Good day, ladies and gentlemen, welcome to the Torchmark Corporation First Quarter 2014 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mike Majors, Vice President of Investor Relations. Sir, you may begin.
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, 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 2013 10-K and any subsequent Form 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 $137 million, or $1.52 per share, a per share increase of 9% from a year ago. Net income for the quarter was $133 million, or $1.48 per share, a 17% increase on a per share basis. With fixed maturities at amortized cost, our return on equity as of March 31st was 15.5%, our book value per share was $39.68, a 10% increase from a year ago. On a GAAP-reported basis, with fixed maturities at market value, book value per share was $46.85, a 2% increase. In our life insurance operations, premium revenue grew 4% to $489 million, life underwriting margins increased 6% to $141 million.
The growth in underwriting margin exceeded the premium growth due to lower amortization on our deferred acquisition costs and the deferral of certain direct response internet acquisition costs that had not been deferred prior to the second quarter of 2013. The lower amortization rate is a result of improvements in persistency attributable to our ongoing conservation program and is incorporated in our guidance. For the full year, we expect life underwriting margin to increase approximately 3%-5% over 2013. The growth rate for the year will be less than the first quarter growth rate, primarily because the direct response internet cost will be on a comparable basis for the remainder of the year. Net life sales were $89 million, up 5% compared to the first quarter of last year, up 7% over the fourth quarter of 2013.
On the health side, premium revenue, excluding Part D, declined 1% to $219 million, and health underwriting margins declined 1% to $49 million. For the full year, we expect health underwriting margin to decline from 2%-4%. Health sales increased 34% to $32 million, due primarily to an increase in group Medicare Supplement sales. Administrative expenses were $44 million for the quarter, 1% more than a year ago. For the full year, we anticipate that administrative expenses will be up around 1% and be approximately 5.7% of premium. I will now turn the call over to Larry Hutchison for his comments on the marketing operations.
Thank you, Gary. Before I get into the marketing operations, I'd like to point out that the agent count information on our website now includes an average agent count for the first quarter of 2014, in addition to the quarter end counts we have historically provided. Due to significant fluctuations that can occur from week to week, we believe that adding an average agent count for the quarter will provide more meaningful information regarding agent trends. Let's look at the results of our marketing operations for the first quarter. First, let's discuss direct response, which generates approximately 35% of our life premiums. We are pleased with the direct response results. Life premiums were up 6% to $178 million, and life underwriting margin increased 15% to $45 million. Net life sales were up 9% to $40 million.
We are continuing to see significant production growth generated by our lower rates, adult insurance offerings, and electronic media. We expect life sales growth for the full year 2014 to be in the range of 6%-9%. American Income, which generates approximately 38% of our life premiums. American Income's life premiums were up 7% to $186 million, and life underwriting margin was up 7% to $60 million. Net life sales increased 1% for the quarter to $38 million. The producing agent count at the end of the first quarter was 5,500, down 2% from a year ago, but up 4% during the quarter. The average agent count for the first quarter was 5,298.
On our last call, we indicated that we expected sales to be flat for the first half of the year and then ramp up in the second half as changes in the compensation system kicked in. Despite significant weather-related difficulties around the country, life sales increased slightly. We believe the changes implemented early in 2014 began to have a positive impact during the first quarter. We have seen improvements in the percentage of agents submitting business and the average premium per application. While the average agent count for the quarter was lower than the count at the end of the fourth quarter, we saw strong, steady growth during March. While it's still early, we believe that agent retention will be positively impacted by the compensation changes. We opened a new office in the first quarter, and we plan to open five more during the remainder of the year.
We expect life sales growth for the full year 2014 to be within a range of 3%-6%, with most of the growth coming in the third and fourth quarters. Now, Liberty National. At Liberty National, life premiums declined 2% to $69 million, while life underwriting margin declined 10% to $17 million. Net life sales grew 4% to $7 million, while net health sales increased 25% to $4 million. The producing agent count at Liberty National ended the quarter of 1,451, up 6% from a year ago and up 1% during the quarter. The average agent count for the full quarter was 1,400. While this is lower than the count at the end of 2013, we saw a steady increase through the last half of the quarter. The first quarter sales increases were higher than we had anticipated, due largely to improvements in agent productivity and activity levels.
We opened another new office of Liberty in the first quarter, and we expect to open four more new offices at Liberty during the remainder of 2014. We will continue to expand into more heavily populated, less penetrated areas to generate long-term agency growth at Liberty. We expect to see total life and health sales growth for the full year 2014 in a range of 3%-6%. Now, Family Heritage. Health premiums increased 7% to $49 million, while health underwriting margin increased 16% to $11 million. Health net sales declined 8% to $10 million. The agent count also declined during the first quarter. We believe these disappointing results were due in large part to weather-related issues that affected Family Heritage to a greater extent than our other distribution channels.
On a positive note, we saw improvements in agent count throughout March, and we have seen positive sales momentum during March and April. We still expect growth in health sales at Family Heritage for the full year 2014 to be in a range of 2%-6%. Now, United American General Agency. Health premiums grew 1% to $78 million in our General Agency. Net health sales grew 116% to $14 million. The increase was due primarily to a large group Medicare Supplement case. We also continue to see strong growth with our individual Medicare Supplement sales. While it is difficult to project group Medicare Supplement sales activity, our guidance for the full year assumes General Agency net health sales growth of approximately 25%-35%. Medicare Part D. Premium revenue for Medicare Part D grew 8% to $83 million, while the underwriting margin grew 19% to $10 million.
Part D sales for the quarter were $31 million compared to $9 million in the year-ago quarter due to the increase of low-income subsidized enrollees for 2014 and a large employer group case. The midpoint of our 2014 guidance assumes an increase of 16%-17% in Part D premiums for the full year. I will now turn the call back to Gary.
Thanks, Larry. I want to spend a few minutes discussing our investment operations. First, excess investment income. Excess investment income, which we define as net investment income, less required interest on policy liabilities and debt, was $57 million, an increase of $1 million or 2% over the first quarter of 2013. On a per share basis, reflecting the impact of our share repurchase program, excess investment income was up 7%. For the full year, we expect excess investment income to increase by about 4%-6%. On a per share basis, the increase should be about 9%-11% compared to 2013.
The growth rate expected for the full year 2014 is higher than that of the first quarter, since the excess investment income in the first quarter of 2013 was the highest of any quarter in 2013 due to the impact of calls of higher-yielding securities during the first and second quarters. Regarding the investment portfolio, invested assets were $13.2 billion, including $12.6 billion of fixed maturities at amortized cost. Out of the fixed maturities, $12.1 billion are investment grade with an average rating of A-minus, and below investment-grade bonds are $552 million compared to $573 million a year ago. The percentage of below investment-grade bonds to fixed maturities is 4.4% compared to 4.7% a year ago. With a portfolio leverage of 3.6 times, the percentage of below investment-grade bonds to equity, excluding net unrealized gains on fixed maturities, is 16%.
Overall, the total portfolio was rated A-minus, same as a year ago. In addition, we have net unrealized gains in the fixed maturity portfolio of $1 billion. The fourth quarter. The increase is due primarily to recent declines in market interest rates. Regarding investment yield, in the first quarter, we invested $158 million in investment-grade fixed maturities, primarily in the industrial and financial sectors. We invested at an average yield of 5.4%, an average rating at BBB+, and an average life of 25 years. For the entire portfolio, the first quarter yield was 5.92%, down eight basis points from the 6% yield in the first quarter of 2013. For the full year 2014, we expect the portfolio to yield approximately 5.9%. I'll turn the call over to Frank to discuss share repurchases and capital.
Thanks, Gary. I want to spend a few minutes discussing our share repurchases and capital position. First, regarding share repurchases and parent company assets. In the first quarter, we spent $108 million to buy 1.4 million Torchmark shares at an average price of $76.09. So far in April, we have used $33 million to purchase another 427,000 shares. For the full year through today, we have spent $141 million of parent company cash to acquire 1.8 million shares. The parent started the year with liquid assets of $60 million. In addition to these liquid assets, the parent will generate additional free cash flow in 2014. Free cash flow results primarily from the dividends received by the parent from its 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 $141 million to purchase Torchmark shares, leaving approximately $300 million available to the parent for the remainder of the year. As noted before, we will use our cash as efficiently as possible. If market conditions are favorable, we expect that share repurchases will continue to be a primary use of those funds. We also expect to retain approximately $50 million-$60 million of liquid assets at the parent company. Now, regarding RBC at our insurance subsidiaries. We plan to maintain our capital at the level necessary to retain our current ratings.
For the last two years, that level has been around an NAIC RBC ratio of 325% on a consolidated basis. This ratio is lower than some peer companies, but is sufficient for our companies in light of our consistent statutory earnings, the relatively lower risk of our policy liabilities, and our ratings. At December 31st, 2013, our consolidated RBC ratio was 341%, and adjusted capital was approximately $70 million in excess of that required for the targeted RBC ratio. We do not anticipate any changes to our targeted RBC levels in 2014. Those are my comments. I will now turn the call back to Larry.
Thank you, Frank. For 2014, we expect that our net operating income will be within a range of $6.08 per share to $6.32 per share. Those are our comments. We will now open the call up for questions.
Thanks, sir. Ladies and gentlemen, we'll now begin the question-and-answer session. For those of you joining us by telephone, please press the star followed by the 1 on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the 2. If you're using speaker equipment, you'll need to lift the handset before making your selection. Our first question is from the line of Jimmy Bhullar with J.P. Morgan. Please go ahead.
Hi, good morning. Just had a couple of questions. First, Larry, you mentioned weather a couple of times. Maybe talk about if you did see an impact on your sales in either life or health or direct response from weather and whether that affected recruiting as well. Secondly, on the agent count, you saw a nice increase at American Income. If I look over the past couple of years, your agent count in the first quarter increased a decent amount, I think up 17% in the first quarter of 2012, 8% in the first quarter of 2013, then last year it actually declined in the other quarters. Is there seasonality in what your expectations are for the agent count at American Income through the rest of the year?
For Liberty National and for American Income, the severe weather did have a slight negative impact on both sales and recruiting. At Family Heritage, the agencies work primarily in rural areas where a majority of the sales involve travel of long distances to market the products. It was challenging to overcome those setbacks, in addition at Family Heritage, the inclement weather coincided with the company's major sales incentive weeks. With respect to the agent retention, we are not expecting a drop in agent retention at American Income later this year. We believe we'll continue to see the positive impact from the changes in compensation that we introduced in January. We will have better information regarding agent retention trends later this summer. Primarily, we're seeing three positive trends in agent productivity at American Income. Our total bonus earners increased in the first quarter.
Percentage of agents submitting new business on a weekly basis increased, the average premium submitted on-
Those three indicators would tell us that we believe our retention is going to better over the next quarter into the remainder of the year.
Were there any disruptions or any effect on your sales with the disruptions in mail delivery and stuff? Actually, in Liberty and at American Income, have you seen better trends in April as the weather's gotten a little bit better or not?
What we're seeing is the same trends in April at American Income and Liberty. Direct response was also affected by the bad weather, particularly in the insert media. Some of the delivery of the insert media was delayed, and that's lost because when you have bad weather, when the next mailing goes out, it's on top of the first mailing. Globe Direct Response had a strong first quarter, so that had a fairly minor impact upon the direct response operation.
Okay. Thank you.
Our next question is from the line of Erik Bass with Citigroup. Please go ahead.
Hi. Thank you. I was hoping you could discuss the current trends in the Med Supp business a little bit more. Are you seeing any pickup in demand for individual policies or any increase in disenrollments from Medicare Advantage at this point?
The Medicare Advantage disenrollments did not have a major impact upon the company. It was already estimated in the first quarter our production increased by approximately 10%-15% because of Medicare disenrollments. The growth we're seeing in 2014 in the general agency really comes from the individual sales, which is a result of strong recruiting and the implementation of a new e-application. In the group Medicare Supplement, we benefited from a large case written in the first quarter, that business tends to be a little bit lumpy. We're hopeful we'll see more large cases during the year, our guidance does not reflect that.
Okay. Maybe what are some of the dynamics in the group market in terms of competition or just margin trends in that business? You have had some relatively good sales in recent periods.
Again, the business is lumpy. It is a competitive market, they are continually quoting different large group cases and medium group cases. We price to a profit margin, and we either receive the business or we do not receive the business.
Just one on Part D. You have pretty strong margins there. Can you just remind us, what are you expecting or what's assumed in guidance for Part D margins for the year? Should we expect that they can hold up at first quarter levels?
It's pretty early in 2014 to really measure our claims experience. We expect margins in Part D for the year 2014 to be in a range of 10%-13%.
Okay. Thank you.
Our next question is from the line of Yaron Kinar with Deutsche Bank. Please go ahead.
Hi. Good morning, gentlemen. I have a couple of questions. First, on Liberty National's margins, which I noticed were off a little bit this quarter, and seem to be going maybe the wrong direction, certainly relative to the other segments. I was curious as to what was causing that and if you thought that that would correct itself as the year progresses.
Well, the impact of the first quarter was really in the decline. We had higher claims in the first quarter. Also the claims for the first quarter last year were a little bit low. At Liberty, the claims are high in the first half of the year, then it's higher than they are in the second half. Excuse me. It just so happened that the first quarter was high this year. Last year, the second quarter was over 40% as a percentage of policy obligation. It's a little bit of seasonality here. For the year, though, we expect the policy obligations at Liberty to be around 38%-39%, and that's compared to a little over 38% for last year.
Okay. On the excess investment income side, with yields pulling back a little bit kind of the beginning of the year, are you still comfortable with the initial guidance you gave for the full year? I think it was 5%-7% growth.
Yeah, I feel comfortable with the guidance we gave earlier. We did lower, though, our new money rate from 5.5% to 5.25%. 5.5% is what we used in our previous guidance because we have seen the market rates decline somewhat. We feel confident that we can hit the 5.25%. At that, again, I think we'll see increasing growth as the year goes on.
If I could, just maybe a quick numbers question, something I missed. Larry, I think you had talked about a 25%-35% sales growth guidance for the year. I missed for what segment that was.
That's for the United American General Agency. We expect health sales from the United American independent agents to be up approximately 25%-35%. Group health Medicare Supplement sales are projected to be up about 35%.
Thank you very much.
Our next question is from the line of Ryan Krueger with KBW. Please go ahead.
Hey, good morning. Thanks. I guess first I wanted to follow up on the Med Supp discussion. You have a pretty good outlook for the year. It sounds like there weren't a lot of This idea that Medicare Advantage funding pressures could go on over time.
I think Med Supp is a growing market. If you look at the demographics, certainly there are many people turning 65, so it'll be a growing market over time. Our sales really aren't dependent upon the assumption of any disenrollments from Medicare Advantage. What we're focusing on is recruiting agents to sell the Medicare Supplement business, and we've implemented a new e-application system that makes it easier for the agents to write the business of the United American Insurance Company. The growth is really driven here by our strong agent recruiting and our new e-application process.
Okay. Have you seen any changes in the competitive environment over the last year or so?
I think it's really the same environment. As I stated, we saw an increase in disenrollments in the first quarter. As we look at replacement forms, it's our estimate that those first-quarter Medicare Advantage disenrollments led to an increase in production of about 10%-15%.
Okay. I just had a couple quick weather-related ones. You noted a little bit higher claims at Liberty, which I know is typical of the first quarter from a seasonal perspective, but wondering if you thought the bad weather had caused any uptick in mortality rates in the first quarter.
I don't think the bad weather affected the mortality rate. When Gary's talking about a seasonal pattern, it's when we look back at Liberty over the many years, the claims tend to be higher in the first half of the year than the second half of the year.
Understood.
It may be the first quarter is a little higher, or maybe the second quarter as it was last year, but I don't think there's anything surprising here.
Okay. Just last one on Family Heritage, the sales weakness from the weather. Do you think that uniquely impacted that business because of its rural focus, or do you think that was more of an industry issue for kind of all supplemental health?
I think the weather uniquely affected Family Heritage. Again, most of our other agency force is for Liberty and particularly for American Income are in urban areas. The sales force travels long distances to market products. Given the bad weather in the upper Midwest and the East and even the South, it really had a negative impact upon Family Heritage. In addition, at Family Heritage, they have major incentive weeks, it so happened that the bad weather coincided with several of those major sales incentive weeks. The impact was greater at Family Heritage than our other two agencies.
Got it. Thanks a lot.
Our next question is from the line of Chris Giovanni with Goldman Sachs. Please go ahead.
Thanks so much. Good morning. I guess first question is just over the past several years, we've heard from several competitors that talk about moving down market. Maybe not all the way down to your target customer, but Met certainly rolled out its partnership with Walmart in some states. Others are seemingly working with what looks like the big box and department store retailers as customers seem to be more willing to purchase through retail channels. Wondering if you're seeing any signs of increased competition or any comments you can make around those strategies and impact it could have on your distribution.
We looked at our direct response operation, we also looked at each of the agency operations, we have not seen any evidence of increased competition in the field in our direct marketing.
Okay, any comments just in terms of maybe that direct through kind of the retail distribution versus mail or internet?
Well, life insurance is a product that doesn't sell itself. The need is sold in the agency, we believe in the agency system. We've had great success in direct response in all three channels, in direct response through the direct mail, the insert media. Our fastest-growing segment is electronic media. Part of the reason I can say we're not seeing an increased competition, if you look at the electronic media in the first quarter, our inquiries were up 40% compared to the same period a year ago. We don't think that'll continue for the full year, but we are expecting electronic media inquiries to be up at least 20% for the full year.
In electronic media, as we focus on the different areas, we're comfortable that Globe will continue to grow, it supports the other two segments or the other two channels in its distribution.
Okay, last question. Just wanted to get some perspective in terms of sort of how much runway you think you have with the higher face amount policies that you guys are selling direct.
A little slow answering. I'm just thinking about your question. Although the actual numbers of policy issued at the higher face amounts has increased, by offering the higher face amounts, we're also seeing an even bigger increase in policies issued across all policy face amounts. We'll continue to explore the higher face amounts, but we're finding is that helps our sales in the other smaller face amounts as we make those offers. We really rolled out, in the third and fourth quarter, the different rates, the different adult products. We're testing some other adult products now. In terms of that runway, I'd be more comfortable addressing that in the third and fourth quarter after we've seen the results of those additional tests.
When you talk about tests, are you talking geographically, even exploring further increases in the face amounts or both?
It's geographic, it's different packaging, it's different riders. There's a lot of different testing we do with these AIL products.
Chris, we've talked about in the past $50,000 being the maximum face amount, and we've increased that up to around $100,000. If your question is, are we going to go further up from $100,000, I'm not sure that happens. It's a little bit hard in direct response because we can't do a great deal of underwriting. It'd be difficult to go to higher face amounts than that.
Understood. Great. Thanks. Appreciate the comments.
Our next question is from the line of Mark Finkelstein with Evercore Partners. Please go ahead.
Hi. Good morning. Broader question on Family Heritage. You did talk about weather impacts in the quarter and expecting a better March and April. You've also talked about in the past, improving some of the recruitment tools of that business. I guess what I'm really curious about is if you look at the level of sales and you look at the level of recruiting generally, I assume it's probably been a little disappointing, and I'm just curious how you think about the performance of that business broadly relative to how you originally thought about it when you bought it.
I don't think it's been disappointing. I think we made some adjustments in the systems, including recruiting last year. As we look at this year-to-date, it was disappointing the first quarter because they were hit by the bad weather. As we move to the second quarter, we're seeing some positive indicators for both recruiting and sales. Our sales projection for full 2014 is a range of 2%-6%. We think the agent count at the end of the year for 2014 in a range of 675-725 agents. The growth at Family Heritage is going to come from the increase in the sales force. That's our focus, and we believe that as the sales force grows, that we're going to see greater growth in production follow that sales growth.
Mark, as to our expectations when we bought the company, we knew there were going to be significant changes made to the way recruiting was done. We expected this to take a little time to get Family Heritage up and going. We're not disappointed with it. We expected this timeline. As a matter of fact, we may be a little ahead of pace.
Okay, that's helpful. Just one follow-up on the American Income agent counts. You had a very strong first-year improvement, you did see a little bit of a fall off in renewal year. Is that just fluctuation or anything else going on there?
I think what the fall off is an indication of the retention issues we've had over the last 15-18 months. As we see better retention of first-year agents, we'd expect to see in the third or fourth quarter that those veteran agent numbers will grow. When you think about it, in any quarter, you're going to lose certain veteran agents. If you're not adding new agents that enter that 13th month, that number will be flat or will slightly drop.
Okay.
Mark, we're encouraged by the fact that when you look at the total agent count, the management count is pretty much flat with last year, but the growth has come in the writing agents. That's a good indicator because as we grow the number of agents, writing agents, they're the ones that will go into management. We think that that's a leading indicator that we'll see an increase in the management as well.
Okay. All right. Thank you.
Our next question is from the line of Steven Schwartz with Raymond James & Associates. Please go ahead.
Hey, good morning, everybody. Couple of numbers first. Frank, I think you typically talk about how you expect yield. You said that the yield should be about 5.9% for the year on average, but how should that develop quarterly? Could you give us that?
Yes. I think it drops. We're at 592 for the first quarter, and we really see it dropping probably just 1% to 2% basis points sequentially over the course of the quarters.
Okay. Then one of the things I noticed on Part D, there seemed to be a significant change in PBM fees. Anything up with that?
Yes, Steven. Including those PBM fees is a new fee that we have to pay under the Affordable Care Act. It's a little over 1% of premium. In addition to that, we renegotiated a contract, and there's additional cost for an option that we've agreed to where we can renegotiate the drug rebates in 2014. That adds a little bit to it as well.
Okay, great. Just a more general question. Exchanges. The group probably a bit overwrought all the discussion about exchanges with regards to active employees, but it definitely seems to be making headway in the retiree market. Given the big group case sale that you made, does United American play in that? Are you on these exchanges through the agencies? Does this affect you at all?
No, we're not on any exchanges currently. We are exploring opportunities in the supplemental health market. As we look at the exchanges, Obamacare, we're looking at those opportunities because we know there are going to be gaps and there'll be deductibles that can be filled. That's our focus.
No, Larry, I was talking about the private exchanges like run through Aon or Towers Watson or somebody like that.
We are not on those exchanges. I'm sorry. I thought you were saying are we on the public exchanges. Okay.
Okay.
We're not on those plans.
If those develop, will those affect the markets that you're in at all?
We don't think so.
It's certainly not going to affect our individual market and in the group, those are quoted individually. With those groups, it could be competition, but we think we'll still be competitive in those markets.
Okay, great. Thanks, guys.
Our next question is from the line of Mark Hughes with SunTrust. Please go ahead.
Thank you. Good morning. Have you gotten more flexible, perhaps opened up the top end in terms of the size of the group that you're willing to quote in the Med Supp business? Should we look for more big lumps, perhaps in the future?
That's possible. We do quote big groups, that's possible. It's almost impossible to predict that business, though. It's, in a sense, an opportunistic business, and we are going to maintain our profit margins. We don't cut profit margins based on the size of the group. We maintain a consistent profit margin, whether it's a medium or a very large group.
Are there more prospects? Are you quoting more for those very large groups?
I don't think it's more or less. I think they look across the market, and that's what that marketing group does, is they go out and try and contact as many groups, as many brokers as possible, and they're willing to write any size group. Obviously, there's a little less competition if you're in a group that has 2,000 members versus 20,000 members.
Thank you very much.
Our next question is from the line of Eric Berg with RBC Capital Markets. Please go ahead.
Thanks very much. Good morning to everyone. I have a general question about the health business and then a narrow one about the health business. My first question is as follows. It feels like it wasn't terribly long ago, say, within the last one to two years, that the health business was well in decline and with premiums falling sharply, and now they're falling a lot less sharply. Indeed, they were essentially flat. It seemed back then, at least to me, that Torchmark was heading towards becoming overwhelmingly a life company and much less of a health company than it had been in the past. My question, as we look forward, given the strength that you're enjoying now in Medicare Supplement and elsewhere in health insurance, is the health business turning around really? Is what I'm asking.
Do you anticipate a more balanced mix between life and health prospectively than what you would have said a year ago?
You have to remember, if you looked at 2010, 2011, and 2012, those declines you saw in our health line were largely the result of a large block of business that we wrote that would've been subject to the Affordable Care Act. We decided to exit that line of business in 2010. So you saw a significant decline. I think what you're seeing is a stabilization in our healthcare business because a large part of our Medicare Supplement business is growing in individual and also growing in the group. Long term, our focus will remain on life insurance. We certainly like the health insurance business, but we find the life insurance business to be more predictable in terms of its sales growth. It's easier to maintain a captive agency force in the life insurance business than it is in the health insurance business.
Yeah, I would agree with Larry. We do prefer the life business because not only the higher margins, but that's where the excess investment income comes from. I think there's a place for us though in the niches that we have in the health insurance side. For example, this year we're looking at premium income being flat. That's actually an improvement over the years you were talking about, Eric.
We expect to see some growth there, it's not going to be as much growth as we're going to have on the life side, and that's fine with us.
My second question is similar but more focused, and it is focused on the Medicare Part D business. Again, if my memory serves me correctly, when Medicare Part D first began several years ago, you had a burst of business, and then there was sort of uncertainty as to whether this drug-related business, drug insurance-related business would continue at the pace that it had been. There was a suggestion that it might fall off sharply, and now it seems to have stabilized. My question, do you see Medicare Part D remaining a meaningful and growing part of the business?
Well, I think, excuse me, Eric. Where we stand now, I think it's a meaningful part of our business. To say whether it's going to grow or how big it's going to be in the future is difficult because it is such a competitive market.
In addition to that, there's a difference between the auto-assign market and the non-auto-assign market, there's different levels of risk there, different, excuse me, uncertainty there. Also when you take a look at it, we like the business, the profit margin there is lower than it is on our life business. It's much more competitive. It's lower margin. We're glad to have the business, it's hard to predict in the future how big it will be or if it will be bigger.
Eric, I agree with everything that Larry said. We look at Part D as an opportunistic market. Every year, we bid to achieve our target profit margins. Every year, we're going to gain regions and we're going to lose regions. Currently, we're in about 20-25 regions out of the 35 possible regions. We hope to maintain that level of regions. If competitors decide to buy the business, we could lose regions in that competitive business line.
If the auto assign market becomes extremely competitive, we could lose most of our auto assigns, but we still have our regular market, our group market to rely on.
Very good. Thanks to both of you.
Our next question is from the line of John Nadel with Sterne Agee. Please go ahead.
Hey, good morning, everybody. I just have two. I think everything's pretty much been covered. I'm just curious, how big was the large group case that was written this quarter in United Agency on the Medicare Supplement? Just to give us a sense, how many lives?
On the Part D case, it was a large case. I think there were approximately 2,800 new lives.
Okay.
The annual premium announced about $7 million.
That's helpful. Thank you. I just have a quick numbers question. Option compensation expense grew on a year-over-year basis. Is the level that you see in the 1Q probably about what we should expect to see going forward?
Yeah, actually, John, it'll be Q1's always a little bit higher. It'll grade down just slightly over the remainder of the year. I think on an annual basis, the midpoint of our guidance, you should probably expect it to be around 4% of our net operating income before the stock option expense.
Okay. If I can sneak one more in, when you think about the range for your guidance, the 10%-13% range for the margin expectation for Medicare Part D, is that contemplated in the low and the high, or is there something more midpoint built in there?
Larry, go check that.
Yeah, as you get closer to the midpoint, you'd be looking at really an expectation of probably being at 11.5%-12%.
Okay. That's perfect. Thank you.
Our next question is from the line of Bob Glasspiegel with Janney Capital. Please go ahead.
Good morning, Globe Life.
Morning.
I love your annual report letter. Kudos to whoever's in charge of writing it. I noticed that towards the end, when you talk about use of free cash flow, for the first time you talked about a special dividend should the stock get at above your proprietary definition of intrinsic value. With the stock bouncing to a new high-- let me step back. You were active in the first quarter as the stock was down. I was wondering if the caveat that would drive the special dividend, is that sort of if you had another rocket ship year for the stock, or is it with the stock hitting sort of all-time high, are we getting in the neighborhood where the special dividend becomes a more reasonable option? You guys have been so good on capital management and investment management that I respect your judgment a lot.
Well, Bob, first of all, as we said in the letter, our first priority is to return the excess cash to the shareholder. Over the years, the share repurchases have outweighed our dividends. This last year or so is the first year our share price has gotten close to what we think intrinsic value is. That's why we mentioned the possibility of special dividend. That would be something we would have to visit with our board about. Absent an acquisition or absent other cash that would provide a strong return to shareholders, we would consider that if we felt we needed to suspend a share repurchase because of valuation. We're not there yet. We felt good about the share repurchase for the first quarter.
As you say, if we have another 30% increase in share price, which we're not expecting, but if we did, we recognize the fact that if we buy back the shares at prices that we can't justify, then that's bad for the shareholders. That's why we had the conversation about the special dividend as being a possibility.
I applaud your logic, and it's very sound. You're somewhere in between close and not near the point where you'd consider it? I guess that was.
From a historical standpoint, we're closer to the intrinsic value or what we feel the value of the stock is than we've been in past years. We're not close enough that we think we should suspend the repurchase.
It's not a fixed point. It's an ongoing analysis. We look at that every quarter. We discuss that with our board of directors, together we'll make a decision that we think is in the best interest of the policyholder, the shareholders, rather.
Thoughtful answer, Larry and Gary.
Thanks.
Our next question is from the line of Joanne Smith with Scotia Capital. Please go ahead.
Yeah. Most of my questions have been asked and answered. I just wanted to go back to American Income for a minute because you quoted some metrics in the Q&A regarding the fact that bonuses were up and the weekly submissions were up as well as total submissions. I'm wondering if you could give us a little bit of a feel as to how that played out through the quarter. If you think that all of the changes that you've made are really starting to hit stride now or if they're still on the cusp. Thanks.
We have better sales in the first quarter than we expected at American Income Life Insurance Company, that's really driven by the percentage of agents submitting new business on a weekly basis. We didn't really see the increase in the agents until about mid-February. We're seeing positive trends. With the new compensation program from mid-February on, not just new colored agents, we're seeing the number of recruits in a positive trend. It's a little early to see what the effect of that new compensation system is going to be. I think it'll be probably mid-July, early August, that we'll have enough data from January, February, March, that we can look at that third, fourth, and fifth month retention and see the real effect that is having.
Okay, great. I'll check back with you on that front. Thanks very much.
Sure.
Ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time. If you are using speaker equipment, you'll need to lift the handset before making your selection. We have a follow-up question from the line of Mark Hughes. Please go ahead.
Thank you. How much of the Globe Life inquiry volume or new policy volume is coming via electronic media?
I want to make sure I understand your question. You're asking what percentage of the direct response sales come from electronic media?
Exactly.
Estimate would be that about 40% of our sales come from electronic media. In electronic media, I'm including incoming telephone calls, the internet, social media, mobile search ads. Mark, it's hard to give you an exact percentage because as we have more electronic internet traffic, we see a greater presence on social media that also supports our direct response and our insert media operations. The three work in tandem. We would give you a rough estimate of about 40% of our new sales come from electronic media.
Thank you.
I'm showing no further questions at this time. I'd now like to turn the call back over to Mr. Major for closing remarks.
All right. Thank you for joining us this morning. Those are our comments, and we'll talk to you again next quarter.
Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.