Good day, ladies and gentlemen. Welcome to the Torchmark Corporation third quarter 2013 earnings release conference call. As a reminder, this call is being recorded. At this time, I would like to turn the conference over to Mr. Mike Majors, Vice President of Investor Relations. Please go ahead.
Thank you. Good morning, everyone. Joining me today are Gary Coleman and Larry Hutchison, our Co-Chief Executive Officers, Frank Svoboda, our Chief Financial Officer, and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Please refer to our 2012 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 third quarter was $133 million, or $1.43 per share, a per share increase of 11% from a year ago. Net income for the quarter was $132 million, or $1.43 per share, a 5% increase on a per share basis. With fixed maturities at amortized cost, our return on equity as of September 30th was 15.6%, and our book value per share was $37.60, a 9% increase from a year ago. On a GAAP reported basis with fixed maturities at market value, book value per share was $40.97, a 9% decrease due to the impact of higher interest rates on the valuation of our fixed maturity portfolio. In our life insurance operations, premium revenue grew 4% to $471 million, and life underwriting margins increased 7% to $139 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. Net life sales decreased 4% to $80 million. On the health side, premium revenue, excluding Part D, increased 23% to $209 million, and health underwriting margin grew 19% to $47 million. Improvement in the health premium and underwriting margin was due primarily to the addition of Family Heritage. Health sales increased 54% to $23 million, also due to the acquisition of Family Heritage. I will now turn the call over to Larry Hutchison for his comments on the insurance operations.
Thank you, Gary. First, let's discuss American Income, which generates approximately 46% of our net life sales. American Income's life premiums were up 8% to $181 million, and life underwriting margin was also up 4% to $59 million. Net life sales decreased 10% for the quarter to $37 million. The producing agent count at the end of the third quarter was 5,449, approximately the same as a year ago, but down 2% during the quarter. We are disappointed with the results of the third quarter at American Income. While the real driver of growth in this agency is going to be the development of new SGAs opening new offices, we did expect that the compensation changes made earlier this year would have had a more positive impact on sales and agent retention.
We continue to modify and tweak the compensation systems and are confident that these changes, which are scheduled for January 1st implementation, will eventually generate improvement, but our primary focus will be on opening new offices and the continual development of middle management to help ensure that we maintain a large pool of highly qualified SGA candidates. We expect a net life sales decline for the full year 2013 within a range from 2%-3%, but we expect sales growth in 2014 to be within a range of 3%-7% as the SGAs added in 2013 make an impact. Now Direct Response, which generates approximately 42% of our life sales. In our Direct Response operation at Globe Life, life premiums were up 4% to $164 million, and life underwriting margin increased 13% to $42 million. Net life sales were up 6% to $33 million.
Response rates continued to improve slightly during the third quarter. We are seeing positive results on rate adjustments and higher face amount offerings on adult insurance products implemented during the second quarter. We expect low to mid-single digit net life sales growth for the full year 2013 and mid-single digit sales growth for 2014. Now Liberty National. At Liberty National, life premiums declined 2% to $69 million, while life underwriting margin increased 3% to $19 million. Net life sales decreased 9% to $8 million, while net health sales declined 6% to $4 million. Producing agent counts at Liberty National ended the quarter at 1,320, down 6% from a year ago, but up 3% during the quarter. The turnaround at Liberty National has been a bit more difficult than we anticipated, and we were disappointed with results of the quarter.
While the transition to the new operating model and new mindset have been more challenging than expected in our traditional Southeastern rural offices, we are pleased with the progress of our geographic expansion. We opened four new offices in the second quarter, another in the third quarter, and we plan to open two more this year. We are confident that expansion into more heavily populated, less penetrated areas will generate long-term agency growth at Liberty beginning in 2014. We expect sales to decline within a range of 6%-8% for the full year 2013, but expect to see low single-digit sales growth in 2014 as we start to see the benefits of geographic expansion. Now, Family Heritage. Health premiums were $48 million, and health net sales were $11 million. While the results were slightly less than expected, we are still pleased with the integration of Family Heritage.
We continue to implement our internet recruiting system across the agency and believe that this will generate long-term sales growth as it becomes fully incorporated. For 2013, we expect health premium income to range from $191 million-$192 million, with margins as a percentage of health premium of about 18%-20%. We expect sales of approximately $43 million-$45 million in 2013 and mid-single-digit sales growth in 2014. Medicare Part D. Premium revenue from Medicare Part D declined 6% to $77 million, while the underwriting margin increased 25% to $9 million. Part D sales for the quarter fell 58% to $9 million due to the decrease in low-income subsidized enrollees for 2013. We expect a decrease of approximately 4%-5% in our Part D premiums for 2013, due primarily to price competition in the employer group market that we discussed on previous calls.
We expect an increase in Part D sales and premiums in 2014 as we have qualified to receive new auto enrollees in 15 regions in 2014 as compared to seven in 2013. We will be better able to quantify that increase on our next call. I will now turn the call back over to Gary.
To complete the discussion of insurance operations, administrative expenses were $45 million for the quarter, 11% more than a year ago. The increase is in line with our expectation and is due primarily to the addition of Family Heritage and an increase in pension costs. As a percentage of premium, administrative expenses for the full year 2013 should be around the same level as 2012. 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 $54 million, a decline of $1 million or 2%, but a 2% increase on a per share basis from the third quarter of 2012. The decline in dollars is due to lower new money yields and the call of $467 million of hybrid securities since June 30, 2012.
For the full year 2013, we expect the decline in excess investment income to be approximately 7%-8%. Reflecting the impact of share repurchases, we expect the decline in 2013 excess investment income per share to be around 3% compared to 2012. Regarding the investment portfolio, invested assets were $12.9 billion, including $12.3 billion of fixed maturities at amortized cost. Of the fixed maturities, $11.7 billion are investment grade with an average rating of A-minus, and below investment grade bonds were $586 million compared to $685 million a year ago. The percentage of below investment grade bonds to fixed maturities is 4.8% compared to 6.3% a year ago. With a portfolio leverage of three and a half times, the percentage of below investment grade bonds to equity, excluding net unrealized gains on fixed maturities, is 17%, which is less than most of our peers.
Overall, the total portfolio is rated A- compared to BBB+ a year ago. In addition, in the portfolio, we have net unrealized gains of $489 million compared to $1.6 billion a year ago. The decrease in net unrealized gains is due primarily to the recent increases in market interest rates rather than credit concerns. Regarding investment yield, in the third quarter, we invested $133 million in investment-grade fixed maturities, primarily in the industrial and utility sectors. We invested at an average yield of 5.2%, an average rating of A, and an average life of 30 years. The entire portfolio, the third quarter yield was 5.91%, down 42 basis points from the 6.33% yield for the third quarter of 2012.
The decline in the yield is due primarily to the addition of the lower yielding Family Heritage portfolio and the calls of the bank hybrid securities since the second quarter of last year. As of today, we still hold approximately $76 million of bank hybrids that we expect to be called at some point. However, we have not yet received a notice of intent to call on any of these securities. If all $76 million of these securities are called, the lost annual income related to these calls would be less than $1 million after tax. We are encouraged by the higher treasury rates due to the positive impact that higher interest rates would have on our excess investment income.
Even at the current new money rate, we would expect to see only modest declines in the portfolio yield over the next five years compared to the larger declines in recent years. This development is due primarily to the hybrid calls being behind us and the expected maturities coming from bonds with lower interest rates than in the past. Even sudden interest rate spikes would be beneficial as we have very little disintermediation risk, and we're not concerned about potential interest rate-driven unrealized losses in our fixed maturity portfolio. As we've said many times, we have both the intent and, more importantly, the ability to hold our bonds to maturity. 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 third quarter, we spent $85 million to buy 1.2 million Torchmark shares at an average cost of $70.45 per share. For the full year through September 30th, we have spent $265 million of parent company cash to acquire 4.2 million shares at an average cost of $62.44 per share. The available liquid assets of the parent consist of assets on hand, plus the expected free cash flow from operations. As we've said before, free cash flow results primarily from the dividends received by the parent from its subsidiaries, less the interest paid on debt and the dividends paid to Torchmark shareholders. The parent ended the second quarter with liquid assets of $117 million.
Assuming shareholder dividends remain at their current level, we expect free cash flow for the remainder of 2013 to be around $38 million. Along with the $117 million of liquid assets available as of September 30th, the parent will have around $155 million of available liquid assets for the remainder of the year. Of this amount, we expect to retain approximately $55 million-$60 million of liquid assets at the parent company. 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 the primary use of the remainder of the funds. So far in the fourth quarter, we have spent approximately $20.4 million to repurchase 284,000 shares at an average cost of $71.97.
Regarding RBC at our insurance subsidiaries, we plan to maintain our capital at the level necessary to retain our current ratings. For the last three years, that level has been around an NAIC RBC ratio of 325%. 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. Those are my comments. I will now turn the call back to Larry.
Thank you, Gary. For 2013, we expect our net operating income within a range of $5.68 per share-$5.72 per share. For 2014, we expect that our net operating income will be within a range of $6 per share-$6.40 per share. Those are our comments. We will now open it up for questions.
Ladies and gentlemen, if you would like to ask a question at this time, please press star one. If you happen to be using a speakerphone, please pick up the handset or depress your mute function so the signal can reach our equipment. Again, that is star one, we'll take our first question from Jimmy Bhullar from JPMorgan.
I had a question first for Larry. Maybe if you could discuss the driver of the decline in the agent count in American Income during the quarter and what gives you comfort that the results are going to improve. Secondly, on Part D expectations. Obviously, you're approved in more regions for auto enrollees next year than this year. I don't think you should see a commensurate increase in the premiums in the business, because I think the regions are going up to 15 from 8. Maybe you could discuss how much of a pickup you're expecting.
Jimmy, in the third quarter, the agent count didn't grow as we believe it would.
The SGAs, our managers, and our agents have not responded as quickly as we had hoped to the compensation changes initiated in the first and second quarter. We do believe we're going to have growth in 2014. In the first quarter, we're going to have a new Senior Life product and a change in our compensation payment system that should have a positive effect on agent activity. This compensation system change will result in agents being paid more quickly, which should also help with agent retention. We also have a change in management compensation to tie bonuses to recruiting results, and that Senior product will allow agents to utilize more of their leads. Part D, if I heard your question correctly, Jimmy, I think you're asking for guidance in what's going to happen.
Just expectations, because I think the number of regions where your auto-enroll is up almost twice as much next year versus this year. I think last year you had declined a lot, your premiums actually held up relatively well. Should we expect a huge jump in premiums because of the increased number of regions that you auto-enrolled in?
I think the guidance we give at this time is that we would expect the premiums for 2014 for Part D to be in a range of $330 million-$340 million, as compared to approximately $300 million in 2012. We'd expect the margin on that business, Jimmy, to be between 9% and 11%.
Gotcha. Thank you.
We'll take our next question from Yaron Kinar from Deutsche Bank.
Hey, good morning, everybody. I wanted me to start off with another question on American Income's headcount and how it pertains to sales growth. If I understood correctly, in the past, you talked about the bottleneck being middle management there. Yet when I look at the, let's say, renewal agents, or those with at least one year experience, that number has actually been growing at a nice pace every quarter this year. I'm wondering what else is going on there that's creating pressure on sales today.
Let's talk about middle management development first. Our middle management numbers really haven't changed since the beginning of the year because we haven't experienced growth in new agents. We just had fewer candidates for promotion to management positions. That slight decrease at the MGA level is in part because we've opened eight new offices, and we've promoted four other MGAs into open offices. I think we'll see that change next year as we pick up our agent recruiting, that begins to increase.
Okay.
Also, I would add, as far as the renewal agents growing, that is a pattern that we expect. When we talk about retention, the fact that our retention is not as good is in the first-year agents, and especially the first six months that they're involved. That's a retention figure that we're trying to improve.
Okay. Is the focus then more on these first-year agents, or is it still about growing the bench of potential middle management agents?
It's both. We know we need to grow middle management to have more SGAs to enlarge our offices or to expand our offices.
It's also important to have the middle management to train the new agents properly. I agree with Larry. It's both the agents and the middle management.
We talked about the compensation changes we initiated in the first and second quarter. Those compensation changes are directed towards first-year agents. What we're trying to do is have an agent that normally would have left in the third month, they would maybe leave in the fifth, sixth, or seventh month. We get that additional production from that agent that cascades through those numbers. Your fourth, fifth, sixth-month agents, we're hoping that with these compensation changes, that they receive a bonus as they stay longer, that they'll have more production for those first-year agents.
Okay. When you talk about these being somewhat disappointing results from your perspective, is the disappointment on the first-year agent growth, or is the disappointment on the middle management bench strength?
A disappointment at both levels.
Okay.
We have not had the first-year agent growth we expected because of the lack of retention, which is not responding to these compensation changes. Likewise, we just haven't had the activity levels that we'd expect from our managers in terms of recruiting, causing that activity as they train those agents. That's why we changed the compensation effective January 1st. It's a different compensation change. It ties that manager's bonuses to the activity of those first-year agents, and it also ties that bonus to recruiting new agents in the office.
Okay. Liberty National. If you're forecasting 6%-8% sales declines for the full year, that implies, call it, 10%-12% maybe sales declines in the fourth quarter. That seems like it's still going the wrong direction. I was curious, A, why we're still moving in the opposite direction from the desired direction, and B, how you get from there to a more positive environment in 2014.
We get there in two ways. First of all, agent productivity, we think, will come up in 2014. Agent productivity is slightly down because we just opened four offices the last quarter, we opened one this quarter, and we'll open several more. We have more experienced agents. As those agents become more experienced, they have a higher level of productivity. The other change we've had at Liberty National this year has been implementation of the laptop. That rollout will be completed by the end of November, and following that rollout, the laptop directors will begin to follow up to ensure that all the officers are using the laptop effectively. I think we talked about in the last call that changing that system actually is a little bit of a step backward. I would say that the other change is we've changed the culture, we've changed the recruiting methodology at Liberty National.
Some of the more experienced agents have left the system. We think that downturn is now complete. We'll start to build that agency count.
The other thing that I would add, you're right. Fourth quarter is projected to be about 11% decrease. That's one. It's a bad comparison. The fourth quarter of 2012 is by far their highest quarter from an issued standpoint. It'll be slight, but we'll see sequential increase in sales at Liberty in the fourth quarter, maybe one to two%.
Okay. Thank you very much.
We'll take a question from Sarah DeWitt from Barclays.
Hi, good morning. At American Income, can you just elaborate on what were the compensation changes you made previously that have caused so much disruption this quarter, and how do the new changes differ from the old ones, and why does that give you so much confidence that that'll be effective and we won't have an ongoing issue there?
Well, again, we were disappointed in the third quarter because, as I stated earlier, the SGAs, the managers, the agents didn't respond as quickly as hoped to the compensation changes. You have to think about agency. It takes a while to institute a compensation change and have that flow through an agency. When we make the compensation changes based on trends that we've seen six or eight months ago, our sales management is experienced. They were former SGAs. As they change that management, they first discuss that with the field. We then test those management changes, and then we have to see the implementation. For retention bonuses, you'll see what effect. If you roll out a retention bonus in the third quarter, it takes three, four, five months to begin to see the effects of that. We're confident that there's going to be a positive impact.
It's just been slower to hit that agency. Early in the year, we had reduced some management bonuses. You have to change your bonus systems from time to time to keep the compensation system as an incentive and a direct behavior. There was a negative reaction to those reductions. As we introduced the new management bonus system in January of 2014, Sarah, we believe that will have an impact and will bring the activity and enthusiasm of that agency back to a normal level.
Okay, great. Just switching gears to share buybacks. How do you think about the valuation there when buying back your stock, and is there a level at which you perhaps would slow or stop share buybacks?
Yeah. Sarah, I think we've talked about in the past. We calculate intrinsic value, what we think the intrinsic value of the stock is. We monitor the actual price to that intrinsic value. That's a very important consideration as to whether we buy shares. If we felt we were fully valued, we would stop share repurchase and use that cash for other means. Although our share price is closer to what we think fair value is, it's still not there yet. We still think that the stock is a good buy, especially when you consider the risk-adjusted return we get on share repurchases versus other alternatives that we can invest in.
We continually watch that, and if the price gets to the point where we think it is fairly valued, we will look at other uses of the cash, our preference is to return the cash to the shareholders, and that'd be a board decision, but we might consider a special dividend or whatever. We just don't feel like we've gotten to that point yet.
Okay. How do you measure intrinsic value?
It's a method we've used for years. It's just, without going into a lot of detail, we value the current equity and value the present value of future premiums or future income. I think we're fairly conservative with it. We also talk to other people as to what bankers know and what they think the value is. Again, we're not saying our value that we come up with is necessarily the best value. What we do is we constantly, and we've done this for years, compare what the shares are actually trading to what that intrinsic value is. It's always been less than that value, and it hasn't gotten to the point where the share price is at that value, that intrinsic value. That's why we can still consider the stock repurchase as the best use of the cash.
Okay, great. Thanks for the answers.
We'll take a question from Randy Binner from FBR Capital Markets.
Thank you very much. I'm going to hit sales again, but just from a different angle. With Torchmark, we talk a lot about very kind of granular details on agent recruiting, compensation, et cetera, which I appreciate. Just kind of thinking more broadly, Aflac U.S., CNO Financial, two names I cover, have seen lower sales than we thought they would be over the last few quarters. So I guess, moving away from the specifics, especially American Income more broadly, is there something going on out there that's making it harder for agents to be successful? Is it because of the economy, gas prices? Is there kind of an external environment change that you're seeing in your business that might be part of the explanation for some of these sales challenges?
No, I don't think there's an overall trend that's ruining sales. I do think it's more difficult for agents today to set appointments. With the advent of, or the onset of do not call lists, as people have moved away from landline phones to cell phones, it's harder for an agent to make appointments. We've overcome that as we introduce new software that helps them set appointments and be more efficient in their calls. I think if you look at, let's look broader at American Income. If you go back and look at historical trends, it's really unusual for American Income to have two very strong years in a row. If you go back in the last 10 years, there are four years where we have double-digit growth, 17%, 18%, 18%, 12% growth. There's also years where we have negative growth.
I can see years in that 10-year cycle, we're down 9%, we're down to 8%, we're down this year, projecting 2%-3%, following a double-digit growth year. What we do know is the cumulative growth is very strong and that your agency grows and your sales grow in a stairstep pattern. I think that's really what's going on at American Income.
Would the same comments apply? I was kind of talking broadly about the dynamic to Liberty. Same thing or that's a little bit different, right? It's a more narrow geographic set.
I would say Liberty is quite different. We restructured Liberty at the end of 2010 and took to a variable cost model. The current restructuring of Liberty is twofold. One is changing the culture of Liberty, that it's a growth culture, not a production culture. The second change is what we've talked about, is geographic expansion. We know to try and expand offices in the Southeast is probably not going to work based on the last 20 years' experience. What we do know as we look at these new offices, we can expand Liberty as they adapt to new systems for recruiting, for selling, that we're seeing positive results in these new offices. The future of Liberty is really a different future, which is to expand outside of the Southeast to adopt these new systems.
All right. Thanks for the response.
We have a question from Mark Finkelstein from Evercore.
Good morning. Direct Response, I guess we'll go through sales again. I guess I was a little surprised that they were up 6%, pretty easy comp. You have a new product with a kind of higher face value that should attract a different audience. What is going on there, and what gives you the confidence that that should improve?
Well, we think in the fourth quarter at Globe, that strong growth is to come from our adult insurance product rate implementation and our continued introduction of higher face offers. We have internet inquiry fulfillment, some new packaging coming out. Remember that Globe, when we talk about a rollout, it's not a single rollout. As we roll out the adult product, we're doing further testing on packaging on rates, and we see some further growth, not just from the rollout, but as we tweak the packaging and the pricing of that product as we go forward. We feel very good about Globe Life and their 2014 sales results that are projected.
Is there anything in these response rates that kind of has changed fundamentally?
No. As we said, we saw a slight improvement in response rates in the third quarter. We saw a noticeable increase in inquiries from electronic campaigns. Our non-electronic circulation inquiries are about the same. A part of the response rates are tied to the economy. We're pleased that we're seeing some progress in the economy on jobs. Gas prices have been stable. We think those are the improvements that help response rates.
Okay. Then just on Family Heritage, I guess I was surprised by the agent decline. I was also surprised by the sales decline sequentially. Obviously, this is a recent acquisition. You're focused on changing the recruiting dynamics and focused on geographic expansion. Is this just part of the kind of the ongoing integration, or are there any things that we need to be worried about on this?
No, I think it's part of the ongoing integration. We need to remember that Family Heritage has just completed its first year under Torchmark after spending its first 23 years as a private company. It's taken some time for them to acclimate to our new recruiting system. We have different incentives. There are cultural changes. We think this is going to be a temporary adjustment, and part of our optimism is based on the fact that Family Heritage has not lost a single owner of any of their agencies since being acquired by Torchmark. In fact, we've added several agency owners this year who we think will have a positive impact on 2014. The other change at Torchmark is we're going to provide Family Heritage with some additional product and marketing support through the fourth quarter of 2013 into 2014 that should further help their results.
We're optimistic about some growth at Family Heritage in 2014.
Okay. All right. Thank you.
We have a question from Christopher Giovanni from Goldman Sachs.
Thanks so much. Good morning. Just wanted to follow up on Direct Response. Are there any numbers you can give us in terms of maybe the percentage of new sales that are above kind of the original 50,000 limit? I guess, how should we be tracking the penetration of the higher face amount policy?
Chris, I don't have those specific numbers in front of me. I can tell you it's reflected in our guidance for the fourth quarter and for the full year 2013 into 2014.
Okay. Then, I guess, at this point, how should we be thinking about Liberty? I think mid-year, I think you talked about sort of being the most optimistic you've been in some time around there and clearly pointing to the laptops as an opportunity. Has it just been just a slower implementation of the laptop strategy or I guess what's kind of derailed the stories? Clearly restructuring took place during 2012. Then do you still have the confidence that kind of 10%-12% growth longer term, setting aside maybe 2014 still being a transition year? Do you still feel like that's a metric you can achieve?
I don't think the story at Liberty has changed. I think we're still optimistic. As I stated, it has taken longer to implement the changes in the system. Remember that the laptop is only for the individual life sales, which is about half of the sales at Liberty National. It will take until November to fully roll that out. Once it's rolled out, you have to go back and inspect that system, it's not an instantaneous change or an improvement. We'll see results of the laptop in individual sales through 2014. Remember that at Liberty, about half those sales are in the workplace, and there was a new system introduced for workplace sales in terms of how you recruit to that, how you prospect on that.
It's taken most of 2013 to implement also the new work site selling system, and we should see the benefit of that into 2014. I probably have been too optimistic about Liberty. I'm optimistic about the long-term results. It's just it takes longer than we anticipate to change systems, change recruiting, change culture in a company.
Okay, lastly, just the over six month retention rate at American Income. Where do we stand on that today?
Are you talking about 13-month retention for agents or?
Yes
I don't have the numbers in front of me. We look at retention from first month through 13th month retention. Over time, you can read that as you see the agency gradually grow or not grow. Off the top of my head, I can't tell you what that number is for six-month retention.
The 13-month retention is down a little bit. I don't have the exact numbers in front of me. What we do know is that it's down because we're losing them in the third to sixth month at a greater rate than we have in the past.
When I talk to Scott Smith, the President of the company, and Roger Smith, the CEO, they're somewhat optimistic. What they see is some uptick in recruiting numbers. As the uptick in the recruits come through that pipeline, those recruits turn into quoted agents that are selling business. As you have more agents that are selling business, your retention rate should go up. Again, they're optimistic. Based on the testing that they've done with the compensation changes, they think we'll see retention gradually increase starting in the first quarter of 2014.
The six month has certainly been critical because I guess over half the sales come from agents that have been there longer than six months. That's your focus. You think this commission structure will help address that kind of lower retention rate?
I think the commission structure addresses the retention. Remember, there's two changes to the compensation system. The first is a bonus system that rewards longer retention. The second is a change in bonus levels that increases activity. As you increase activity of agents and you increase activity of managers, it reflects on a higher retention rate.
Got it. Okay. Thanks so much.
We have a question from Vincent Lee from Morningstar.
Hi, good morning, and thanks for taking my question. Just want to go take a look at the investment portfolio. I noticed that you've been gradually increasing the duration of the bond portfolio from about 26 years to 29.7 years this quarter. Can you give some general comments on that? Is that a change in strategy where you're trying to position in some ways for rising rates in the future?
Vincent, there really hasn't been a change in strategy. A lot of it depends on what's available in the market. We do invest long, as we've talked about before, because our policy liability is long. If you go back and look at the last Four or five quarters. It varies because the third quarter of last year, I think it was 23 years.
It's been around 25, 26. I think the 29-
Maybe the highest.
We haven't changed the strategy. I just think that's what was available.
Okay. All right. Okay, thanks a lot.
We have a question from Bob Glasspiegel.
Good morning, Torchmark. Question, it seems like some of the tweaks that you're making to try to get sales going are offering the agents a little bit more, or the customers a little bit more, and there's a trade-off between margins and sales that you're balancing all the time. With margins very strong and sales a little bit disappointing, are the changes you're making margin neutral or margin negative, recognizing that new sales don't move the aggregate needle that much?
Changes are margin neutral, Bob.
Margin neutral?
Yes. Margin neutral. The changes aren't just compensation. We recognize compensation is the biggest driver of agent activity and retention. There's also system changes. The lead mapping system I talked about makes those agents more effective, so they have more presentations they can make in a week. Another positive we see within American Income, they've increased their lead flow by about 10% this year.
That's a positive. We know that agents have more leads to set more appointments, have higher sales. As that increases their income, they're going to stay with the company longer and hopefully transition into that management role. There are systems, there are lead changes besides the compensation that we think are positive signs that point towards the higher growth rates in 2014.
Bob, we've always had bonuses, and we allow for bonuses in setting our pricing and our margins. What we're talking about is moving that margin money to incentivize different behavior. It's all part of our normal margin.
Okay. I didn't hear, did you give your estimate for statutory earnings for 2013 and what the free cash flow for 2014 might be?
Yeah, Gary, I'll go ahead and take that. We did not give an estimate on as far as statutory earnings was concerned for 2013. We have not yet completed our third quarter statutory results. We do think that our RBC as of the end of the year should be roughly in line with where we were at the end of 2012. Far as what's built into the midpoint of our guidance for 2014, we're estimating free cash flow stock buybacks in the range of $360 million-$370 million.
Okay. It's fair to say this should be a good statutory earnings year given the lack of credit issues that have hit the portfolio. Is that a fair assumption?
Yeah, investment income, there's still a drag on investment income just in general on statutory, just as you've seen on the GAAP side.
Right. I'm talking about credit losses aren't hitting like you're modeling. You allow for certain credit losses a year in your modeling.
From a credit loss perspective, it's been a very good year.
Bob, we'll give better estimates when we do the fourth quarter call. We'll have statutory information by then to give a better estimate.
Okay, no guesstimate of how nine months is running versus a year ago, just the percentage increase?
Yeah, I really don't have that.
Full perk.
I really don't have that at this point.
Got you. Thank you very much.
Ladies and gentlemen, that is star 1 if you have a question. We'll take a question from Erik Bass from Citi.
Hi, thank you. Just a question on productivity at American Income. It looks like if we just look at sales versus agent growth over the past year or so, the sales have lagged, suggesting that productivity has declined. Can you just talk about what's driving this? I realize some of it is probably mix of new hires. So maybe if you have any data on how productivity is trending for agents with different amounts of experience.
Well, I have it overall, that if you look at per agent production in 2013 versus 2012, per agent production has decreased in 2013, but only about 3% as compared to 2012. As I stated earlier, I think part of that is more difficult to set sales appointments over the telephone. To offset that difficulty, we're making system changes. Productivity is tied to agent activity. As we see more agent activity, we'll see our productivity slightly rise.
Okay. Maybe just another question on just how you view some of the new initiatives that competitors are rolling out to try to reach more middle-income consumers, things like kiosks at Walmart, whether you view that as a competitive threat. I guess, would just be interested in your opinion on how much potential you think alternative distribution models have in the lower to middle income segment of the market.
We don't see it as a threat. What we know is we serve an underserved market, and when we look across our distribution, what we're not seeing is any replacement activity from competitors. Also, we're the only agents in the home. We're in a niche, particularly with our union business. It's not a competition issue for us as people try and seek the middle-income market. Life insurance is something you have to sell across the kitchen table
We'll take a look at what they're doing with those kiosks, it's not a product that sells itself. We're more comfortable to make sales projections looking at agency growth as the driver of production rather than worrying about new products or the competition. We're really a sales organization. Our focus is growing that sales organization to reach more of that middle-income market.
Okay, thanks. Appreciate the thoughts.
We have a question from Mark Hughes from SunTrust.
Thank you. Good morning.
Good morning.
Did you give us an estimate for excess investment income, either on an absolute basis or a per share basis for next year?
Yeah, Mark, we've had a decline in excess investment income this year of 7%-8%. We're going to reverse that next year. In dollar amount, excess investment income should increase in the 7%-8% range. A good part of that is because we're going to see growth in investment income. The $467 million of hybrid calls had a tremendous impact, reduction-wise, on the 2013 income. As I mentioned earlier, that's behind us. Now, with the higher new money rates, the growth in investment income won't be as high as the growth in assets, but it's going to be much closer. We'll see growth in the income and our policy obligations. The interest on policy obligations will grow at about the same range. Actually, our interest on the debt calls will be lower.
When you add all that together, you get to about a 7%-8% increase in the midpoint of our guidance.
Great. Thank you.
We have a follow-up question from Yaron Kinar from Deutsche Bank.
Hey, thanks for taking the follow-up. Just one question on kind of the 2014 sales guidance. Since a lot of it depends on the initiatives and the tweaks of existing initiatives, should we expect the sales growth to be kind of back-weighted next year, or is it roughly even throughout the year?
I think it'll be a little bit back-loaded because if you put in initiatives in the first quarter, you'll see those flow through more in the second, third, and fourth quarter than the first quarter. That'd be our expectation. That's not true with the Direct Response because those initiatives were started in the second and third quarter of this year. It's to do with additional testing. I think we'll see the same kind of growth out of Globe Life and Asset that we saw this quarter and is projected for the fourth quarter. That's in our guidance.
Great. Thank you very much, good luck.
Once again, ladies and gentlemen, that is star one if you have a question at this time. It appears we have no further questions.
All right. Thank you for joining us this morning. Those are our comments, we'll talk to you again next quarter.
Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation