Torchmark Earnings Call Insights: Direct Response Sales and Margin Levels

Torchmark Corporation (NYSE:TMK) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Direct Response Sales

Jimmy Bhullar – JPMorgan: I had a question first on the Direct Response business. Sales have actually slowed for each of the past three quarters and I think you mentioned that maybe response rates are lower just given the economy but, given what the trends have been recently. How comfortable are you that you could actually do your mid-single digit sales growth target because, the economy is certainly not changing much or its unnecessary economy changes? Then secondly, just on the Liberty National business, the margins on the life side were very strong this quarter and you had several initiatives going on to improve the margins there, but what’s your expectation, do you expect a further improvement from here?

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Larry M. Hutchison – Co-CEO: I’ll address the Direct Response sales first Jimmy. We have confidence that the Direct Response rates will come up in the second quarter of this year. We currently have initiatives regarding our adult products. We also are testing different initiatives with packaging. We think, each of those will have a positive effect on our response rates as we go forward.

Gary L. Coleman – Co-CEO: Jimmy on Liberty National, for the quarter we had an underwriting margin of about 29% versus 25% last year.

Jimmy Bhullar – JPMorgan: True.

Gary L. Coleman – Co-CEO: That was a little higher because we had a lower claim month or lower claim quarter. For the year the underwriting margin was 26% versus 22% at the last year and the primary difference there is the fact that we’ve lowered the non-DAC acquisition expenses by the changes we made in the agency system there. On a go forward basis the margin won’t be 29%, it’s going to be at the 26% or a little above the 26% range.

Jimmy Bhullar – JPMorgan: Then just one more on Family Heritage if you could just talk about how the results, you gave some guidance for how the results have been versus your expectations and any pleasant or unpleasant surprises as you’ve looked at the business a little bit more?

Larry M. Hutchison – Co-CEO: Jimmy as we look at the business there are no unpleasant surprises. Integration goes forward well. The agency is growing as expected. We’re seeing some addition within the agency in case some recruiting programs take place. Those were the comments you finally hear because there are no surprises in the sales guidance that was given in our (accounts).

Margin Levels

Paul Sarran – Evercore Partners: I wanted to ask at Liberty, is there any sort of structural reason why the margins overtime can’t get up to the 32%, 33% range you run at American Income?

Gary L. Coleman – Co-CEO: Paul, we still have higher expense at Liberty and have had as far as acquisition expenses – and although that’s, we have made improvements there, it’s going to take a while for that to work through the results because of the large in-force like we have. I don’t see us getting to the 31% level, at the 27% level, 27%, 28% margin level we could get to that on a fairly soon basis.

Paul Sarran – Evercore Partners: On Direct Response, towards the end of last year, beginning of this year, you’re talking about new underwriting technology in a pretty big expansion of circulation, I think, well into the double-digits, which I would have thought should drive pretty strong sales in the back half of this year or in 2012. Did something go wrong with that program or not as expected once you implemented it?

Gary L. Coleman – Co-CEO: Nothing is going wrong with the program. I think the underwriting trends you’re referring to is the use of pharmaceutical data, underwriting program, actually that decreases of sales because you think we reject more business. We have greater profits on the business and you see a decline in sales and we’re certainly seeing that comes through because we’re rejecting more business as we apply that data through the end of any process.

Paul Sarran – Evercore Partners: I think the idea was you increased circulation by enough to offset the higher declines that did that not occur did you end up declining more business than you expected before hand?

Gary L. Coleman – Co-CEO: Paul, I think we did increase circulation, but as Larry mentioned our response rates were down, so that continue to offset the increase of circulation.