Globe Life Inc. (GL) Q4 2012 Earnings Report, Transcript and Summary

Good day, and welcome to Torchmark Corporation’s Fourth Quarter 2012 Earnings Release Conference Call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mike Majors, Vice President of Investor Relations of Torchmark Corporation. Please go ahead, sir.

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 2011 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 and good morning everyone. Net operating income for the fourth quarter was $127 million or $1.33 per share, a per share increase of 10% from a year ago. Net income for the quarter was $151 million or $1.58 per share, a 32% increase on a per share basis. With fixed maturities at amortized costs, our return on equity for 2012 was 15.5% and our book value per share was $35.24, a 10% increase from a year ago. On a GAAP reported basis with fixed maturities at market value, book value per share grew 21% to $45.85. In our Life Insurance operations, premium revenue grew 5% to $452 million and life underwriting margins increased 9% to $129 million. Net life sales increased 3% to $83 million. On the health side, premium revenue excluding Part D increased 13% to $203 million and health underwriting margin improved 10% to $45 million. Health sales increased 67% to $35 million. I’ll 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 $171 million and life underwriting margin was also up 16% to $57 million. Net life sales increased 8% for the quarter to $40 million. The producing agent count at the end of fourth quarter was 5,176, up 18% from a year ago but down 5% during the quarter. We’re very pleased overall with the progress made at American Income in 2012. The agent count decreased during the fourth quarter is not surprising as American Incomes agent count typically decreases in the fourth quarter. We also had increased terminations resulting from the big growth spurt we had in the early part of 2012. We’re excited about the company’s future prospects and we expect sales growth for 2013 to range from 10% to 14%. Now, Direct Response, our Direct Response operation at Globe Life, life premiums were up 5% to $153 million and life underwriting margin increased 6% to $34 million. Net life sales were down 4% to $32 million, however for the year life sales were up 3%. In addition, the business we grew was more profitable. Response rates were lower than anticipated in the fourth quarter. We believe this is possibly due to the state of the economy, however it is not unusually a fluctuations (Inaudible) from time to time in Direct Response. We are confident that our 2003 initiatives will help increase response rates in 2013 and we expect mid-single digit sales growth in 2013. Now, Liberty National, Liberty National life premiums declined 2% to $69 million, while life underwriting margin was up 14% to $20 million. Net life sales grew 3% to $9 million, and net health sales declined 12% to $4 million. The producing agent count at Liberty National ended…

Thanks, Larry. To complete the insurance operations, administrative expenses were $44.5 million for the quarter, 8% more than a year ago quarter. The increase is due primarily to the addition of Family Heritage and the 2012 expiration of a third party agreement under which we received reimbursement for providing administrative services. For 2013 we expect a 6.5% to 7.5% increase in administrative expenses with most of the increase due to the acquisition of Family Heritage. However as a percent of premium, administrative expenses will be around the same level as 2012. Now, I’ll 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 or net policy liabilities and debt was $56 million, a decline of $8 million or 13%, 6% decline on a per share basis from the fourth quarter of 2011. Sequentially excess investment income was down $1 million from the third quarter. Due to expected calls, hybrid securities, and lower new money rates we expect excess investment income in 2013 to decrease approximately 6.5% to 7.5%. However, reflecting the impact of share repurchases, we expect 2013 excess investment income per share to be down 1% to 2% compared to 2012. Now regarding the investment portfolio, investment assets are $12.5 billion, including $12 billion of fixed maturities at amortized costs. There is no exposure to European sovereign debt and there are no commercial mortgage backed securities or securities backed by sub-prime or Alt-A mortgages. Of the fixed maturities, $11.4 billion are investment grade with an average rating of A minus and below investment grade bonds are $585 million, compared to $685 million at the end of the third quarter and $701 million a year ago. The percentage of below investment grade bonds of fixed…

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 fourth quarter, we spent $42 million to buy 844,000 Torchmark shares. For the full year we have spent $360.5 million of parent company cash to acquire 7.5 million shares. The parent ended the year with liquid assets of $147 million, including $94 million that has been invested to be used for the redemption of our senior notes that mature on August 1, 2013, or at an earlier time if opportunities to repurchase the notes become available. This leaves the parent with $53 million of liquid assets available for other corporate needs. In addition to these liquid assets, the parent will generate additional free cash flow in 2013. Free cash flow results primarily from the dividends received by the parent and the subsidiaries less the interest paid on debt and the dividends paid to Torchmark shareholders. While our 2012 statutory earnings have not yet been finalized and assuming shareholder dividends remain at the current level, we expect free cash flow in 2013 to be in the range of $355 million to $365 million. Thus, including the $53 million available from assets on hand we will have approximately $408 million to $418 million of cash and liquid assets available to the parent during the year. To-date in 2013, we have used $17.7 million of this cash to buy 330,000 Torchmark shares. 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 of approximately $50 million of liquid assets at the parent company. Now regarding RBC at our insurance subsidiaries,…

Thank you Frank. For 2013, we expect our net operating income will be within a range of $5.45 per share to $5.75 per share. The decrease in guidance is due primarily to the fact, we’re repurchasing shares at a higher price than we originally anticipated and also due to the loss of some employer group Part D cases because of increased competition. Those are our comments, we will now open the call up for questions.

(Operator Instructions) We’ll take our first question from Jimmy Bhullar, with JPMorgan.

Hi, thank you. Good morning, 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?

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.

Jimmy on Liberty National, for the quarter we had an underwriting margin of about 29% versus 25% last year.

True.

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.

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?

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.

Okay. Thank you.

We’ll take our next question from Paul Sarran with Evercore Partners.

Thanks, good morning. 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?

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.

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?

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.

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?

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.

Okay, all right, thanks.

We’ll take our next question from Sarah DeWitt with Barclays.

Hi, good morning. In American Income on the sales growth guidance, why did you lower that range modestly versus your prior guidance for 2013?

Because, we had a decline in the growth of the agency in fourth quarter and it’s just slightly -- it’s 10% to 14% versus 10% to 15% guidance we gave in the last quarter, and it’s just recognizing that we have not as many agents signing business in the first quarter that you’d hope.

Then just following up on that, anything about longer term opportunities that you see to grow the agent count? Is the current pace sustainable over several years and how much opportunity is there to grow before you view that as saturated?

It’s not saturated at all. We have unlimited opportunity to grow that agency force, so naturally I would say the agency force is 10,000 to 12,000 agents in American Income. I don’t think it’s the same when they have 20% agency growth year in and year out. I would predict that you can see the agency count at the end of fourth quarter 2013 at 5,900 to 6,000 agents, and it could vary. It could be slightly higher than that or slightly less, but certainly 10% agent growth per year is sustainable at American Income.

Sarah, one thing that I might add to that, we expect 10% to 14% growth at American Income. You probably won’t see that in the first quarter and may be more mid-single digit in the first quarter because of the fact that we had a very large first quarter last year and as Larry mentioned, we’ll be building up the agent count as we go through the year. So, the growth will be more towards -- starting with the second quarter on, than say, the first quarter.

Then finally, just on the underwriting margin, the growth there is the strongest it’s been in several years that mostly you reflect to your pricing actions and how should we be thinking about that going forward?

Well, first it’s -- I really don’t know any margins having changed that much in terms of the impact of the increased premium. It’s more from the reduction in the acquisition cost that we could no longer defer. We’ve reduced our lead cost and we made that a sounds really SG&A. But when you look at on a year-to-date basis, this year versus last year the margins 33 versus 31, well that two points increase in margin came from the fact that we reduced those expenses from 5% of premium to 3% of premium.

Okay, great. Makes sense. Thanks for the answers.

Okay.

We’ll take our next question from Jeff Schuman with Keefe, Bruyette & Woods. Jeffrey Schuman - Keefe, Bruyette & Woods: Thanks, good morning. Just want to circle back a couple of details on Family Heritage. Can you remind us is there any obvious seasonal pattern to the earnings or premiums there?

I think there’s a seasonal pattern, like our other agency forces, you tend to have higher agency growth in the first eight months of the year and usually the fourth quarter is a little bit slower for Family Heritage as well as the other agency operations. Jeffrey Schuman - Keefe, Bruyette & Woods: Then help us put this into context of the risk-based capital ratios you gave, I’ve forgotten. Is this -- they are just staying at the holding company or is this downstream and if its downstream is it included in the sort of consolidated RBC view that you gave earlier?

Frank?

Yeah, Jeff it is down in the subsidiaries and included in the RBC for the consolidated group. Jeffrey Schuman - Keefe, Bruyette & Woods: Do you have a rough estimate of what the RBC specific to Family Heritage ended up at?

I do not at this point in time. Jeffrey Schuman - Keefe, Bruyette & Woods: Okay because my recollection was at least prior to any transaction adjustments that it was pretty high and earnings are pretty strong, so I was just wondering if there was at this point any capital to be executed from there?

At this point of time, we don’t anticipate taking out any excess capital allowing for some growth. You are correct in that, the RBC was fairly high at their company individually and on a consolidated basis, it really doesn’t move the needle very much on the consolidation. Jeffrey Schuman - Keefe, Bruyette & Woods: Okay, thank you.

And we’ll take our next question from Mark Hughes with SunTrust.

Thank you, good morning. The Liberty National sales for us, you shared some specific outlook numbers for year-end and sustainable growth for American Income and any similar numbers for Liberty National?

For Liberty National, agent count should grow up by about 10% also this year. Our traditional agent count at the end of the year was 1,419. I’d expect that to be at 1,800 to 1,900 agents by the end of the fourth quarter.

Then that sort of pace sustainable or what pace is sustainable?

That pace is certainly sustainable, Mark, part of this is sustainable growth traditionally speaking, Liberty National traditionally has been focused on the southeast as we continue to have offices outside of the southeast that will help that growth rate at the Liberty National. The other development is as we add the [accelerated] management at Liberty National it produces more candidates to become branch managers, and open new branches across the U.S. So, I think certainly that growth rate is sustainable for the foreseeable future.

Then the Medicare Part D, I think the group price competition you mentioned, any more detail you can provide there. Was that -- is the market now a little more rational or do you expect that to continue?

I don’t think it will continue. What we saw this year was a new entrant into the market and we feel they’ve substantially underpriced their business, that’s our experience from the new entrant, under prices their business that’s [arranged] pretty quickly and so we don’t think that’s a trend going forward.

We’ll take our next question from Steven Schwartz with Raymond James. Steven Schwartz - Raymond James & Associates: Hey, good morning everybody. First, I was hoping that’s impossible, I think it might have been Gary. Kind of if you could repeat the Family Heritage Life sales guidance, he was going fast, I didn’t catch that?

At Family Heritage, we expect health sales of approximately $50 million to $53 million in 2013, and Steven that would be a growth rate of 5% to 9% for 2012. For 2013, we expect premium income to range from $195 million to $205 million. Again, we’re seeing the margins as a percentage of health premium to be about 18% to 19%. Steven Schwartz - Raymond James & Associates: Okay, great. Then the guidance on L&L sales, was that life only or did that include health as well?

A bit life and health. Steven Schwartz - Raymond James & Associates: Both, okay. Then on the subject of health, I don’t think there was any reference to it in your script. Maybe you could talk a little bit about what is going on at United American and what is driving that and I guess whether or not we should be happy about it.

What’s going on United American is gradually strengthening Medicare supplement sales through a general agency force. Medicare supplement is difficult to predict as you go forward there is many uncertainties around that market, because the American supplement sales declines automatically over the last five years. We think that we’ll see continued growth within Medicare supplement, but that assumes that there aren’t major political changes around the Medicare supplement arena. Steven Schwartz - Raymond James & Associates: Okay, all right. That’s what I had, thank you guys.

We’ll go next to Bob Glasspiegel with Langen McAlenney.

Good morning everyone. After two months you’re getting really excited about the acquisition on Family Heritage, because I think if my notes are right you bumped up your premium expectations from 180 to 195 to 200 and your margins from 14 to 17 to 18 to 19. So, what are you seeing that’s getting you more excited about both growth and profitability and if I work through the midpoint of the range those two things looks like it’s about $0.06 to $0.07 there’s more admin spending, eat up half of it or is there some conservatism?

Bob, we’re excited about the growth potential because as we get familiar with the leadership of Family Heritage we should see strong leadership within that agency. I think the pending uncertainty of the sales that comprehends and present for the last two years now that uncertainty has been removed as a part of Torchmark, and really focus on growing that agency. As it could then be, additional recruiting systems, additional compensation systems. I think we want to see real growth at Family Heritage. There is also geographic expansion that’s been taking place. Our building at New York we’re looking at some space down operate and so additional expansion possibilities for the Company.

So, don’t know deer antler spray, real legitimate underlying growth in the production, that’s good. The margin 400 bps more, I mean that’s a pretty big bump up in two months of expectations?

Yeah, I’m not sure. Frank?

Yeah, Bob, the real increase in that a big majority of that is a result of the finalizing all of our PGAAP computations. As we said on the last call, we are very early in the stages of taking a look at purchase business and where some of the margins would be on the acquired block. And now that we’ve finalized the PGAAP computations, the margins really on that opening block, really looking at 15% on an after admin expense basis, which was a little bit higher or a fair amount higher than what we had originally anticipated. So, that’s really driving a big portion of that increase in the guidance.

It’s accounting or is it -- things are better at last year by operating?

Well, part of it’s accounting just from estimates on where the final interest rate adjustments and how reserves will be calculated and the (inaudible) would be calculated and amortized off over time, but part of it is also just real getting a better comfort in where ultimate assumptions would be and underlying margins.

Remind me whether there was any expense efficiencies to be realized.

We are probably seeing just a little bit of reduction in some of the initial cost estimates that we had, but nothing real material ultimately, but we’re looking at admin expenses being about 5% of their premiums. So they’re a very efficient operation, but we’re seeing a little bit lower than what we had originally anticipated as well.

And too early to think about cross-selling or new products into their distribution channel, right?

Correct.

Yes.

When should we think about that or not at all, is that be too confusing?

I think we want to be careful is to expand that cross-selling Bob. I’d really like to focus on expanding the agency. They’re doing very well with the product mix they have now, and let’s stay focused on -- just trying the basic agency with the existing product mix.

Thanks for the insights. And hopefully maybe we can get some of the management on a call at some point.

I’d be glad to do that.

And we will take our next question from Eric Berg with RBC Capital Markets.

Thanks very much and good morning Gary to you and to the rest of your team. My questions relate to the Health business. For reasons that I think you’ve discussed the Part D business pardon me had essentially no sales increase either in the quarter or in the year and you’re showing very, very strong premium growth. I presume that happens because you had very strong sales in the year before. Could you just help me understand that financial reporting dynamic?

Well, Bob, the reason we had to increase sales in 2012 really occurred at the end of last year when we received auto assigns from I think 20 states or 20-plus states. That all came about at one-time, that production for the most part we did have some production during the year, but the [auto sign] business really -- we get notified at the beginning of the year. And so, most of the reduction came in there and that accounted for the large production at the beginning of the year. We just at the end of the year this year, we didn’t get the auto assigns that we’ve gotten in the prior years. We’ve been able to maintain for the most part what we had gotten the year before, but we did not get new auto assigns.

So the guidance then is for premium level to be down modestly in 2013 from 2012 in the Part D area?

Well, we actually expected premiums to be up in 2013 slightly because not all that business is auto assign business. The auto assign business is about 45% of the total premium for us. We also sell this through our United American General Agency and through Direct Response. So we were thinking that premiums will go from $318 million in 2012 to I think last quarter we talked about $327 million for 2013. Well, now that looks like 2013 is only going to be $300 million and the reason for that as Larry mentioned earlier in the comments as that we lost some large groups that it’s a year-to-year contract and they elected to go with the carriers who are offering lower rates. So we’ll actually have a slight decline in premiums in 2013 from the 318 million in 2012 to around 300 million in 2013.

And then with respect to the core of your health business, I just want to build on the question and answer from earlier. Indeed you had many areas when Mark was running the company in which the health business seemed to be in decline, is it -- and now we’re getting very strong sales of health products along within -- at least in the December quarter it looks like, just like to turn to the right page here. Yeah, it looks like very strong premium growth as very strong premium growth as well. Is it purely a matter of the Medicare supplement or are we seeing resurgence in sales of other medical products -- sales and premiums of other medical products other than med supplement?

Eric, if we go back five or six years ago, a lot of the premiums relative to an unlimited health benefits and it was product line as we exit in 2009, 2010, it subject to ObamaCare, more important that we just didn’t like the persistency, we didn’t like the margins for that business. So you’re seeing a little decline over the last year as that block has decreased. I think we stand about at $50 million block now which we’re seeing here is an increase around two products. So our individual Medicare supplement sales have been good over the last 18 months and we’re also seeing the addition of Family Heritage which substantially changes our health and insurance sales.

And I know you report what your sales would have been in Health, do you report what’s your premium growth, if Mike would say or maybe you can tell is, do you report what your premium growth in Health would have been excluding the acquisition of Family Heritage? I guess we can see that on Page 10 of our Analyst pack, we can see that, so I’m offset at this point.

Fair enough, right.

And we will go next to Randy Binner with FBR.

Thanks. Just a couple kind of follow-ups here. On the Medicare sub-dynamic, I guess over time -- you know maybe a few years we thought saw Medicare Advantage the other kind of pieces of the Medicare market there for supplemental, so it was going to fade and it kind of held on better than we would have thought. Is part of kind of the better Medicare sub sales overall because folks are starting to move away from Medicare Advantage as kind of payouts for that get constricted. Are we kind of finally seeing that switchover?

I don’t think it’s a switchover. The original prediction was that there will be 17 million additional release for Medicare Advantage. We certainly haven’t seen those numbers materialized and [we’re interested] in seeing to go forward with healthcare reform if (inaudible) doesn’t materialize you would see much stronger Medicare supplement sales. I think there’s strength in Medicare supplement sales. We just done a better job recruiting general agents and we’ve better penetrated particularly with the high deductible health plan and the successful offering of that plan in a number of states.

Thanks for that. So from what you said, I mean Medicare Advantage just hasn’t and even though the payouts from CMS of those companies have been lower, it’s been a sticky product still that you’re seeing with clients, was that right?

That’s what we’re saying, yes.

And then back to AIA, I appreciate the guidance there for ‘13. And I guess people have hit at it a couple of different ways, but it still seems like a confident guide and you targeted hopefully 6,000 agents there by year end ‘13, but I’d like to hear kind of more -- maybe more color on what’s going well there. Is it still manager progression, is it -- you’ve talked in the past about better analytics around kind of recruiting data and kind of segment and who’s successful and who’s not. But just would be interested, that’s a major kind of debatable point on the stock is whether or not AIA sales could hit that level. So, just would like to hear more kind of on what’s driving your confidence there?

Randy, this is what’s driving your confidence is, we’re focusing most right now is agent retention and so we’re working at different systems, everything from lead support to better training to help that agent retention. We’re also working at changes that we could introduce in our compensation systems and we stretch out that compensation and we keep those [first share] agents longer. And structurally what I see is a growing SGA body. We’ve added 5 new SGAs this year. We believe those of you who were successfully had also contributed to the agent growth and which you’ve seen in the last five years so I think there is a long average age of that SGA body and so I’m comfortable that those SGAs will continue to grow and expand within each, territories and expand their agencies.

Is that -- SGA sounds like is that a new office or is that just a new individual?

New SGA is a new office and some of those are promoted into the system as far as an agent. From SGA they become MGA, the last set of progression is from SGA position and we open those offices depending on opportunity and we look at the company support, we look at the recruiting support you can get in a particular office and that’s how you open the new offices. It’s in addition to a nice attraction.

So you did 5 new SGA offices in ‘12 is the similar amount expected for ‘13?

For ‘13 and again, we’re looking at who are these MGAs that are ready to take that next step. We normally make sure that the MGA is always successful. So, we look at their production and we look at their time in the business and then Roger and Company make that decision to promote that MGA to an SGA position.

Then just one clarification I think AIA already does business in most major metropolitan areas, so when you are opening a new offices these offices are being opened like in new cities or is it adding office like in a growing suburb or something like that?

We’re typically adding to -- we have SGAs in all states and which are looking as particularly in large metropolitan areas, with really the excess, in each year the excess recruits in terms of system. The personal and other recruiting sections that we have, there is extra capacity that we’re going to add in SGA.

All right, understood thank you.

(Operator Instructions) We’ll go next to John Nadel with Sterne Agee.

Thanks for taking my question good morning everybody. One on Part D and one on Direct Response. Part D, obviously a lot of great color and I appreciate all the guidance there on sales in top line. The margin in 4Q was probably one of the strongest I can recall seeing it around 12%. Is there any reason to believe that we’ve stepped up on the margin or should we still be thinking about something more like the 10% going forward?

John, we’re looking at margin of between 10% and 11% for next year. One of the problems with the Part D is that the clients do not come in evenly throughout the year and so from quarter-to-quarter, you’ll see some fluctuations, but we’ve priced the product around 2.5% level and that’s what we expect in terms of margins.

Then a sort of longer-term question around Direct Response. I get so much less mail and I think a lot of people get so much less mail now versus a year ago versus especially versus 10 years ago, So we’ve gone electronic billing and so much and the world is going more and more paperless or at least the U.S. Is that over time, do you think that that sort of continuing trend becomes sort of a secular impediment to the potential growth of Direct Response?

That is why I don’t because if you go to Direct Response in 2007 a very small percentage of our business came through electronically i.e. the Internet or the electronic media and today, it’s a significant part of our business. It’s the fastest growing segment of Global Life international companies saw. Global Life channel is not different than it was 20 years ago. It’s continuing to work to enhancing how do we reach our consumer and I think you’ll see a greater improvement. But mail is still an important part and foundation of the Company, but I think we’re confident that we can grow Direct Response through other media.

Not only from the Internet, but we’re now putting our 800 net phone number on mailings and inserts and over 10% of our business is now coming in through inbound calls. As Larry mentioned, we’re just trying to find all the different ways that we can reach the customer, but one thing to consider too, there is maybe less -- solicitations that you get in the mail that means there’s less competition in the mail for us. The mail is still going to be a vital part of it, but we’re -- as Larry mentioned we’ve really grown the percentage of our sales. I think it’s up to 40% that’s either internet or inbound versus a few years ago it was much less than that.

That’s very helpful. I didn’t realize it was that strong already. Thank you very much.

We’ll take our next question from Vincent Lui with Morningstar.

Hi, good morning. Thank you for taking my questions. What do you see -- if you can give me some comments about what’s driving the uptick in lapse rates at American Income? It seems like there is a 15% to 20% business point increase quarter-to-quarter at the agency?

There was a strong uptick in the lapse rates, we’re talking about first year, if you look at renewal rates there is one uptick.

Yeah, renewal rate is pretty stable, yeah.

Right, you expect your agency force since you have more new agents selling business. You have an uptick in your lapse rates and we had an 18% growth in our new agents last year. So I would expect to see an uptick. [That’s not across that] if you go back two years ago in the fourth quarter we had the same first year lapse rates. So it’s within and on the range in my opinion.

How would you comment on the seasonality of lapse rate at a -- should it be pretty consistent quarter-over-quarter or there is a more of an uptick in the last quarter, in the fourth quarter?

If you look at the agent recruiting in the agency forces, typically 80% of your agent recruitment is in the first eight months. And you have been having new agents starting the year, so by the time you get later in the year you get more new agents form business, it would be logical you see a small uptick in the first year lapse rates as you have more new agents sign business.

On the Direct Response side, you see seasonality more there than maybe in our agency line, part of that is because we’ve -- a good fortune of our Direct Response sales occur in the first, second quarter and so you see more of the lapses coming in the third and fourth quarter. So you obviously see a higher lapse rate in the third and fourth quarter versus the first and second quarter in Direct Response.

I think the item that’s affecting the lapse rates is in Direct Response. As we mentioned earlier using the (inaudible) confirmation to underwrite business with that regulation more substandard business, which has a higher premium rate. If you’re going to issue more substandard business than you’re going to issue business at higher premium rates that’s followed with higher lapse rates as a result.

How do you generally reflect that in your actuarial valuation or reserve. I mean in the annual review, is it typically you change your lapse rate in reserve calculations annually, after seeing this general experience?

Well, I don’t think we’re getting back to Direct Response, so we haven’t seen any change in experience of as Larry mentioned the substandard business at this price for us for the higher lapse rate. So, our reserves are going to set up accordingly and we’re expecting those lapse rates that is really not adjustment necessary.

Okay, thanks for the answers.

There are no other questions at this time. I’d like to turn the conference back to our speakers for any closing remarks.

Thank you for joining us this morning. Those are our comments and we’ll talk to you again next quarter.