Globe Life Inc (GL) 2003 Q4 法說會逐字稿

Good day everyone and welcome to the Torchmark Corporation fourth quarter 2003 earnings release conference call. Please note that this call is being recorded and is also being simultaneously webcast. At this time I would like to turn the call over to the Chief Executive Officer, Mr. C.B. Hudson. Please go ahead, sir.

Good morning everybody and welcome. Joining us from our operating companies are Mark McAndrew, Chairman of Insurance Operations, Tony McWhorter, CEO of Liberty National and United Investors, also Gary Coleman, Chief Financial Officer, Larry Hudson, General Counsel, and Joyce Lane, Vice President 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 Investor's Relation page. Select Financial Reports from the menu. These reports include GAAP disclosures and reconciliations required by the SEC regulation G.

Some of our comments or answers to you questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly you'll refer to the Company's cautionary statement regarding forward-looking statements contained in our SEC Form 10-Q for the quarter ended 9/30/03, which is on file with the SEC, on the Company's Web site, and as a matter of public record.

Our operating income for the quarter was $114 million, or $1 per share, an increase of 11 percent over the 90 cents in the fourth quarter of last year. It is worthwhile to note that the quarter was our 16th consecutive quarter of increasing operating earnings per share. Return on equity for the quarter was 16.2 percent. And we ended the year with a book value of $25.06, and a debt to capital ratio of 23.5 percent.

Now turning to the insurance operations, first, life insurance. Total annualized premium sales for the quarter increased 24 percent to over 103 million. First-year premiums, which in the future will replace annualized premium issued as our measuring stick for new business activity, increased 12 percent to $57 million.

Our Direct Response operation again produced outstanding results, with annualized premium issued increasing 47 percent to almost $47 million. First-year premiums increased 26 percent to 16.3 million. Our packaging and postage expenses for the year were 65 cents per dollar of annualized premium issued. That compares to 63 cents in 2002. Our underwriting margins in Direct Response as a percent of premium income were 25.0 percent, the highest percentage of premium margin since the second quarter of 2001.

American Income sales increased 27 percent to over $29 million. And first-year premiums increased 17 percent to over $19 million. We ended the year with 2,291 producing agents, over 300 more agents than a year ago.

With respect to our military operation which generates the highest quality business within Torchmark, sales increased 21 percent to $7 million, and the first year premiums increased 14 percent to 6.4 million.

At Liberty National, sales declined 2 percent to 13.6 million, but first-year premiums were 9.7 million and were flat with a year ago. The changes that have been implemented at Liberty National are having the desired effect. Sales are recovering and just as importantly, if not more importantly, the quality of the business is improving. Mark and Tony will have additional comments on Liberty later in the call.

Total life premium income increased 8 percent to 333.6 million, with double-digit increases at American Income and our Direct Response operation and our Military operations. Our life underwriting margins increased 9 percent to 83.8 million, and were 25.1 percent of premium income, the highest percentage of premium margin since the last quarter of 2001.

Now turning to health insurance, total sales for the quarter increased 20 percent to over 62 million and first-year premiums increased 10 percent to almost 40 million. United American General Agency sales increased 14 percent to 29 million, due to continued strong sales in the non-Med Sup market.

With respect to our United American Branch Office operation sales increased 25 percent to 25 million. Branch Office producing agents numbered 1,510 at year-end, an increase of 230 agents for the year. Med Sup sales from the General Agency and Branch Office operations declined 21 percent to 16.7 million for the quarter, but non-Med Sup sales increased 54 percent to 37.7 million. Our overall 2004 Med Sup rate increase will be less than 5 percent of premiums, which is the smallest increase in over ten years, and should have a favorable impact on 2004 Med Sup sales.

Health insurance premium income increased 3 percent to 260 million. And underwriting margins increased 2 percent to 41 million. Our Liberty National health margins continued to be under pressure due to the high claims loss ratios on the subset of the 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 103 percent of the 18.7 million in premiums for the quarter. Even though the paid claims loss ratio is unacceptably high, it was our lowest ratio for the four quarters of the year.

In our annuity business the margins were 2.8 million, flat relative to last year. Our administrative costs, which included 1.45 million of litigation expenses increased 7 percent to 33.8 million, but were 5.6 percent of premium income; no change from the fourth quarter of last year.

Turning to our investment operations, excess investment income increased 10 percent to almost 83 million. But on a per-share basis, which reflects the effect of our share repurchase program, excess investment income increased 16 percent to 73 cents. For the quarter we acquired investment-grade bonds with annual effective yields of 650 basis points, basically the same as for the full year.

Now before my final comments with respect to the year and guidance for 2004, we would like to provide some additional details as to what is happening in some of our operations. I will first call upon Mark McAndrew to talk about the insurance operations.

As C.B. mentioned, we had an excellent quarter in new life sales with three of our four major distribution systems exceeding 20 percent growth for the fourth quarter. We also started saying some positive results from some of the changes we made at Liberty National. I will let Tony McWhorter elaborate on the Liberty results in a few minutes.

In the Direct Response, our Direct Response operation ended the year with 164 million of life sales, up 33 percent for the year. This was well up ahead of 150 million we projected a year ago. First-year collected premiums for the year grew 26 percent. It was 26 percent for the quarter and 24 percent for the full year.

The first-year collected premium number is lagging the percentage growth in sales due to the unusually strong fourth quarter sales, coupled with the introductory offer in our Direct Response offerings. We should see continued acceleration of the first-year collected premium during the first half of 2004.

For the year total life premiums for Direct Response grew by 11 percent, and underwriting margins grew by 14 percent. At year-end life in force premiums were up 13 percent, which should be a good projection of our life collected premiums in 2004.

We continue to project a 28 percent underwriting margin on new sales. So we should continue to see a gradual improvement in our overall life margins in the Direct Response. At this time I'm expecting around 15 percent growth in new life sales in our Direct Response operation for 2004.

At American Income, for the year American Income Life sales were up 17 percent to 107 million, slightly ahead of our 105 million projection from a year ago. First year life premiums were up 19 percent, with total life premiums and underwriting margins up 13 percent.

As I mentioned last quarter our labor relations at American Income have never been better. During the fourth quarter we saw a 37 percent increase in our new lead generation, predominantly from increases in our endorsed labor union mailings.

For 2004 we are projecting 10 percent growth in life sales at American Income. This projection is somewhat less than the 2003 growth due to our continuing efforts to improve the persistency of the new business written. I expect to at least maintain the 13 percent growth in life premiums and margins at American income in 2004.

I will now let Tony McWhorter comment on Liberty National.

Good morning. First in regard to Liberty's life sales the results in the fourth quarter were in line with our expectation. As you may recall, in April of 2003 we made the decision to no longer accept new business where the initial application fee was paid in cash. The reason for the change was due to the very poor persistency of that cash business.

Because the cash sales that were discontinued accounted for about 25 to 30 percent of Liberty's sales at that time, we knew the short-range effect would be a drag on new sales. But we also believe that we could replace the loss cash sales with higher quality check sales by the end of the year, and that is pretty much what happened. In the third quarter of '03 life sales were lowered by 10 percent than the same quarter of '02. By the fourth quarter, the shortfall compared to the prior year fourth quarter was down to just 2 percent.

Although it is still early, the positive trend is continuing in 2004 were life sales through the first six weeks are up slightly over the same period in 2003. As another example of the positive trend, I would also point out that life sales in the fourth quarter of '03 were 8 percent higher than the third quarter of '03.

With the elimination of cash sales in April of 2003 we anticipated an improvement in the persistency of our new business. The four month persistency of new business written in August, which contained no cash new sales, was 7 percentage points higher than the four month persistency of new business written in March, which of course contained a significant portion of cash new sales. So we are seeing some early evidence of the expected better persistency.

Now looking at 2004, we have implemented the changes in our field force compensation that I mentioned in last quarter's conference call. Two major items are worth noting again. First, beginning in January of 2004 bonuses at all levels of our sales force are now based entirely on the production of persistent business. For our field management, their bonus is now heavily weighted towards sales generated by new agents.

The other major item is that beginning with agents hired in 2004 we no longer supplement the pay of nonproductive agents. This expense amounted to over $6 million in 2003. The end result of these changes will be to enhance the compensation of productive agents and management by reducing the compensation for those that are nonproductive.

All in all, things are on track and moving along in the direction and the speed that we anticipate. Those are my comments. So back to you, Mark.

I have to curb my enthusiasm when it comes to Liberty National. I'm very pleased with the progress we have made to date. And I fully expect to see double-digit growth in sales for 2004 with continued improvement in persistency and expenses. Longer-term I see as much, or more, potential for growth at Liberty as I do at any of our distribution systems.

On the health side, we turned the corner at United American in 2003, particularly in our branch office operations. Medicare supplement sales were down 17 percent for the quarter versus a 23 percent decline for the full year. Nearly two-thirds of the fourth quarter decline can be attributed to fewer HMO disenrollees in 2003 versus 2002.

As C.B. mentioned, for 2004 our average Medicare supplement rate increase is less than 5 percent; the lowest in recent history. We should see a continued improvement in our competitive situation, and I expect to see modest growth in our new Medicare supplement sales in 2004.

On the horizon the new Medicare legislation passed by Congress mandates that at least two new standardized Medicare supplement plans be designed which will allow for cost-sharing. These new plans will be more affordable and, hopefully, help to control utilization. We are represented on the NEIC Committee to help design these new plans. Their current time table calls for a fourth quarter 2004 implementation. I believe that is a bit optimistic. When these plans are introduced, which I believe it will happen in 2005, I do expect to see a substantial upswing in our new Medicare supplement sales.

Sales of non-Medicare supplemental health products were up 47 percent for the quarter. With continued cutbacks and employer provided benefits, and over 43 million Americans uninsured, I expect to see 20 percent plus growth in these sales in 2004.

As I mentioned earlier, our branch office operation turned the corner in 2003. After two years of declining sales, 2003 sales increased 12 percent to 84.6 million, and were up 25 percent for the fourth quarter. First-year collected premiums for the branch office was up only 2 percent for the year, but increased 10 percent in the fourth quarter.

For 2004 we should see modest single digit growth in health premiums and underwriting margins in both of our distribution systems at United American. Those are my comments C.B. Back to you.

Gary, if you will comment on our investment operations.

Good morning. As shown on page 16 of our supplemental financial pages the schedule entitled, Fixed Maturities, Torchmark has $7.5 billion of thick securities at amortized cost which comprise 93 percent of invested assets. These assets are carried on the balance sheet at their market value of $8.1 billion.

The $631 million excess in market value over cost includes $670 million of unrealized gains, and $39 million of unrealized losses. Overall, 95 percent of the fixed maturity portfolio is in corporate securities. We had no CDO's, and have less than $170 million of asset-backed securities, and over two-thirds of those are seasoned Jenny Maes with little prepayment risk.

Of the $7.5 billion of fixed maturities at amortized cost, 6.8 billion are investment-grade and have an average rating of A-. The low investment-grade bonds are $713 million and have an average rating of double B-.

At 8.9 percent of total invested assets, the percentage of below investment-grade bonds is essentially the same as at year end 2002, but lower than the 9.6 percent at the end of the third quarter of 2003. During the year, below investment grade bonds grew by $57 million, because downgrades exceeded dispositions from the portfolio. However, in the fourth quarter the portfolio declined by $47 million due to $58 million of dispositions and only $11 million of downgrades.

Although the percentage of below investment-grade bonds is higher than the industry average, the risk is mitigated by Torchmark's bond leverage ratios. Bond leveraged the ratio of total bonds to equity, excluding FAS 115, is a favorable 2.6 to 1 compared to the 6 to 1 average ratio for our peer group.

Now turning now turning to investment income and excess investment income. In 2003 we generated $1.4 billion in new cash corporatewide, with $225 million used 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 invested our money primarily in investment-grade corporate securities with long maturities. In the fourth quarter we invested $350 million in bonds yielding around 6.5 percent, and having an average maturity of 25 years with an average rating of triple B+. For the year the yield on new investments was 6.6 percent compared to 7.5 percent in 2002.

Excess investment income is net investment income less interest credited to or paid on the interest-bearing liabilities, which are the net policy liabilities in our debt. Despite the lower yield of new investments, excess investment income for the fourth quarter was $83 million, up 10 percent.

Lower new money rates have had an impact on our overall yield rates, as the yield on total invested assets for the quarter was 7.09 percent, 7 basis points lower than in the fourth quarter of 2002. However, the lower yield was offset by the reduction in the average crediting rate earned on that policy liabilities by 11 basis points to 5.45 percent.

In addition, 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 was more than offset by the reduced cost of the net policy liabilities and the increased benefits from the swaps. This enabled us to earn a 200 basis point spread on the interest-bearing liabilities, which is slightly higher than 190 basis point spread we earned in the fourth quarter of 2002. Those are my comments, C.B.

Now I would like to call on Larry Hutchison, General Counsel, to update you on our cancer -- Liberty National cancer business.

We continue to work on our cancer problem. And although this has been resolved as quick as we had hoped, we are pursuing several options that should give Liberty and its policyholders relief. Today my comments have to be limited because we're currently in negotiation with third parties, and hopefully we will be able to share details of our progress with you during our next conference call.

Thank you. I want to just add that the solutions that we're after in the cancer business, and I thought we would have them this quarter, we didn't, and I am confident that we will next quarter, don't involve any write-down of DAC. We're looking to solve the loss ratio problem that is a cash drain at Liberty National.

We have had both a good quarter and a good year. At this time last year we guestimated that our 2003 operating earnings per share would increase 8 percent to roughly $3.78, assuming that we did not repurchase any stock in 2003. Actual operating earnings were only 1.4 million less than we projected a year ago, even though our 2003 stock repurchase activity reduced 2003 earnings by $5.7 million, the after-tax interest loss on the money that we spent.

My point is, one, actual results were better than our guessimates for the year. It worked out that way. We weren't being conservative. That is what we thought. And, two, even without the stock repurchase program, earnings per share would have increased 9 percent, about $3.81 for the year.

So keeping in mind that our guidance is just a guessimate, here is what we think for 2004. With respect to life insurance, we look for annualized premium sales to increase about 11 percent versus the 14 percent in 2002, with total sales between 424, 425 million.

Premium income and life insurance should increase by 8 percent in 2004 versus 7 percent last year, and be about 105 million more than in 2003. Our underwriting margins in life insurance should increase 9 percent more than -- 9 percent versus 8 percent increase in premiums to about 355 million.

In health insurance we expect overall sales to increase 16 to 17 percent to roughly 266 million versus 13 percent increase in 2003. And our premium income and health insurance to increase 4 percent versus 1 percent in 2003.

Our underwriting margins and health insurance, we are expecting a 4 percent increase to about $171 million versus a 2 percent decline last year. In our annuity business, it is a guess depending upon the stock market, as well as continued Waddell and Reed replacement, but we're just assuming that declines from the 10.6 million in 2003 to roughly 10 million in 2004.

Total underwriting margins from all operations we expect to grow about 7 percent to 535 to 536 million versus the 4 percent growth last year. Administrative expenses should increase 6 percent, including litigation expenses, but it will remain at 5.5 percent of premium income.

And our total underwriting income we expect to increase roughly 7 percent to 398 million versus the 3 percent increase in 2003. With regard to excess investment income, we're looking at an 8 percent increase to about 348 million versus 9 percent increase last year. And this assumes that in the fourth quarter of the year we will see a drop of roughly $3 million in our interest swap income due to the swaps expiring.

Other expenses at Torchmark level will remain flat compared to the prior year, including corporate tax rates. And overall, we expect operating income to be around 480 million plus, an 8 percent increase over 2003. And assuming we started the year with 113.9 million shares, that would be roughly $4.22, assuming that we do not repurchase any stock for year 2004, which of course we will.

Those are our comments and guidance for this morning's call. And I will now open it up for questions.

(OPERATOR INSTRUCTIONS) Nigel Dally of Morgan Stanley.

A question on capital. Do you have an estimate as to where your risk based capital ratios ended the year? And also do you have an estimate as to the likely amount of stock repurchases over the course of (indiscernible) as well?

Nigel, as far as the risk-based capital, I don't have an estimate. We were at last year at 314 percent. I don't think it would be much different than that this year. As far as how much stock we will buy back, I don't have an estimate for that. But I can tell you that our free cash flow this year 2003 was 225 million, and 2004 should be closer to 250 million.

David Lewis of Sun Trust Robinson.

C.B. or Mark, can you talk a little bit about the the Medicare supplement sales? Obviously you're looking for some improvement in the sales given the modest rate increase. But won't you continue to see some competitive pressures out there in the marketplace? And under the new government program for Medicare recipients, won't the HMOs and other healthcare providers pick up some share?

Mark, would you like to address that?

I will try. Medicare supplement sales are probably the hardest thing for me to predict of all the different distribution systems. I think we will be in a better competitive situation. Yes, I have seen that a number of HMOs are coming out with reduced premiums or expanded benefits. I don't expect to see a massive influx of people into HMOs. I think the people have been in them are a little disillusioned. And there is some question about the long-term -- is the additional funding going to be there long-term? I don't expect that to be a big factor.

But it is difficult to project. Right now we're looking at -- we're expecting 5 to 10 percent growth from Medicare supplement sales next year. I think that is achievable. But I'm not expecting -- until 2005, I'm not really expecting to see a significant upswing.

That's helpful. And just some clear on something else. The interest rate swap recognition is now -- has that picked up in investment income?

Gary.

It is a reduction of our interest expense.

You changed the format of reporting in your 10-Q format from the third quarter to the fourth quarter, I believe.

That's right, David. That's an SEC requirement. The swaps there -- part of that now is shown as gains and losses that used to be shown as a reduction of interest expense.

When you say gains and losses, below the opening line?

Yes.

So that would negatively impact your operating earnings?

No. From our operating earnings standpoint, we're keeping the classification the same.

I guess what I'm trying to get to, it looks like the investment income spiked up in the quarter. Is that anything to do with that, or why is interest -- is interest income up fairly substantially?

Investment income was up 8 percent, and that is in line with -- our invested assets were up a little over 8 percent. Again, the operating summaries -- or what we use in page -- I believe it is page 10 of the supplemental financials. That is consistent with the way we have always reported under the SEC format, in which we will explain in our annual report we are having to make a change. And there is a portion of those blocks now that have to be moved to realize gains and losses, where it used to be a component of interest expense. The other swaps stay of a component of interest expense.

Back on the investment income, is it a good guess to start with the fourth quarter and look at that as a decent number of growing from that level? And there wasn't anything unusual in there?

I would think that instead of 8 percent, it may be more in the 7 percent range. Next year this is what we projected so far.

Vanessa Wilson of Deutsche Bank.

Could you talk a little bit about your non-Medicare supplement, or the supplemental health products that you are selling, and what your sense is about the market potential there for you? It seems this year you have almost done better than you expected. And what could we see near-term and long-term out of that product?

Mark?

Well first off, I think, particularly in our branch office, sales for the year were about what we projected a year ago. So we did -- they're not much over what we expected. The products are pretty basic products. They're not major medical, but they have scheduled benefits. For example, I am looking at a product that we offer. You can get anywhere from 100 to $400 a day hospital room and board benefit. If you're in intensive care it pays two times that. It pays for other hospital expenses after a $500 deductible, it pays 80 percent of the expenses incurred up to $15,000. It has a set surgical schedule that says for every possible surgery that could be performed, it is a set amount that we pay.

And all of the benefits in the policy are scheduled benefits. So, one, they're not susceptible to inflation. We also have a large PPO network that we package with this, so that if people go to a participating hospital the products do provide good coverage for most confinements. But they are defined benefit products that really it is fairly uncommon for us to see rate increases on those products. And most of the products we have had actually out on the market for 10, 15 years, so we're very comfortable with the products.

The market is really the 43 million people that are Americans that are uninsured. In fact, in our branch office we write exclusively uninsured people. So that market is continuing to grow, and I expect to see continued strong sales there.

And what would be the average premium these people would be paying each year?

Well, let's see, on this particular products -- I think I even have a rate sheet around here. If someone bought a $400 a day benefit for a 40-year-old male the premium is $748 a year; for a 40-year-old female it is 1,056. That is in the state of Texas.

I just wanted to follow up on the question on the interest rate swap. I am looking at both disclosures. Your supplement on page 10 shows interest rate swaps of 6681, 6.7 million. And then in, I guess the SEC's disclosure, it is taking 4.4 million of that and putting it into realized gains? Is that --?

No, Vanessa, the 4.4 million is the change in the -- we had to value the swaps at each quarter end, and that is the change in the value.

So that is a loss? The valuation? The 4.4 is a loss?

Right. That's correct.

Separately and later on, a portion of the 6.6 is going to move below the line in the SEC disclosure?

Right, that's correct.

That's a third piece.

Right.

Thank you. I'm sorry, go ahead.

I was just going to say nothing has changed on the swaps. It is just the SEC has deemed that the accounting should be different on certain swaps. So the economics stay the same.

And economically, the 4.4 million valuation number that is a negative, is that something that will reverse out over time, so it is just a temporary negative?

Yes, that is one accounting that we really have disagreed with. Again we are having to set the value of the swap at each quarter end, and the value is based on the present value, the future payments and also anticipated interest rate changes.

As time goes by -- first of all we're going to hold these swaps until they expire. As time goes by all the cumulative gains and losses that we have recognized each quarter end will all add up to zero. So it is just looking at it at a point in time and saying, here's what the value is based on the future payments. But as the future payments come in and when you get to the expiration date that value will be zero.

Of the 4.4?

Right.

All of those changes below the line. But above the line, the 6.6 million doesn't reverse itself?

No, that is actual cash.

That is cash that you're getting today.

Yes.

Vanessa, if you would take out of the balance sheet the value that those swaps have, which in my mind shouldn't even be in the balance sheet, the assets shouldn't be there, then there wouldn't be this continual loss at the bottom of the sheet, and we would have, as we did this quarter, roughly 6.7 million in investment income.

It is 6.7 million of cash that is coming into us. I hate to disagree with the SEC and FASB, but the rest of the accounting is kind of silly to me.

Let me say it back to you one more time. You're getting 6.7 million of economic cash this quarter. And then there is a true up that is just accounting, that is going to reverse to zero over the full life of the contract?

That's correct. And, Vanessa, if you went back and looked at -- you can look of the prior year. For the year we had gains of $12 million. For 2003 we had losses of $10 million. And you'll see some other losses because we're still in the cumulative gain situation because on the balance sheet they are still valued at $33 million.

Positive.

Positive. So that $33 million will have to go off -- will go down to zero over time.

Ed Spehar of Merrill Lynch.

The questions on the life side, C.B., in the outlook you have 8 percent premium growth, 9 percent margin growth. I guess if you look at the collected premium number up 12 percent for the year, and if you look at the implied margin that these numbers suggest, which is I think a 25, just over a 25 percent margin. It seems, I guess from the outside, it seems a little conservative. Just from the standpoint that your margins were 25 percent in the fourth quarter. I don't think there was anything unusual there. You continue to have your fastest growing business be your highest margin businesses. And the sales have been very strong. So is there something in the persistency that is different? Maybe you could just help us understand what the offsets are?

No, Ed, the persistency isn't different other than we think it is improving, particularly at Liberty National. The guidance that I have given -- I haven't made any assumptions as to improvements in margin in the life insurance. That would be presumptuous of me. I think it is going to happen. I have been saying that for 14 years in Direct Response. And I think there is some evidence it is happening. But I haven't really built anything in the underwriting margins for life insurance. That was guided more by what the margins were for the full year. So there could be improvement there. This is just a guidance number. For God's sake, you can't start holding me precisely to the next year's earnings or margins. I missed it by $4 million this past year. Just estimates. It could be better than what I have given you, yes.

One follow-up for Gary. It looks like you're giving your free cash flow estimate that you're talking about for '04. It looks like the plan is take a 100 percent of stat earnings again as a dividend. First of all, is that correct? And secondly, at what point, especially now that the growth has really picked up, at what point do you think you need to start retaining some stat earnings at the insurance company level to support growth?

First of all, you're right. Our plans for this year's dividend is the full amount of 2003 earnings. We have done things to take nonadmitted assets to the balance sheet and convert them to admitted assets, and we have room to do more of that. In the foreseeable future, I think we will still continue to take near 100 percent of the earnings. And maybe down the road we may not be able to, but it will be a ways down the road.

Bob Glasspiegel of Langen McAlenney.

And staying on Ed Spehar's lowballing theme for '04, I guess I would like to zero in on the administrative expense guidance. With premium income, I think, showing the fastest growth in several years, I'm surprised that administrative expenses would grow in line with premiums. And in fact that is a pretty significant administrative expense ratio growth relative to Torchmark's history. There is some major expense that has hit you on a one time -- ?

Bob, I'm projecting 6 percent growth next year in administrative expenses. That will be less than the 7 percent growth we're looking at in the margins for the year. We are still expecting 5.5 percent. We've had a history of reducing that percentage. Well, we didn't do it in 2003 versus 2002. And we are looking at expenses. I haven't built in anything in there for some of the things that we're looking at. I think we will be lower for the coming year. I haven't assumed that in the projection. They haven't happened yet. It is possible that the expenses -- I don't think the expenses would grow any more than the 6 percent or be any higher then 5.5 percent of premium income.

We had built in a little bit more litigation costs, partly because of the cancer situation that we're working on, and also we're getting ready to step up the litigation again with Waddell and Reed. So all in all it is still quite reasonable, but we ran 5.6 percent of premium in the fourth quarter of this year. We were 5.6 in the fourth quarter of last year. The fourth quarter for the last several years has been -- that and the first quarter -- have been the highest quarters. But our expenses are in line and we are looking at them.

It just seems like with an acceleration in premium comparisons, you would see administrative expenses starting to trend down. And I don't hear you saying you're going to let up your -- at least the 25 year history me following the Company -- keeping expenses under tight control.

No, no, we're looking at them. And again, this is a guesstimate. This is certainly one item I hope is less than our guesstimate.

One quick follow-up. Some of your competitors are mentioning that the reinsurance market has tightened. I know you're not a big user of reinsurance, but anything you're seeing and is there any implications to competition in any of your markets relative to that?

Well, we don't have that -- we had very little reinsurance. We're large enough where we don't need it. And if you are implying -- asking if that is a market we would like to get into, we don't know anything about it. I don't think it has any effect on us one way or the other.

No implications to competition lightening up -- that is sort of where I was driving at? Just some competitors that might use it more -- no impact?

Really the only competition that I view that we have in Torchmark is in the health insurers, most specifically Med Sup. And I'm not even aware that there's anything out there in the world as far as Med Sup reinsurance. I can't imagine what a fool would do that.

(OPERATOR INSTRUCTIONS) Tom Gallagher of CSFB.

The new health care product you have been selling, the defined benefit hospitalization product, what are your loss ratios in that product? And how do the loss ratios compared to Med Sup? I would imagine it is a lower loss ratio given your expense efficiency on Medicare sup side.

Well, the Med Sup is mandated 65 percent over the life of the business. And as a general rule, the under age 65 products run 60 percent. On a GAAP basis, we're on target with our loss ratios in both areas. And yes, the under age has a little more margin in the products than does the Med Sup. That is the good news. The bad news, it has a shorter life. Actually the Med Sup will produce more dollars of profit per dollar of premium issued in the under age.

C.B., on a go forward basis when you talk about flat margins for that business, knowing that at least on a longer-term basis it is lower margin in Med Sup, given that that is the increasing mix of business, is it a challenge to keep margins flat, or is there --?

It is not a lower margin. The under age is a higher margin than the Med Sup. It just doesn't have as long a life to it. The Med Sup has a life of about 4.5 to 5 years discounted premiums issued. And the under age 65 products is closer to 3 years. We have had -- the mandated plans that went into effect in 1992 immediately reduced our margins on Med Sup business. And up through 2002, our margins in health insurance had been coming down because we were operating under the 65 percent loss ratio versus the 60 in the old Med Sup world.

But if you look in United American in both the branch and the GA you will see that margins were basically the same in 2003 as they were in 2002, which I think suggests, as I believe, that there will be no further decline in either one of those operations. Partly because we have adjusted to the Med Sup, and partly because we're getting some benefit from the under age 65.

And again, C.B., for 2004 we're projecting 4 percent growth in health premiums and 4 percent growth in health margins.

And so if I'm following you correctly, there actually could be a little bit of a pickup in the margin, even if longer-term sort of the embedded value of that business may be a little lower, since it is shorter tail, the immediate margin on it -- if your business is shifting more towards that product, couldn't you see a little bit of pickup in margin then?

We could. It may be. We'll just have to wait and see. These health margins are greatly influenced by that Liberty cancer business. That is a priority to solve when you are running -- we ran for the year 109 percent cash loss ratio. We've got another 5 points of administration, and another 5 points of premium taxes and commissions. So there is 19 points of absolute certain loss on some $80 million of premiums. That affects our underwriting margins in the health insurance.

John Hall of Prudential Security Group.

C.B., in your comments you talked about the swaps expiring in the fourth quarter. I was wondering if you could just clarify your comments? Is that all the swaps, and are you thinking about refinancing or changing your financing at all?

No, it is not all our swaps. Gary, you want to explain that?

It is not all of them. We have $530 million of swaps. They are in three swaps. One of them is for $200 million, and it expires at the end of September of this year. That is the one that C.B. mentioned as providing about $3 million a quarter. And at today's rates it provided 3 million per quarter for the first, second and third quarters of this year. The only thing that we're considering is we're considering doing two new swaps. One, on our $100 million of 8 1/4 debt due in 2009, and another on the $100 million of 7 3/8 debt due in 2013.

At the current rates those two swaps, even though the total amount of those would be under $200 million dollars, it won't provide the 3 million and 1/4 that we're getting on the swap that is expiring. It would probably be more like half that. The old swap is we're swapping -- we are receiving 9.18 percent and paying around a little under 3 percent. We can't find anybody to take us up on that again. The new ones that we would do would be a plus earnings and current rates, but it would probably be half of what we were getting the one that is expiring.

If we don't do a new swap, the 6.7 million of income per quarter that we're getting off the swaps that we projected, would drop to 3.4 million in the fourth quarter. But we have built that into our guidance that we have given you.

And it would stay that way through '05?

Well, that 3.3 million loss or disappearance would never come back. Yes, that's true.

(OPERATOR INSTRUCTIONS) Adam Algerberg (ph) of Silver Crest Asset Management.

I was curious with the rapid growth in Direct Response on the life side, what are some of the things that you are tracking to make sure that the business that is coming in has good persistency, good mortality rates, and things like that, that in fact it is going to develop appropriately long-term?

Mark?

Well, we look at it very closely every month by every category, every line of business that we're writing there. We are updating our mortality assumptions, persistency assumptions on a very regular basis. And we have a world of information there, and we have people that do nothing but monitor the results there. And again, for the year the business we issued last year we are projecting we had a little over 28 percent underwriting margin on the business. But we're constantly looking at persistency and mortality on that business.

Adam, that's good question. We made some mistakes several years past in the Direct Response. And believe me, we're watching it very closely. A number of people in the Company just make sure that that 28 percent margin that Mark mentioned is there.

I'm sure you are. I guess I'm just trying to learn a little bit more about some of the things you had looked at, because it is somewhat long tail. And I guess I just wonder if you have a big bubble of sales come through, it is there. It is now on the books. And I guess what are some of the -- how quickly would you get information that would show you things might be a little bit off-track? And if they were, what are things you could do to adjust for that?

Well, again, we made a mistake a few years ago by trying to get into a higher face amount, which we really had no experience at, and we did miss the persistent mortality. Since that we have really gone back to businesses that we have long-term experience at.

Again, our bread and butter product is small face amount policies on children, which we have been selling since 1964. Even though the product and rate may change a little bit, the overall mortality and persistency assumptions that we have in there, we have an awful lot of experience at. But it is something we compare actual to expected just on a very regular basis. And we make -- the adjustments that are made are fairly small. There aren't any big surprises there -- haven't been.

Thank you. The sales growth is amazing. I think everyone thought you were in a stodgy old business, and it looks like you are in an exciting rapid growth business. I congratulate you on that.

Thank you. We will take that. Right, Mark?

That business has rapidly grown now since 1985. I think in 1985 we had something like 8 million of sales there, and something less than 50 million of in-force premiums. And we now have over 400 million of in-force premiums. So it has been consistently double-digit growth.

Ed Spehar of Merrill Lynch.

I wanted to go back on the health side in terms of the topline outlook. Could you talk about what impact, if any, you're seeing from the product introductions that you had in Med Sup with the annual renewable term, YRT -- I forget which one you use as the name. But basically the term type pricing, which I thought was going to make some of your products look more competitive in early years? Has that had any impact?

And also, C.B., on the cancer block, when you look at your outlook for '04, have you assumed resolution of the Liberty National cancer block issue?

Alright. Mark, first on the Med Sup issue age.

Actually I'm a little disappointed in the Medicare supplement sales. I did hope that we would see more impact at the younger ages with those products. There is about 30 states that would allow us to do that. It took us a little longer to get those products out there than I thought. We now have it out there in most of the 30 states. But I'm not expecting major improvements in the Medicare supplement sales. Again, I think 5 to 10 percent growth in the coming year is realistic, but I don't have high hopes that it is going to do anything major.

The second half of your question, Ed, on the Liberty, we had 9.5 million of margins at Liberty National in 2003. We're projecting a little over 10 million in 2004, just because of some of the changes we have implemented in processing some claims.

In answer to your question though, no, I have not built in anything for the resolution of the cancer problem. Until it is a done deal, it is not solved.

And then just one last follow up, Mark, on this YRT pricing issue, what is it that has not lead to some sort of market acceptance of this? Because I thought that this was the route that most, or at least a lot of your competitors have gone?

Well, there's no doubt, it is that -- most of our competitors do do the attained age pricing. Our agents that have written business for us have used the issue age in their sales process forever. And it is difficult getting them to -- that was a big selling point for them. And it just hasn't taken off. Even though we are more competitive on the attained age rating, particularly at the younger ages, it is a hard habit to break. I don't have an answer for that right now.

There are no further questions at this time. I will turn the conference back over to our host for any additional or closing remarks.

I have no further remarks. I thank you for joining us this morning. And we will see you in a couple of months. Thank you.

That concludes today's conference call. Thank you everyone for your participation. You may now disconnect.