Globe Life Inc (GL) 2002 Q3 法說會逐字稿

Please stand by.

Good day everyone and welcome to the Torchmark Corporation, third quarter 2002 earnings release conference call.

Please note that this call is being recorded and is also been simultaneously webcasted.

At this time I would like to turn the call over to the Chairman of the Board and Chief Executive Officer, Mr. C. B. Hudson. Please go ahead Sir.

Thank you. Good morning everybody and welcome.

Joining us from our Operating Companies this morning are Mark , CEO of Globe United American and American Income, and Tony , CEO of Liberty National and United Investors.

Also joining us this morning are Gary Coleman, Chief Financial Officer, Larry Hudson, General Counsel and Joyce , Vice President of Investor Relations.

For those of you who have not seen our supplemental financial reports, I would like to pre the follow along if you wish by tuning into www.torchmarkcorp.com at our Investor Relations page on our web site, select financial reports from the menu.

Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance proposes only. Accordingly you are referred to the company's cautionary statement, regarding forward looking statements contained in our SCC Form 10Q for the quarter ended 03/30/2002 which is on file with the SCC.

Our operating income for the quarter was 106.4 million or 89 cents per share. An increase of 10 percent over the 81 cents in the third quarter of last year. In order to keep things on an apple's to apple's basis we adjusted last year's earnings to exclude amortization of goodwill.

For the quarter return on equity was 16.7 percent and we ended the quarter with a book value of $21.73 cents excluding for has been 115. Our debt to capital ratio was 25.3 percent trading our trust as debt.

Now turning to our life assurance operations. Total sales for the quarter increased 23 percent to $86 million. American Income's sales increased 41 percent to 25 million and we ended the quarter with 1967 producing agents.

American Income is not only our fastest growing life operation but also our highest margin operation both in terms of dollars and percentage premiums.

Direct response sales increased 25 percent to $31 million. Our direct response acquisition costs for the quarter were $18.3 million or 59 cents per $1 of sales. For the nine months our direct response acquisition costs were 61 cents per $1 of sales down 14 percent from the 71 cents we incurred in all of 2001.

This decline in acquisition costs reflects our commitment to producing higher profit margin business in our direct response operation. With respect to the remaining life distribution systems sales were $30 million up nine percent from a year ago. Total life premium income increased seven percent to 307 million with double digit increases at American income or direct response operation and the military operation.

Life under writing margins increased eight percent to 76.9 million and we are in line with expectations. For the quarter our policy obligations were $5 million less than in the second quarter which as we stated in the last conference call was an unusually high claims quarter.

Also in spite of the war against terrorism our military operations continued to experience favorable mortality.

Turning to the health insurance operations sales for the quarter increased nine percent to 47 million. United American general agency sales increased 63 percent to 24.5 million due to strong sales in the non market. Although sales declined 19 percent to $7 million or other health sales increased a 181 percent to 17 million.

With respect to our United American branch office operations sales declined 26 percent to $16 million. We ended the quarter with 1255 producing agents. As stated in last quarters call we expect the slows turn around in the branch office operation although we have had three consecutive quarters of declining health sales in the branch office we do expect this trend to reverse in the fourth quarter.

During the conference calls through the year we have stated that health sales would decline for the year anywhere from one to 10 percent. Now with the recent announcement that only 200,000 seniors will be dropped from the Medicare were expecting health sales for the year to be around 200 million down six percent from 2001.

Total health premiums were 251 million basically unchanged from last year. Our health under writing margin declined five percent to 41.1 million. The decline was due to lower percentage of premium margins and lower premiums in our branch office operation.

As stated in the last call we previously increased our branch office expenses to support a much larger sales force than we currently had. These earlier expenses plus negative impacts of on persistency from rate increases and loss of agents as resulted in a higher of acquisitions expenses per dollar premium income.

Although we have been reducing the expenses we have been doing it at slower rate than on decline in sales. None the less as we previously stated we expect to maintain the percentage of premium margins at the current level as we go forward. Furthermore and as I said earlier we expect an improvement in branch office sales in the fourth quarter compared to this years third quarter.

Turning to our annuities margins our under writing margin in annuity business declined 54 percent to $2.5 million. The $3 million decline is categorized as follows one about $1 million to do to the continued and replacement activity. Two about $1 million due to the decline in the market and a resulting decline in revenues in the third quarter and three about $1 million increase in guaranteed death benefits in excess of fund values. With respect to this last item we incurred $1.35 dollar excess benefits this quarter.

This was $1 million more than we incurred in the third quarter of last year and 800,000 more than we incurred in the second quarter of this year. In addition to the market taking of beading in the third quarter we incurred 75 live claims involving guaranteed death benefits.

Compared to less than 50 death claims in each of the previous four quarters. Thus far market conditions have improved in the fourth quarter and we anticipate the number of live claims to return to a more normal level for the balance of the year.

Therefore we expected an improvement in the annuities margins in the last quarter. Administrative expenses increased 10 percent to 31.5 million. Litigation expenses were $2 million during the quarter compared to 700,000 last year.

As we mentioned in the last conference call due to increased litigation involving race based, our cancer business and we expected litigation costs run about 1.5 million a quarter for the balance of the year.

Investment operations our excess investment income increased 14 percent to 74.2 million. On a per share basis, which we believe was a more meaningful view of the subject in light of share re-purchase program excess investment income, increased 20 percent to 62 cents a share.

Through out the quarter we purchased investment grade securities that provide annual yields right at 750 basis points. As stated in previous calls we are no longer in a choir of below investment grades securities.

In summary we had a good quarter with operating earnings growing 10 percent to 89 cents per share. Our live operations are producing strong results not only is our life insurance far and away our highest margin business but it's also responsible for almost 90 percent of net policy liabilities and over 90 percent of excess investment income.

2002 will be a sluggish year for the health insurance operations but sales should improve going forward and margins should remain at the current levels. In absolute dollars our under riding income for the nine months was down three percent but the cash we generate within our under riding operations is increasing.

Cash in on schedule to hit $400 million for the year compared to $357 million in 2001. The roll in cash being generated for both under riding and our investment operations combined with the favorable yields we're obtaining on our investments speaks well for our prospects with respect to future investment income and excess investment income.

During the quarter we continued our acquisition program by buying 1.4 million shares of our stock and for the nine months we've acquired 4.45 million shares at a total cost of about $169 million.

Looking forward to the last quarter of the year the consensus is that earnings per share for 2002 will be $3 and 51 cents per share which means that the fourth quarter earnings per share are predicted to be around 90 cents.

I believe we will meet or exceed that number excluding any additional beneficial effect from our continuing stock re-purchase program. Those are my comments this morning. Now Ken, I'll turn it back to you for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and will take as many questions as time permits.

Once again, please press star one on your touch-tone telephone to ask a question. And our first question will come from Nigel Dally with Morgan Stanley.

All right thank you, good morning everyone. Three questions, first, I know it's still early but I was just wondering whether it's possible to get a 1000 premium outlook for 2003, second, with Medigap, I just want some additional details on the HMR disloyalties and the overall competitive conditions and lastly with the human investment portfolio, the non investment grade hit 10 percent are you looking to reduce any of those potential holdings there?

All right, with respect to the 2003 premium, we haven't done the projections for 2003, I'll give you guidance on the next call, however I will say our premium growth is growing in the life insurance operation, our sales are very strong, we look to have a pretty good year next year, given that we are going to have about 15 percent growth in sales this year.

Health Insurance, of the 200 million that we will probably have this year, we expect at least 10 percent growth in sales going forward, I just haven't taken those numbers, Nigel, and put them into what we think the premium revenues will be for 2003.

OK.

With respect to the HMO in competitive environment, Mark, I'll turn that to you.

OK well there's no doubt, two years ago they were close to a million over 900,000 disenrols, and I believe our total sales were 58 million in just HMO disenrols last year dropped to between 4 and 500,000, I think our total sales there were somewhere in the 20 million range, this year with the number and with a competitive environment, I know to date we've written less than $1 million we don't expect it to be a significant piece of our sales for the fourth quarter, although, we do expect a competitive environment to improve, it does appear now that most states are increases for next year will be single digit which and compared with the last two years they were 16 and 12 percent, so, that will both help our persistency as well as help our competitive environment on these sales, we are hearing some wrung wings about some competitors having rather significant increases, there's no doubt next year, we will be in better shape competitively than we were this year.

Gary, with respect to the last question, on the low investment grade securities.

Well Nigel, the low investment grades securities were 669 million, that was 59 million higher than when we entered into the second quarter, however, during the quarter, we didn't buy any of the low investment grade bonds as we mentioned last time, we are not going to buy those type bonds and we sold $24 million, where we had the increase was that we had another $82 million of down grades, your price did sell more of our investment grade bonds and what we cant control are the down grades.

Well that gets to one follow up on the---will those sales result in any everyday losses in the fourth quarter or likely in 2003 and one other unrelated question just regard to interest rates, in the past I think you said interest rates, higher interest rates were a positive fundamental, just running with the agreements that you have in your book whether this is still the case or whether lower interest rates helped these years results now.

Gary, you want to address the first question and I'll speak on the second.

All right with those sales of below investment grade bonds there probably would be some loss as we do have an in that portfolio but I don't know that they'll be that significant.

OK.

in last year's annual report when I talked to the I mentioned that we hoped that the interest rates did go up and the cost us more because we generate enough cash from operations both underwriting and investment operations plus the securities that will be maturing over the next 12 months. All of that money reinvested is in excess of our debt, therefore, particularly our variable interest rate debt, so even though our variable debt costs could go up on higher interest rates we would prefer higher interest rates because it would enhance the total earnings of the company.

That's great, many thanks.

And with we have .

Good morning.

Good morning David.

Couple of questions just to clarify some I think you indicated in the initial comments that sales were down 19 percent and the press release I think shows they're down 31 percent.

Well they were down 19 percent on a GA, United American General Agency, and they were down 34 percent overall, so that they're down 42 percent in the branch and 19 percent on the GA side.

OK, I just wanted to clarify that, and the health sales that you're seeing right now is primarily on the hip products bill is that correct.

They are basically schedule benefit products yes, I mean it's not just strictly hospital indemnity but they all are schedule benefits.

OK and are the schedule benefits margin - product margins better or worse than the margins.

Ah you want me to take that C.B. Basically overall they have a lower loss ratio requirement so they are a few points higher margin of the percentage of premium but the not as good as it is on the Medicare and that's something we're trying to work on a little bit. But as a percentage of premium the margins are a little higher than Medicare.

OK so a little above the 16 maybe 17/18 percent on an underwriting basis.

That, I think that's reasonable, yes.

And CB if we just talked a little bit about how the outlook for 2003 and the current quarter obviously got significant benefits from the excess investment income and the repurchases, kind of driving the earnings growth, if the refinancing benefits start to level out somewhat next year maybe you could give us some guidance there, you're clearly going to have to rely more on the underwriting income, can you give us something there.

Well again we haven't projected the full year of 2003 and I'll have more guidance after the fourth quarter, but on the earlier projections rough projections that we did for the first half of the year, we are going to benefit from the strong cash that we're generating in our underwriting operations, that cash is being used for investment purposes. We're maintaining a high yields as I said 750 basis points on our fixed maturities, which is about what our total fixed maturity portfolio is yielding. The growing investment income from investment operations could be reinvested this year on share re-purchased or in bonds.

Well that's a strong sales in our life insurance operation that our premiums up I think seven percent for this quarter and as I said earlier for the year should be up in the 14 to 15 percent range with higher margins being thrown off on American income.

Our highest margin business and I expect the margins in direct response are a percentage of premiums to start showing itself in the 2003. The lower costs that we've been incurring in direct response for the last two years really hasn't come through the financials yet but it should next year so I can't I'm not going to say we'll have 12 percent growth I don't believe but I think we'll exceed eight percent growth just on the numbers I looked at a few months ago.

So somewhere in that range again excluding the benefits of stock re-purchase.

I understand great thanks very much.

And we'll proceed with Ed from Merrill Lynch.

Good morning I have a couple of questions. I guess well first of all I was wondering if you could talk a little bit about what you see going on in the competitive environment in the non medic Medicare supplement health business because your showing big growth there and I'm wondering if what, what type trends and how sustainable those are?

And then in terms of margins in life insurance CB I know you've been sort of looking at this direct response acquisition costs going down and kind wondering when we're going to see this through the financials and now your saying your pretty comfortable it's going to be you know three. Do you have any expectation to where those margins could go longer term?

And then I guess the final question is that I just wanted to clarify what your comment about earnings per share for this year I think you said believe meet or exceed this implied 90 whatever that ...

90 cents per share yeah.

Without any additional share re-PO was that what you said?

Yes.

OK.

90 cents in the fourth quarter gets us to 351 for the year and my statement was comfortable that we will meet or exceed the 90 cents not considering any benefit from stock re-purchase.

Taking your questions going back---Mark, on competitive environment on the under age health why don't you take that. macandrew: OK, OK and Ed you know it's still even though those sales are growing it's still a relatively small piece of our business even at United American in total is looking a year ago it was six percent of our total premium now it's roughly nine percent.

There is what I think right now the number is somewhere in the neighborhood of 41 million people uninsured. And what has happened over the last couple of years is particularly with getting out of the market there really are very few options as far as individual major medical insurance concerned.

So people that agencies that used to be writing individual major medical coming to us and writing on our products I think we expect next year those sales continue to grow rather rapidly.

Although I wouldn't be I would still be surprised if there getting 15 percent of our total health insurance at United American but we do expect those sales to continue to grow rapidly next year.

Ed, on the margins in the direct response I'm not going to predict what there going to be. I think that they know the business that we're producing today and last year are producing margins under riding margins in excess of 26 percent of premiums, but as far as the total block of business I look for next year for us to have 25 percent a solid 25 percent of premium margin in the direct response business and much more growth in revenues.

The last two quarters we've been $30 million of sales and if you understand the nature of that direct response but in this there is introductory offer period we really haven't seen the benefit of the strong sales in the last two quarters so far this year and the premium revenues should be coming in next year.

Our direct response I want 25 percent is all I'll say today expect the margins to be for the whole block of business next year but with much more premium growth than we've had thus far.

OK just two quick follow ups if I might I guess the question I was one of the things I wanted to get at was direct response is given the significant decline in acquisition costs per dollar of sales is there any reason to look for you know benefit ratios to be higher on what you sold more recently that would off set some of that or is this sort of acquisition costs savings sort of find it's way to the bottom line and then just to follow up on your comments about the major medical could you talk about the risk profile of what your selling today versus sort of how you think about the business and .

OK do you want me to.

Yes go ahead.

Well actually I will address both of those.

OK.

As far as the direct response goes we do expect we don't expect to see the mortality increase so the benefits are those savings in fact actually we believe that the business that we generated this year should have a 29 percent margin it is just going to take time for that it will be a very gradual movement to the bottom line over the next few years. We do expect that we can maintain double-digit growth in sales and premiums and it will be a very gradual movement to the bottom line or those improved margins but it will be very gradual.

On the would you repeat the question on end of I'm sorry.

Yes I used I want to get a sense for sort of the risk profile of the health business your writhing versus the business of Medicare supplement.

Ordering these products that were writhing we've have these products based in on the books for a number of years. They are scheduled benefits for example they do pay so much per day. They can pay to $400 per day for a hospital room and pay so much for misleading hospital expenses it has scheduled benefits if you have a surgery it pays $3,000 for this particular surgery and a different amount they are scheduled benefits. The rate history on it has been very stable. We are comfortable with the margins on the business. Most of the people were writing are primarily of rural uninsured individuals. So our experience on the business to date has been good and then a lot of these products we've had out there for 20 years.

They are just now becoming a little more attractive because of the absence of alternatives.

OK thank you very much.

And next we have with .

Good morning, C. B. Here, a couple of questions on capital position currently agency occurring getting tougher in today's environment. Thankfully for you, you're - you have very exposure to the areas that they're most concerned about. Where do you stand on your discussions with the key rating agencies today, are they still comfortable with your rate? I guess is the first question.

And the flip side is you've consistently said that, you know, acquisitionary stock is the best use of excess funds, and nothing interesting out there in the acquisition front. Is that still where you stand in this chaotic environment today?

All right. Gary, we'd like you to address the rating agency question.

Yeah. Bob, as far as the rating agencies I think they're comfortable from where we are. upgraded us earlier in the year. And our statutory capital ratios of the companies are strong, they're well above regulatory requirements, and they're well within line with what the rating agencies expect for our rating levels. So I think we're in good shape there.

We will probably - we will be careful in the last quarter, in the stock repurchase program. Because of the bond write down in the second quarter there won't be as much cash used for repurchase as would have been because we want to maintain our good ratings with the rating agencies. So it will be a lighter quarter on stock repurchase, I think that's fairly certain.

As far as other acquisitions are concerned, we've looked at things from time to time, and continue to do so. Most things that we've seen from our perspective don't have great growth opportunities. It's more or less, I would call it, dead blocks of business.

We're not really interested in any health insurance operations, we would be interested in if it had a going concern to it, and we really haven't seen anything that was attractive to us.

Relative to buying back our stock, the repurchase of our stock is a major acquisition program. The fact that we bought back well over 50 percent of it in the last 16 years, and a fair amount of it in the last four, I think you can count on that as being our major acquisition program.

OK. One last question, any progress in resolving the litigation or is it just sort of in the state?

That case is on appeal to the Alabama Supreme Court. That's where the case stands right now.

I will add to that, continues to replace our business which was part of the last law suit, and I would say that the odds of another law suit are very high.

OK. So no progress .

The first law suit on the $50 million award, no progress.

Thank you.

And with Lehman Brothers we have Eric Berg.

Thanks very much. Good morning. Two questions.

First could you review with us please why is the sales experience so different these days on the health side as to between your branch office at United and the independent? That's question one.

Question two, can you help us understand how despite the dramatic decline in interest rate you are maintaining your portfolio yield? Thank you.

Well in the differences in the margins on the - in the health insurance, Eric.

One, as I stated in my comments we have had higher acquisition costs in the branch. We were spending money in earlier periods for a much larger sales force than we currently have. And that has resulted in just higher acquisition .

We were running 20 basis points - or not 20 basis points, 20 percent of premium this quarter, versus 19 on the general agency side. And at the same numbers year to date ...

I'm actually - I'm sorry I'm actually talking about the sales please. There's a big difference in sales - the sales experience it would seem on the health side as to between the branch office and the independent.

Well the branch office is to date is really been a Medicare supplement operation where as our general agency is been both underage and Medicare supplement you might want to talk about where the branch is going with respect to non-Medicare supplement sales.

Well, what CB said is true. But I mean both operations have seen the Medicare supplement sales decline this year - the general agency operation particularly one large L.A. agency that we do business with has seen rapid growth in their non-Medicare sales it is something we're starting to see in the branch and going forward we will see much more rapid growth in non-Medicare sales in the branch office as well as hopefully next year we'll see our Medicare sales come back in both operations.

But as far as year to date the big difference is particularly one large general agency whose riding the bulk of that non-Medicare business force.

With respect to the yields as I stated in earlier conference calls we do not hesititating any longer to go out longer on maturities only in investment grade bonds I don't hesitate to buy securities that are maturing 20 - 25 years into the future and we've been able to find those types of securities that have yielded 750 basis points.

If you matched our outside of the fixed annuities business which is very small piece of our business if you matched assets to liabilities you could literally go out 30 years - 40 years on the business. We are going to have positive cash coming in forever we don't have a matching assets to liability problem that a fixed annuity company would have. Does that answer your question?

It does I thank you.

And next we'll go to with .

Hi, , we just have a couple questions that we wanted to ask. We wanted to ask for - when are the assumptions that go into the valuation of your access if you could give us that.

And then we also - just to ask a little bit more about the investment income. We just wanted to know how much of the portfolio is going to mature next year? So how much of the - how much are you going to take?

And just to make sure I understood what you were saying - the reason that you're able to maintain the yield on the portfolio is that your buying investment grade securities that are very, very long term and could you just give us an idea of what some of those types of securities are?

Well on one of your questions that you may have a more updated number we'll have about $200 million of bonds maturing next year. would be happy to send you a print out of the securities that we have purchased for both the nine months this quarter if you like but their investment grade when you stay very long yes we've got anywhere from 2015 to some 2025 even a couple 2030 maturities probably best after the call we could give you a listing of those securities.

As far as the assumptions in the agreement Gary would you like to address that?

Yes those well first of all the 200 million is a little over 220 million maturities next year. As far as the , we have those value out side I can't tell you all the assumptions but honestly there is assumptions as to what interest rates are going to do over the remaining period of the and based on the other terms of the , so.

But I guess there are I guess the reason that were asking is if you earn in the income of about five to six million dollars pre tax on the the spread is it and they go out 10 years and more. I guess my question is, is it realistic to think that there only worth 25 million.

Well that's what the you know it is not just based on what happened today it is also based on projections the way rates are going in the future. You know that's that is supposed to be what there that is an arm length today if we want it sell them today is what were been told that we could sell them for.

OK, that's great. Thank you.

And just as a reminder if you do have a question today please press star one on your telephone and next we will go to with Bank.

Thank you good morning.

Good morning.

Could you give us a sense of the asset liability duration at this point.

Gary.

The duration of the assets is around six as far as the liability I mean C B mentioned I don't know that we have a duration on our liabilities but it would be again our liabilities are very long term.

So they would be longer than your assets.

Much longer.

And then what do the do. Do they change that miss match.

Gary.

I guess we look at the as separate from you know our over all liabilities are these are for fixture of time the longest is goes out nine more years and again it is I don't know that we look at it as taking our duration of liabilities and were looking at it it's a cash flow that it can generate in the spirit of lower interest rates.

Gary let me ask you this way was you assets shorter than your liabilities it's painful when interest rates fall it's fundamentally reduces your earning. So the are fundamentally increasing your earnings so it sounds to me like the are some how a little better match for you.

Well I guess in that respect they are your right and that's why interred in to the because in the spirit of lower interest rates on investments it was the thing to do and as C B mentioned as rates go up obviously we will be paying higher interest on these but we will benefit more because of the higher assets the more the higher cash that we are generating will be investing and we will have more investment income over what we are loosing from the .

OK and then but C B I know you said this but I'm sorry to make you repeat it. You said something about been careful in the fourth quarter about purchase and then you said something about a bond brake down and you would earlier I think responded that some of the non investment rates securities will be written down in the fourth quarter.

No, no.

Sorry.

What I meant is because of the bond write down that we took in the second quarter it's impacted our share repurchase program for the year and as a we won't we probably 10 20 million dollars is all that we could do in the fourth quarter maybe closer to $10 million in order to maintain or not we don't want to take any chances with our ratings but it that a way so the prior right down as affected the repurchase program, and we won't buy anywhere near as much stock in the fourth quarter as we did in the second quarter, I mean in the third quarter.

Understood and how should we think about your capitals that you are generating each year, is that share earnings, is that the best proxy?

Well, the sad story in earnings that we were able to pass up to the holding company are critical in the purchase program but I can't tell you what that number will be, perhaps Gary has an estimate but I do know this, Vanessa, as I have said in my conference call, we are generating an immense amount of cash in our underwriting operations, I said that for this year, it would be over $400 million of cash, some of that goes to policy reserves some of it staying offset with paper acquisition, the write off of acquisition expenses but that's about a 9 or 10 percent increase in cash and we had a good increase last year so I believe that these statutory earnings are going to get stronger and stronger going forward, given consideration of what I just said plus the strong investment operation that we have got, I look forward to seeing what the actual statutory earnings for the year are, Gary can you add to that?

Yeah Vanessa, when all is said and done this year, we will have generated a little over $190 million in cash flow, free cash flow at the holding company and I would expect it to be at the $190 to $200 million level next year, I haven't seen our third quarter statutory earnings and I'm not sure what they are going to be for the year, we will know a little bit more about that in a few weeks, but it still should be close to the $200 million level of free cash flow next year.

Might I add, that's free cash flow, at our interest on after dividend, and it was only I think it was in '98 we were generating less than a 100 million in free cash flow, so we have increased it dramatically.

That's terrific, thank you very much.

And Jeff Shuman with KBW has our next question.

Good morning, I was wondering if you could clarify a couple of items, first on the follow up on the free cash discussion, the 190 to 200 million that you expect next year, does that reflect any change in I guess expected dividends practice from the life companies that you talked to in the fourth quarter about suggesting share repurchase of the holding company level or are you thinking about making adjustments in I guess announcing dividends and then secondly, did I understand you correctly to say that a lot of the non Medi-health production is coming from one particular generally consumer relationship?

Gary, take the first part of that.

There's not any plans as far as changing our dividend policy earnings up stream we generally take most of the earnings from the companies and move that to the holding company and will continue that next year.

OK and in light of seeing these comments about protecting the ratings, there is no need to change that?

Well I don't think there will, we did get impacted by again that write down that we took in the second quarter, but as we move into the next year, we will be generating more earnings, we'll take a look at it, but just at this point, I don't see that we will have to reduce it.

OK.

Mark, would you like to ...

As far as the non Medicare health sales on the general agency side, the bulk of those sales are coming from one large general agency in Fort Worth.

And is that an agency that previously have produced this type of business for someone else or are they switching those products from some other products or sort of what ...

Well, they have generated business for us for a number of years, though there's no doubt in the last couple of years it's gone up dramatically. I do know that they've previously produced a lot of business for work and which most of that has now been non renewed so there's no doubt that they shifted a large volume of business from other companies to us.

OK, thank you.

Jeff, I would just make one further comment there that is major medical has disappeared out there in the world I suppose there's a golden rule maybe the only company riding any meaningful volume but with people cutting back on group health insurance plans across the Country and the underage market there really is a greater need today for supplemental health plans than there has been in years so if agencies are recognized, there is no major medical but there is a need for supplemental health coverage and that's what we're providing.

At this point do you have the full range of products to exploit that opportunity or is there some opportunities ... some new products as well?

We're developing new products as we go. We have a new product we hope to introduce first quarter of next year and we have some ideas for how we can better while still maintaining controls on costs, we have some ideas for some additional products which we will be developing in the next year.

OK, thank you very much.

And we do have a follow up question from with Goldman Sachs.

Hi, it's isn't this on the medical business--on the health business, is there any changes in regulation that you're seeing, do you think that without major medical that everybody moves towards this more income replacement or as you say schedule benefits product that state regulators will have greater scrutiny on this type of and the price increases and is there anything going on for that - on the legislative front that might be a benefit or a challenge.

Mark, would you like to ...

Well I can as far as the non Medicare regulation we haven't seen any it is much less regulated than Medicare is we haven't seen any big increase in regulatory any movement there as far as the Medicare I don't think we see any thing right now that concerns us as far as any regulations there. Basically Medicare has remained the same for almost 40 years now and I don't expect any major changes.

I'll further comment on that---Mark said less regulated, it's certainly less political than the Medicare regulation is and the under age health is less political. Furthermore we don't have unlike Medicare where we have rate increases every year and it's the nature of the business in the supplemental products that we're selling we don't expect to have rate increases every year or even every couple of years and that takes some of the pressure off on the regulatory side, and actually because of the demise of the HMOs a couple of years ago the regulatory world has been a little easier to deal with in Medicare, they're more open minded on the rate increases, we still have problems but it's much better today than it was three or four years ago.

Could you just give me an idea of what type of premium you collect on one of those underage policies, I don't know if it's age based but you know your typical customer if I was doing just your typical average hospitalization policy, how much premium would I be paying on a monthly basis.

Well that's all over the board really. It's been it is age based and also you have a choice of benefit levels. I mean for example just hospital room and board do you buy a $200 a day benefit or a $300 or a $400. You have choices. The average premium I would guess would be under $2000 a year so it would be it would be somewhere in the 150 to $200 a month range.

Ok, ok. That's great thank you very much.

And there's a final reminder if you do have a question or comment please press star one on your telephone.

And at this time we do not have any further questions in the queue. I'll turn the call back over to you Mr. Hudson.

Thank you for joining us this morning and look forward to visiting with you in three months. Good day.

That just concludes today's conference. Thank you for your participation and have a great day.