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Branch Manager Meeting October 12 th - 14 th , 2011

Branch Manager Meeting October 12 th - 14 th , 2011. TMK1645 0710. Welcome and Recognitions. Mark McAndrew Chairman of the Board Chief Executive Officer Torchmark Corporation. Tony McWhorter Chief Executive Officer Liberty National Life Insurance Company.

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Branch Manager Meeting October 12 th - 14 th , 2011

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  1. Branch Manager MeetingOctober 12th - 14th, 2011 TMK1645 0710

  2. Welcome and Recognitions

  3. Mark McAndrew Chairman of the BoardChief Executive Officer Torchmark Corporation

  4. Tony McWhorterChief Executive Officer Liberty National Life Insurance Company

  5. Andy King President / Chief Marketing OfficerLiberty National Life Insurance Company

  6. Socialism vs. Capitalism Which works better?

  7. LIBERTY NATIONALSALES AND IN-FORCE PREMIUMS Sales and In-force premiums show a declining pattern… PREMIUM (In 000’s) SALES*INFORCE 201034,732Quality problems fixed; new Life Rates for profit margin 271,634 200945,930New DCN & QOB Quality rules 272,531 200848,540Quality problems begin287,312 200736,981More Recruiting & Lead plans 293,936 200641,369New Service Salaries stop; higher commissions instead300,933 200547,088New Recruiting Programs 302,747 200449,145New “Production Pay” 303,965 200353,525Starting Salaries stop 304,406 200256,341301,770 *Gross

  8. Liberty National Past Changes We have invested in many costly programs to improve growth. Let us count the ways…

  9. Liberty National:Past Quality of Business Issues In 2008, we increased sales, but saw a serious deterioration in the quality of new business This was attributable to: Structure of Production Pay– was delivered by e-app before bank drafts cleared the bank Production Pay Quality Multiplier– was based on 3 month “Active” Agent rates, rather than on both “Active” and “Terminated” Agents 3. Managers and Agents with poor QOB practices- promoted were based on 3 month “Active” Agent DCN rates, making matters even worse with expansion

  10. Liberty National:How We Improved Quality of Business Processes instituted to improve QOB rates: “Production Pay”: a) Delayed New Business cycle to allow more time for returned drafts; 1st premium must clear bank before production pay payment b) Prohibited family business by new agents; prohibited Money-orders, Cashier’s Checks. “Production Pay” Quality Multiplier: a) Tightened quality multiplier standards b) Required Managers’ Quality multipliers to be based on both Active and Terminated agents. Improper Behavior - Managers and Agents with poor QOB practices: a) Hired “Quality Analyst” to identify problem Managers and Agents b) Poor quality practices: Agents terminated; re-assigned or terminated Managers c) Closed offices with poor quality practices d) Stronger rules on assigning commissions on Worksite cases to ensure New Agent training. 4. Poor Quality Oversight a) Discontinued “Quality-Approved” branch programs, due to quality deterioration.

  11. Liberty National: Improved Quality of BusinessLatest three Month Lapse Rates

  12. “RECRUITING PAY” CHANGES $2.9 Million was paid to BMs for Recruiting in 1st 8 Mos of 2011 - 7 times the amount paid out for all of 2010 2009 Jun : New PLs and $5k rewards released. ----------------------------------------------------------------------------------------------------------------------------------- 2010 Mar : New $1K component; reduced ad charge. ----------------------------------------------------------------------------------------------------------------------------------- 2011 Jan : $7.5k and/or $15k Med Supp production component added. Richer “Recruiting Rewards” for 40%ers, with $7500 AP. Mar : Production increase required to get full pay. Jun : Altered Med Supp requirement to 8 week look-back. Aug : Increased PL payout, reduced Part B and C 40%er Multipliers. Sep: “Recruiting Rewards” Discontinued.

  13. Effect of Past Programs Total Appointed Agents - Temps & PLs Liberty National - 626 3Q vs. 1Q - 33% 37% Temps 37% Temps 1281 38% Temps 63% PLs 63% PLs 62% PLs

  14. Effect of Past ProgramsTotal Appointed Agents - Temps & PLs Year-over-Year Recruiting 2010 vs. 2011 -1,072 - 17.6%

  15. Effect of Past Programs Producing Agents Decrease in Producing Agents – matched decrease in Recruiting Year-over-Year Producing Agents 2011 vs. 2010 YTD -463 -23.1% -158 -51 -254

  16. “PRODUCTION PAY” CHANGES 2010 May : Added 20% of Health submit to “Production Pay” calculation. Combined PD and non-PD quality multiplier Aug : Introduction of Enhanced “Production Pay” to UM & BM for New Agents submitting $2500/wk. Oct : Changed to rolling 8 weeks look-back for UM 1st time 40%ers. Nov : Discontinued test program of Enhanced “Production Pay” for New Agents submitting $2500/wk. Dec : Changed the calculation so that extra premiums on any increase or decrease count towards gross submit.  ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 2011 Jun : “Production Pay” qualification threshold increased to $1,050. Jul : Shortened time for second 80% “Production Pay” from Week 12 to Week 8.

  17. “PRODUCTION PAY” CHANGES NO POSITIVE IMPACT ON SALES Over the last year, Total “Production Pay” increased 6.4% - while production decreased: 2010 $18,455,539 2011* $19,629,699 +$1,174,160 +$6.4% * Jan – Aug 2011, Annualized

  18. PRODUCTION PAY CHANGES NO POSITIVE IMPACT ON SALES Production Pay for Agent’s DECREASED… While Manager’s Production Pay INCREASED… Average Weekly Production Pay AgentCum Diff.UMCum Diff.BMCum Diff. 2009* $506 $324 $385 2010 $447 -12% $435 +34% $443 +15% 2011** $457 -10% $538 +66% $659 +71% Indicates a TRAINING PROBLEM – and a Comp design problem. * Sep - Dec 2009 ** Jan – Aug 2011

  19. Unit Manager Training Examples UMs Not Focused on Training New Agents

  20. New Agent Training by Unit ManagersThis is a branch with many UMs who could train new agents. The BM says many of the UMs are enrolling Worksites with previously-trained Agents because they are “fast enrollers”. Are these UMs training new agents - successfully? May Hires

  21. New Agent Training by Unit ManagersThis is a branch with many UMs who could train new agents. The BM says many of the UMs are enrolling Worksites with previously-trained Agents because they are “fast enrollers”. Are these UMs training New Agents - successfully? June Hires

  22. New Agent Training by Unit Managers This is a branch with many UMs who could train new agents. The BM says many of the UMs are enrolling Worksites with previously-trained Agents because they are “fast enrollers”. Are these UMs training New Agents - successfully? July Hires

  23. New Agent Training by Unit ManagersThis is a branch with many UMs who could train new agents. The BM says many of the UMs are enrolling Worksites with previously-trained Agents because they are “fast enrollers”. Are these UMs training new agents - successfully? August Hires

  24. New Agent Training by Unit ManagersThis is a branch with many UMs who could train new agents. The BM says many of the UMs are enrolling Worksites with previously-trained Agents because they are “fast enrollers”. Are these UMs training new agents - successfully? September Hires

  25. Branch results do not appear to match core company values

  26. State of the Union Life and Health Sales

  27. 2010 Product ChangesObjectives were: Appropriate Ratesto achieve profit objectives Simplify portfoliofor needs-based sales Simplify Commissionsfor better Agent retention Desired Result: Increase profits for Company, Shareholders, and Representatives

  28. Total Net Health Sales (in millions) 3RD Q vs. 2nd Q: Health Sales INCREASED $685K, BUT… 2Q vs. 3Q +$685 $4,215 $3,014 2Q 11 3Q 11 1Q 11 As of 9/7

  29. Total Net Life Sales (in millions) … But 3rd Q vs. 2nd Q: Life Sales DECREASED by $1.2 Million $9,772 3Q vs. 2Q -$1,172 $9,443 $8,600 As of 9/7

  30. Total Net Life and Health Sales 2010 vs. 2011 (in millions) - 11% $44,831 $39,854 • Life • $6,172 • - 18% Health + $1,195 + 11%

  31. Profits on New Business Past Growth “investments” have been unsuccessful. TMK invested inordinate sums to support: Recruiting, Quality, Branch Expenses, Compensation, and Benefits After our latest 2010 changes, sales did not grow. Based on current expenses, profit margins on current new business are Negative 3%. Without changes and increased production, we would overspend by about $25 million.

  32. Branches under $10K per Week $10K PER WEEK MINIMUM To meet our expense and profit margins within a branch, a minimum weekly average of $10K of quality business is required. BRANCHES UNDER $10K Branches under $10K per week have been assigned to other BMs with better training and supervisory systems.

  33. Consolidated Branches Consolidated Branches - Combined Production Receiving Branch + Transferred BranchesReceiving Branch + Transferred Branches BEFORE CONSOLIDATIONAFTER CONSOLIDATIONPercent Increase 4 WK AVG $467,082/wk $540,006/wk +16%* *As of August

  34. Liberty National Compensation Changes

  35. Current Agents No Changes For Agents appointed BEFOREOctober 31, 2011

  36. Agent Commission Changes for: New Agents Contracted on or after 10/31/11

  37. New Agent Commissions New Contract for New Agents New Agents appointed October 31, 2011 & after will be on a “New Contract” When they begin, New Agents will have the same commission rates as the existing contract - however when New Agents reach $15K Net issue*, in lieu of benefits, higher commission is awarded *$15K requirement does not include Med-sup AP or any UA products

  38. Revised New Agent Commissions Benefits will no longer be offered to: New Agents contracted 10/31/11 or later Instead of Benefits: a) Increased Commissions awarded at $15K Net Issue* b) Vested Commissions, awarded according to a time schedule Current Agents contracted BEFORE 10/31/11: a) Current benefits will NOT change b) Current Agents will NOT get higher commissions or vesting *$15K requirement does not include Med-sup AP or any UA products

  39. Revised New Agent Commissions: New Agents Contracted on or after 10/31/11 1st Year Commission Increase Examples - After $15K Net Issue*

  40. LNL Revised New Agent Commissions: New Agents Contracted on or after 10/31/11 2nd and Subsequent Year Renewal Increase Examples After $15K Net Issue* *$15K requirement does not include Med-sup AP or any UA products

  41. LNL Revised New Agent Commissions: New Agents Contracted on or after 10/31/11 Agent Renewal Commission Vesting* Vesting occurs over a 5-20 year period of continuous service, depending on which event occurs first: - Fully vested at 20 years service, or - At age 60, with a minimum of 5 years’ service # Years ServiceRenewal Fully Completed Vesting Rate 1-10 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% *Refer to actual contract for further details

  42. LNL Revised New Agent Commissions: New Agents Contracted on or after 10/31/11 Agent Renewal Commission Vesting Death & Disability* If the Agent has been contracted over 2 full years but less than 20 completed years, renewals will be payable for an equal time to the Agent’s continuous service under the new contract. *Refer to actual contract for further details

  43. New Agent Revised Commission Account Release For NEW AGENTS contracted on or after 10/31/11 New Agent entry-level commissions (prior to $15K Net Issue) $915.20 Annual Whole Life Policy on BB X 60% commission rate = $549.12 Payable Commissions X 70% Direct Pay rate = $300 Direct Pay (Max on one policy) Remaining $249.12 deposited into commission account upon policy issue New Commission Account Release To Avoid Negative Commission Accounts: Bank Draft

  44. New Agent Revised Commission Account Release For New Agents Contracted on or after 10/31/11 $971.55 Annual Group Term Policy on PD Section 125 X 62.5% commission rate = $607.21 Payable Commissions X 50% Direct Pay rate = $300 Direct Pay (Max on one policy) ------------------------------------------------------------------------------------------------------------------------- Remaining $307.21 deposited into commission account upon policy issue: New Commission Account Release To Avoid Negative Commission Accounts: Worksite New Agent entry-level Commission Advance (before $15K Net Issue)

  45. Unit Manager Commissions

  46. Unit Manager Commissions UNIT MANAGERS No Changes to UM Commission O-R Rates

  47. Branch Manager

  48. Torchmark Corporation New Accounting Rules for 2012

  49. NEW ACCOUNTING RULES FOR 2012 2011 and earlier The “OLD” Rule allowed more liberal deferral expensing of Acquisition Costs over time: Up through 2011, expenses were more loosely defined as costs that “vary with and are primarily related to” the acquisition of NEW insurance contracts. Field expenses could formerly be deferred over a period of many years (emulating the way we receive premiums), even if not tied directly to a specific sale. ----------------------------------------------------------------------------------- 2012 and later The “NEW” Rule is more restrictive in deferrals of Acquisition Costs over time: Beginning in 2012, TMK’s Field Expenses can no longer be deferred over many years - UNLESS they can be closely tied to a specific policy issued. If not tied to a specific sale, costs have to be FULLY EXPENSED the 1st policy year. For Liberty, losing the ability to defer over time would translate to $7.9 MILLION in 1st YEAR EXPENSES - if we do not make certain changes.This rule is called ASU 2010-26 - its intent is to have all insurance companies account in the same way all banks must now account for mortgage loan origination costs. Every TMK company is impacted, as well as ALL other insurance companies:  Companies with company-supported Branch Offices are more greatly impacted since they can no longer defer the traditional expenses of operating offices over time.  Again, ALL COMPANIES are losing deferrals of any in-house expenses - unless directly connected to acquiring a sale. This is very difficult to show under the new rules.

  50. NEW ACCOUNTING RULES FOR 2012:How Liberty National is affected In the past, we have been able to defer the costs of operating Branch offices, with Accounting able to expense them over many years (emulating the way we receive premiums). Future expenses: Liberty’s costs are no longer deferrable on certain expenses. Expenses affected include: Rent Phone & Internet Clerical Supplies Furniture and Equipment Z Account Leads Health, Life, Disability & Retirement Benefits

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