Globe Life Inc (GL) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the Torchmark Corporation second-quarter 2003 earnings release conference call. (CALLER INSTRUCTIONS). At this time, I would like to turn the call over to the Chairman of the Board and Chief Executive Officer C.B. Hudson.

Thank you. Good morning everybody and welcome. Joining us from our operating companies are Mark McAndrew, Chairman of Insurance and Operations; Tony McWhorter, CEO of Liberty National and United Investors. Also joining us are Gary Coleman, Chief Financial Officer; Larry Hutchison, General Counsel, and Joyce Lane, Vice President of Investor Relations.

For those of you who have not seen our supplemental financial reports and would like to follow along as I discuss some of the details, you can view them on our Website, www.torchmarkcorp.com at the Investors Relations page. Select Financial Reports from the menu. These reports also include the GAAP disclosures and reconciliations required by the SEC Regulation G.

Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, you are referred to the Company's cautionary statement regarding forward-looking statements contained in our SEC form 10-Q for the quarter ended March 31st, 2003, which is on file with the SEC and a matter of public record.

Our operating income for the quarter was $110m or 95 cents per share, an increase of 9% over the 87 cents in the second quarter of last year. It is worthwhile to note that this quarter was the fourteenth consecutive quarter of increasing operating earnings per share. Return on equity for the quarter and for the six months was 16.3%, and we ended the quarter with a book value just under $24. Our debt to capital ratio was 23.3% treating our preferred stock as debt.

Now turning to our insurance operations and first, Life Insurance. Total life sales for the quarter increased 9% to $95m. Our direct response operation again produced outstanding results with sales increasing 25% to $39m. In addition, our direct response packaging and postage expenses for the first half of the year were 60 cents per dollar of sales compared to 62 cents for the first half of 2002.

American Income sales increased 8% to 27m, and we ended the quarter with 2253 producing agents, 300 more agents than a year ago and 200 more agents since the end of the first-quarter. Sales in our military operations increased 13% to $7m. This business, as I have said many times, is the highest quality business in Torchmark. Although our military sales for several years have represented about 7% of our total sales, the extraordinarily high persistency of the business has resulted in the military life premiums now representing 13% of the total Torchmark life revenue.

Liberty National sales were down 8% to $13m. Liberty during the quarter ceased excepting cash or money orders with applications. The higher lapse in mortality rates from such business have been a drag on margins. Our ceasing to accept this business has resulted in a decline in sales. This isn't surprising to us, but we expect it to be temporary, and we expect when sales improve, margins will likewise do the same.

Total live premium income increased 7% to 327m with double-digit increases in our American Income, direct response and military operations, and our life margins have improved by increasing 11% to $81m.

Turning to health insurance, total sales for the quarter increased 12% to $59m. United American general agency sales increased 11% to 26m due to strong sales in the non med-sup market. Although med-sup sales declined 8% to 7.3m, other health sales increased 21% to 18.5m.

With respect to our United American captive agency, our branch office operations sales increased 12% to 21.3m. Our branch office producing agents numbered 1,304 at the end of the quarter, an increase of some 100 agents from three months ago. Total health premium increased 1% to 257m.

Our health underwriting margins declined 8% to $39m. The decline in margins is the result of the continued high claims experienced in this segment of our Liberty National cancer business. The business that we refer to as the class business, which was subject to litigation settlement in 1994, experienced a cash loss ratio in the quarter equal to 112% of the $19m of premium.

The high claims and the sprinkling of our claim liabilities dramatically reduced Liberty's health underwriting margins. Although we continue to implement rate increases in this business, we also working on a permanent solution to the cancer business problem. We are optimistic that that problem will be solved, but we are not at liberty to discuss it during this call.

Now turning to the annuity business, our underwriting margins declined 40% to $2.6m, but improved by some $400,000 over the results in the first quarter of this year. The improvement was due to an improvement in the stock market. Although Waddell & Reed continues to replace our business, we expect if the stock market does not rise or fall that margins should remain at about the same level for the balance of the year. Administrative expenses for Torchmark increased 3% to 31.2m, which included 1.1m of litigation expense.

Now turning to the investment operations. Excess investment income increased 8% to 79m, but on a per-share basis, which reflects the effect of our share repurchase program, excess investment income increased 13% to 68 cents. For the quarter, we acquired investment-grade bonds with annual effective yields of about 6%, well below the yields we have obtained in the recent past.

Given that we will invest or reinvest some $1b over the next 12 months and given that the yields do not change, investment income will be approximately $12.5m less in the next year than we would have earlier expected. In response, we have recently downward adjusted the interest rates we are crediting on our annuity and interest-sensitive life business. The effect of this change over the next twelve months is about $9m. Therefore our growth in earnings over the next twelve months should not be significantly impacted by the lower investment yields.

Now before my final comments with respect to the quarter and the year, we would like to provide some additional information about what is happening in our operations. And with respect to the life and health insurance market, Tony will have a few comments, and I will first call upon Mark.

As C.B. mentioned, our direct response operation had an outstanding quarter with over 39m of new sales, an increase of 25%. Our gross margin improved from 23% a year ago to 25% in the current quarter. Life premium was just over 10%, while our margins were up 18% for the quarter.

The primary reason our direct response margins have declined over the past several years was a decline in our new life sales on children. In 1998, we issued 383,000 new juvenile life policies. By 2000, that number had dropped to 235,000. While these sales were replaced by adult sales, which had a higher average premium, they also had poor persistency and lower margins.

In 2002, as a result of finding a new product, new rates, our new juvenile sales increased almost 440,000 policies, and we should write roughly 550,000 new policies this year. The subsequent upselling and cross-selling of these households comprise our most persistent and highest margin business. In 2002, up sales and cross sales of our juvenile customer base represented 32% of our sales but represented 60% of our total margins. For the balance of this year as well as 2004, I expect to see continued double-digit growth in sales and premiums and a continual gradual increase in the margins in the direct response.

At American Income, for the first six months of 2003, American Income life sales were up 13%. Premiums were up 13% and margins were up 13%, all on track with expectations. At the end of the quarter, the agent counts stood at 2253, which was up 13% from year-end and 18% from a year ago.

Changes at American Income over the next six to twelve months will be focused on improving the quality of the business written. Historically, American Income loses almost half of the business submitted during its first year due to underwriting declines, cancellations at issue and lapses. Over the next year, our goal is to reduce this loss of business to 40% or less. This ten-point change in first year loss of business would effectively increase our persisting new business by 20%. It will also have a positive impact on our margins. While some of these changes could have a short-term negative impact on reported sales, I continue to expect double-digit growth in sales as well as premiums and margins through 2004 at American Income.

I will now let Tony McWhorter, CEO of Liberty National, comment on its results.

First in regard to Liberty National's life margins, we did show a slight downturn in life underwriting margins in the second quarter. Cash claims continued Liberty's historical trend of being higher in the first half of the year. We are already seeing a moderation of the cash claims and expect to see our normal pattern of lower policy obligations in the second half of the year.

During the call last quarter, I noted that we had made a move to improve the quality of our sales by no longer excepting new business where the initial application fee was paid in cash. Beginning in April, we required that the initial premium must be paid by customer check. The reason we made the change was due to the very poor persistency of that cash business.

Not surprisingly, we did see a drop in new sales in the second quarter of this year. Life sales this quarter were down about 8% compared to the second quarter of 2002. However, the cash sales that we eliminated represented about 25 to 30% of our total production in 2002. So during this quarter, we recovered and converted over two-thirds of that low persistency, low quality cash business into the higher quality check business. I believe by the end of this year that Liberty will have recovered the production that was lost by eliminating the cash business. I am also confident that because of the higher quality of our new sales we will see an improvement in life underwriting margins in time.

Another recent development at Liberty National deals with compensation. We made a change in the bonus structure of the middle management of Liberty's sales force. The prior bonus was based entirely on the growth in premium in force produced by the agents working under that middle manager. The new structure will continue to be based in part on growth but also will now contain an element based upon the attainment of a certain level of production by the agents under that middle manager.

The newly implemented production element of the bonus will be heavily weighted towards the sales generated by new agents. The expected positive results of this change are increased emphasis on recruiting, training and assisting the new agent in generating higher sales during the crucial first few months of employment, therefore, increased income from new agents because of the financial incentives for the middle manager to raise the average production level of those new agents and ultimately increased retention of new agents as they see their income rise. This change in the bonus structure was implemented on July 1st of this year just a few weeks ago.

In regard to Liberty's Cancer line of business, we have suffered very poor claims experience on the Cancer class-action business in 2003. The loss ratio on a cash basis was 112% in the second quarter of 2003 compared to 98% in the same quarter of 2002. In mid-July, we implemented a 25% rate increase on this Cancer class business. This should help stem flow for the time being. In addition, as C.B. mentioned, there are some options on the legal side that we are exploring.

Those are my comments, so back to you Mark.

On the health side, health sales at United American were up 11% in independent agencies and 12% in the branch office distribution system. Sales of our limited benefit health plans continued strong, accounting for 72% of independent agencies sales and 60% of our branch office sales. With over 42m Americans without health insurance, I expect demand for these products to continue to grow.

On the Medicare supplement side, I am more optimistic than I was three months ago. During the quarter, we conducted a new rate comparison with our primary competitors, and the differences are significantly less than they were two years ago. The changes we made in our underwriting year and a half ago have improved our claims experience. In May, we received an opinion from the Inspector General's office allowing us to contract with hospitals to waive the Medicare Part A deductible, which amounts to over $80m a year in claims.

In the third quarter, we will begin offering three of our standardized plans with attained age pricing, and we will leave three with issue age pricing in most states. This will give us more competitive rate below age 70. With these changes, I expect individual Medicare supplement sales to turn around the second half of this year, and I believe we can see double-digit growth in Medicare supplement sales in 2004.

On the group side, we have recently been awarded the contract to provide Medicare supplement coverage for the reliance of retired Americans. The alliance is an association established by the AFL-CIO to provide benefits to retirees. While sales should begin in the fourth quarter of this year, it is really too early to predict the volume of those sales.

Our branch office operation has finally turned the corner. We ended the quarter with 1374 producing agents, up 13% from the bottom of 1212 we hit in February this year. We are in the process of changing our sales management compensation to be more performance-based, similar to what we did at American Income and what Tony is doing at Liberty National. I believe 2004 is going to be an outstanding year for branch office.

C.B.?

Thank you, Mark and Tony. Now I will ask Gary to make comments with regard to our investment operations and investment portfolio.

As shown on page 13, our schedule entitled "Fixed Maturities", Torchmark has $7b of fixed maturities and amortized costs which comprise 91% of our investment portfolio. These assets are carried on the balance sheet at their market value of 7.8b. The $734m excess of market value over cost is made up of $788m of unrealized gains and $54m of unrealized losses.

Investment-grade bonds make up 90% of the fixed maturity portfolio and have an average rating of A3A-. The low investment-grade bonds are $716m at amortized cost and have an average rating of B1B+. At 10.1% of the fixed portfolio and 9.2% of the total invested assets, the low investment-grade bonds are up slightly from the 9.5% and 8.8% respectively at the end of 2002. However, the low investment-grade bonds declined by $6m of amortized cost in the second quarter as sales exceeded downgrades.

Regarding our below investment-grade bonds, we think that just looking at the percentage of the below investment-grade bonds in the total portfolio alone may imply a greater risk to our shareholders than actually exists. Bond leverage, the ratio of the total bond portfolio to common equity, should also be considered. The ratio of bonds to equity for Torchmark excluding FAS 115 is a favorable 2.6 to 1 when compared to the 6 to 1 average ratio for our peer group, and this serves to reduce credit risks.

Overall 94% of the fixed maturity portfolio is in corporate securities. We have less than $200m of asset-backed securities, and over half of those were seasoned Jenny Maes (ph) with low prepayment risk. As mentioned above, fixed maturities comprised 91% of invested assets, and that percentage should increase in the future.

Now I would like to address the impact of the lower interest rate environment. Due to the long-term nature of our policy liabilities, we will continue to invest our money primarily in investment grade corporate securities. However, current interest rates have had a significant impact on the yields we are getting on new investments. Year-to-date we have invested approximately $540m at around 6.8%; however, in the second quarter, we earned just 6% on the investment.

This year we expect to generate $1 to 1.2b of new cash corporate life, with $225m available primarily for stock repurchases and the other approximately $1b to be invested. If rates remain at current levels, we will invest about $1b a year at 6% versus the 7.25 we expected coming into 2003. As C.B. mentioned, on an annual basis, this would result in $12.5m less investment income.

To offset the lost income, we reduced the crediting rate on our interest policy liabilities affected in the third quarter, which will save us approximately $9m on an annual basis. In addition, our interest expense will be lower due to the reduced short-term borrowing costs and increased benefits from our interest rate swap arrangement. Obviously we hope that interest rates go up and sooner rather than later; however, we see nothing in the economy or our operating position to cause us to change our investment strategy of emphasizing investment grade fixed maturities.

Those are my comments. C.B.?

Now I would like to call upon Larry Hutchison to update you on the recent litigation.

This is the status on the Alabama litigation between United Ventures and Waddell & Reed. On July the 3rd, the Alabama Supreme Court released an opinion revising its earlier ruling. Effective to the revised opinion is that Waddell & Reed may not argue as it did previously, that its actions withholding more than $10m belonging to United Investors which justifies the existence of a valid and binding contract.

Waddell & Reed has now filed an application for rehearing with the Alabama Supreme Court. We believe this application will be denied, and United Investors will pursue its claims, including compensatory damaged of over $10m for conversion of funds by Waddell & Reed and for punitive damages relating to the conversion without regard to any offsetting claims of Waddell & Reed. United Investors also plans to file suits in other of the jurisdictions, to recover damages arising from Waddell & Reed's replacement activity.

C.B.?

Thank you, Larry. In my closing comments, I want to emphasize we have had a strong first six months in 2003. At the beginning of the year, we estimated that our 2003 earnings per share would increase by 8% to around $3.78, assuming no repurchases of our stock. In spite of the loss of approximately $1.5m of after-tax investment income due to the $137m we spent to repurchase our stock, our six-month operating earnings were over $220m, only a few hundred thousand dollars less than we estimated at the beginning of the year. Therefore, we believe for the federal year and again assuming no additional stock repurchases, our operating income earnings per share will likely grow somewhere between 9 and 10% off the $3.51 reported in 2002.

You have heard our comments this morning, and now I will call upon Paula to open it for questions.

(CALLER INSTRUCTIONS). David Lewis, SunTrust Robinson Humphrey.

Good morning. Can you talk a little more or even (inaudible)about the cancer resolution? How much premium is involved here? Are we going to continue to see pressure over the next twelve months until we get the rate increases to bring that loss ratio down? I know you don't want to get into details of how you might find some resolution, what would be the financial impact if you were to resolve that, please?

Well, the premiums involved for the quarter were $19m. As I said, we had 112% cash loss ratio. The enforce premium on an annualized basis on this class business is almost $76m, and it has declined. The rate increases, we will continue with that, and as I said previously, that is not the solution.

Part of the problem or the problem with this business is that we are paying claims that are 60 to 80% more than the incurred charges. In other words, we are paying bills that are well in excess of what the hospitals are excepting for payment, either from Medicare or from other providers. If you recall this cancer business, we are supplemental. We are not the primary carrier. We think that we have a means whereby we might be able to reduce our payments through the actual incurred charge.

David, that is about all I can say at the time. Larry, is there any additional?

I think that is accurate. The problem with the cancer is just that, that we are paying more of the legal liability of the insured. Those legal solutions are intended to reduce that payment of what the person actually owes.

Of the fact that we are paying more of the legal liability is a result of the settlement in 1994.

That settlement ran out after a few years, is that correct?

No, the settlement did not run out. It was a few years before we could raise rates, and we got well behind, and I don't think -- I believe it was '98 or '97 when we started raising the rates, and we were well behind, in trouble at that point, and we knew it. We have taken those rates from an average of $300 a year to -- the rates were $300 a year then, and now the average rate is about $1230 a year.

They are about to go up even higher with this impending rate increase.

We need another solution, and we think we have got one, and we are optimistic it is going to take the time, certainly the balance of this year, to have it implemented.

Ed Spehar, Merrill Lynch.

Good morning. I have two questions. The first is on the expenses. Is there anything unusual in the administration expense this quarter? Can you maintain it at about this run-rate?

And then the second question is, I was wondering if you could talk a little bit more about the change in mid-level management compensation at Liberty National? I guess specifically how is it different from -- I think if you go back a few years ago when American Income had some difficulties, I think there was a shift in focus there away from recruiting new agents to increasing the productivity of agents. That did not really work out. So can you talk about how this is different?

On the administrative expenses, in the first place, you had first quarter is always higher or has been for several years because of payroll taxes. Generally administrative expenses are lower in the remaining quarters. Expenses were little lower than we had thought, a few hundred thousand dollars excluding litigation and our litigation expenses, which I said that 1.1m were a few hundred thousand than we thought they would be. So all-in-all, administrative expenses were about down 800,000 or 400,000 litigation, 400,000 administration. We think for the balance of the year excluding litigation will run at a little under $31m, and litigation will be whatever it is.

As far as the compensation at Liberty --

Tony, if you don't mind, I will take that. First off, the change we made at American Income three years ago to that middle management combination I think has been instrumental in the growth. We have seen -- basically what we do, we are not only compensation that middle manager to recruit a new agent, but he has got to achieve a certain level of production for him to obtain a bonus. We have seen an improvement in our agent retention in American Income, but I think that change was rather instrumental in the growth in American Income.

Also, we made a similar change in our branch office operation with the same type of bonus structure in thereduring the quarter, and we have obviously grown our new agents by 100 during the quarter. So I am very optimistic that going forward the same type of change at Liberty National will have a positive impact there.

If I could add to that just a little bit, this bonus as geared is paid to the middle management, but nothing happens for him unless that individual agent productivity increases. Now that is really the ultimate objective is to get the income of the agent up, and the way we approached it is to provide incentives for the middle manager to help achieve that, and I think is where the magic lies.

If I could just follow-up, Mark, I was not referring to the change in American Income three years ago, sort of the fix. I was referring to previously there was a change made in the approach in American Income where it was less of a focus on bringing in new bodies and more of a focus on productivity improvement. I am just wondering how is this all different than that?

Well, I don't know. Our average production per agent has not changed much at American Income, although the American Income production per agent is substantially higher than what it is at Liberty. I don't know that we are really looking at seeing great improvements in the production per agent at Liberty, but I do think it will help our new agent retention along with increased recruiting. If we can retain more of those agents in that first year, it will have a positive impact, and that is what our goal is.

One additional comment, as Tony said, roughly 25 or 30% of the production last year was from this cash or money order with application. That business was running extraordinarily high last year, which meant that agents who were producing that business were being disappointed on their compensation. We have to get out into a higher level of persistency, and that alone will help the income of the agents, and these other things that Tony and Mark have talked about will also be of help.

Michelle Giordano, J.P. Morgan.

Good morning. I was hoping you could give us a little bit more detail on the changes in the interest-sensitive crediting rate? What are the new crediting rates, and where did you reduce them from? And is that just on new business, or is it also on the existing business? Then I will have a follow-up question.

Gary?

First of all, it's not just on new business; it is on existing business. Our interest-sensitive business is made up of our annuities and universal life business, the annuities being about 700m of reserves and the universal life being 1.2b.

On the annuities, therefore, about two-thirds of the universal life business we have lowered the rate to the minimum rate. The other part of the universal life business we do not go all the way down the minimum, but we got pretty close.

What would be the minimum rates on Universal life?

It varies by the different products. The minimum rate is the rate that is in the contract. We have got minimum rates of 4%, 3.5%, and we have some a little bit higher than that. A good portion of the business is around 4%, and we took the rate down to the 4%.

On annuities, I am assuming you are going to the new minimum crediting rates, which in most states are 1.5 to 2% right now?

Actually we have got minimum rates in our products and a little bit higher than that. We're going down to 3%, 3.5%, but we are also looking at filing new products that will have a lower minimum rate.

For the existing annuity block, you are going to the normal minimum rate, which is the 3 or 3.5, and for any new fixed annuities, you would go down to the new minimum crediting rates, which is 1.5 to 2%?

Yes, if we get those filed.

When do you think you will have them filed?

I don't have a timeline for that, but that is something we will be working on.

I was wondering on investment yields, we have seen some wild swings in 10 year treasury yields in the second quarter with yields coming down quite a bit and now thus far in the third quarter moving up quite a bit. Could you just talk about broadly speaking how much sensitivity your investment portfolio has to these moves in the 10 year treasury yields? Are you seeing yields picking up at least a little bit thus far in the third quarter?

The answer to the second part of your question we are investing higher than 6% so far this quarter. As far the effect of 10 year treasury, are you referring to the market value of the portfolio?

Yes.

Well, the duration of the portfolio is 6.2, so that may give you an idea of the impact and change in rates, but we don't really look at that. That is not something we focus on because, again, we hold our bonds to maturity.

It does fluctuate on the balance sheet, but as C.B. mentioned, we are regenerating so much cash flow that we are not having to call on bonds to pay claims or whatever. So the changes in the rate and the effect on the market value really is not something we have focused on.

And just lastly, what are you expecting for litigation expenses for the second half of the year?

At the beginning of the year, we thought they would run about 1.6m, and I believe they were 1.1 in the second quarter, and Larry, do you recall what they were in the first quarter?

I think 1.3m in the first quarter.

Somewhere right in that area. I will say this, that the intention is to take a portion of that -- a portion of that expense was capitalized back dime. They took the monies. We would write-off the DAC. I think that is in the neighborhood of $5 or $6m.

For most of the balance of those funds, I believe we would be likely to set up a special litigation reserve as we pursue ongoing litigation with Waddell & Reed and if we do decide that will have a positive impact on our litigation expenses going forward.

Thank you very much.

Joan Zief, Goldman Sachs.

I would like to just talk a little bit more about the interest rate. You had some nice hedging gains in the quarter, and interest rates in the second quarter were down, but we have seen a sharp back of interest rates in the third quarter so far. Interest rates going up. If interest rates stay where they are, maybe even drift up a little bit more, should we expect your hedging gains to be substantially less? Is there a risk that you can actually have a loss?

Gary?

(inaudible) the interest rate loss?

Yes.

There again, you have to look at the amount we have out there. We've got 530m on those swaps, and I think as we have talked about before, they don't all reset immediately. Some are set to annually; others quarterly. There is one that is monthly.

If rates go up, then when those do reset, then we won't be getting as much benefit as we have had in the past. We will still be getting benefit because we are much lower than the fixed rate that we are exchanging. But again, if rates go up, we are going to be investing more money than we have got out there on the swaps. We don't see that as a detriment.

Let me add an additional comment. Given the 1.2 of cash that we are generating and some maturing, given the lower yields on those swaps, it is my hope -- nothing would please me more to see those swaps producing negative numbers. We would have with that $1b, that would mean we would be investing long-term at much higher rates. So pray to the lord that we will see those swaps and their negative position down the road.

When you talked about your estimation that if you were to take the money, your cash flow and invest it at the current rate, your investment income could be about $12m less. Were you talking about interest rates at a lower-level than they are today? Were you talking about interest rates about 6% that you were investing in the second quarter? And if interest rates stay where they are, does that $12m actually shrink a little bit?

Yes, you are right. We were talking about 6% when we mentioned the 12.5m, and we have not gone very far in the quarter but we are investing higher than 6% now, so the impact would be less.

I have just one other question on another topic, which is about the agent productivity that you are trying to improve with the new compensation schedule. What type of agent productivity gains do these middle managers need to generate before they get their bonus? Is it a 5% improvement; is it a 20% improvement? How are you measuring that?

It is a little hard to, I think, measure the way you are speaking because the bonus is generated off each individual agent. So if only one agent and an agent in the managers group produces at a higher level, and there were already some that were producing at that level or higher, that will generate a bonus for that middle manager.

Now, of course, the effort there is to get the people that are just below the trigger point motivated and assisted to reach the higher level. So I really don't know that I have a precise percentage increase that would really be applicable to your question.

Just to add to that, we basically went in and looked at it what kind of production level does an individual agent need to retain for him to make a decent living? And we have set those bars at -- if an agent will get to this level, we have very high retention because the agent is making a good living. So we are no longer really going to be bonusing a middle manager to just hirer an agent to go out and write the $1000 of premium. He has got to work with him long enough to get him to that level production where he will stay with us.

That is what we're trying to achieve. Not that our average production per agent will necessarily up, but the agents that we are hiring, the middle manager will spend more time with them to get them to a level of production or it will stay with the company. That is what we did see at American Income, and I think we will see the same thing at Liberty.

Tom Gallagher, CS First Boston.

A couple of questions. The first is on crediting rates. I know you talked about lowering the crediting rates on inter-sensitive policies. How about your traditional life insurance policies where if I am correct, your implied crediting rates are in the high-fives. Are you able to lower those on new business going forward, or do you have plans to do so?

Well, the cash values in the policies I think I believe that is used for 5% is the rate that is used. For GAAPing purposes, we basically are using 6% today on new business, and our overall GAAP rate in the life business is I think 5.4, 5.5%.

[Now], Tom, as far as repricing products and making any changes there, we are just a long, long way of ever seriously considering that. We have been into the lower rate environment now three months out of the last 360 months. So I don't believe we want to overreact to it.

So you are going to hold the line on pricing in that business?

Absolutely.

The other question I had is on just asset liability management and mainly just to understand better what the GAAP is currently? I know you all manage things on a slightly different basis because most of your liabilities is not interest sensitive. But my understanding is your liabilities are significantly longer than your assets. Can you just quantify how much?

Well, I have told the story before at Liberty National if we cease volume business, and that is our most mature company, if we cease volume business and we just paid -- first it would take us about ten years before the premiums were insufficient to cover the expenses and claims, and then it would take another eight or so years before the interest on the assets backing the liabilities were insufficient to pay the difference between premiums between premiums and claims.

That is our most mature block of business, and it is our oldest business, and we're not going to stop writing business at Liberty National. Really in this traditional life insurance and also in the health insurance, there is very little need for matching assets to liabilities. That is about all I can say on that. This is not like the fixed annuity business in the world.

Okay. That is fair. The last question I just had you thought about the trade-off of possibility increasing the shareholder dividend instead of buying back stock?

Well, I believe we are always going to be buying back stock, it being as undervalued as we believe it is. The shareholder dividend policy is a Board of Directors decision. We have a board meeting later this week, and I'm sure it will be a topic of discussion.

Vanessa Wilson, Deutsche Bank.

Could you talk a little bit about if we should pay attention to some of the prescription drug bills related to Medicare if that has any effect on your business?

Yes, Vanessa. It looks like something is going to happen there. We do not cover prescription drugs. The old saying, "Fools rush in where angels fear to tread." I don't think there are going to be many fools jumping in there to cover that, but we are an angel though. We have no interest in that, and it will not affect our business. We do not provide prescription drug coverage now, nor do we have any plans to do so in the future.

But if the benefits under Medicare are richer, would people continue to buy supplemental products?

Well, I don't think the benefits under Medicare are going to be richer. They are likely to be reduced in the future as far as the regular Part A and Part B of Medicare. Certainly the prescription drug will enrich the total Medicare package, but that will not reduce the need for Medicare supplement covering Part A and Part B.

Okay. With the cancer claims you might have said this and I apologize, did you tell us the amount of the reserve increase you took? You said part of the number was the cash claims, but then you also boosted the reserves a little bit.

We increased the liability ability for incurred but unreported claims a little more so than we have in the past. Vanessa, I don't have that number at my fingertips. We can get that to you later.

Robert Glasspiegel, Langen McAlenney.

It seems like going into the year you gave sort of rather precise guidance all over the place, I think 378 excluding buyback for guidance for the year. You are now talking in terms of 9 to 10% growth which I think factors in buyback. (multiple speakers)

Third factor in any additional buyback.

But the buyback to date but no further from here?

Right.

Where there any other important legals from your guidance other than investment income that we should be thinking about as a model?

As I said, in spite of the loss of $1.5m of after-tax earnings from our stock repurchase program in the first six months, we are only a few hundred thousand below what we thought we would be for the six months. Our life operations are performing better than we thought. Our margins are improving. (sales is a little less) also a little less due to the cancer business. The annuity business is going to be up, say, 2.6. That will be probably almost $1m more in the second half than we thought at the beginning of the gear. Administrative expenses are on target, a little as than we thought. And excess investment income is holding in there, so again it is an estimate. We are doing better than we estimated at the beginning of the year, so I think that is going to hold through for the balance of the year.

I think you said 3.5m could be absorbed easily, the net investment income impact, and that was a June 30th analysis? So the backup in rates is going to be helpful net debt on that, or is that done as of yesterday?

(inaudible) the 3.5m as a loss in investment income (multiple speakers)

The difference between those two items of what you're going to capture --

That is over a twelve-month period, and that assumes that interest rates stay at 6%.

You say you get more than 6 so far this quarter you said. That was a little bit of a still analysis?

That is right. The 12.5m will not be 12.5m of interest rates. I think interest rates are closer to 6.25 for right now.

That is right. We didn't mention (we did mention) that the borrowing costs will be less, and where rates are today, it could be 500,000 per quarter less than what we thought earlier in the year. Okay. So those things are going to squish back to being an irrelevancy as we model forward until -- as far as the net impact?

Much less impact, yes.

I am going to let you off on the dividend. C.B., you've got one sort of important vote in that you have not increased the dividend since at least 19 quarters at this rate the following reduction post what Waddell & Reed spends. So clearly you favored share repurchase, which has been the correct call from the date, and you know what the new rules are and what it does. What were your initial thoughts on where you would stand on your vote?

Personally, as the tax rates have changed, they are 15% maxed tax rate. I think it requires all companies to adjust their dividends.

So we should not be astonished to see the increase out of the Board meeting?

(multiple speakers). If somebody says we are to take it to 35 cents a quarter, I am going to be screaming. I don't think anyone will, but I look forward to adjustment.

I would like to make one other comment. I have gathered from some remarks that I have read that some analysts think that our investment income is going to be devastated by these lower interest rates. That 1.2b of cash and it is growing. Our insurance operations last year, we were off 750m before financing cost and dividends.

We are on schedule this year for around 825m, maybe 850. We generated an enormous amount of cash. That 1.2b only includes about 400m of bonds maturing. Our investment income is not going to go down. If interest rates stay at 6%, it simply won't grow quite as much as we thought at an earlier time. But it is not devastating to Torchmark.

Any other questions?

Eric Burke, Lehman Brothers.

I thought I had this interest rate issue figured out, but I find myself confused at this point. Once again, interest rates have obviously they fell in the first half of the year or first few months of the year. Now they have risen. So let's go back to the beginning.

With respect to net investment income, are you saying that you expect it to be lower than you thought it was going to be when you made your revisions or your projections at the start of the year? And then separately, what is going to happen to the interest expense relative to the beginning of your expectations?

Well, I will ask Gary to comment as well, but at the beginning of the year, we were thinking 7.25. In the second quarter, we were investing at 6. That is 125 basis points. When you have got $1b and we have got 1.2b assuming we spend 200m for stock repurchase dividends, etc., and you have got you're investing at 125 basis points less, that is before taxes $12.5m. From this point forward over the next twelve months was what Gary was saying earlier.

We have taken by reducing the crediting rates on the annuities and the interest-sensitive life, we have offset the 9m pretax of that. That is the logic I think Gary was going through. As to the expenses, Gary?

As far as the interest expense, several lowered that where we stated versus the beginning here, interest expense will be about 500,000 a quarter less than we thought. If that obviously changes, if we (inaudible) more to buy stock or whatever the liability behind it, but where we stand today with short term debt and with our swaps, again our interest expense growing forward is not going to be 500,000 a quarter less than we thought it would be in a year.

If I can ask a couple more quick questions. First of all with respect to this cancer block, could you walk me through the simple mechanics of what is happening here? Specifically I know you mentioned that people are paying more than the incurred amount, but what specifically happens? An individual receives a diagnosis of cancer, goes to a physician or the hospital to receive care, is treated, the primary insurance company pays whatever percentage of the claim, and then Torchmark responds. How does all that work, and what do you mean when you are saying more than the incurred amount?

Let me give you a simple example on the Medicare, and a very large percentage of these folks are on Medicare, 65 and older. Part of that settlement in 1994 said that we paid the bill of charge, whatever the bulk of this comes from the outpatient hospital, whatever the hospital bill.

Let us say that the incurred charge by Medicare, Medicare recognizes $100 as a reasonable charge, and between Medicare, maybe the individual's med-sup they pay $100. We then pay $180 off of that bill charge instead of paying $100. On the underage business, where Blue Cross is the primary carrier, they are paying $100. The bill being sent to our insureds and the insurer then sends the bill to us instead of $160.

We do not pay the hospitals directly. We are a supplemental carrier. We're not the primary carrier. Under normal insurance operations, we would not be paying these type of charges. But it is a result of the settlement in '94, and we are pursuing relief.

In the simple illustration that you just provided where a individual senior citizen incurred $100 of cost that were picked up fully by Medicare and supplemental insurance, but you received a bill for an additional $80.

We received a bill for $180; we paid $180.

Where would that additional $80 behind the $100 of incurred cost, to whom would that additional $80 be paid?

(multiple speakers). The full $180 is paid to the insurer. Kind of a windfall profit for those people unfortunate enough to have cancer, but it is also a result of these rates being $1200 and going higher, which is unfair to the people who want supplemental coverage and are paying outrageous rates. It is just wrong. Unfortunately we have been bound by that '94 settlement.

Finally, Mark, you mentioned a couple of initiatives, one with respect to elimination of a co-pay or deductible on Medicare and two, with respect to attained age in the Medicare supplement there. Can you go over and expand on how these two initiatives work in a little bit more detail than you have provided?

First on the waiver (inaudible) deductible, again that represents over $80m here in medical supplement claims for us. Prior until now, it has been a gray area whether it is legal for a hospital to waive that. There are quite a few hospitals out there willing to waive that in order to have our customers steered to them. But we have not really been able to contract with them prior to this.

Larry was very instrumental, and it took us fifteen months to get a ruling, but it is now legal. We have actually a couple of different PPO networks who are very interested in contracting hospitals for this. It won't affect our margins, but if we could get, say for example we could get 20% or 30% of our Part A deductibles waived, it will have a significant impact on our rates going forward. It will help us keep our rates down and be more competitive. So that is really the goal there.

Why would it not affect your margins?

We're still locked into -- we have to have a 65% loss ratio on that business. If we reduce our claims, we can't take that in the margin. It will just help us lower our rates gowing forward, and hopefully we will generate more sales on better persistency of the business that we have. But we are still locked into a 65% loss ratio.

That Inspector General's office ruling applies only to United American, and it gives us a good-sized advantage of over the next year or two to take advantage of it. Other companies will not have that available to them. Of course, they will also apply, but I expect it to take them fifteen months as well.

On the second half of that as far as the attained age versus issue age, again we primarily sell issue age policy and have in the past. We are competing with primarily obtained age rates out there by most of our competitors. That is like selling a whole life versus an annual renewable term. On attained age, the people's rate goes up every year as they get older. Issue age, it stays. If they buy at 65, they will always pay the 65 year-old rate.

So we are at a bit of a competitive disadvantage there. Several years ago the difference was not that great, but as rates have gone up, that difference in premiums between attained age and issue age has increased. We are now seeing at age -- for example, we did a new rate comparison during the quarter, and most of the big differences now between our rates and our competitors' rates are strictly attained age versus issue age pricing. So we offer six standardized plans, which really the benefits are pretty similar in. So we made the decision that going forward, we would take three of our plans and price them at obtain age, and leave the three at issue age.

Because what has happened, in Florida and Georgia, for example, that do not allow attained age, we are very competitive, and our average issue age is between 70 and 71 years old. In other states where we are competing with attained age rates, our average issue age is 75 years-old. So we have priced ourselves out of that 65 to 69 year-old market. At age 65, the difference in rates is $400 or $500 a year. So it is going to make us much more competitive in that 65 to 69 year-old age group going forward.

Jeff Shuman, KBW.

I was wondering if you could give us a little more perspective on the insured Medicare market in general. You talked about being better positioned within that market due to narrowing the pricing and these other changes, but can you give us a sense for how fast the overall insured side of the market is expanding or contracting at this point?

On the Medicare side? I don't see any major shifts right now. I think the HMO dis-enrollees have pretty well played themselves out. I don't see them becoming a bigger or smaller part of the market. Even with the changes proposed, I don't see any major shift in that market I think. I think the need for Medicare supplement will continue to be there. Hopefully we will just improve our market share, but I don't see any major shift growing forward.

No shift from what you see is the natural growth rate, but what do you think the natural growth rate is?

I don't have those statistics in front of me, but the number of people in Medicare obviously is baby boomers age. I just don't have those statistics, but it is growing every year, the number of people on Medicare. I just don't have those statistics in front of me.

David Merkel, Host Capital.

I have two questions. On your Life business, what proportion of your earnings do you get from mortality versus investment earnings?

Well, David, if you will look at the financials, you see that out of every dollar of premium income, we have 25 cents of underwriting margins. We have another 5 cents administrative expenses, so we make 20 cents of pretax profit out of every dollar of premium.

In the past, I have calculated or we have calculated if you threw in the excess investment income -- this is a yield of 7.1% on investment portfolio, in effect we were adding another 4 percentage points of premium profit. Excess investment income plus underwriting profit put together is around 24% versus health insurance. What you see in the underwriting margin is all you get.

Very good. My other question is the duration figure that you mentioned of 6.2, does that contain the swaps, or is that just the bond portfolio? MARK McANDREW

That is just the bond portfolio.

What would it be if you had the swaps in there?

I don't know. We have not calculated that. I am not sure how much impact it would have. We have 530m of swaps with $7b of bonds on it. I don't know that would have that big an impact.

(inaudible) swaps, correct? You've gone from fixed to floating, correct?

Yes.

Ed Spehar, Merrill Lynch.

Mark, I was wondering if you could compare the positive impact that you might see from the attained age pricing and the developments on the (inaudible) deductible for sales with the opportunity that you had a couple of years ago with the big disenrollment from the Medicare HMOs?

Well, that is difficult to say. I am really anxious to see what our rate for 2004 is going to be. I am pretty optimistic we are going to be in a very favorable interest rate increase environment next year. I think there is no doubt putting three plans out there on attained age will help us pick up some of the 65 to 69 year-old business that we have lost.

Ed, it would just be a guess. I think Medicare sales in 2004 will come back very strongly. Can they get to the level they were three or four years ago? I sure hope so, but it would just be a guess on my part, Ed.

We will know in a few months, Ed. We have a BPO right now out working to contract the hospitals, and we want to know by October where we stand there so we will have some idea of the impact on rate increases for 2004. So we will be get back with you later in the year as that develops.

I know you have thought about attained age pricing numerous times over the years. What was really the holdup over the years that kept you from being more aggressive?

I think at age 65 that is about a 20 to 25% reduction in the rate, and then gradually at age 80 there is no difference in the rate. So when the average premium was $1200, that was a couple hundred dollars a year difference, and our agents were good enough to sell a $200 difference in premium. Now it is a $400 to $500 difference in premium because the rates have gone up.

It just has become a little more than they can overcome, and we just had to rethink -- we would still like to see attained age rates banned, and everybody be on the same page. I know North Carolina is looking at that right now, and there are a few states that have moved to that. But it has just gotten to the point we cannot ignore it, and when we have seen our average age, issue age, increase the way it has, we had to react to it.

Going back, C.B. was always against (inaudible) rates, and I had good reason. One, I did not like double rate increases in the year. One, for inflation; two, for advancing in age. I thought it would create higher lapses, and I wanted to go out with an issue age rate. That was my thinking years ago.

Well, the lapse rates are not materially different between the two products. Furthermore, in my defense, years ago when it was $1000 issue age and $940 attained age, it was a $60 difference. Now that gap has widened, and we just cannot ignore it.

Hudson, there are no further questions in the queue at this time. I will turn the conference back over to you for any additional remarks.

Thank you for joining us this morning. I hope you have a good day. I am looking forward to visiting with you three months from now.

That concludes today's conference. We thank you for your participation