Globe Life Inc (GL) — Q4 2015 Earnings Call Transcript

Thank you. Good morning, everyone. And 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 2014 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. In the fourth quarter, net operating income from all operations was $131 million or $1.05 per share, a per share increase of 5% from a year ago. During the fourth quarter, management determined that the Part D business met the criteria to be held for sale and is classified as discontinued operations. Net operating income from continuing operations, which excludes Part D, was $131 million or $1.05 per share up 6% on a per share basis from a year ago. Net income for the quarter was $133 million or $1.07 per share, a 5% decline on a per share basis. The decline was due primarily to the fact that we had $11 million of tax-driven realized losses in the fourth quarter of this year compared to a gain of $5 million in the year-ago quarter. With fixed maturities at amortized cost, our return on equity as of December 31 was 14.5% and our book value per share was $30.09, an 8% increase from a year ago. On a GAAP reported basis, with fixed maturities at market value, book value per share was $32.71, a decline of 10% from a year ago. In our life insurance operations, premium revenue grew 5.5% to $521 million, while life underwriting margins were $145 million, up 6.3% from a year ago. Net life sales increased 2% to $99 million. On the health side, premium revenue grew 5% to $225 million and health underwriting margin was up $51 million, approximately the same as a year ago. Health sales declined 17% to $16 million due to the decline in group sales. Individual health sales were $38 million, up 20%. Administrative expenses were $48 million for the quarter, up 9% from a year ago and in line with our expectations. As a percentage of premium from continuing operations, administrative expenses were 6.3% compared to 6.1% a year ago. The primary reasons for the increase in administrative expenses are higher information technology and pension costs. For the full year, administrative expenses were $186 million or 6.2% of premium. In 2016, we expect administrative expenses to grow approximately 5% and to remain around 6.2% of premium. I will now turn the call over to Larry Hutchison for his comments on the marketing operations.

Thank you, Gary. I'll now go over the results for each company. At American Income, life premiums were up 8% to $213 million and life underwriting margin was up 10% to $69 million. Net life sales were $50 million, up 9% due primarily to increased agent productivity. The average agent count for the fourth quarter was 6,590, up 4% over a year ago but approximately the same as the third quarter. The producing agent count at the end of the fourth quarter was 6,552. We expect the producing agent count to be in a range of 6,600 to 6,800 at the end of 2016. Life sales for the full year 2015 grew 15%. We expect 5% to 7% life sales growth in 2016. In our direct response operation at Globe Life, life premiums were up 7% to $185 million. Life underwriting margin declined 2% to $37 million. Net life sales were down 3% to $37 million. Life sales for the full year of 2015 grew 4%. We expect life sales to be flat or down slightly in 2016. At Liberty National, life premiums were $67 million, approximately the same as the year-ago quarter. Life underwriting margin was $19 million, up 24%. Net life sales decreased 5% to $9 million. Net health sales decreased 4% to $5 million. The average producing agent count for the fourth quarter was 1,539, down 2% from a year ago, and down 3% from the third quarter. The producing agent count at Liberty National ended the quarter at 1,478. We expect the producing agent count to be in a range of 1,550 to 1,625 at the end of 2016. Life net sales for the full year of 2015 grew 4%. Life net sales growth is expected to be within a range of 4% to 7% for the full year 2016. Health net sales for the full year 2015 grew 4%. Health net sales growth is expected to be within a range of 2% to 4% in 2016. At Family Heritage, health premiums increased 8% to $57 million. Health underwriting margin increased 2% to $11 million. Health net sales were up 2% to $12 million. The average producing agent count for the fourth quarter was 877, up 12% from a year ago but down 3% from the third quarter. The producing agent count at the end of the quarter was 911. We expect the producing agent count to be in a range of 975 to 1,000 at the end of 2016. Health sales for the full year 2015 grew 7%. We expect health sales growth to be in a range of 5% to 9% for the full year 2016. At United American General Agency health premiums increased 12% to $90 million. Net health sales declined from $51 million to $38 million. Individual sales grew 49% to $18 million. Our group sales declined 47% to $21 million. Individual Medicare supplement sales for the full year 2015 grew 36%. For the full year 2016, we expect growth in Individual Medicare supplement sales to be around 8% to 10%. I will now turn the call back to Gary.

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 acquired interest on policy liabilities and debt was $54 million compared to $55 million in the fourth quarter of 2014. On a per share basis, reflecting the impact of our share repurchase program, excess investment income was flat. As discussed on previous calls, the Part D segment has had a negative impact on excess investment income due to negative cash flows that occurred during the year, including the long delay in receiving reimbursements from CMS for excess claims paid by the company. The impact of the lost investment income from the delayed receipt of reimbursements is reflected in income from continuing operations rather than discontinued operations in accordance with applicable accounting rules. In 2015, Part D had a negative impact on excess investment income of approximately $8 million. In 2016, we expect excess investment income to grow by about 1% to 3%. However, on a per-share basis, we should see an increase of about 6% to 8%. At the mid-point of our 2016 guidance, we're expecting a drag on excess investment income from Part D of approximately $8 million to $9 million. Now regarding the investment portfolio, invested assets were $13.8 billion including $13.3 billion of fixed maturities at amortized costs. Of the fixed maturities, $12.6 billion are investment grade with an average rating of A-minus, and below investment grade bonds are $640 million compared to $561 million a year ago. The percentage of below investment grade bonds of fixed maturities is 4.8% compared to 4.4% a year ago. With a portfolio leverage of 3.6 times, the percentage of below investment grade bonds to equity, excluding net unrealized gains of fixed maturities is 17%. Overall the total portfolio is rated A-minus, the same as a year ago. In addition, we have net unrealized gains in the fixed maturity portfolio of $506 million, approximately $408 million less than at the end of the third quarter. To complete the investment portfolio discussion, I'd like to address our $1.6 billion of fixed maturities in the energy sector. As a result of spreads widening in the fourth quarter, the net unrealized loss of our energy portfolio increased by $142 million to a total of $165 million at December 31. However, we believe the risk of realizing any losses in the foreseeable future is minimal for the following reasons. $1.5 billion or 94% of our energy holdings are investment grade. Only $143 million or 9% of our energy holdings are in the oil field service and drilling sector. Approximately 70% of these bonds are investment grade. Also based on the consensus of expert views, our investment department believes that oil is more likely to increase to $45 a barrel or $50 a barrel during the next 12 to 24 months than to remain at current levels. We believe the companies in our portfolio can continue to operate for a very long time with oil prices at $45 a barrel to $50 a barrel. Even if oil remains around $30 a barrel for the next 12 to 24 months, we would not expect to have any defaults during that period. Finally, the companies we have invested in have a variety of options that they can utilize to avoid default, including but not limited to, reducing distributions to partners, drawing on lines of credit, and reducing exploration activities. Now we do believe that there could be further downgrades that could pressure our RBC ratio. However, that doesn't mean we would have to suspend or materially impact our stock buyback program. Frank will address this in more detail when he discusses capital.

Thanks, Gary. First I wanted to spend a few minutes discussing our share repurchases and capital position. In the fourth quarter, we spent $83 million to buy 1.4 million Torchmark shares at an average price of $58.68. For the full year, we spent $359 million of parent company cash to acquire 6.3 million shares at an average price of $56.99. The parent ended the year with liquid assets of $46 million. In addition to these liquid assets, the parent will generate additional free cash flow during the remainder of 2016. Free cash flow resulted primarily from the dividends received by the parent from the subsidiaries less the interest paid on debt and the dividends paid to Torchmark shareholders. While our 2015 statutory earnings have not yet been finalized, we expect free cash flow in 2016 to be in the range of $320 million to $330 million. Thus including the $46 million available from assets on hand at the beginning of the year, we currently expect to have $366 million to $376 million of cash and liquid assets available to the parent during the year. This level of free cash flow in 2016 is lower than in recent years due to lower distributable statutory earnings at our subsidiaries in 2015. As we've discussed on prior calls, a key driver of the lower earnings is higher commission and acquisition expenses associated with the higher levels of sales growth we have experienced in 2014 and 2015, coupled with lower growth rates in investment income due to lower new money yields and adverse Part D cash flows. Another significant driver of the lower earnings is higher Federal income tax expense in 2015 as compared to 2014. At this time, we anticipate that statutory earnings in 2016 will be approximately the same as 2015, as the profits from recent sales start to emerge, the incremental impact of new sales lessens, and the growth in investment income improves. 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 approximately $50 million to $60 million of assets at the parent company, absent the need to utilize any of these funds to support our insurance company operations. Now regarding RBC at our insurance subsidiaries. We currently 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% 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 liability, and our ratings. Although we had not finalized our 2015 statutory financial statements, we expect that the RBC percentage at December 31, 2015, will be around the 325% consolidated target. We do not anticipate any changes in our targeted RBC levels in 2016. Our investment department has reviewed multiple scenarios of downgrades within our fixed maturity holdings including those in the energy sector. To put their findings into context, as a rule of thumb, downgrades of around $100 million in statutory book value would reduce our RBC ratio by approximately two percentage points, and require around $9 million of additional capital to retain a 325% RBC level. Using this rule of thumb, and to the extent additional downgrades do occur in 2016, we are comfortable that we would be able to fund the additional capital requirements with available assets on hand and other sources of liquidity available to Torchmark without having to suspend or reduce the amount available for buyback. Now a few comments to provide an update on our Medicare Part D operations. Management has committed to a plan to sell the Part D business and expect it to be sold before the end of the year. We have met the criteria to account for the business as held for sale and the results of the Part D operations will be reflected within discontinued operations in our financial statements. As we have previously said, we originally decided to participate in the Medicare Part D program back in 2006 because most of the underwriting risk was covered by the government and we believe that would complement our Medicare supplement business. Over the years, the Part D business has been good for Torchmark as it has provided over $259 million of underwriting margin since 2006. However, this business has been changing rapidly over the past few years and the earnings had become much more volatile. Increased competition, industry consolidation, and preferred networks have reduced overall margins and made it more difficult for smaller players to compete in this market. While we are still generating profits from the Part D operations, those profits have been shrinking in recent years due to higher drug costs and increased administrative and compliance costs. We believe this trend will likely continue and perhaps could even turn into significant losses in the future as drug costs, especially those on specialty drugs, continue to escalate. In addition, we have already seen regulatory changes that have shifted costs from the government to carriers and it appears likely that more cost shifting is to come. Overall, the risks and the administrative and compliance costs associated with the business are much greater than they once were and the business now demands an increasingly disproportionate amount of time and focus given its level of earnings. Looking forward, we prefer to focus our attention on our core life insurance businesses and our other lines of health business that produce more predictable stable margins. We previously indicated that we view this business opportunistically and then we would review it on a yearly basis. While the Part D business has been a good opportunity to this point, we no longer believe it is a business that makes sense for Torchmark going forward, and therefore it is the right time to exit the business. We have included on our website a final operating summary for the discontinued operations. For the year we earned $10.8 million or $0.09 per share after tax. This amount was lower than we had anticipated on the last call due to higher than expected claims in the fourth quarter as a result of higher drug costs. To the extent we were to hold the business for the full year 2016, we estimate that our after-tax earnings would be in the range of $5 million to $9 million. As noted on our previous calls, the profits from the Part D business are further reduced by lost investment income that results from having to finance substantial cash outflows during the year, including amounts paid upfront on behalf of the government that won't get repaid to us until the following year. These outflows are generally represented by the significant receivable balances that are included in the assets held for sale line of our consolidated balance sheet. The opportunity cost of not being able to timely invest the receivable balances is included in our continuing operations as required by the applicable accounting rules. However, to reflect what management considers to be a better reflection of earnings from the Part D operations, we have included on our website a schedule showing the pro forma income from discontinued operations, and includes an estimate of the after-tax cost of the foregone investment income. As we're in the midst of discussions with multiple parties regarding a purchase, we're unable to discuss the timing, potential value, or other details of the sale. However, we do anticipate that the assets held for sale on our balance sheet will be fully recovered and do not believe the consummation of the sale will have a material impact on our income from continuing operations. Any such impact on earnings is included in the range of earnings guidance provided. Now with respect to our guidance for 2016, on our last call, we indicated a preliminary range of $4.25 to $4.55 for our 2016 net operating earnings per share, with a mid-point of $4.40. Excluding the effect of the discontinued Part D operations, the midpoint would have been $4.35. We now estimate that our earnings from continued operations will be in the range of $4.28 to $4.48, a 6.1% growth at the midpoint over our 2015 earnings from continued operations. A schedule providing prior year earnings per share for continued operations only and our revised 2016 earnings per share guidance has been placed on our website. Those are my comments. I will now turn the call back to Larry.

Thank you, Frank. Those are our comments; we will now open the call up for questions.

Good morning, everybody. Thanks for taking my call. I wanted to start with the last point on the revised guidance, the $0.03 increase in the midpoint. Looking at the different parts of the guidance that the granularity that you offer seems like you're expecting sales to actually come down a bit from your prior guidance, expenses may be going up a little bit, headcounts may be a little weaker. So where is the positive offset coming from? Where are you expecting to out-earn your previous guidance?

Yes, I believe that the increase at the midpoint reflects an improved outlook for life and underwriting margins, as well as overall underwriting income. There is a slight margin improvement at Liberty National due to the favorable claims experience we had in Q4. Additionally, the strong sales at American Income have led to better expectations for some of our premium at direct response, which positively affects the 2016 guidance. It's important to note that while there is reduced sales guidance for 2016, it doesn’t significantly impact the 2016 premiums as much as it will affect future premiums.

Okay, that's helpful. And then you had talked about expecting new money yields going up a bit over the course of 2016, or at least that being one of your underlying assumptions. What's that based on there? Is it spread widening? Is it opportunities you see in the market?

It's a little bit of both. We are expecting and this is from our investment department giving us all reports coming in with consensus. We expect the treasury rate to, although it's declined so far in January, we expect it to gradually increase during the year. Spreads we're pretty much expecting to stay where they were towards the end of 2015.

Okay. And then one quick final question. Is there any capital impact from the sale of the Part D business?

Yes, there will be eventually some of the capital freed up. We do have to carry some RBC on that business. We would estimate, we would probably carry, we don't have the final RBC for 2015 done yet, but with respect to that business, we would expect it to be somewhere maybe in that $60 million to $70 million of capital ultimately we hold on that business. We would see that capital being freed up over the course of 2016 and then partially and then more fully over the course of 2017.

So the expectation would be then that it would be deployed like in 2017/2018?

Yes, and though it's a possibility that we would be able to deploy that capital or would be able to distribute some of that excess capital, but we would really have to be able to see what the capital situation looks like at that point in time, but probably it really wouldn't be fully available if you roll into that 2017/2018 timeframe.

So first question just on available resources for buybacks in 2016. I think Frank; you mentioned the cash available with the liquidity on hand will be $366 million to $376 million. And if I assume like roughly $70 million for dividends and also put in the cushion that you're going to hold $50 million to $60 million, it implies buybacks of about $250 million in 2016. Is that a fair assumption?

No, I think our, as I indicated I think the free cash flow that was available for buyback that we see for 2016 should be in that range of $320 million to $330 million.

Okay, got it. Because I was taking out the dividend and the numbers you gave were post dividend?

Yes, that's correct.

And then as we think about from 2016 to 2017, given I think you mentioned in your remarks that sub-dividends will be somewhat stable or flat, that number shouldn't change that much in 2017, right?

That's correct.

And the proceeds from the sale whenever that happens are those going into the sub or would those come directly to the whole? I realize the capital freed is going to be sitting in the sub and might not be dividend deductible, but what about the proceeds, where would those go?

Those go into the subsidiary.

Okay. And when you talked about freed capital that did not obviously include any impact from proceeds, right? From the sales proceeds?

That's correct.

And then just on the business, your direct response sales were weak, and I think you're expecting a flat or sort of flattish sales in 2016 off just 4% growth in 2015. So may be talk about what's going on there, whether it's because of the market environment or is it more some of the changes that you're making, given what's happened with your margins in that business?

Jimmy, as we have discussed previously, we've experienced lower than expected profit margins associated with prescription drug underwriting changes. So sales will be lower since we've now adjusted our marketing activities to eliminate the segments of profitable sales.

Hi, thank you. First, Frank, could you just elaborate a little bit on your comment about if you do see ratings downgrades you think that you could use some assets on hand or other measures to kind of plug the RBC impact? Can you just expand on that a little bit?

Sure. As I mentioned earlier, we have a general guideline that suggests approximately $100 million in downgrades would likely translate to needing around $9 million in additional capital to maintain our current RBC levels. Whether it's through the cash available at the holding company or accessing the capital markets, we have options to provide extra capital for the company if necessary. Using that guideline, if we were to experience roughly $500 million in downgrades, which represents about half of the BBB-rated energy bonds we hold, we would essentially require only about $50 million in additional capital to maintain our existing RBC levels.

Got it. And obviously one option would be to just not dividend that out as well. So I think were you implying that you don't expect any change to the free cash flow guidance or could the free cash flow be lower in that scenario?

Always a possibility, but we would always be looking at the opportunities and looking for the cheapest or most inexpensive way for our shareholders to fund that additional capital.

Erik, I was just going to say, Frank is right. We probably use the lower cost approach. And if you're talking about $50 million we could use the cash on hand or we could borrow short-term at a very low cost. To us, that's a much lower cost than reducing the dividend, the amount we're divesting to the parent company.

Got it, that's helpful. And then just one question on direct response policy obligations. As a percentage of premiums, they were slightly above the 52% range that you're targeting for next year. Any comments there and what gives you confidence that that ratio will come down over the next year?

Yes, that's right, and that 52% was what we had there in Q4. And for the year as a whole we had the obligation percentage of around 51%, which was right at the top edge of what we had estimated for 2015. I think for 2016, we had previously indicated we thought the policy obligations would be around that 52%. If I move that up just slightly to somewhere in the 52.5% range is kind of what we would anticipate for the policy obligations and we're still really seeing our overall margin percentage on the direct response in '16 being somewhere in that 19.5% to 20% range pretty much related I previously indicated, we haven't really seen a lot of change in that at this point.

Hi, good morning, everybody. First just a couple I guess on Part D. It sounds maybe it's the nature of the Part D business, but it sounds to me from the conversation that just occurred with regards to when capital will be released, that you kind of will remain on the books, on the hook until current liabilities runoff. And then, so in a sense you're selling really the renewal rights. Is that an accurate way to think about it?

We would hold responsibilities for the business until the time of sale unless there is another agreement with the buyer. However, I cannot disclose specific details about how that might operate. From our perspective, based on the RBC rules, if we were to sell now or partway through the year, we wouldn't receive a full reduction by the end of 2016. Some implications would carry over into 2017. We may also need to settle in 2017 regarding receiving payments, depending on the sales process and the arrangements required.

Okay. And then, Frank, I think you said that you thought the drag in 2016 from reimbursement patterns on Part D would hurt by about $8 million, your excess investment income. Does that mean looking at a 2017 model just add that back?

Correct.

Okay. And then Larry, I apologize, I came a little bit late. Did you run through kind of the sales expectations for the individual agencies already? If you did, I'll just check the transcript.

I did, but I'm happy to go through it again. For 2000.

Yes, thanks. I guess Steven Schwartz kind of asked my question, but I'm just trying to understand what it is exactly you're selling? And I guess is the right way to think of it as mostly a renewal rights deal? I mean there are really standalone systems or other kind of distribution assets that would transfer with the business like this Part D business?

Yes, it really is a sale of contracts to be able to offer the Part D prescription drug coverage. So to a certain degree it is the renewal rights. We want to think about it in that way, there aren’t any hard assets; we don’t have any systems, those types of things that are infrastructure, if you will, that's being sold.

All right. To follow up on an earlier question, the absence of earnings impact is related to the nature of this being a short tail business, which tends to resolve itself within the next 12 months. After that period, someone would have the option to take over the book if they choose to.

That’s correct.

And then just touching on, and I apologize if I missed this. But did you all go through kind of where you're getting new money yields right now on investment grade and below investment grade? And I'd also be interested if you're seeing kind of stress or need for de-risking in any part of your investment portfolio outside of energy?

Well Randy, regarding our investment allocations, I mentioned that we're primarily focusing on the industrial sector, which has been our direction over the last few quarters. Within that, we are mainly invested in the consumer sector and transportation, while we haven’t significantly increased our exposure to energy. At this point, we don't see a need to sell any of our bonds as part of our de-risking strategy. Let's discuss energy, as it's a common concern. We are confident in the bonds we hold and expect them to perform well, so we do not anticipate selling those. Over the past few years, we've effectively spread our risk, especially given that we were somewhat overexposed to financials previously. Overall, we are satisfied with our sector distribution.

And then just on yields, did you touch on where you're getting new money yields in investment grade? And is it investment grade kind of A minus; is that the center point of the portfolio right now?

It's A minus BBB plus.

And what yield did you get in the fourth quarter there?

On fourth quarter we were just a little under 5%. And I mentioned earlier that we've had some tax-driven sales at the end of the year that actually pushes it a little bit under 5%. Had we not done that but I can't remember but it seemed like we would have been 5.10% or in that range. So far this quarter we've invested a little over $100 million as 5.25%. But the rates have just the last few weeks have gone down, and so, if we were investing money today it would probably be around 5%.

Hi, good morning. I have a couple of questions. One on the American Income agent count, if I look 3Q to 4Q, kind of surprised by the decline, maybe it's nothing more than some culling of underperformers at year-end. I suspect that's really the answer for Liberty, but can you give us some color on that?

I think your question was American Income or was it Liberty?

Regarding the question about American Income, I believe that what you're seeing is typical of the year-end adjustments we usually observe at Liberty in the fourth quarter. However, I don't think we normally experience as much of this in American Income, but I could be mistaken.

Okay, thank you. There are two reasons for lower guidance. It's based in part on the lower recruiting numbers I've seen during the fourth quarter of 2015 in January this year plus remember 2016 calls two strong years of agency and sales growth at American Income. Over the two-year period, our industry grew by 23%. So based on our historical data, I just sort of expect solid growth here in 2016. I'll be in a better position to give that guidance into the second, certainly by the third quarter call probably a better feel for the agent growth for 2016.

Okay. But the dip from the third quarter to the fourth quarter in the actual agent count not producing but I'm sorry, not the average producing agent count but the actual quarter-end agent count? What was the driver of that?

And if you look back at that, that's seasonal with the Thanksgiving and Christmas Holidays. Within American Income there is always a seasonal drop from third to fourth quarter.

The second question pertains to the sensitivity you mentioned regarding the approximately $100 million in downgrades, which translates to about two points on risk-based capital. Can you clarify whether the downgrade is a one notch downgrade or a full letter downgrade? Essentially, are we considering that $100 million of your BBB ratings will drop to BB?

Generally, that's a rough guideline, looking at various scenarios and trying to assess what can be inferred from analyzing all these different situations. We specifically examined the BBB ratings and considered moving some of them to the NAIC class 2, potentially downgrading them to class 3, as well as what the implications would be if everyone decided to downgrade. These factors were part of the various scenarios we analyzed.

In that case it would still stay within the NAIC 2 category, correct?

It would remain within the NAIC, although some may transition between NAIC categories.

2 to 3, yes.

It definitely did include the drops from 2 to 3.

Okay, that's helpful. What was my last question? I'm sorry to put you on the spot. I guess my question is this: as you consider the level of buybacks for 2016, and it seems for 2017 it will be similar, in the $320 million to $330 million range, is there a different approach to timing that we should take into account? There have obviously been movements in the market and fluctuations in stock valuations. I'm interested to know how you maintained a consistent pace during 2015. I don't usually ask about pace, but I’m sure you are aware, as many market participants are, that there is speculation about Torchmark and a few other companies as possible acquisition targets following transactions that occurred over the past year or two with Protective, Symetra, and StanCorp. I'm curious about how you perceive the impact of that on your stock price and your buyback pace.

I would say generally with respect to the pace of the buyback is that we would continue for the most parts to have those buybacks radically throughout the course of the year. So we would still think about having 80-some million dollars somewhere per quarter. And then where you do think that maybe there are some market opportunities, may be that stepped up just a little bit in kind of a near-term. Obviously, we have had that from time-to-time, where one quarter was a little bit more or less than the average, if you will. But I don't see us wearing for all strategy at any significant degree.

Okay. And then is there any change as a result of Part D moving now into discontinued operations and essentially lack of sales at this point? Is there any change in the amount of new cash that you expect to be investing, the pattern that that looks like 1Q to 2Q to 3Q and obviously 4Q is a pretty high level of cash invested and I assume that was in part driven by the receipts of cash from CMS?

Yes, that's correct. Looking forward to 2016, it will continue to have a drag throughout the year, with more of a drag in the first three quarters, but then a slight uptick in the fourth quarter again.

And your expectations for what that receivable will look like? Were the cash received in the fourth quarter of '15, how much is that?

We have around $75 million that we anticipate being a receivable from CMS by the end of 2015, and in the fourth quarter of 2016, we expect it to be in that $75 million range.

Okay. So not nearly as big as the one from '14 received, just a quarter early?

That's correct. We do anticipate it going down.

Hi. Thank you. Just wanted to follow-up on the I guess decline in cash flow for 2016 relative to really the last three years. Can you help just walkthrough the drivers of that? I know a lot of it is sales driven, but if you could give us a little bit more granularity? I was a little surprised at the step down in cash flow.

Yes, I believe there are a few key factors that are working together to lower cash flow. Firstly, we have seen an increase in sales, but during the first year of these sales, acquisition costs surpass the premiums coming in, which negatively impacts our statutory earnings. Positive statutory income typically begins in the second year following a sale. Despite the strong sales growth we've experienced over the past couple of years, which continues to exert pressure on statutory income, we expect those future profits from sales to begin to materialize soon. This alone could account for somewhere between $15 million to $20 million of statutory drag in 2015. Additionally, in more usual circumstances, we would see a significant increase in investment income to help balance this out. However, over the past couple of years, we've faced ongoing challenges primarily from Part D, along with lower interest rates and increased direct response claims, leading to only modest growth in investment income, around 2%, rather than the 4% level at which our invested assets are growing. This has added further pressure. We've also experienced higher acquisition and administrative costs in 2015 due to IT and pension expenses. Furthermore, due to how federal income tax accounting works, we don't benefit from the smoothing effect seen under GAAP, resulting in higher taxes in 2015 compared to 2014.

Okay. So there is I mean obviously a lot of factors there. If we look back over the last three years, was there anything unusual and perhaps unsustainable that was contributing to cash flow or would you think of the next two years as may be that the drag from higher sales in some of these other items that you've outlined as may be keeping it unusually low for a couple of years?

Yes, in response to your later comment, I don't see anything particularly unusual aside from the impact of some higher direct response costs and the drag from Part D.

Hi, thanks. Good morning. I have a couple of follow-up questions. Regarding the $60 million to $70 million of capital from Part D, to the extent that it decreases, I don't believe that would contribute to earnings. However, would you consider it as an increase in the RBC ratio that could be allocated to the parent company in the next year?

Right. It does not come through as earnings as you said. So that well it may be available as extraordinary dividend to the extent that our capital levels would permit it. But it truly would have to be something that would have to be approved by the regulators.

Okay. Got it. And what entities is this business legally involved with?

United American predominantly.

Understood. Regarding the downgrade scenario, some other companies have indicated that the impact of the scenario they provided would be less severe if you simply applied the RBC and factors for C1 risk. They mentioned that there are co-variants and diversification offsets in that regard. However, it seems that in your impact assessment, there was no mention of any co-variant offset. How should we approach this?

I believe the effects of the co-variant from the other offsets were considered to some extent within the general guideline I provided.

Can you discuss how the impairment policy works from a pricing standpoint? If you fully intend to hold a security to maturity, but the bond is trading at $0.50 on the dollar for an extended period, is there anything that requires you to potentially impair that security if you still believe it will pay off at par?

No. And the answer to your question, the fact that it's just trading below book value in and of itself even for an extend period of time wouldn't require us to impair that security. We would have to take a look and evaluate that particular bond offering and determine do we think its money good. And as long as we believe that we're going to collect that, the principal amount from that. And in our particular case, we have the ability and the intent to hold those two maturities. So as long as we believe and can demonstrate that we will be able to collect that at maturity, then we do not have to have an impairment on the accounting rule.

That includes both GAAP and statutory?

Correct.

Good morning. What's behind the margin improvement in Liberty National in Q4? And I think you said it was a factor behind your revised guidance for 2016?

Bob, it really is more of a timing issue there, because if you compare the two quarters the reason for the higher margin is that we had lower policy obligations in the fourth quarter of '15. As it turns out, fourth quarter '14 was our highest policy obligation quarter, and fourth quarter '15 was the lowest for the year 2015. If you look at on a year-to-date basis, 2015 was 38% of premium versus 39% of premium the year before, so it's yes pretty much the same. Our outlook for the coming year is that our policy obligations will be at around 38% level. And our margins would be somewhere I think at the midpoint about 26.5%, and that's a little bit lower than 2015, but a little bit higher than 2014.

So you didn't say that the preset increase was partially due to Liberty National margin assumptions for '16 change?

Yes. What I had just indicated was that we just had a little bit of an improved outlook internally with respect to where that margin was from what we had back in the third quarter. So I think we're anticipating our overall margin to be somewhere in that 25% to 27% range for the entire year of 2016 and just a slight improvement over where we just kind of thought it would have been back in October.

But nothing has changed at Liberty National Q3 to Q4; I misheard that for your outlook?

Yes. Between Q3 and Q4 guidance we just had a slight increase in our expectation of the margin for 2016.

Okay, what's the timing of the sale? How far along are you? Are there RFPs out?

Yes. We really can't discuss it.

Whether there are RFPs out, you can't say?

Well, I think in my comments indicated that we're in the midst of discussions with multiple parties.

Thanks. Frank, I wanted to revisit the question regarding the reduction in ratings within the energy portfolio. Is the $100 million the principal amount related to the $9 million of additional capital needed? Is this analysis, in response to John Nadel's question, considering the effects of multiple rating scenarios for notching changes or just a single notch? I wasn't clear on the response.

It's a combination of analyzing various scenarios that our investment department examined. Some of those scenarios would have considered a single notch downgrade for the entire portfolio.

Right.

We also examined the scenarios where the ratings dropped from 2 to 3 for a portion of our portfolio. The impact varies depending on whether all downgrades are from one notch to another. If it involves all ratings going from 2 to 3, there will be some effect. However, we generally believe this guideline will remain valid or be approximately accurate.

Okay. Why don't I leave it there for now? Thanks very much.

All right. Thanks for being with us. Those are our comments, and we'll talk to you again next quarter.