Good day, and welcome to the Torchmark Corporation second quarter 2013 earnings release conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to 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, and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2012 10-K and any subsequent form 10-Q on file with the SEC. I will now turn the call over to Gary Coleman.
Thank you, Mike, and good morning, everyone. Net operating income for the second quarter was $133 million, or $1.42 per share, a per share increase of 9% from a year ago. Net income for the quarter was $134 million, or $1.44 per share, also a 9% increase on a per share basis. With fixed maturities at amortized cost, our return on equity as of June 30 was 15.6%, and our book value per share was $36.73, a 10% increase from a year ago. On a GAAP reported basis with fixed maturities at market value, book value per share remained flat at $41.19. In our life insurance operations, premium revenue grew 5% to $475 million, and life underwriting margins increased 9% to $136 million.
The growth in underwriting margin exceeded the premium growth due to lower amortization of deferred acquisition costs and the deferral of certain Direct Response internet acquisition costs that previously have not been deferred. 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. Frank will discuss the deferral of internet costs in just a few minutes. Finishing life, net life sales increased 2% to $91 million. On the health side, premium revenue, excluding Part D, increased 23% to $218 million, and health underwriting margin grew 25% to $50 million. Improvement in the health premium and underwriting margin was due primarily to the addition of Family Heritage. Health sales increased 88% to $24 million, also due primarily 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. At American Income, life premiums were up 9% to $178 million, and life underwriting margin was also up 5% to $57 million. Net life sales increased 2% for the quarter to $41 million. The producing agent count at the end of the second quarter was 5,540, up 4% from a year ago, but down 1% during the quarter. While net sales increased less than we expected for the second quarter, we are not discouraged. We're pleased that the first quarter sales decline was reversed and believe this agency is moving in the right direction. American Income has had a long history of stairstep growth, and continual adjustments have always been needed to ensure long-term agency growth.
We continue to make changes to address new agent retention and agent productivity, we're adding new SGAs in certain existing territories where we have large offices with slower growth rates. We expect sales growth for the full year 2013 to range from 3%-6%. Now, Direct Response. In our Direct Response operation at Globe Life, life premiums were up 7% to $169 million, and life underwriting margin increased 24% to $43 million. Net life sales were up 3% to $40 million. Response rates began to improve during the second quarter, as we mentioned last quarter, we are confident that our new initiatives will help further increase response rates in 2013. We introduced rate adjustments and higher face amount offerings on adult products late in the second quarter. We expect mid-single-digit sales growth for the full year 2013. Now, Liberty National.
At Liberty National, life premiums declined 2% to $69 million, while life underwriting margin was down 1% to $17 million. Net life sales grew 2% to $8 million, while net health sales declined 5% to $3 million. The producing agent count at Liberty National ended the quarter at 1,283, down 5% from a year ago and down 7% during the quarter. While the agent count was down, we continue to make progress with the turnaround at Liberty National. As we've said many times, this is going to be a slow process. The changes we have made have begun to improve agent productivity as life sales increased during the second quarter despite the decline in agent count. With regard to the agent count, geographic expansion into more urban areas is the key to growth at Liberty National.
We opened four new offices in the second quarter, and we plan to open three more this year. We expect this to generate long-term agent and sales growth. Sales growth is expected to range from 2%-5% for the full year 2013. Family Heritage. Health premiums were $48 million, and health net sales were $11 million. As we previously indicated, we intend to grow this agency through geographic expansion and implementation of our internet recruiting program. For 2013, we expect health premium income to range from $189 million to $193 million, with margins as a percentage of health premium of about 18%-20%. We expect sales of approximately $46 million to $48 million in 2013. While our sales guidance is slightly lower than before, this agency continues to show steady sequential growth in agent count and health sales while being integrated into Torchmark. Medicare Part D.
Premium revenue for Medicare Part D declined 6% to $73 million, while underwriting margin decreased 1% to $8 million. Part D sales for the quarter fell 63% to $8 million due to the decrease in low-income subsidized enrollees for 2013. As we've mentioned before, we aren't receiving as many new auto enrollees under the Low-Income Subsidy program in 2013 as we did in 2012. We don't have the type of sales and premium growth we had in 2012. We expect a decrease of approximately 5%-7% in our Part D premiums for 2013, due primarily to price competition in the employer group market that we discussed previously. I will now turn the call back to Gary.
To complete the discussion of insurance operations, administrative expenses were $44.1 million for the quarter, 11% more than a year ago. The increase is in line with our expectations and is due primarily to the addition of Family Heritage. As a percentage of premium, administrative expenses in 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 $55 million, a decline of $8 million or 12%, 8% on a per share basis from the second quarter of 2012. This decline is due to lower new money yields and the call of $467 million of hybrid securities since June 30, 2012.
For the full year of 2013, we expect the decline in excess investment income to be approximately 7%-8%. However, reflecting the impact of share repurchases, we expect 2013 excess investment income per share to be down around 3% compared to 2012. Regarding the investment portfolio, invested assets were $12.8 billion, including $12.2 billion of fixed maturities at amortized cost. Of the fixed maturities, $11.6 billion are investment grade with an average rating of A-minus, and below investment-grade bonds are $585 million compared to $764 million a year ago. The percentage of below investment-grade bonds to fixed maturities is 4.8%, compared to 6.9% 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-minus compared to triple B plus a year ago. In addition, we have net unrealized gains in the fixed maturity portfolio of $652 million compared to $1.2 billion a year ago. The decrease in unrealized gains is due primarily to the recent increases in market interest rates rather than credit concerns. Regarding investment yield, in the second quarter, we invested $305 million in investment-grade fixed maturities, primarily in the industrial and utility sectors. We invested at an average yield of 4.07%, an average rating of A-minus and an average life of 26 years. The new money yield decreased despite the increase in Treasury rates during the second quarter due to the following reasons. First, on a one-time basis, we invested $43 million for Family Heritage in securities with shorter maturities than usual due to asset liability matching considerations.
Had this money been invested longer term, the average yield on total acquisitions for the quarter would have been around 4.2%. Also contributing to the lower new money rate is that most of our investments were made early in the quarter when Treasury rates were actually lower than they were in the first quarter. For the entire portfolio, the second quarter yield was 5.95%, down 48 basis points from the 6.43% yield in the second quarter of 2012. Of this decline in yield, excuse me, 14 basis points was due to the addition of Family Heritage, and 13 basis points was due to the $467 million of bank hybrids called since June 30, 2012. On the last call, we indicated that we still held approximately $159 million of bank hybrids expected to be called in 2013. In the second quarter, $63 million were called.
In addition, we have determined that another $20 million is now unlikely to be called leaving $76 million of those bank hybrids that we expect to be called. As of today, we have not received a notice of intent to call any of these securities. However, if all $76 million of these securities are called, the lost annual income will be approximately $1 million after tax. On past analyst calls, we have discussed in detail the current low interest rate environment and the impact of a lower for longer rate scenario. As discussed, our concern regarding the extended period of low interest rates is the impact on earnings, not the GAAP or statutory balance sheets. Even so, Torchmark would continue to earn a substantial excess investment income in an extended low interest rate environment.
We are encouraged by the recent increase in Treasury rates due to the positive impact that higher interest rates will have on our excess investment income. Even sudden interest rate spikes would be beneficial as we have very little disintermediation risk, and we are not concerned about potential interest rate-driven unrealized losses in our fixed maturity portfolios. As we have said many times, we have both the intent and, more importantly, the ability to hold our bonds to maturity. Now 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 second quarter, we spent $90 million to buy 1.43 million Torchmark shares at an average cost of $62.77 per share. For the full year through June 30th, we have spent $180 million of parent company cash to acquire 3 million shares at an average cost of $59.26 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 $138 million, including $94 million that has been invested to redeem our senior notes that mature on August 1st, 2013. Assuming shareholder dividends remain at their current level, we expect free cash flow for the remainder of 2013 to be around $206 million. Along with the $138 million of liquid assets available as of June 30th, the parent will have around $344 million of available liquid assets for the remainder of the year. As previously noted, $94 million of these assets will be used to redeem our senior notes on August 1st, and we expect to utilize approximately $20 million in other financing activities, leaving the parent with around $230 million of liquid assets for the remainder of the year. Of this amount, we expect to retain approximately $50 million at the parent company.
As noted before, we will use our cash as efficiently as possible. If market conditions are favorable, we expect share repurchases will continue to be a primary use of the remainder of the funds. 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. Before I turn the call back to Larry, I would like to briefly make just a couple of comments related to the change in the treatment of certain Direct Response acquisition expenses.
During the second quarter, we began deferring Direct Response advertising costs related to our internet campaigns. As we've discussed on prior calls, Direct Response advertising costs qualify for deferral treatment, provided certain requirements in the accounting literature are met. One of these requirements is that we maintained detailed historical data to support a probable future benefit of the advertising. We initiated our Direct Response advertising through the web around 2007. Thus, at the time of our adoption of the new accounting guidance related to the treatment of acquisition expenses in 2011, we did not have sufficient historical data to adequately support deferral of these internet related costs. We have been building on that data since 2011 and now have developed sufficient historical data to firmly support the deferral of these costs going forward.
As a result of this change, non-deferred acquisition expenses related to Direct Response decreased approximately $4 million to $1.6 million in the second quarter, or to about 1% of our Direct Response premium. For the third and fourth quarters, we anticipate that the amount of non-deferred acquisition expenses for Direct Response will be approximately the same as in the second quarter, resulting in approximately $12 million less in non-deferred acquisition expenses for the full year of 2013. This reduction will be offset by an increase in amortization expense over the year of approximately $1 million due to the additional deferred expenses, resulting in an $11 million reduction in total Direct Response acquisition expenses. For the full year 2013, we estimate that our underwriting margin for Direct Response will be approximately 25%, as compared to 23% in 2012.
Overall, the effect of the change, net of the increased amortization and net of income taxes, was to increase our second quarter earnings per share by approximately $0.025, and has been reflected in our revised guidance. Those are my comments. I will now turn the call back to Larry.
Thank you, Frank. For 2013, we expect our net operating income will be within a range of $5.60 per share to $5.75 per share. Those are our comments for this morning. We will now open it up for questions.
Thank you. Ladies and gentlemen, to ask a question today, please press *1 on your telephone keypad. If you are on a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, to ask a question today, please press *1. Our first question will come from Jimmy Bhullar from JP Morgan.
Hi, good morning. First, I had a question on just the agent count. It had begun to recover, and this quarter dropped at both American Income and Liberty National. Liberty's actually been down for two consecutive quarters. The first one's just what's going on there, what's driving that? Secondly, are you still comfortable that you could achieve your sales growth targets if the agent count doesn't begin to pick up? Another question just on your expectations for Part D enrollments in 2014, and what type of products are you planning, and are you expecting a pickup in auto enrollees next year?
Jimmy, this is Larry. I'll address Liberty National first. As our new systems were implemented, we just found that agents did not meet the new activity levels required, and those agents left the agency. Also, our new training processes at Liberty National and the implementation of the laptop presentation for individual sales have limited agents' or managers' recruiting efforts for the first six months of 2013. Our guidance for agent growth at Liberty National is at year-end, we believe the agent count at Liberty National will be between 1,400 and 1,500 agents. At American Income, what we found is our initiatives to improve agent retention did not give us the desired results as quickly as we had hoped. Also, our agent recruiting didn't reach the level needed to achieve double-digit agent sales growth in the second quarter.
Again, we have initiatives that are changing at American Income, and our guidance for agent growth is that the year-end agent count at American Income should be in the range of 5,800 to 6,000 agents. In terms of Part D in 2014, Jimmy, it's really too early to give guidance on 2014 Part D sales. We've submitted our bid, but we don't see the results of those bids until October, November of this year.
Just maybe one more on Family Heritage, as you've had the company for a few quarters now. What have been sort of the positives or negatives versus what you might have assumed initially? What's your longer term expectation for growth of that business?
At Family Heritage, the integration is going very well. We've not lost a single agency director since the acquisition. Our internet recruiting system is coming online at all agencies, and Family Heritage sales directors are now familiar with the system, and they can manage their resume volume. In addition, in response to the growth we're seeing at Family Heritage, we've hired a full-time recruiting director to manage internet recruiting at Family Heritage. Family Heritage has also hired a director of agency development to support new agency directors. Jimmy, this year we've added approximately nine new agency directors. Again, to avoid confusion on the call, when we talk about agency directors at Family Heritage, those are the SGAs or those are the managers in the other two systems. When we use the term sales director, that means a new agency head within Family Heritage.
With the increase in agency counts that we see sequentially, we think there's good growth prospects at Family Heritage.
Thank you.
Our next question will come from Erik Bass with Citi.
Hi, good morning. Thank you. I was hoping you could talk a little bit about competition both in the life and health businesses. On the life side, you're seeing more insurers beginning to focus on the middle market consumers, although they are often using different distribution than you are. I was just wondering, are you seeing that your customers have more options for purchasing insurance than they have historically? On the health side, I've also seen increased focus on supplemental products from some insurers, and has there been any noticeable impact on pricing there?
With respect to life insurance, we have not seen any impact of other insurers entering the middle income market. We're still seeing that when we make presentations in our customers' homes, we're the only agent in that home, and we're not seeing any replacement activity that results from those sales. The second question, I believe, was health insurance.
Yes.
Again, there in our health insurance, we're in a niche with Family Heritage. They operate in basically rural areas, and we're the only agent that is at home making those presentations. On the Medicare supplement, obviously, is a very competitive market, although we've seen good growth in our Medicare supplement sales, particularly in our GA distribution. Health sales for the UA independent agents, which is primarily Medicare supplement, were up 17% in the quarter. We think for the year that within that agency, we're going to have double-digit sales growth in the independent agents. That's low double-digit sales growth, it'd be 9% or 10%, in that range. Again, we're not seeing competition affect our sales.
Okay, thanks. That's helpful. Just one on American Income. You mentioned you added some more SGAs this quarter and the opportunity to add additional SGAs in sort of slower growth markets. I'm just wondering, what is the opportunity to add there, and how much middle management capacity do you have currently to fill those roles?
What we've seen is improved middle management capacity because we really focused on middle management at American Income over the last two years. As we stated earlier in the call, on January 1, 2013, our SGA count was 64. We've added the 8 SGAs in the second quarter, or selected the 8 SGAs in the second quarter. That brings our total to 72. We anticipate by year-end 2013, we'll be at 75 SGAs. I'm not going to give guidance for next year, it's our expectation that we'll be adding additional SGAs next year in those areas where we don't have high growth rates. We know we have plenty of leads. We have resumes to recruit agents. We will be adding additional SGAs.
Okay, thank you.
Our next question will come from John Nadel with Sterne Agee.
Hey. I think it's still good morning in Texas. Good morning. The question, I guess, two places where I wanted to focus. One, obviously some challenges at Liberty, but really wanted to more focus on American Income and agent count growth. The target for year-end is largely unchanged, right, despite some pressure in 2Q. I guess I'm just wondering if you could just help us understand where your confidence comes from. What are the specific efforts that have been put in place? Or can you talk at all to any sort of progress in July that helps us feel better about the turnaround there?
John, this is Larry again. It's really not July progress that we're focused on. The reason we're expecting a stronger third and fourth quarter is because the changes that we introduced in the first and second quarter really focus on increased agent activity, and we have compensation changes that focus on improved agent retention. We think those are going to have greater impact on the third and fourth quarter. The other change at American Income is that starting in August, we're going to introduce another compensation change at the agent level. There'll be a bonus that's delivered to the agents as they have longer retention.
Okay.
I kind of emphasize this, we talk about agent retention, we're not talking about 12-month agent retention. We're talking about increased agent retention in the third, fourth, fifth, and sixth months through that 12 months.
Understood. Okay. I'm sorry. Did I interrupt?
Yeah, John, I was just going to add that as Larry alluded to, we had to make adjustments along the way. A couple of years ago, we identified getting agents to the level where they were getting the top bonus as a means of growing the agency. What we found is that through supervision training, we were getting them to the top bonus level, but we weren't staying with them or helping them to stay at that level, and so that contributed to the lower retention. The things that Larry pointed out, especially bonus at the agent level as they improve their tenure, I think will not only help us to get them to the level they need to be able to stay there in order to not only make it to the fourth, fifth month.
If they can make it about halfway through the year, they have a much better chance of making it through the full year.
Okay, understood. Then, really nice rebound in Direct Response this quarter. I know that last quarter you had talked about some initiatives there. Maybe you could help us understand where the success was. In particular, I know that you had talked about introducing through Globe Life the opportunity for higher face amount on the life insurance side, and I'm wondering if you have any success with the higher face amount product.
John, this is Larry. I'll answer that in two parts. The first is really regarding response rates. Overall, Direct Response saw an improvement in response rates in the second quarter. Let's break that down a little bit. May and June, we really didn't see an improvement in response rates for circulation inquiries, but we did see a significant increase in response rates for our email campaigns, and our mailing response rates were much better in the second quarter than the first quarter of 2013 or the final quarter of 2012. We're definitely seeing an overall increase in response rates. I think your other question is really the rollout of our rates and our adult products, there we are seeing good early results, and that's reflected in our guidance for the third and fourth quarter of 2013.
Okay, very good. Thank you very much.
We'll now go to a question by Mark Finkelstein from Evercore.
Good morning. I actually want to go back to American Income as well. I guess I'm just trying to put the mosaic together. The sales outlook was moved from 10%-14%, down to what? 3%-6%, or whatever the number was. You really aren't changing the outlook on agents for the year. I think you said last quarter, 5,900, 6,000. Now you're 5,800-6,000. Why the sizable drop in sales, given that the agent count? Is it just because of the impact of the second quarter and the steeper ramp to getting back to that agent count? Or is there something else going on?
Mark, let's think about 2012 versus 2013. These two years have developed very differently. In 2012, American Income had an 18% first quarter year-over-year and an 8% first quarter. Then we really slowed sales as agent retention dropped in the third and fourth quarters. Still, at the end of the year, we had 11%. If you look at American Income, we have a negative first quarter. We have a 2% second quarter. You're looking at fairly strong third and fourth quarters to still reach that range of 3%-6%. The reason that we think we're going to be able to grow this agency in the 3%-6% range is these initiatives in compensation. The activity models are going to take hold in the third and fourth quarter, and we'll see better results.
Additionally, as we add these additional SGAs, that'll start to boost some of the sales, some of the agent activity in the second half of 2013.
Mark, I would add, too, that I think in our previous guidance, we anticipated an increase in production per agent that we didn't see in the second quarter. It's going to take us a little bit longer to get to that productivity level. I think that's why you may see about the same number of agents, but not quite as much production.
Okay. Then just on the Direct Response deferral of certain costs related to internet distribution. I guess just I'm surprised to see that this change kind of fully result in the decline. That's a change in estimate. It's not a change in accounting principle. Is that right?
That's correct. This is Frank.
Okay.
It is a change in estimate that will be applied on a going-forward basis.
As the buildup in the deferral occurs and then the amortization, the impact will kind of slowly ease, but it'll take a very long time for that to happen, essentially.
Correct. Yeah, you'll see generally maybe about an 8% of the first-year cost will result in an increase in amortization that first year, and then it'll be spread out over a long period of time as the premiums are collected on that business.
Okay. All right. Thank you.
Once again, ladies and gentlemen, if you'd like to ask a question at this time, please press star one now. Our next question will come from Mark Hughes with SunTrust.
Yeah, thank you very much. Is there any opportunity for other expenses to be deferred where you might not have adequate track record yet, but you could at some point down the road?
We're always taking a look to see, to look at the various expenses that we have and evaluating them. At this point in time, there are none that we've, if you will, focused in on like we have been here on these internet expenses, and building that historical track record.
Yeah, Mark, I would add that we took a real hard look at this on the agency expenses back in 2011. I don't know that we see any more expenses that we can move from non-deferral to deferral there. The difference with Direct Response is though the deferral comes under the advertising cost rule, and those are a little bit harder to assess. As Frank said, you really have to develop information over a long period of time. I really kind of think this is probably the last in the Direct Response because most of the other expenses we have that were non-deferred are mostly salaries of home office people that can be deferred. I think we're set now as how we've got our expenses defined.
Okay. Thank you.
Our next question will come from Randy Binner with FBR Capital Markets.
Hey, good morning. Thanks. I actually want to follow up on that deferral thing, and I apologize if I missed this, but what is the nature of the data that's changed or you've been able to gather that leads you to have a better deferral view on the internet? What is it that you've captured in the data that changes that view?
Well, you have to be able to develop enough of the historical data that shows that the expenses that you're incurring, those advertising expenses that you have, result in a probable future benefit that actually exceeds the amount of the expense. You have to be able to show that those expenses result in sales and that you have overall a profit margin relating from those particular activities. They're really very similar to what we do in the insert media. I mean, these costs are essentially the same other than rather than being in print, these are electronic type. So at this point in time, when we now have just gotten enough history, we've got a full five years under our belt, if you will.
The analysis and the data, we are very comfortable that we can fully support, that we do in fact have this probable future benefit of profits.
That probable future benefit's over the scope of that activity, right? Do you have to kind of hit a certain profit margin before you can say all of this activity is profitable? There's a lot of initiatives that go out that don't have the result of a successful sale. Is it like a profit margin hurdle? Is that what the hurdle is?
Not as much of a profit margin hurdle as much as there is that the overall activity can be shown to be that it will, in fact, be profitable over a long period of time.
Okay, interesting. Similar to what you were able to achieve over the years with the print media, that's kind of the philosophy of it.
Exactly.
Yeah. Mark, when we applied this in 2011, we had many years of experience to draw on for both the mail side and also the insert media side. It's just that this internet side had just really started up. We just didn't have the data there. We finally have that, I will add to the prior question, you do have to show a profit margin to be able to defer the expenses because you got to be able to show that you can recover that DAC over time. There is a little bit of a hurdle there from a profit margin side.
No, yeah. I appreciate that. I'm more interested in it because of the new DAC rules. Just one other cleanup question, then I apologize too if I missed this, but Gary, did you lay out kind of what the new money yield was this quarter? If you could compare that to where you were last quarter, I'd be interested in that.
Yeah. I mentioned earlier that our new money rate was 4.07% for the quarter. Part of the reason it was lower than it was even the first quarter was the fact that we had to invest some money short at Family Heritage in a one-time-
Yep
asset liability matching thing. We really would have expected to have a higher rate than, that would've gotten us to 4.20 if we'd have invested that money long. We were expecting to have a little bit higher rate, we happened to invest our money in the first six or seven weeks of the quarter when Treasury rates were lower than they were in the first quarter. We missed the increase in the Treasury rates later in the second quarter. We expect that, going forward, we're going to invest at obviously greater than 4.07%. In our guidance for the last half of the year, we built in that we will be investing at 4.75%.
4.75%. That's perfect. Thank you.
Our next question will come from Dan Welden with BlueCrest.
Thanks. I had two questions. One on Liberty National. You talked about it being a gradual process. Can you kind of revisit what your long-term goals would be for growth in agent count and in sales?
Our long-term goal for agent count at Liberty National is we'd like to have a sustainable year-on-year out of agent growth of about 10%. We know to do that, we need to expand our geographic number of offices. As I mentioned, we opened four new offices in the second quarter. Between now and the end of the year, we're going to open an additional three offices. Those new office growth is really dependent upon as we develop middle management, we will expand geographically.
Got it. Thanks. Secondly, premium growth in life accelerated a bit year-over-year, maybe in part on your conservation efforts. What's envisioned in your full year 2013 guidance for life premium?
I think we're looking between 4%-5%, and I think we were a little over 5% during the quarter, but I think over the full year, it'll be 4%-5%.
Great. Thanks.
Our next question will come from Eric Berg with RBC. Hello, Mr. Berg, we're unable to hear you.
Can you hear me now?
Yes, we can. Thank you.
Thank you. I'm sorry. I had my phone on mute, and I had just one question. The profitability of Family Heritage continues to be on the health side, of course, materially less than the overall underwriting margin in your health business. I know that was anticipated when you acquired the company last November, what's the outlook there? In particular, do you see the two profitability numbers moving closer over time?
Eric, we're looking at a margin around 19%, 18%-20% for the year. That's what we expected for this type of business, and we don't expect that to change over time. One thing that's not reflected in the underwriting margin is we get a little more investment income on this business because, as you remember, a lot of this is we have a refund, a premium-
Yes
feature after 20 years. No, we're happy with this margin, and I don't see it moving up any to match the margin on the other products.
Is the margin on its supplemental health business, as opposed to your Medicare business, similar to that on the legacy Torchmark, your existing supplemental medical margin?
Eric, I'm not sure. Are you talking about Family Heritage's supplemental?
Yes. I'm trying to compare the profitability of Family Heritage supplemental medical business profitability to the profitability of the supplemental medical business of Torchmark's other distribution agencies.
I would say it's maybe a little bit higher than in our other lines. I would say it's more towards a Medicare supplement than it is a non-med.
All right. Thank you very much.
Once again, ladies and gentlemen, if you'd like to ask a question at this time, please press star one now. Our next question will come from Chris Giovanni with Goldman Sachs.
Thanks so much. Moesh, just one question regarding, I guess, M&A pipeline. When you changed the buyback strategy just to be a bit more, I guess, conservative and consistent in terms of when you've been in the market. Is anything out there in terms of M&A that is enticing to you guys, or can you remind us just what your potential actions would be in terms of what you'd be looking for? Obviously, some form of captive distribution, but both maybe U.S. as well as internationally.
Well, Chris, it really hasn't changed over what we've talked about before. The type of companies that we would be interested in acquiring are companies that have captive or controlled distribution. It could be agencies or Direct Response, that are in the middle income market, and selling products similar to what we're doing in our other lines. That's the type of insurance that we're comfortable with and we want to sell. I would say it's going to be primarily domestic, at least from what we've seen. We're still looking. There's nothing for me to report any different from last quarter. We'll continue to look. As I mentioned before, we're very pleased in finding Family Heritage, and we'll be on the lookout for companies similar to that because that's what we're interested in. We're not interested in companies in other lines of business.
We want more of the type of business we already have.
Okay. Is there a certain size deal you'd like to try and find?
Well, as I mentioned before, we do wish that the Family Heritage may have been a little bit bigger. There's no particular size. I say that, there's a limit to how much we would go, but each deal would stand on its own.
Thanks so much.
Once again, ladies and gentlemen, if you'd like to ask a question at this time, please press star one now. At this time, we have no further questions in the queue. I'll turn the call back over to our presenters for any additional or closing remarks.
All right. Thank you for joining us this morning. Those are our comments, and we'll talk to you again next quarter.
That does conclude our conference for today. Thank you for your participation. You may now disconnect.