Mike Majors - Vice President, Investor Relations Gary Coleman - Co-Chief Executive Officer Larry Hutchison - Co-Chief Executive Officer Frank Svoboda - Chief Financial Officer Brian Mitchell - General Counsel.

Erik Bass - Citigroup Randy Binner - FBR Capital Markets Jimmy Bhullar - JPMorgan Seth Weiss - Bank of America Merrill Lynch Yaron Kinar - Deutsche Bank John Nadel - Sterne Agee Kenneth Lee - RBC Capital Markets Mark Hughes - SunTrust Bob Glasspiegel - Janney Capital Steven Schwartz - Raymond James & Associates.

Good day, and welcome to the Torchmark Corporation Fourth Quarter 2014 Earnings Release Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mike Majors, Vice President of Investor Relations. Please go ahead, sir..

Thank you. Good morning, everyone. Joining the call 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 2013 10-K and any subsequent Forms 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 fourth quarter was $131 million or $1 dollar per share, a per share increase of 30% from a year ago. Net income for the quarter was $147 million or $1.13 per share, a 9% increase on a per share basis.

With fixed maturities and amortized cost, our return on equity as of December 31, was 14.9% and our book value per share was $27.91, an 8% increase from year ago. On a GAAP reported basis with fixed maturities and market value, book value per share increased 31% to $36.19.

In our life insurance operations, premium revenue grew 5% to $494 million, while life underwriting margins were $136 million, down 1% from a year ago. On the health side, premium revenue grew 5% to $225 million and health underwriting margin grew 3% to $51 million.

Health sales increased from $40 million to $72 million, $25 million of the increase was due to group business and the remaining $7 million was related to individual business. Administrative expenses were $45 million for the quarter, down 2% from year ago. For the full year, administrative expenses were $180 million or 5.7% of premium.

In 2015, we expect administrative expenses to grow approximately 6% to 7% and be approximately 5.8% of premium. The primary reasons for the increase in administrative expenses are higher pension costs resulting from the required implementation of a new mortality table and further investments in IT systems.

I will now turn the call over to Larry Hutchison for his comments on the marketing operations..

Thank you, Gary. We are very pleased that we had strong sales growth in each of the distribution channels for both the quarter and the full year. Now, I would like to discuss results for each of those channels. At American Income, life premiums were up 8% to $196 million and life underwriting margin was up 6% to $62 million.

Net life sales were $46 million, up 23% due primarily to increased agent counts. The producing agent count at the end of the fourth quarter was 6,434, up 21% from a year ago. The average agent count the fourth quarter was 6,323, up 4% from the third quarter. We expect life sales growth in 2015 to be within a range of 6% to 10%.

At our Direct Response operation at Globe Life, life premiums were up 7% to $174 million. But life underwriting margin declined 9% to $37 million. Net life sales were up 10% to $38 million. We expect 4% to 8% life sales growth for 2015. At Liberty National life premiums were $67 million, approximately the same as the year ago quarter.

Our life underwriting margin declined 16% to $16 million. Net life sales grew 15% to $9 million, while net health sales increased 19% to $5 million. The producing agent count at Liberty National ended the quarter at 1,498, up 5% from a year ago. The average agent count the fourth quarter was 1,572, up 1% from the third quarter.

Life net sales growth is expected to be within a range of 6% to 10% for 2015. Health net sales growth is expected to be within a range 4% to 8% for 2015. At Family Heritage, health premiums increased 7% to $53 million, while health underwriting margin increased 12% to $11 million. Health net sales were up 8% to $12 million.

The producing agent count at the end of the quarter was 785, up 13% over a year ago. The average agent count for the fourth quarter was 782, up 2% from the third quarter. We expect health sales growth to be in a range from 4% to 10% for 2015. At United American General Agency count premiums increased 8% to $81 million.

Net health sales grew from $22 million to $51 million. Of the $51 0230 million in 2014 sales individual sales were $12 million, up 15%, our group sales were $39 million compared to $14 million a year ago.

In 2015, we expect growth in individual sales to be around 14% to 16%, while group health sales are hard to predict we expect them to decline in 2015 due to the unusual number of large group cases we acquired in 2014. Premium revenue for Medicare Part D grew 22% to $90 million while the underwriting margin declined from $10 million to $5 million.

The decline in underwriting margin was due to the higher than unanticipated Part D drug costs discussed in our previous calls. We expect Part D premiums of $315 million to $335 million in 2015 and expect margin as a percentage of premium to be approximately 6% to 8%. Frank will discuss this further in his comments.

I will now turn the call back to Gary..

I will 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 $56 million, an increase of 2% over the fourth quarter of 2013.

On a per share basis reflecting the impact of our share repurchase program, excess investment income increased 8%. As we discussed previously excess investment income was negatively impacted by Part D to the extent of $2 million in the fourth quarter and approximately $5 million for the full year.

Excluding the negative impact of Part D, excess investment income would have increased almost 5% for the year or about 10% on per share basis. For 2015, we expect excess investment income to decrease by about 1% to 3%. However, on a per share basis we should see an increase of about 3% to 4%.

At the midpoint of our 2015 guidance we are expecting a further drag on excess investment income from Part D of approximately $6 million. Regarding the investment portfolio, invested assets were $13.3 billion, including $12.8 billion of fixed maturities at amortized cost.

Out of the fixed maturities, $12.3 billion are investment grade with an average rating of A- and below investment grade bonds are $561 million compared to $566 million a year ago. The percentage of below investment grade bonds to fixed maturities is 4.4% compared to 4.5% a year ago.

With a portfolio leverage of 3.5 times, the percentage of below investment grade bonds to equity, excluding net unrealized gains on fixed maturities, is 15%. Overall, the total portfolio is rated A- same as the year ago.

In addition, we have net unrealized gains in the fixed maturity portfolio of $1.7 billion, approximately $250 million higher at the end of the third quarter. To complete the investment portfolio discussion, I would like to address our investments in the energy sector.

We believe the risk of realizing losses in the foreseeable future is minimal for the following reasons. Over 99% of our energy holdings are investment grade. And at the end of 2014, our energy portfolio had net unrealized gains of $152 million. Also less than 10% of our energy holdings are in the oilfield service and drilling sector.

And we have reviewed our energy holdings and concluded that while we may see some downgrades, we believe that the companies we have invested in can withstand low oil prices for an extended duration.

As to investment yield, in the fourth quarter, we invested $205 million in investment grade fixed maturities, primarily in the industrial financial sectors. We invested at an average yield of 4.8% and we are trading at BBB+ and an average life of 29 years.

For the entire portfolio, the fourth quarter yield was 5.89%, down 1 basis point from the 5.9% yield in the fourth quarter of 2013. At December 31, 2014, the portfolio yield was approximately 5.89%. We are concerned about the decline in new money rates this year and as a result, we lowered the new money rates from our previous guidance.

The midpoint of our current guidance for 2015 assumes new money yields of 4.5% for the first half of the year and 4.75% for the second half. On past analyst calls we have discussed in detail the impact of a lower, prolonger interest rate environment.

As a reminder, an extended low interest rate environment impacts our income statement, but not the balance sheet.

Since we primarily sell non-interest sensitive protection products accounted for in the past 60, we don’t see a reasonable scenario that would require us to write-off DAC or put up additional GAAP reserves due to interest rate fluctuations. In addition, we do not foresee a negative impact on our statutory balance sheet.

While we would benefit from higher interest rates, Torchmark would continue to earn substantial excess investment income in an extended low interest rate environment. Now, I will 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 our share repurchases and parent company assets, in the fourth quarter, we spent $87 million to buy 1.7 million Torchmark shares at an average price of $52.76.

For the full year, we spent $375 million of parent company cash to acquire 7.2 million shares at an average price of $52.42. The parent ended the year with liquid assets of $57 million. In addition to these liquid assets, the parent will generate additional cash flow in 2015.

Free cash flow results primarily from the dividend received by the parent from the subsidiaries, less the interest paid on debt and the dividends paid to Torchmark shareholders. While our 2014 statutory earnings have not yet been finalized, we expect free cash flow in 2015 to be in the range of $355 million to $365 million.

Thus including the $57 million available from assets on hand, we currently expect to have around $417 million of cash and liquid assets available to the parent during the year. To-date in 2015, we have used $34.3 million of this cash to buy 656,000 Torchmark shares. 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 those funds. We also expect to retain approximately $50 million to $60 million of liquid assets at the parent company.

Now, regarding RBC at our insurance subsidiaries, we plan to maintain our capital at the level necessary to retain our current ratings. For the last two years, that level has been around an NAIC RBC ratio of 325% on a consolidated basis.

This ratio is lower than some peer companies, but is sufficient for our companies in light of our consistent statutory earnings, the relatively lower risk of our policy liabilities and our ratings.

Although we haven’t finalized our 2014 statutory financial statements, we expect that the RBC percentage at December 31, 2014 will be slightly above the 325% consolidated target. We do not anticipate any changes to our targeted RBC levels in 2015. Now, I’d like to take a few minutes to discuss our Part D operations.

Our final underwriting results were largely in line with our expectations, ending the year with $27 million underwriting margins or 7.8% of premiums. As discussed on our last call, this margin is less than originally anticipated primarily because of higher-than-expected hepatitis C claims during the year.

Included on our website is a schedule entitled Medicare Part D margins, which provides information regarding Part D premiums and margins for 2013, 2014 and estimated for 2015. As the schedule shows, we anticipate higher premiums and indicated on our last call.

This is due primarily to higher than anticipated enrollments in both our individual and group plan offerings during the enrollment period. Premiums from auto enrollees will be approximately $25 million to $28 million the same as indicated in our last call.

Although we expect higher premiums, we expect that our underwriting margins will be relatively flat to slightly lower than 2014 and then our margin as a percentage of premium will be lower than last indicated.

The revised outlook in the margin percentage is as a result of preliminary analysis of the risk scores and claims history of our actual 2015 enrollees. The mix of enrollees for 2015 preliminarily indicates higher utilization of higher cost drugs which have lower margins.

As noted on our last call, the higher-than-expected Part D cost in 2014 didn’t just impact underwriting income, but also resulted in lower net investment income. These higher costs resulted in higher amounts paid upfront on behalf of the government and won’t get reimbursed to us until November 2015.

For 2014, net investment income was negatively impacted by approximately $4.5 million. In 2015, the midpoint of our guidance anticipates about $6 million of reduced investment income as a result of the delayed 2014 cash flows plus additional cash outflows expected to occur in 2015. Those are my comments. I will now turn the call back to Larry..

Thank you, Frank. For 2015, we expect our net operating income to be within the range of $4.20 per share to $4.40 per share, a 7% increase over 2014 at the midpoint.

The $0.05 reduction at the midpoint from our previous guidance was due primarily to the increase in pension expense, reduction in expected Part D margins, and a reduction in expected earnings from our Canadian operations due to the recent change in the Canadian exchange rate. Those are our comments. We will now open the call up for questions..

Thank you. [Operator Instructions] We will take our first question from Erik Bass with Citigroup..

Hi, thank you.

Just wanted to spend a little bit more time on Part D and I was hoping you could talk about what changed in Part D and why enrollments you think ended up being so much higher than your initial expectations? And then also as you touched on your margin guidance, it’s obviously lower than previously and it seems to imply that you are expecting some adverse selection.

So, maybe if you could comment a little bit more, what is it about the enrollment base that suggests that would be the case?.

Yes, Eric.

With respect to the enrollments, at the time of the last call, we are using our best estimates taking a look at kind of normal trends in the premium, taking into account the premium rate increases that we had put into effect working with our consultant to look at a particular mix and trying to get an estimate of the total number of enrollees that we might have.

Keep in mind it was before obviously the open enrollment period that occurred in the fourth quarter. So, we did end up having a substantially higher amount of enrollments within our individuals by about two-thirds of the added enrollments in our individual plans and then we did have higher group sales in the fourth quarter as well.

And as I noted before, the auto enrollees ended up being about the same as where the same as where we ended up – what we had indicated on our last call with total premiums around $25 million, which is at 85% or so decrease from 2014 levels. With respect to the margins, the decrease is really just higher.

It is higher expected claims and fewer drug rebates than we had originally anticipated.

And it’s across all of our businesses both the individual and group, but the last guidance was again given prior to the actual enrollment results and now with those – with the final enrollment results and being able to see who exactly is in the plan, we are just better able to estimate the anticipated drug utilization and cost.

And it just does appear that the group that we have is a group that has higher utilization and actually it’s having a little higher utilization of higher cost drugs, which then while they are included in our pricing really just have a lower margin and tend to have fewer rebates from the pharmaceutical companies..

Got it. That’s helpful.

So it ended up essentially then that your pricing was a little bit more competitive than you had initially expected?.

Yes. I think there is a lot of different factors that enter into why a particular individual chooses our plan versus another. And the websites, I think facilitate that comparison and really we are taking a look into what maybe some of those factors are, but at this time, we don’t have all those answers..

Got it.

Maybe just a follow-up bigger picture question on Part D I guess is do you think that this is a good business and something that you want to be in over time or does the challenge with accurately projecting enrollments and margins change your thinking at all on that?.

Well, I think as we have talked about in previous calls, I mean, this has always been an opportunistic business for us. And we have in looking back at the program over since 2006, when we first got into it it’s been a good program for us.

The margins clearly in 2014 and what we are looking for in 2015 are what we would prefer and we will continue to evaluate the program as we do every year and see what tweaks and changes we want to make with it..

Okay, thank you for the comments..

We will take our next question from Randy Binner with FBR Capital Markets..

Hey, good morning. Thanks. I was interested actually in picking up on some of the yield comments and Gary, if you covered this, I apologize if I missed it.

But first of all, where is the portfolio yield coming off now and where is new money coming on just currently not talking about the 2015 guidance, because I have a question on that, but where are you now on those two metrics?.

Okay. Randy, for the portfolio yield, at the end of the year it’s 5.89%. And during the year, we invested money at 4.77%, the higher at the full year and then we – I think we ended up at 4.8% for the quarter..

Okay.

So, 4.8% for the quarter and then I guess your kind of spot, you are saying it’s 4.5%, I guess, because if I got that right, in your 2015 guidance, you said you are assuming 4.5% growing to 4.75% basis points, is that right?.

Right, but we’re assuming 4.5% for half the year and 4.75% for the second half of the year..

So, that 4.5% is coming in where, is that is that still A- or you do have to go into the high BBBs to get that?.

It would be in the high BBBs, which is we fluctuate between A- and BBB+. To get to those rates, it would BBBs and BBB+..

Okay.

And then on the energy disclosure, I appreciate that, but the one piece I didn’t get and then again I may have missed it, the energy exposure you have currently in the below investment grade area, is what number or percentage?.

Well, out of the $1.5 billion of energy bonds, only $16 million are below investment grade bond – below investment grade..

Okay, so it’s de minimis?.

It’s de minimis and over – almost 9% of the bonds are pipelines and exploration production. There is very little in the oil field service or drillers..

Okay, oil service. Okay.

I am just going to ask one more, just in case no one hits on it, but I have asked this question I think almost every conference call, but I have been interested to see how well you all have done in improving your sales, while some other direct and kind of let’s call it direct distributors of life, health products, I have struggled because of a better employment environment meaning the folks who take a direct sales job find something else to do in this kind of economy.

I would just be interested in your perspective on that of how you have gotten the agent counts up really across the board whether you talk about [indiscernible] American Income or Liberty despite the fact that these targeted individuals assuming they would have other job opportunities, just kind of interested in your color on that dynamic?.

This is Larry, in all three agencies particular recurring system have enabled us to continue to grow the agent count. We are continually trying to improve those recruiting system and training systems. Additionally in all three agencies we have implemented systems is to really focus on improving agent retention.

In answering your question I am less concerned about the general economy, we are really focusing on performance in terms of recruiting and retraining agents..

And also Randy I would add is in recruiting we are not just recruiting agents to come in and sell insurance. We are recruiting them with the opportunity that they can – as they grow they can some day head up an office, its own their own business to a certain extent. So I think that helps us..

I guess the quick follow-up is beyond I guess becoming a middle I think you all call middle managers, is there a better – are using better technology, the processes on the recruiting or what it was – is it specifically that’s improved there?.

It’s better technology, but it’s also using different sources of recruiting. Now, internet recruiting has been a strong source for the last 10 years. We have recruited and personally recruiting is another specialized recruiting.

I will say the other factor that’s driving agent growth and the companies are focused on middle management Randy is not just recruiting our agents, it’s we promote middle-management and we see that middle-management number increase, more people are coming through and trained in the field..

Okay. That’s very helpful. Thank you..

We will take our next question from Jimmy Bhullar with JPMorgan..

Hi. First, I had a question on margins in Liberty National and in the Direct Response businesses, both businesses’ underwriting margins declined sequentially and I think they are the lowest that they have been in the last several years, so maybe if you can discuss what happened there.

And then secondly on the producing agent count at Liberty National, obviously it’s going over time, but it did drop on a sequential basis and what caused the drop and what your expectations are for that channel?.

Okay. Jimmy let’s talk about the margins first and let’s talk about Liberty National. There are some at Liberty there are unfavorable comparisons not only a quarter, but on the year basis. For example, in the quarter – fourth quarter we had high quarter in terms of claims this year, last year it was a low quarter.

When you look at it for the year, the policy obligation ratio which is the main impact on the margin here it was 39% in 2014 versus 38% in 2013. The 38% is a little bit of an outlier. Those prior two years we were at the 39% level. So we think the 39% level is the – is appropriate and that’s we have included in our guidance.

And then it has the impact on the margins this year 26% versus 27% last year, but if you go back and look at the prior two years we were at that 26% level. So what I am saying is, is I think that where we were in 2014 is more realistic and that’s also where we think we will be going forward both on the policy obligation ratio and the margin.

On that Direct Response, we really had two issues to hit us there. The margins were low in Direct Response for the same reason Liberty National higher policy obligation percentage. That policy obligation percentage is high. One, because there is a little bit of a quarterly fluctuation that’s there that we didn’t have in the fourth quarter of last year.

But also from our trends, we have seen that the policy obligation percentage is higher in Direct Response versus the prior years. So if you look at year-to-date the policy obligation percentage is 48%, that’s higher than the 46% to 47% we have had in prior years.

But we from where our trends are showing we think the 48% is the level not only for this year, but it will be the level we will have next year as well and that’s what we had included in the midpoint of our guidance. Not a big change, but we think it is – that instead of 46%, 47%, we will be at 48%..

Okay..

So, in the fourth quarter Liberty National agencies were focused on their worksite policy renewals and new sales. The agencies have refocused on recruiting new agents during the first quarter.

We don’t expect much growth in agent count during the first quarter, but we do expect to see an increase in agent count quarter-to-quarter for the remainder of 2015. And we believe that producing an agent count at the end of 2015 for Liberty National should be between 1,650 to 1,700 agents..

Okay. Thank you..

We will take our next question from Yaron Kinar from Deutsche Bank..

Good morning gentlemen, go back to the Part D business and maybe better understand what the underlying trends there were.

So first you talked about high utilization rates of high cost drugs is this still mostly the Hep C drugs?.

It does not appear to be with respect to the Hep C drugs at all. In fact, for 2015 and the new drug Harvoni, we feel very comfortable in the pricing that we have in our PBM and as our preferred – also our preferred pharmacy has been able to negotiate similar rebates and some discounts on those particular drugs in 2015.

So we see those as actually being very well taken into account. Just it seems to be across the board just other again there is a myriad of other more just the brand A drugs versus using generic drugs..

Okay.

And is there something that just kind of creeped up unexpectedly or because ultimately there are generic and brand drugs out there any given year and things like this year in particular seems to be hitting a little more severely?.

We did see a little bit of that trend moving in that direction towards the end of 2014 with respect to some of our the new enrollees that we had in 2014, that did seem to be a new trend that we did see in 2014 versus in any of our prior years..

Okay.

And maybe one final question on actually – specifically to the Hep C, are you assuming that same utilization rate for ‘15 as the one you saw in ‘14?.

We are assuming actually a pretty high utilization rate and a little bit of an increased rate or continuing an increased rate into 2015..

Okay. Thank you very much..

We will take our next question from John Nadel with Sterne Agee..

Hey, good morning.

Most of my questions have been asked and answered, I guess not to beat a dead horse on Part D, but I am just curious if you are earning 6% to 8% margin and I think the more typical historical margin would have been around 10% give or take, how does that – what does that do to the ROE on that business?.

It drives it down, obviously, its interesting ROE on that particular business is the hard one to take a look at because there is actually very little capital that is required to maintain and operate that business.

So we don’t tend to look at that on a strictly on ROE basis as much as we are overall looking at our overall margins and overall investment return..

Okay.

And then I understand can you – I think last quarter you told us that in November of ‘15 you expected to get back from the government I think somewhere slightly north of $100 million in cash, I assume that number is higher now overall?.

That is correct. It is about $195 million that we are actually set to receive from the government in November 2015..

Okay. And….

John we talked about that in the third quarter, I think we are talking about, it was going to be $165 million, it’s gone from $165 million to $195 million..

Okay.

And then – and so if I think about a lot of your assumptions that are baked into ‘15 guide and if we just assume they held constant and I am thinking really more about the new money rate and excess investment income, the receipt of that cash towards the end of ’15 all else equal should that lead us to believe that excess investment income in dollars not per share, but in dollars is likely actually going to be up in ‘16 versus ‘15 even if it’s only modestly?.

Yes, I would think so, part of it depends on our experience in Part D for 2015 in terms of how much receivable we have – that growth from the 2015 business, but as to what we are expecting is it will be less and so therefore I think your assumption is right. We should be able to see a pickup in 2016..

Okay.

And just – and then just one quick following up on the Direct Response margin, so I understood your comments on the benefit ratio if I would – policy obligations divided by premiums maybe 48% is the new normal there, does that mean that the underwriting margin the new normal is more like a 24% give or take margin there too?.

Yes, John that’s what – we are finishing this year right at 24% and in the midpoint of our guidance we are right at 24%..

Okay. And then just overall that I know it’s only a one point increase in the benefit ratio there, claims ratio, but I am curious as you dissect that whether you have seen any – whether you can find exactly what’s driving that.

And I am really more curious whether it’s a result of I know some time ago you increased policy limits on what you are willing to write face amount I think $100,000 give or take and I am wondering if you are seeing some times – some poor results there or not?.

No, John it’s not in the more recent issues. We are seeing this as policies are issued back in early 2000s..

Okay..

Where the actual claims coming in a little higher than we anticipated at that time..

Okay.

So it’s aging?.

Right..

Okay, very helpful. Thank you very much..

We will take our next question from Seth Weiss with Bank of America Merrill Lynch..

Hi, thank you. Thanks for taking the question. I had just a few follow-ups, most of my questions have been asked at this point.

American Income producing agent count could seem quite strong, is there some upside perhaps to the sales growth forecast for ’15 which I believe you kept in that same range of 6% to 10%?.

Producing agent count at the end of 2015 for American Income should be between 6,800 and 7,000 agents that’s what we used in giving our sales forecast..

Okay.

So we don’t want to think about the producing agent count as a leading indicator then of sales growth…?.

As far as the leading indicator, but there is always a lag in sales activity versus agent recruiting and that’s really because sales growth follows agent growth because new agents are generally less productive than veteran agents..

Okay, understood.

And just coming back to the Part D, I just want to clarify one thing because I guess I am a little surprised, the focus on it from the call considering that with change in your margins and the dollar amounts that I believe it’s less than $0.02 a share are you – if we look back a 6% to 8% margin on, call it, $300 million of premium versus a 10% margin on $180 million of premium.

If it’s the same dollar amount, are you basically ambivalent to it? I think you addressed that question earlier on, but the higher premium in force, that doesn’t create a greater capital need.

Is that correct?.

No, that is correct. And what we are pretty focused is what that the net underwriting margin in dollars is that’s adding to our bottom line.

As you indicated, I think at the midpoint of our guidance, we have gone from – on the last call, we had pointed to about $25 million of midpoint as far as underwriting margin is concerned and now we are looking in that $21 million to $23 million range. So, you are right, that’s really the net impact and that’s really where we are focused on..

Okay. Appreciate the clarity. Thanks a lot..

We will take our next question from Kenneth Lee with RBC Capital Markets..

Hi, how is it going? Just had a quick follow-up question on life margins, a while back there was expectation that life margins for Liberty National could get somewhere on the ballpark of 27%, 28% longer term after restructuring towards the variable cost model in American Incomes, just wanted to know whether that is still the case, because it sounds as if it could be close to 26% right now? Thanks..

Yes, Kenneth, I think we are expecting 26% and that’s basically what we had in our midpoint of our guidance. So, I think the 27% that we had in 2013 as I mentioned now that is an outlier there. We think that the difference there was really in the policy obligations 38% in 2013 versus 39% in 2014. So, we expect to be in that 26% range.

And that should – it should remain there, plus or minus a little..

Got it.

For the long-term, right?.

Right..

Okay, thanks..

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

Thank you very much. Good morning.

The impact on 2016 from the pension cost and the IT investments, can you give us some sense of that? Is there a kind of one-time hit or will that be flat and therefore less of a margin impact in 2016? How should we think about that?.

Yes, with respect to the pension, there is a little bit of a larger hit here in 2015 diverse with what would expect to see in 2016, there will still be some carryover effect and some just general higher expenses relating to the new mortality table, a lot of 2016 will depend on what happens with interest rates.

Again, the discount rate that’s applicable to our 2015 expense is at 4.23% if we get some relief on the rates where that drifts back up toward 5%, then that’s going to help relieve some of the pressure from the 2016 expense as well, but you shouldn’t see the same magnitude of increase from ‘15 to ‘16 as we saw in ‘14 to ‘15.

As far as the IT, go ahead..

Frank, as far as the – just the impact of mortality table, not interest rates, over 60% of that like a one-time as we convert everybody over to mortality table as opposed to going forward..

That’s correct..

And then on the IT investments?.

Yes. So, on the IT investments, you will continue to see strong increases on that from year-to-year.

I would say, the increase has been fairly consistent with what you are seeing from ‘14 to ‘15 largely as we have been making some investments over the past couple of years and the depreciation of those investments are starting to really hit the books here in ‘15 and then we will get some of the added depreciation that we are seeing on our investments here in ‘15, we will start to hit it in ‘16.

So, you will continue to see some increases there..

Then I had just one follow-up.

Just kind of any broad thoughts on productivity with the economy perhaps getting a little bit better, a little faster job growth, household formation, et cetera, do think you are seeing a little more appetite for consumers to buy insurance? Should that be meaningful going forward?.

I think the increased percent of productivity was less related to the economy is more focused on some changes we are making to the American Income and the other distribution. We are implementing some new technology to make agents better at rate mapping. We have new payment systems in place.

It’s specifically each agency to improve productivity, so we are less focused on general economy, really focusing on each distribution unit and how do we pick up distribution within each unit..

Thank you..

We will take our next question from Bob Glasspiegel with Janney Capital..

Just want to follow-up on the IT question, having followed you guys for 34 years I don’t think I have ever seen an admin expense budget of up 7% going into a year.

And what are you trying to get from the IT expenses that you are building? Is this catching up to the rest of the world on maintenance or is this taking you to another level as far as on the sales perspective?.

I don’t think it’s catch-up, Bob, I think it’s really making changes in our investment in each agency. And so as you look at really new technology has just become available in the last 24, 36 months. So, the IT changes in the agency system are staying ahead of the curve not to catch-up..

And Bob, I would add though, we were – our administrative expenses were virtually flat for 2014, but we benefited by lower pension expense in 2014 that remember last year at this time, those were higher.

That drove the pension expense down, excluding the impact of the benefit we got there, you would have seen growth in our administrative expenses last year..

Got it.

Just so I can understand better though, the IT spending, this is going to allow your agents to sell better or how does it work? Is this laptop?.

It’s not laptop, Bob, it’s our – we want to talk about rate mapping, I am talking about the recent technology, so it makes agents more efficient. As we put leads into that system, they call on their prospects in order so they spend the least amount of time on the road, more time making presentations. That’s one example.

Another is upgrading our compensation systems. As we need to treat our compensation, we can make those changes more quickly and we can respond to the data we are seeing come out of the agencies. Before we need to focus our compensation we focus on recruiting, retention, all of the different metrics we are going to focus on compensation on.

So, the technology is really changing quickly in the agency world and we are just trying to be responsive of that and make our agents spend more time in presentations, less time in trying to setup appointments and the time it takes to drive those different appointments..

Is this more of a top-line sales or a margin sort of benefit that you will get from these investments?.

I think it’s in investments, but over time we are able to grow our sales force..

Okay.

Is that what you were going to say, Gary?.

No, what I was going to say getting back to the impact on administrative expenses, even with these additional expenses, IT and also the pension expense, our ratio to premium is going to be 5.8%. This year, it’s 5.7%. For 2014, it’s 5.7% but we have been in the 5.8%, 5.9% range.

So, these are just reasons expenses are going to be a little bit higher this year, but our overall expense ratio was going to stay where it has been..

Okay.

So, part of it is your premiums are growing faster so you can absorb higher admin expenses?.

Yes..

Got it. Thank you..

Go ahead..

No, that was it. Thank you..

We will take our next question from Steven Schwartz with Raymond James & Associates..

Hey, good morning, everybody.

Just Larry, could you restate what the AIZ target count is for the agents for the year, you broke up a little bit on the lower end?.

Well, sure. I hope there is distribution given the producing agent count at the end of 2015 for American Income should be 6,800 and 7,000 agents, at Liberty National, the producing agent count at the end of 2015 should be between 1,650 and 1,700 agents and at Family Heritage, at the end of 2015 we expect to have between 840 to 880 agents..

Okay. Thank you.

And then just a quick one, most of my questions have been asked, given the 4.5% targeted new money rate for the first half of the year and then 4.75% for the second half, how should we see the effective portfolio yield come down, how much on a quarterly basis?.

Well, for the year we are – if we invest at those ranges, we are thinking instead of 5.89% the portfolio will decline – portfolio yield will decline 10 basis points to 5.79% and 5.80% somewhere in that stakes up. I don’t know that it’s even for a quarter but for the year it would be 10 basis points..

Okay, alright. Thanks guys..

We will take our next questions from Yaron Kinar with Deutsche Bank..

Hi, I have a quick couple of follow-ups.

You touched upon the energy space at least with regards to investment I was curious if you expected any impact to sales next year given the turmoil in the energy sector?.

No, we are not expecting any impact on the sales at all from the turmoil in the energy sector..

Okay.

And then just a quick follow-up on the pension and then the new mortality tables, I was just curious why those weren’t factored in already at the time of the last – or when the initial guidance was given on the last call?.

Yes. The timing Yaron from the information that had been provided out by the Society of Actuaries I mean there had been some proposals that had been floated around earlier in the year.

The final mortality tables and the comments that had been floating around during the year really weren’t available until late in October, the final mortality tables were actually released in October of 2014.

So for us to get a reasonable estimate we just did not have a reasonable estimate of what the overall impact of these mortality tables would be on our particular population within our pension plan at the time of the last call..

Okay, got it. Thank you..

And we will take our next questions from John Nadel with Sterne Agee..

Hi, just quick follow-up on the higher pension costs, there was some discussion earlier in the Q&A about some portion of it likely more one-time in nature, some portion of it potentially more of an ongoing issue and I know we have to be concerned about what happens with the discount rate, but if – similar to my last question if we assume no real change on the longer term discount rate on the pension block, looking out to 2016 how do we think about those overall costs?.

Yes. John, at this time we don’t have a projection of our 2016 costs, it’s been provided to us that takes into account the full impact of those mortality tables..

Okay..

So I don’t really have a good number to give you, I don’t anticipate there being a – that there would not be a similar type increase from what we saw here for ’15, but we do think the majority of the increase from ‘14 to ‘15 really came from that change in the mortality table, so we wouldn’t expect – I sure don’t expect a similar increase..

Got it.

So it should be it should be more of – in dollar terms there would be expense in ’16 versus ’15 should be reasonably similar?.

Reasonably similar I would think..

Yes, okay.

But no big step back down unless discount moves?.

Correct..

Thank you. That’s helpful..

And we have no further questions in the queue at this time. I would now like to turn the conference back over to management for any additional or closing remarks..

Alright. Thank you for joining us this morning. Those were our comments and we will talk to you again next quarter.

And this does conclude today’s conference call. Thank you all for your participation. You may now disconnect..