Globe Life Inc (GL) 2003 Q3 法說會逐字稿

Welcome to the Torchmark Corporation third-quarter 2003 earnings release conference call. Please note that this call is being recorded and is also being simultaneously web cast. At this time for opening remarks and introductions I would like to turn the call over to the 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 McAndrew, Chairman of the insurance 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 Investor Relations.

For those of you that 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, Torchmarkcorp.com at the Investor Relations page. Select financial reports from the menu. These reports also included 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 June 30, 2003 which is on file with the SEC and a matter of public record.

Our operating income for the quarter was $112.3 million or 98 cents per share, an increase of 10 percent over the 89 cents in the third quarter of last year. It is worthwhile to note that this quarter was the 15th consecutive quarter of increasing operating earnings per share. Return on equity was 16.3 percent, and we ended the quarter with a book value of $24.35 and our debt to capital ratio was 23.9 percent.

Now turning to the operations, first life insurance. Total sales for the quarter increased 12 percent to almost $96 million. Our Direct Response operation again produced outstanding results with sales increasing 33 percent to $41 million, and with our packaging and postage expenses remaining at 62 cents per dollar of sales for the nine months. American Income life sales increased 14 percent to 28 million and we ended the quarter with 2,348 producing agents, almost 400 more agents than a year ago. With respect to our military operation, which generates the highest quality business within Torchmark, sales increased 13 percent to $7 million.

Liberty National sales were down 10 percent to 13 million. In terms of sales, Liberty is currently paying a price for needed changes that are being implemented. But as time passes, we believe that the changes will not only result in increased production, but will also result in higher quality business and higher margin business. Mark and Tony will have additional comments on Liberty National later on in this call. Total life premium income increased 7 percent to 330 million with double-digit increases at American Income, our Direct Response operation and the military operation. Our life underwriting margins increased 6 percent to $82 million.

Turning to health insurance, sales for the quarter increased 24 percent to 59 million. United American general agency sales increased 9 percent to 27 million due to strong sales in the non Med Sup market. With respect to the United American Branch Office operations, sales increased 30 percent to 21 million. Our branch office producing agent count at the end of the quarter was 1,496 agents, an increase of some 250 agents over the third quarter of 2002. Med Sup sales from the United General American agency and United American Branch Office operations declined 29 percent to $13 million, but non Med Sup sales from these two distribution systems increased 57 percent to 35 million.

It now appears that our overall 2004 Med Sup rate increase will be around 5 percent, which will be about the smallest increase we've experienced in the past 10 years, and this should have a favorable impact on 2004 Med Sup sales. Health Insurance premium income increased 2 percent to 255 million and underwriting margins increased 1 percent to 41 million.

Our Liberty National health margins continue to be under pressure due to the continued high claim loss ratios on the subset of our cancer business that we refer to as the class business, which was subject to a class-action settlement in 1994. The paid claims loss ratio on this subset was 107 percent of the $20 million of premiums for the quarter. We are diligently continuing to work toward a solution to the problem, and we hope to be able to announce the details in our fourth quarter conference call.

Now turning to the annuity business, our annuity underwriting margin increased 17 percent to 3 million. And as we stated in the last conference call, if the stock market doesn't materially rise or fall the current level margins are likely what we'll experience in the near future. Administrative costs, which included 1.1 million of Liberty National United Investors litigation expenses increased 4 percent to 32.7 million and were in line with expectations.

In our investment operations, excess investment income increased 9 percent to over $80 million, but on a per-share basis, which reflects the effect of our share repurchase program, excess investment income increased 15 percent to 71 cents. For the quarter we inquired (ph) investment-grade bonds with annual effective yields of 630 basis points, about 30 basis points above the results of the second quarter, and thus far in the fourth quarter I'm pleased to report that the upward trend continues. Now before my final comments with respect to the quarter and the year, I'd like to call upon Mark McAndrew to provide some details on our insurance operations.

Thank you, C.B. Good morning. As C.B. mentioned, three of our four primary life distribution systems continued their double-digit growth in sales and premiums. American Income had another excellent quarter with a 14 percent increase in life sales, 13 percent increase in premiums, and 9 percent growth underwriting margins. Growth in margins trailed growth in premium for the quarter due to an unusually strong quarter in 2002. For the first nine months of 2003 life underwriting margins at American Income are up over 11 percent and are the same percentage of premium as full year 2002. For 2004 I would expect to see similar growth in sales, premiums and underwriting margins at American Income. With our continuing emphasis on quality business, I also expect to see meaningful improvement in the persistency of the business at American Income during the course of 2004.

Direct Response also had an excellent quarter with 33 percent growth in life sales, 10 percent growth in premiums and 13 percent growth in underwriting margins. We continue to see major successes in our testing of new products, rates and packaging. We will come close to 160 million new life sales this year, and I expect to see 15 percent growth in new life sales in 2004. The gradual increase in underwriting margins as a percentage of premiums should also continue through next year.

Our primary challenge continues to be Liberty National. For the quarter life sales were down 10 percent. Premiums were up 1 percent, and underwriting margins were down 6 percent. Over the next year we have four primary goals at Liberty National. The first is to grow sales. We also expect to improve persistency, improved the mortality of the business we write, as well as reduce acquisition expenses as a percentage of new premium written. I strongly believe that all four of these objectives will be met in 2004. I will now turn it over to Tony McWhorter, CEO of Liberty National, to elaborate on some of the changes being made to accomplish these goals.

Thank you, Mark, and good morning to all. First, in regard to liberty's life sales, earlier this year I noted that we had made a move to improve the quality of our sales by no longer accepting new business where the initial application fee was paid in cash. Beginning in April of this year 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. As expected, liberty's life sales are still affected somewhat by the change made earlier this year. Life sales in the third quarter were down about 10 percent as compared to last year's third quarter. However, the cash business that we eliminated accounted for about 25 to 30 percent of liberty sales at that time. So during this quarter we have recovered and converted about two-thirds of that low persistency, low quality cash business into the higher quality check business.

Actually the non-cash production this quarter is up nicely over the non-cash production of a year ago. We are committed to improving the quality of business written at Liberty National. Toward that end we are also in the process of revising our medical underwriting procedures on new life applications. In the early part of next year we will have strengthened our medical underwriting procedures so that our mortality experience should improve over time. It will take some time, but each of the changes that we've made or have plans to make should have a positive affect on Liberty's underwriting margins.

Looking forward, we're also in the midst of a substantial revamping of our field force bonus structure. Beginning in January of 2004, bonuses at all levels of our sales force will be based upon the production of persistent business. The bonus available to a productive agent will be very attractive. For our field management, their bonus will be heavily weighted toward the sales generated by new agents, thereby providing increased incentives for the recruiting and training of new agents.

Also as part of these changes in field bonuses, beginning in 2004 we will no longer supplement the pay of new agents. The supplemental pay to agent is running at the level of over $6 million in 2003. The elimination of this expense, the bulk of which is paid to nonproductive agents that we eventually lose anyway, will enable us to improve margins and, in addition, enhance the compensation of our productive agents. The net effect of these changes is to move Liberty's field force toward a more performance-based contract where we can pay higher compensation to productive agents and management by reducing the compensation for those that are nonproductive. I fully expect to see us attract a better quality agent under the new bonus arrangement. In turn, this should also improve our retention rate for new agents.

Regarding cancer insurance, underwriting margins improved in the third quarter due to a combination of lower cash claims in the non class action segment and higher premium income on both the cancer class action and non class action segments that resulted from rate increases implemented on both segments during the quarter. Those are my comments so back to you, Mark.

Thanks, Tony. With the changes Tony is implementing in January at Liberty, I expect to see meaningful growth in life sales at Liberty by the end of the third quarter of 2004. On the health side, things are improving at United American, but we still have a way to go to see an acceptable level of growth in premiums and margins. Sales of non Medicare health products continued strong growth while Medicare supplement sales continued to decline from 2002. As C.B. mentioned, our rate increases next year should average less than 5 percent, our smallest increase in 10 years. This level of rate increase will have a positive impact on our new sales and will definitely improve our persistency going forward.

We also continue to lobby for some new standardized Medicare Supplement plans which will allow cost-sharing. These plans would be more affordable as well as be less susceptible to future rate increases. If we can get this legislation passed in 2004, we should see a significant jump in our Medicare Supplement sales.

In our branch office operation we are also making major changes to our management compensation beginning next month, similar to what we did at American Income and what Tony is doing at Liberty National. I'm confident that these changes will accelerate our growth in sales, premiums and underwriting margins in 2004. Overall 2004 is shaping up to be a very good year. I expect to see substantial sales growth in all of our major distribution systems next year while maintaining or improving margins on all new sales. Those are my comments.

Thank you, Mark. Tony. I'll now call upon Gary Coleman to make comments with regard to our investment operations.

Good morning. As shown on page 14, the schedule entitled fixed maturities, Torchmark has $7 billion of fixed maturities of amortized costs which comprise 93 percent of our invested assets. These assets are carried on the balance sheet at their market value of $8 billion. The $659 million excess to market value over cost includes $709 million of unrealized gains and $50 million of unrealized losses. The investment-grade bonds make up 90 percent of the fixed maturity portfolio and have an average rating of A-3. The low investment-grade bonds are $760 million at amortized cost and have an average rating of B-1. At 9.6 percent of total invested assets, the low investment-grade bonds were up slightly from the 8.8 percent at year end 2002.

For the year, below investment-grade bonds have increased by $104 million because downgrades have exceeded sales. As we've said before, the percentage of below investment-grade bonds for the total portfolio when taken alone may imply a greater risk to our shareholders than actually exists. Torchmark's bond leverage, the ratio of total bonds to equity 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 risk.

Overall 95 percent of the fixed maturity portfolio is in corporate securities. We have no CDOs and have less than $170 million of asset backed securities. Over two-thirds of those are seasoned Ginnie Mae's with little prepayment risk. As mentioned earlier, fixed maturities comprise 93 percent of invested assets and that percentage should increase in the future.

Now I'd like to address the impact of the lower interest rate environment. For the full year we will generate around $1.4 billion of new cash corporate wide with $225 million available for stock repurchases and the other approximately $1.2 billion invested at the subsidiary level. Due to the long-term nature of our policy liabilities, we have and will continue to invest our money primarily in investment-grade corporate securities with long maturities. In the third quarter we invested $484 million in bonds, yielding around 6.3 percent, and having an average maturity of 25 years with an average rating of A-3. Although the yield on the third quarter purchases is lower than the 6.6 percent yield on the billion dollars invested year to date, it exceeds the 6 percent yield that we got on second-quarter investments.

Despite the lower yield on new investments, excess investment income for the third quarter was $81 million, up 8.6 percent and in line with a similar increase in the average invested assets for the quarter. Lower new money rates have had an impact on our overall yield rate. The yield on total invested assets for the quarter was 7 percent, 18 basis points lower than in the third quarter of 2002. However, the average crediting rate on our net policy liability declined 27 basis points to 5.4 percent during the same period, and our financing costs declined $1 million due to the impact of lower rates on the interest rate swaps. As a result, the lower yield on our assets has been entirely offset by the reduced cost of the net policy liabilities and the increased benefits from the swaps.

But even though we have fared well through this period of lower rates, we hope that interest rates will rise. With the large and growing cash that we generate each year the benefits of investing at higher rates will more than offset any increase in our floating-rate debt cost. Whatever rates are, we expect to continue our investment practice of emphasizing the investment grade fixed maturities, primarily corporate bonds. Those are my comments.

Thank you, Gary. We've had a strong first nine months. At the beginning of the year we guestimated that our 2003 earnings per share would increase by 8 percent to $3.78 assuming no repurchase of our stock. In spite of the loss of approximately $3.3 million of after-tax investment income due to the 199 million we've used to repurchase our stock, our nine-month operating earnings were over $332 million, only about $1 million less than what we guestimated at the beginning of the year when we assumed no stock buyback. Therefore, we believe for the full year, and again no -- assuming no additional stock repurchases, that our operating earnings per share will likely grow at the 10 percent level off the S3.51 in 2002. You've heard our comments this morning, and now I'll call upon April to open it for questions.

(OPERATOR INSTRUCTIONS) Vanessa Wilson of Deutsche Bank.

CB, you've given fairly bullish comments here about sales momentum in a number of products. I understand there are some challenges, and you're changing compensation in some different distribution channels. But are you ready at all to tell us anything about how you feel going into '04 in terms of just what the growth prospects look like? And in particular I'm interested in the non medical business, which seems to have gone very well for you this year and has good momentum.

No, I don't have -- we feel very strongly about 2004. Three of our four major life distribution systems are exceeding our expectations at the beginning of this year and I expect them to have strong years in 2004. Liberty National, we've been making the changes, as Mark said, it will probably be in the latter half of the year before we really see the benefits of it as far as production is concerned, but sooner than that maybe with respect to expenses and certainly the mortality changes -- the underwriting changes are going to help the margins in that business as we go forward.

On the health side, the non Medicare supplement sales are strong. We expect that to continue. Plus with the low rate increases in the Med Sup for 2004, I think it's going to be a better year than I thought a couple of months ago, just because of those low rate increases. I don't have any guidelines at this point, we'll certainly provide that at the end of the fourth quarter during the call. But clearly we're optimistic about everything going into 2004.

I guess just on the non Medicare supplement business, could you give us a feel for the opportunity there, if you think the market is sizable and if other companies are also targeting that market sort of what --?

I'll let Mark address that.

Well, the market is definitely sizable. Again, the uninsured population is somewhere in the -- over 45 million people. There is, there are some competitors there, but I don't -- the market is so big, I don't see competition being nearly what it is in the Medicare Supplement side. Particularly in the branch office operation, I would expect to see 20 percent plus growth in sales for 2004. General agency side is a little harder to predict, but I expect continued strong growth there next year.

Thank you.

Eric Berg of Lehman Brothers.

Thanks, and good morning to everyone. Mark, following up on Vanessa's question, with respect to the non Medicare Supplement health business, can you contrast the success that you've had between -- in sort of migrating the agents to this business between the branch office and the independent or general agency? Thank you.

Well, to contrast it, obviously the general agency side, we were seeing success in there prior to moving the branch office. In fact, actually our branch office operation learned a lot from the general agency side on how to market it and who to market it to. So they were a little slower in making the shift, but they've definitely shifted now. And I think next year, as CB mentioned, we'll see strong growth in definitely the non Medicare sales and I also believe that the Medicare sales will come back nicely next year also.

Thank you.

Michelle Giordano of J.P. Morgan.

I just wanted to follow-up on the comments about Direct Response sales for 2004. I think you said about 15 percent sales growth. Is it fair to assume that that's probably a pretty conservative estimate, or are you being cautious because sales were just so strong this year? Or is there anything that would cause you to be more modest on your guidance for next year? And then secondly, on the below investment grade bonds, could you talk about what some of your goals are for dispositions here given that there was a slowdown? Should we expect it to continue to rain fairly slow, or should we expect you to increasingly dispose of some of these bonds?

Mark, you're the one who said --.

Direct Response -- I think 15 percent. I feel very comfortable with that. At the start of this year we were hoping to get 150 million. We're going to end up closer to $160 million. Fifteen percent I feel very comfortable with. I think with the things we already know and the volumes we're going to be mailing that that number is -- I hate to call it conservative, but we're pretty well assured of that at this point. I think we'll continue to see some improvements we that make during the course of the year that hopefully we can beat that. But I feel very comfortable with the 15 percent currently.

I would like to just mention, we don't really seriously start looking at 2004 until we get later on into the quarter, the fourth quarter of 2003. Mark is right, 15 percent, he's very comfortable with that, and so am I. But let's don't get too far into 2004 until the fourth quarter conference call. It's just, we don't really set down and take it seriously until then. As regard to your -- on the investment side, Gary.

Michelle, regarding our goals in the below investment grade bonds, as you can see from our information provided, we have been selling those bonds. Obviously the sales haven't offset the downgrades that we'll still continue to look at sellings from those bonds. One think I'd like to point out is that two-thirds of those bonds are in the upper levels of the ratings for below investment grade bonds. They were investment grade when we bought them, they just slipped down just under that. There's some good bonds there. We will look at them, and -- but there's tax considerations to consider also. I think what you'll see is we'll continue -- there will still continue to be sales, and we just hope that the downgrades will slow.

Great. Thank you.

Stephen Karn (ph) of Goldman Sachs.

A quick question, Gary. I was hoping you can help me reconcile something on the interest rate swaps. I would've thought since you guys are receiving fixed and paying out variable that the sequential interest rate swap interest income, which I believe is a net number, would've declined. But in fact it increased. Is there a reason for that, am I missing something?

Are you talking about compared to the second quarter?

Yes. The interest rates rose at the beginning of the third quarter. I would've thought that your spread that you would've been getting on those swaps would've narrowed and that number would've declined sequentially.

I don't have the rates here in front of me. They did decline slightly. Again, it's based on the -- the (indiscernible) rates are based on the LIBOR rates. And you've got to remember, too, there's only one of those that's resetting monthly. One of them is the six-month swap that didn't reset during the quarter. So not all of them are affected by the rates in the quarter, some were already set before and didn't reset during the quarter.

Okay. One other question about your ROE. C.B., is there any target out there or a general target that you try to price to? Looking at the numbers over time the ROE seems to the trending down slowly but surely. Is there a level that you target?

There really isn't a level that we target as far as the overall earnings Torchmark return on equity. Certainly within the individual lines the distribution systems, there are minimum acceptable targets, and we're -- you have to recognize what we consider as an investment in the business. And we're, in all our major life distribution systems we have return on investments in excess of the 16.3%, if you will. Really work towards a margin, a profit margin that we'd like to maintain or grow to in these distribution systems. And where I think you're going to see improvement in the margin is the direct-mail very gradual as we go forward, and we want to turn around the margin in the Liberty National, both in the life and health side.

I'd like to add, the rates on the swaps during the quarter, the six-month one was 180 million, it did not change, and it did not reset during the quarter. The two that did -- we have one that's based on one month LIBOR and the one month LIBOR for the month was lower. It was 1.2 versus 1.3 for the prior quarter.

Great. Thank you very much.

Ed Spehar of Merrill Lynch.

I have a few questions. First on Liberty National -- two-part question. I think the sales were down 10 percent in the quarter, but you also said that the cash pay business was 25 to 30 percent of sales in the prior year period. So if we just look at sort of what's going on there --underlying growth, it seems like wouldn't that be 20 percent growth if we sort of take out the business that's been discontinued? Am I doing the math right?

That would be right, Ed. If you eliminate say 25 percent of last year's production to eliminate the cash portion, I think you do get about a 20 percent growth in the non-cash third quarter this year compared to the non-cash third-quarter last year.

And you discontinued this taking cash business at the beginning of last quarter or mid last quarter?

No, it was the beginning of April. So really it was the early part of the second quarter.

Okay. Because then I guess the question is why wouldn't -- it seems to me that maybe you're being a little conservative in terms of the Liberty National turnaround because don't you sort of anniversary this business 2Q of next year?

Maybe a little conservative, Ed. I think definitely third-quarter we're going to have much better quarter-over-quarter comparisons, and I expect to see some true growth in sales at Liberty. Hopefully second quarter, I think it'll be more apparent in the third quarter, but we should start seeing -- yes I would definitely hope to see growth in sales in the second quarter of next year.

Okay, and then another question at Liberty. Could you quantify sort of what you're thinking about as sort of the earnings benefit in '04 from the changes you're making in field force compensation? I mean, the more targeted bonuses going forward versus what you've done, the elimination of the -- I think it was called the sales service contract -- supplemental pay contract. Can you quantify at all what the net GAAP earnings benefit might be from these changes?

You need to realize that the $6 million plus that we're spending this year, we're going to eliminate the supplement for new agents starting January 1st. But we will still have some agents that were hired prior to that date under the old basis. Of course over the course of the year no new agent that is hired will receive a supplement. So we'll see the benefit of that $6 million not immediately but over the -- during the course of 2004.

Those are acquisition costs that we're eliminating, Ed, that in the past have been capitalized and written off over the life of the business. These are major changes that are taking place in that distribution system. It's the only distribution system in Torchmark -- captive distribution system where we have actually supplemented pay and paid people who were not producing anything, who had not produced business. And it's a dramatic change for that culture. What we do know is it's going to improve the margins, and the changes that we're making in the underwriting are going to improve the margins. Frankly I'm more interested in that as to what level of sales we grow the business next year. We've got to make these changes to get it to be a more profitable business where it has a chance to grow and to contribute more than what it's doing to Torchmark.

So in terms of any direct earnings impact next year it's probably something that would be measured in pennies versus anything else?

Yes, I wouldn't -- we're really not that concerned about that at the moment, we've just got to make the changes, and it'll take care of itself. Mark and Tony are optimistic it's going to happen a lot faster than I am. I guess I'm always pessimistic about things. But my primary concern is getting the margins back.

Okay. And then a question on the health side. I was wondering, Mark, if you could -- maybe I missed it or maybe you didn't give it, and maybe you're not willing to give it, but could you give me, if you are willing, some thought on health sales growth expectations overall and maybe what that might mean for health premium growth? And I guess what I'm thinking on the premium growth side, I think, C.B., you have said in the past that you were thinking sort of maybe flattish kind of premium in '04, and that maybe 5 percent growth would be considered a home run I think you've actually said. So I would just wondering if --.

Yes, that would be a home run I think, Ed. Mark, you go ahead first.

Again, on the branch office side. If I look back, Ed, I was looking back in April I think or on the branch office our health enforce premiums were down about 6 percent. Today they're back to flat with a year ago. We still have to -- if we can get 20 percent additional growth in sales next year we should have some modest single digit growth in premiums and underwriting margins next year. I hope we hit C.B.'s home run. I hope -- but it'll be modest single digit. The general agency side, I think it's a little tougher to predict, but I would expect to continue to see in that 10 percent growth in sales, which again is going to give us pretty modest 1, 2 percent growth in premiums the way it's looking right now. But again, we'll know more at the end of the fourth quarter.

We were at 250 million of health sales in 2000, and we've really fallen off and this year it looks like about 220, 225. So we have a ways to go to get back to a level of production that can give us any meaningful growth. We'll just have to see how much that production is going to be next year, and it's really too early for us to know at the moment.

And then one, if I could, one real quick final question. Gary, I'm just wondering on the impact of an increase in short rates, can you give us any sense, even if it is just a rough rule of thumb, how long it takes for the immediate sort of negative impact of an increase in financing costs to be offset by the positive impact of higher rates on invested cash flow?

Well, Ed, I looked at an example if the interest rates went up 200 basis points on January 1st, what would happen to the swaps versus the investment income from the cash flow. And what would happen is there would be a small negative in the first quarter as the reduced benefit of the swaps would be more than the additional investment income. But from the second quarter on it's positive, and for the year it would be positive. So there may be one quarter -- and that's going up 200 basis points. You know, there could be a small negative impact. If it is, though, it would be confined to one quarter.

Thank you very much.

Tom Gallagher of Credit Suisse First Boston.

The first question is, I just wanted to make sure I understood this correctly. C.B., did you mention that you hope to announce a solution to the cancer block in 4Q?

I hope that we have implemented a solution that we can fully describe in the fourth quarter conference call. We are working to that end. We have two solutions. The primary one we hope will be implemented before the quarter is out. The second one would, if the first fails, the second one would be implemented January 1st. So yes, we expect to be able to talk in more detail in the next conference call.

And from the sound of that, I would take that to mean that this is not just rate relief. This is --.

No, that hasn't worked. We have raised those rates so they were $300 a year. I think the average rate in that cancer class business in 1996, and the latest number shows that they are about $1250 a year. That's a pretty strong rate increases. We implemented a 25 percent rate increase in the third quarter and for the Alabama, Georgia and Tennessee business. But it hasn't affected the loss ratio. The rates go up, the loss ratio stays at the 100 percent plus. We've known for some time that that is not the ultimate solution.

Okay, and two follow-up questions on that. Can you just quantify the amount that you think the margin's being dragged down by when you look at the overall margins on your health business related to that cancer business?

You can kind of figure it out. If we were at a 107 percent loss ratio this -- actually it's cash loss ratio, so there's 7 cents out of $1.00. Throw in premium taxes and commissions you can come up with another 5 cents. So there's 12 cents for certain on roughly $20 million for the quarter premium, so 12 percent on $80 million a year, that's 10 million minimum. And other expenses in there, so I think it's closer to $15 million. We are working to cut that back dramatically with a solution that's beneficial to our customers as well as the company.

And would be fair -- I can appreciate the fact that you can't talk too what about it, but just generally speaking is it fair to assume that one potential solution may result in a charge in the current quarter that results in better earnings in the future?

I'm not expecting that at the moment, no. If the primary solution that we're working on might result in higher claims as a percentage of premium for possibly one quarter, and then that percentage would go down. A solution we're looking at is -- involves the -- as you may know, the problem is that we are paying fictitious claims. We're paying on charges -- bill charges that are roughly 100 percent higher than the incurred charges. And whatever change we implement will involve a significant rate reduction to our customers and also a reduction in claims. But we'll still have a few claims coming in under the old method. We're not worrying too much about that. But I'm not looking to see anything unusual adverse as far as the earnings when we make this change.

Okay. A couple of other questions. Can you just comment on how your margins look on this non Medicare Supplement health sale compared to the basic Med Sup product? Are they about the same or are there any differences there?

You might say that they're slightly higher because it is a lower loss ratio requirement than the 65 percent on the Medicare. That's the plus, but as I said before, the business is not as persistent as the Medicare business, and it has a shorter lifetime. All in all we make more money over the life of the business on the Med Sup and the health than the non Med Sup.

Okay. The last question is regarding any potential acquisitions. I know there have certainly been a number of announcements of companies looking to potentially get out of small blocks of life insurance businesses. Would that be an interest is there was a compelling value out there to you?

If there was a compelling value, yes, and there was a distribution system there that we think that we could help, we would have an interest. I doubt that we would be looking at anything to acquire that did not have an ongoing active distribution system.

Okay, thanks very much.

We will keep going on our other acquisition program of buying back this stock.

Okay, thanks.

Bob Glasspiegel of Langen McAlenney.

Gary, I was wondering if you could just tell me what your maturities are this year and what the sort of embedded yield on the stuff following off has been?

The maturities have been around $170 million, and then we've another $360 million of bonds that were called during the year. On the ones being called, the yield was 7.2 percent, and on the maturities it was about 7.4 percent.

And that's in that 1.4 billion of cash flow that you're --?

Yes.

Okay, so if we subtract that out we'll be close to what cash flow from operations is running?

Yes, that's right.

Okay, gotcha. Tony or Mark, I just wondered -- I don't know who wants to handle this. Your fixes at Liberty National certainly look to me to be logical. The one piece that I'm not sure I follow is how do you recruit new agents if you have no supplemental pay?

Basically, as C.B. mentioned, we don't have any other distribution system within Torchmark that supplements new agents. American Income used to up till about 3.5 years ago. They called it training pay. We stopped that. It's basically you have so much turnover in that first few months, it's an expense you can't afford. It obviously hasn't negatively affected American Income's recruiting. Their agent count has doubled since we made that change. The branch office system I think we eliminated the subsidy, gee, it's been probably six or seven years ago. But even in our general agency operations, the military -- there's no one else out there who supplements new agents. You may recruit a few less people, but the people that you do recruit will be more motivated I think to quickly perform. And as Tony mentioned, part of our objective here were the people that are motivated or are willing to work, we're going to be able to pay them more because we're not going to be spending all this money on the people who fail.

Just in rough terms, what does the average first-year agent make a year, and how big was the supplemental pay before for that agent?

The average compensation for an agent in his first year of employment is somewhere in the mid $20,000, 25,000, 28,000, somewhere in that ballpark. I don't have the number in front of me, but that's close to it. What portion of that will be the supplement, that's a tough question because the 25,000 to 28,000 is an agent who stays with us for the entire year. The supplement for him would not be terribly great. Where we're in effect wasting money is paying a supplement to an agent who is with us for a month, two months, three months and then he leaves. And that's where the bulk of the supplement dollars go. And that's what we're cutting out. What we're saying is moving Liberty into no longer being the exception within Torchmark but the rule here.

You said 6 million, how many agents are receiving supplemental pay? I can just do the --.

We will hire between 2500 and 3000 agents this year.

That's good enough for me to -- that sounds like it's a meaningful part of their first-year compensation. If it is 25,000 -- you're losing a lot so -- you're getting turnover a lot so --.

And the nice thing about it is, going forward -- in fact, Tony, you had run some projections that agents who will come in and work and achieve these bonus levels now can make substantially more. It will not be an -- we will see our average first-year agents income increased next year.

Absolutely. That 6 million that's getting redistributed, it's not going to shareholders, right?

Some of it will and some of it we are using to supplement the bonus situation.

Thank you for the clarification. Appreciate it.

David Lewis of SunTrust Robinson Humphrey.

C.B., you've touched a little bit on the Medicare Supplement, it seemed to me that we talked last quarter about -- it's a little more upbeat in the second half and going into '04 as I guess the -- you got the Inspector General's office to grant permission to waive the part A Medicare deductible, and that you were going to offer three new standardized plans with attained age pricing. Tell us how that's going and really if you're kind of where you're at you thought you would've been three months ago.

The waiving of the part A deductible was going a little slower than we'd hoped. Right now we have hospitals signed up to waive the party deductible that represent about 6 percent of our total claims. We are continuing to move forward with that. It's just taking a little more time than what we'd hoped. It will -- I mean, still we have 100,000 part A claims a year, right now I think the hospitals we have signed up represent about 6000 of those claims.

As far as introducing the three plans with attained age pricing, we have done that now. I believe there's 32 states that will allow that. And again, it's taken us some time to get that out there, we really haven't seen the benefit of that. Again, we had to go back and get approval from the states. In fact, I'm not sure if all 32 -- I think we're at 24 of the 32 states we've now introduced. So we will see some benefit from that going forward. But again, it's just taking some time to get implemented so we haven't seen much impact there yet.

So you think those are going to be a couple of the key areas as well as the only 5 percent rate increase that will really drive 2004 results?

I think those items will also help, yes.

And can you talk about -- and I may have missed it, I got interrupted -- I don't know if Gary talked about kind of the expectations for kind of free cash flow for 2004?

David, I hadn't looked at that or we haven't made our projections yet for 2004. It was -- this year it was $225 million. Last year it was $195 million, fully expect it to be in excess of the $225 million this year, but just don't have the projection yet.

At this point no reason to assume you wouldn't use the bulk of that for repurchases, correct?

Well, if there was an acquisition or something that came along we could use it for that, but you can see what we've done in the last few years. We really have emphasized the repurchase program.

Great. And back on the Medicare supplement, what's the timing of the new legislation that --.

The timing is -- there is no timing. The (indiscernible) world is still in turmoil. The changes -- the new products that we would like introduced, probably -- we're probably looking hopefully sometime in 2004 the legislation will take place. I no longer believe it can happen this year.

Do you think it's likely to be in the spring or can I get a guestimate?

Boy, David, you're really talking about something over which we have no control. We just try to influence people in Washington, and they have been receptive, but no progress is being made on the prescription drug at the moment. So it's just a waiting game.

Understand. And any change in competition in that business? I know you lost a lot of recruits, I guess that's picking up again.

We have not much change from a quarter ago. There's still about the same players out there, our recruiting has definitely come up. I expect it to continue to do so. Again next year with our rate increases, we should be more in line with the competition. But not a significant change.

All right. Thanks very much.

Eric Berg of Lehman Brothers.

A couple of quick follow-ups. First of all, Gary, if there were an increase in interest rates -- I'm looking now on page 6 of your news release -- would two line items, interest on debt and the interest rate swaps, be affected negatively? In other worlds, would there be sort of a double negative impact on earnings?

There would be an impact on the debt, the short-term debt that we have out there because right now we have 170 million out there that -- that's commercial paper and those are variable-rates. So increasing interest rates would cause that to go up. And then the benefit from the swaps, as LIBOR rates go up the less benefit we'll have.

Okay, and Tony, could he describe in a little bit more detail the underwriting problem that you're having on the life side? It doesn't seem like from just from the gross numbers -- I'm looking at the underwriting income exhibit -- or underwriting margin exhibit on page 10 of your supplementary material, and it looks like life margins have been pretty stable, at least they were in the quarter and I believe year-to-date.

Well, I think if you look over some period of time you will see a gradual decline in margins, underwriting income at Liberty and margins thereon. What we're trying to do is just improve the selection of risks that -- select a better quality of risk and underwrite them properly and charge them the appropriate rate so that the -- again, looking at one quarter to one quarter may now show a picture, but if you look over a period of years the decline of a couple of points is something we need to address.

Thank you.

Stephen Karn of Goldman Sachs.

C.B., you talk about wanting to manage the business to the margin and wanting to improve margins. The total margins of the business are pretty substantial at around 25 percent. And I guess my question is, what type of improvement from this level do you think is really possible?

Again, we continue to believe -- we will see improvement in the margins in the direct response business, so that's slowly coming in now. It's there, we know it's there, we may be a little conservative today because we missed it in the past. That's a big block of our life insurance. So as those margins improve overall life margins improve.

So do you think then -- since that's a big block do you think we can expect the overall margins maybe to move up from 25 to maybe 26, 27, 28?

No, I won't go 27-28%. Getting it to 26% by the end of 2004, I would consider that a real big success. I'm not sure that we will, but what I am sure of is they're going to go up. We're writing a great deal of business at American income that's overall 30 percent. We know the direct response business we're putting on the books is north of 28 percent, and we're taking the action to improve the margins at Liberty National. Well, that's three out of the four main distribution systems, and if the margins stay the same or improve in those systems and they continue to grow, overall margins should also improve.

Okay, thank you.

Ed Spehar, Merrill Lynch.

I just wanted to follow-up on what Tony was saying about Liberty National margins. Could you sort of repeat what you had said because I thought I heard you say that you think margins are going down over time.

What I said was if you look at the margins at Liberty as a percentage of premium over the past few years, we are lower today than we were a couple to three years ago -- a few years ago. And it's the reversal of that trend that we are putting changes forth to effect.

The decline, it has been over a period of years and it's in the mortality -- slightly in the acquisition but primarily in the mortality.

The other thing -- this is Mark McAndrew -- we did a study between American Income and Liberty National, and the underwriting procedures being used in American Income have resulted in a substantially better mortality than what we've seen at Liberty, so there's some benefit to us to just make them consistent for one thing. But it just makes sense to change more closely to the American income underwriting standards.

And what if any reason is there that if things work out that Liberty National margins would be lower than American Income? Let's say that everything works out. You say you have four goals to sort of fix Liberty National, and you sort of touch on every important aspect of profitability for a life company. And I'm just wondering, if all those things work, is there any reason to think that Liberty National's margins at some point in the future would not be similar to American Income?

There are a few reasons to not think that. American Income is at 30 percent margin and Liberty is floating around 22-23% right now. We just like to get Liberty back to a 24-25% level that they were 6, 7 years ago. There are different costs in the two systems, Ed. I don't think it's possible to get Liberty National to 30 percent any more than I think it's possible to get the United American branch office to 30 percent. But we can improve it, and that's what we're trying to do.

Okay, thank you very much.

Mr. Hudson, there are no further questions left in our queue. At this time I'll turn the call back over to you for any additional or closing remarks.

All right. Thank you very much for joining us this morning, and we will look forward to talking to you three months from now. Good day.

This concludes today's teleconference. Thank you all for your participation. You may now disconnect.