strong growth in premiums, strong growth in sales, strong growth in in-force, is it just about the fact that you have a lot more people selling your product these days, or is there more going on at Family Heritage that would explain the very healthy increase in all the major measures of corporate performance at this company?
I think at Family Heritage, it's driven primarily by an increase in the number of agents. I want to caution that those additional agents, I would expect that they will write slightly lower weekly premiums than experienced agents, the additional agents will result in overall premium growth for Family Heritage.
If I could add-- I'm sorry. Please continue.
It's not productivity as much as I just see a greater number of agents are writing business at Family Heritage.
If I could just sneak in one more quick one. As we continue to monitor, to study the data that you report out in one of your supplementary pages on agent count, I'd be curious to know how you look at those data. Are you interested in the relationship between, say, renewal agents and the total, the idea being that first-year agents tend to be not nearly as productive as renewal agents? Are you looking at the total number? What numbers would you encourage readers of your financial statements to really hone in on, or ratios on that page showing the agent count?
The two things that we focus on is the average agent count is indicative of what production was for the quarter. As we provide an ending agent count, I think it's an indicator of what's going to happen in the subsequent quarter in terms of new sales. For the mix of [inaudible] it's a concern. At Liberty, you've seen some improvement in that ratio, but the two primary focus points are average agent count and ending agent count in terms of an indicator of where we're going with our recruiting.
All right. Thank you very much.
At this time, there is one name remaining on the roster, so if there are any additional questions, please press star one at this time. We will now go to Mark Hughes with SunTrust. Please go ahead.
Thank you very much. I'm sorry if you touched on this earlier, could you talk about trends in policy retention with the good, strong growth in life sales lately? Has there been any impact on retention? Any new initiatives or sustained initiatives internally that will influence that going forward?
Mark, this is Larry. I think the one concern we had as we looked at Liberty National, we saw a little decrease in agent retention. As we looked further into that item, it really was some specific agencies that we're addressing within Liberty National. We have a conservation person in the agency. As she's addressed at the agencies, we don't think there'll be a decline. We think we'll see normal persistency or cancellation rates within that agency.
As far as if you're talking about policy lapse rates, we're continuing to see improvement in our lapse rates. We've talked about our conservation program, and we're improving there. We're expecting to conserve a little over 18% of policies that lapse this year, versus just three years ago or five years ago, it was like 5%. We're continuing to find the new ways to conserve policies that have lapsed or are about to lapse. We feel very good about where we are with our conservation program. Our unit there is doing a really good job, and we think that we'll continue to see improvement in the conservation. That's a good sign as you mentioned, our production grows as we improve the conservation. I think we'll see further improvements in our lapse rates.
Mark, this is Larry again. If I misspoke, I may have said agent retention. I was talking about policy retention at Liberty National. We've talked about agent retention so much this morning, I may have used that term, the concern we had at Liberty is actually with policy retention, and that's been addressed.
Okay. Yes. Thank you.
There are no other questions. At this time, I'd like to turn the call back to Mike Majors for any additional or closing remarks.
Okay. Thank you for joining us this morning. Those are our comments, and we'll talk to you again next quarter.
Thank you very much. That concludes our conference for today. I'd like to thank everyone for your participation.