Globe Life Inc (GL) 2004 Q1 法說會逐字稿

Good morning everyone, and welcome to the Torchmark Corporation’s first quarter of 2004 earnings release conference call. Please note that this call is being recorded and is also being simultaneously webcast. At this time I am going 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 me are Mark McAndrew, Chairman of Insurance Operations, Gary Coleman, Chief Financial Officer, Larry Hutchison, 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 we discuss some of the details, you can view them on our Web site, Torchmarkcorp.com at the Investor Relations page.

Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, you will refer to the Company’s 10-K, which has been filed and is available.

Our operating income for the quarter was $117.1 million, or $1.03 per share, an increase of 11 percent over the 93 cents in the first quarter of last year. It’s worthwhile to note that this quarter was our 17th 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 $25.49, and a debt-to-capital ratio of 24.2 percent.

Our net operating income of $117.1 million was slightly higher than we expected for the quarter. However, our outstanding diluted shares were also higher than expected, due primarily to stock price increases during the quarter.

Now turning to the Insurance Operations, first, Life Insurance.

Our first-year premiums increased 10 percent to over $59 million and total premiums increased seven percent to $343 million. Our underwriting margins also increased seven percent to $84.6 million, but were somewhat higher than we expected due to higher claims in several areas.

Our direct response operation again produced strong results with first-year premiums increasing 22 percent to over $18 million, and total premiums increasing 10 percent to over $95 million. Underwriting margin increased 12 percent to $23.8 million. With respect to the underwriting margin, the good news that it was the second consecutive quarter in which the margin was 25.0 percent of premium, the highest percent of premium margins in three years.

The bad news is that we still have a block of United investors high face-amount insurance that we ceased issuing over two years ago that is negatively impacting our margins, more so this quarter than in the past. Excluding the impact of this closed block of business, the direct response underwriting margin for the first quarters of this year and last year would have been 26.0 percent and 25.4 percent, respectively.

At American Income first-year premiums and total premiums both increased 13 percent to over $19 million and $84 million, respectively. The underwriting margin increased 16 percent, to $25.3 million, and was in line with expectations. The number of producing agents declined from 2,291 at yearend to 2,027 at the end of the quarter. Mark will comment on this development later on in the presentation.

At Liberty National first-year premiums were $10 million, flat compared to a year ago, and total premiums increased one percent to $76.6 million. Although policy obligations were 48 percent of premium, the same percentage as a year ago, they were higher than expected. And although we are reducing expenses at Liberty National, for timing reasons the reductions weren’t reflected in this quarter’s financials, but will show up during the balance of the year. The bottom line is that underwriting margin was less than expected and was down three percent to $16.6 million.

With respect to our military operations, first-year premiums increased 14 percent to $6.6 million, and total premiums increased 12 percent to $44.6 million. Underwriting margin increased only four percent to $9.4 million and was less than expected due to higher policy obligations. Paid claims due to Iraq hostilities were the highest since the war began and were $531,000, and contributed 1.2 percent of the 48.8 percent policy obligations ratio for the quarter. Excluding the Iraq hostility-related claims, the loss ratio was still somewhat higher than normal and we just consider that an aberration.

Turning to health insurance, our first-year premiums increased 19 percent to $40.7 million, and total premiums increased three percent to over $270 million. Underwriting margins exceeded our expectations and increased six percent to over $45 million.

The UA General Agency operation, first-year premiums increased 13 percent to $17.3 million, with Med Sup first-year premiums declining seven percent to $6.3 million, and other health insurance first-year premiums increasing 29 percent to $11 million. Both total premiums and underwriting margins increased one percent and were in line with expectations for the first quarter.

In the UA branch office operation, first-year premiums increased 20 percent to over $15 million, and total premiums and underwriting margin increased three percent and were in line with expectations. The branch office ended the quarter with 1,640 producing agents, 130 more than at yearend, and 365 more than at this time last year.

At Liberty National, the underwriting margin increased 53 percent to $4.7 million, and was well above expectations due to lower losses and what we refer to as the cancer class business, which experienced a paid-claims-to-paid-premium loss ratio of 100 percent on $19.4 million of premiums, well below the 113 percent loss ratio we experienced in the first quarter of last year.

I am pleased to finally be able to report that we have agreed on a settlement of the current litigation regarding the cancer class business, and that the settlement has been submitted to the Judge for approval. I’ll provide more details on the settlement later on in the call.

Now, turning to our annuity business and administration expenses, the annuity margin increased 55 percent to $3.4 million and exceeded our guesstimate for the quarter of $2.5 million. Administrative expenses, including $820,000 of litigation expense at United American and Liberty National, increased four percent to $34.8 million, and we’re at 5.6 percent of premiums compared to 5.7 percent in the first quarter of last year.

Turning to the investment operations, excess investment income increased five percent to $82.2 million. On a per-share basis, which reflects the effect of our share repurchase program, excess investment income increased nine percent to $0.72. For the quarter, we acquired investment grade bonds with an annual effective yield of 630 basis points. Excess investment income was lower than expected. Lower yields on new investments are affecting our investment results and we were pleased earlier in the week to hear the developments that rates may be rising soon and we look very much forward to that day.

Now before my final comments, including comments regarding the class settlement, we’d like to provide some additional details as to what is happening within some of our operations. First I’ll call upon Mark McAndrew to talk about the insurance.

Thank you C.B. For the quarter three of our four Life distribution systems continued to see double-digit growth in both first-year premiums and total premiums. As far as the direct response, I don’t have a lot to add to C.B.’s comments. Direct response had another excellent quarter and I’m confident that we can maintain the 20 percent, or higher, growth in first-year premiums for the balance of this year.

At American Income, first-year premiums were up 13 percent from a year ago, but were flat when compared to the fourth quarter. As C.B. mentioned, our agent count also declined 11 percent in the quarter. There are two factors, which contributed to our decline in agents.

First, at our fourth-quarter agency management meeting, our emphasis was to improve the quality of the business we were writing. We did take several positive steps in the quarter to improve the persistency of the business. As a result, we lost some agents who had been writing poor quality business. An unanticipated byproduct of our emphasis on quality was the loss of emphasis on recruiting new agents. For the quarter, specifically in January and February, we’ve recruited almost 100 fewer agents than we did a year earlier.

The second factor, which I believe is more critical, was the change to the bonus compensation for agents at American Income. To give you a little history — in January of 2002 we implemented a new bonus program, which rewarded agents who produced over $6,000 of new annualized premium in a month and pet persistency standards.

In 2002, 24 percent of our agency force qualified for a monthly bonus on average. New sales for the year were up 38 percent and we saw a consistent improvement in our agent retention. In January of 2003, we increased the minimum production requirement to $6,500 a month, while also increasing our persistency standards. As a result, a percentage of our sales force earning a monthly bonus dropped from 24 percent to 19 percent. Sales growth for the year slowed to 13 percent, but we paid over half-a-million less in bonuses to agents in the year.

Late in the year we began to see deterioration in our agent retention. In January of 2004 we again raised the minimum production requirement to $7,000 a month. During the first two months of this year less than 13 percent of our agents received a monthly bonus. As a result, agent terminations were at record levels and for the first time in over three years we did not see growth in new sales volume during January and February.

Effective March 1, we reduced the production requirement back to the $6,000 level. During the month of March, 24 percent of our agents, the same level as in 2002, received a bonus and new sales volume jumped over 20 percent from February of this year.

We’ve learned a valuable lesson and we will not repeat this mistake in any of our other distribution systems. The good news is we have made some needed changes at American Income to improve the quality of the business written, and we are back on track to see renewed growth in both our agency force and new premiums written.

At Liberty National, first-year premiums were flat from a year ago. I am encouraged by the fact that first-year premiums were up six percent from the fourth quarter numbers after declines in the prior two quarters. This can be attributed both to improvement in new sales volume and significant improvement in the persistency of the new business written. I expect to see continued improvement in first-year premiums at Liberty National as the year progresses.

The agent count at Liberty dropped 299 for the quarter, as we anticipated. As you will recall, we discontinued subsidizing new agents who were hired effective January 1 of this year. New agents are also not eligible for service salaries or other benefits until they have passed their exam and obtained a permanent insurance license. This typically takes four to six weeks.

As we anticipated, we saw a surge of new recruits in December, followed by almost no recruits in January. The drop in agents for the quarter was merely eliminating the mostly non-productive, unlicensed agents from our count. The agent count has now stabilized and I anticipate growth the balance of the year.

On the expense side at Liberty, last year we spent $6.3 million subsidizing new agents. The service salaries and benefits for unlicensed agents cost us an additional $2–$3 million a year. These expenses were eliminated for agents hired effective January 1, but the impact was not seen in the quarter due to the influx of December hires, coupled with changes we made in incentive-based compensation. Bonuses, which were previously accrued on a quarterly basis, we changed, effective in January, to monthly bonuses. So, during the quarter we incurred both the fourth quarter of 2003 bonus charges as well as the first quarter of 2004, so we had some doubling up on expenses. The Life margin should begin to improve in the second quarter as these expense savings begin to develop.

I continue to believe that Liberty is on track to see significant improvements in both first-year premiums and underwriting margins, beginning in the second quarter and definitely in the second half of this year.

Concerning health operations, at United American, first-year health premiums were up 13 percent in our general agencies and 20 percent in the branch office operations. We should be able to maintain at least the 13-percent growth level on the general agency side for the balance of the year, while the branch office should accelerate to 25–30 percent growth by yearend. The growth in 2004 will continue to come from non-Medicare Supplemental health products.

Concerning Medicare, our competitive situation has improved in many states and I anticipate a flattening of our first-year Medicare Sup premiums as the year progresses.

The NAIC, National Association of Insurance Commissioners, is continuing to work on at least two new standardized Medicare Supplement plans, which include cost sharing features. Until these new plans are made available, which should be some time in 2005, I’m not anticipating growth in the Medicare Supplement market.

The improvement in HMO reimbursement rates will also have some negative impact on us. The government is now reimbursing HMOs on average of seven percent more than the cost to providing traditional fee-for-service Medicare. Until these reimbursement rates come down, and they will come down, we will see more HMOs entering the marketplace.

C.B., those are my comments. I’ll turn it back to you.

Alright Mark. Now I’ll call upon Gary to talk about our investment operations.

Good morning. As shown on page 12 of our Supplemental Financial pages, the schedule and table on fixed maturities, the [indiscernible] at $7.7 billion of fixed maturities at amortized costs, which comprises 93 percent of invested assets. These assets are carried on the balance sheet at their market value of $8.5 billion. The $818 million excess of market value overcost includes $836 million of unrealized gains and $18 million of unrealized losses.

Overall, 95 percent of the fixed maturity portfolio is in corporate securities. We have no CDOs and have less than $140 million of asset-backed securities, and over two-thirds of those are ‘Cs’ and Jennie Maes with little prepayment risk.

At the $7.7 billion of fixed maturities at amortized costs, $7 billion are investment grade and have an average rating of A-minus. The below investment-grade bonds are $712 million and have an average rating of Double-D-minus. At 8.6 percent of total invested assets, the percentage of below-investment-grade bonds is lower than the 8.9 percent at yearend 2003, and the 9.4 percent at the end of the first quarter of 2003.

It is worth noting that since the third quarter of 2003 below-investment-grade bonds have declined $48 million because dispositions have exceeded downgrades.

Now, regarding investment income and excess investment income, due to the low interest rate environment and the long-term nature of our policy liabilities, we invest our money primarily in investment-grade corporate securities with long maturities. In the first quarter, we invested $375 million in bonds yielding around 6.3 percent, and having an average maturity of 23 years with an average rating of A-minus.

In the first quarter of 2003 we invested new money at 7.5 percent, but in the four quarters since then we have invested money at an average yield of 6.3 percent. As C.B. mentioned, the lower yields have impacted our excess investment income. Excess investment income is the net investment income less the interest costs associated with the interest-bearing liabilities, which are the net policy liabilities in our debt. Because we have invested money at lower than the portfolio yield for the last four quarters, the yield on the $8.3 billion of invested assets was 6.96 percent in the first quarter of 2004, compared to 7.2 percent in the year-ago quarter.

The lower yield on the $4.8 billion of invested assets that support our interest-bearing liabilities was offset by lower crediting rates on the policy liabilities and lower financing costs. [indiscernible] the 206 basis point spread was comparable to the spread that we earned in the first quarter of 2003. However, the lower portfolio yield has had an impact on reducing the earnings on the remaining $3.5 billion of invested assets that we refer to as equity assets. Although average equity assets were up eight percent over the year-ago quarter, the income on these assets increased just five percent.

Clearly, Torchmark will benefit if interest rates go up. We will invest in excess of $1 billion in new cash this year. The benefits of investing at higher rates would more than offset any increase in our floating rate debt costs.

Those are my comments. C.B.?

Thank you, Gary. I’ll call upon Larry Hutchison now to make some comments regarding our litigation.

Thank you, C.B. On March 17th, United Investors was awarded $15 million in punitive damages against each of the three defendants — Waddell and Reed Financial Inc., Waddell and Reed Financial Services, Inc., and Waddell and Reed, Inc. The three awards totaled $45 million.

C.B. also mentioned our cancer class settlement and I’d like to comment on some of the settlement details.

The stipulation of settlement was filed by the plaintiffs, Liberty National, on April 16th. The settlement is subject to court approval, was entered into by Liberty National with a view towards accomplishing four broad objectives.

First, there is a reduction in the current premiums on the policy of the cancer class members.

Secondly, the settlement provides an objective standard for determining the actual or the regional customary charges of medical providers.

Thirdly, the settlement should mitigate some of the inflationary effect of increasing medical charges in the future with respect to the premiums for members of the cancer class.

And fourth, we believe this settlement will ensure that future loss ratios are kept within reasonable limits for the class members in Liberty National.

In summary, all the class policyholders will benefit from this proposed settlement. It provides a fair method of determining benefits while immediately reducing the premiums. In addition, this settlement is designed to avoid future severe premium increases. C.B. will explain some of the financial and mathematical aspects of the class settlement.

C.B.?

Alright, thank you Larry. For the class business, Liberty currently has about 51,000 policies providing coverage to some 90,000 customers. With few exceptions, Liberty is not the primary carrier. Instead, we are the secondary or supplemental carrier.

The healthcare provider looks to the primary carrier for incurred charges, but submits to our customers bill charges, which currently average in excess of two times the incurred charges, and the ratio has been increasing. Liberty National’s payment of claims, based on bill charges, has created a burden on both our customers and the company. Since 1996, the average annual premium has increased from $300 a year to over $1,500, an average compounded rate increase of 25 percent per year.

Now, effective — the document is the size of a telephone book and I’m going to try to condense it down here in very simple terms — effective with the settlement date, which we hope will be sometime in June, but we can’t control that, a) customers who had incurred claims within two months prior to the settlement date will receive benefits based on bill charges for 12 incurral months after the settlement date. Thereafter benefits will be based on Medicare-approved charges, which on average are half of the bill charges.

For all other customers who didn’t have claims in the two months prior to the settlement date, claims will be paid based on Medicare-approved charges beginning post settlement date.

Liberty National will implement a 27-percent rate reduction, phased in during a 12-month period after the settlement date. Seventy percent of the reduction will be immediate for policies renewing in the six months subsequent to the settlement date. The other 30 percent of the rate reduction will be implemented after six months on renewal dates.

Furthermore, Liberty agrees not to implement rate increases in excess of those necessary to maintain an 85-percent claims loss ratio over the life of the business, and the life of the business begins with the settlement date.

Now, I’m going to give you an illustration of what this means in terms of dollars, or what we think it means. Mind you, this is just an illustration. I’m assuming that no lapses occur, which we will have lapses. We can’t tell for sure how it will work out, but this gives you an idea. I’m going to use a base year of 2003.

In 2003, in this class business, we paid $83.5 million in claims. Our premiums were $76.7 million, which resulted in 109 percent claims loss ratio. In addition, we paid six percent of the premiums in commissions and premium taxes, and we also incurred $4 million of administrative expenses. So, the total cash loss in 2003 was about $15.4 million.

Now, for the first 12 months after the settlement date, and again, assuming no lapses, paid claims would be $63 million. Paid premiums would be $60 million, for 105 percent loss ratio. Again, we would pay six percent of the premiums in the form of commissions and premium taxes and we would incur an additional $4 million of administrative expenses. So, the total cash loss for the 12 months after the settlement date would be $10.6 million.

For the second 12 months after the settlement date, paid claims would be $46 million and paid premiums would be $56 million, for an 82-percent loss ratio. Again, six percent of premiums for commissions and premium taxes and $4 million for administrative expenses, that would give us in the second 12-month period a positive cash gain of $2.6 million.

This isn’t necessarily how it’s going to work out exactly. We will have lapses; we will have some anti-selection, but we’re going to be paying these claims, as a general rule, based on Medicare-approved charges, which have only been increasing at a fraction of the rate that billed charges have. And our objective on this block of business is to get it under control. It will never be a real profit center for the Company. If it works as we plan, going forward there will be far less frequent rate increases and they will be much smaller in magnitude.

Now, for the quarter, we started the year with 13.9 million shares and we had projected or given you an estimate last quarter that our earnings for the year dollar-wise would be about $480.4 million, which would have resulted in a nine-percent increase in earnings per share. The first quarter earnings actually — dollar earnings actually exceeded our expectation, but so did the outstanding shares.

We’ve had a good quarter; we’re still optimistic for the balance of the year. I see no reason to make any changes in our guidance, although I do believe now that we will probably have excess investment income at a little lower level than we earlier anticipated, but I think that our insurance operations are going to pick up every bit of the shortfall.

Those are my comments this morning. Now I’ll turn it to Karen and open it for questions.

Thank you. The question-and-answer session will be conducted electronically. For those of you joining us via the telephone today you can press the star key, followed by the digit one, on your touchtone telephone to ask a question. In addition, if you are using a speakerphone, please ensure that your mute function is turned off to allow your signal to reach our equipment. And once again, that is star, one, for a question.

We’ll take our first question today from Michael Levy with Lehman Brothers.

Good morning everyone. I was wondering whether you would be able to let me know what the — what was the reason behind the big jump in the in-force of the direct response health business?

Well, we have put a great deal of business on the books this quarter. That’s the only way that it could increase.

Was there any — I guess my question is, was there anything changed with respect to the way that you compensate your agents?

For the direct response?

I’m sorry. Obviously, was there anything — did you change the way that you send out the policies, did you have any change there?

No.

It was just…

No, we just continued to grow that business at a rapid rate and as Mark said, we think we’ll continue to do it for the balance of the year.

And with respect to the going from $6,000 in monthly premiums to $6,500, to $7,000, and then back to $6,000 in March, did you change at any point the persistency requirement? I know you said you raised it when you went to $6,500, but when you went back down to $6,000, how has the persistency requirement changed?

Well, we did — between 2002 and 2003 we did increase the persistency requirement. We haven’t gone back on that. In fact, since we’re emphasizing improving the persistency, that’s not something we really wanted to take a step backward on. We are starting to see improvements on our persistency at American Income, so the number of agents qualifying for bonuses is automatically increasing because the overall persistency is increasing, is improving.

OK, thanks.

I’d like to make one other comment with regard to my earlier comment on the guidance for the year, what I said there does not take into consideration any continued stock repurchase program, which, of course, will benefit earnings per share, and you can count on us buying back the stock. Sorry if I omitted that.

With the stock trading where it is right now, has your attitude towards — how has your attitude towards share repurchases changed from a year ago?

Well, our attitude hasn’t changed as far as buying back as much stock as we can. It was nice buying it back at $40 versus $50, but that’s life.

So, OK.

We’ll now hear from Nigel Dally with Morgan Stanley.

Great, thank you, and good morning. A couple of questions. First, we have interest rates. You noted in your comments that rising interest rates would be a positive for the Company. Maybe you can discuss how much a 100-basis point increase in interest rates would impact your pre-tax earnings and the impact of the swap agreements.

Second, on the annuity line, maybe you can provide a little additional color on why you had a negative net policy obligation for the current quarter.

Gary, comment on a 100 basis points?

Sure. Nigel, if rates went up 100 basis points tomorrow the relationship of the benefits that we’re getting for invested [technical difficulty] versus the diminished value of the swaps, the first couple of quarters it would be a very small negative number. After that it would be positive the third quarter, and for four quarters it would be a positive number and it would be just — it would take awhile to filter through the — in total it would be — through those first four quarters it would be in excess of $500,000 and it would grow from there.

Just say to follow-up on that, the backup in interest rates that we’ve seen since the end of this quarter, that’s fully factored into the guidance numbers that you talked about?

Yes.

Nigel, with respect to the variable annuity and the changing policy obligations, some of that has to do with changes — the improvement as far as guaranteed death benefits, but I really can’t give you much more detail than that, but we can get back to you with some answers.

OK, thank you.

We’ll now go to Ed Spehar with Merrill Lynch.

Thank you. A couple of questions. First, back on the benefit from the interest rate increase, if you have — it would seem to me to be, I guess, more than that. I want to figure out what I’m missing here, because if you have over a billion dollars that you’re investing on an annual basis and you have — isn’t there about $500—$600 million of short-term debt or long-term debt that’s been swapped into short-term debt, so isn’t there a positive of about, let’s say $600 million being invested at higher rates? Or, is that not correct?

Gary?

Yes. Well, Ed, the swaps are $530 million but we have around $200 million in short-term debt. So in total, it would be a little over $700 million, and to be comparing that to a billion dollars of new cash coming in.

Is it — I guess I’m seeing this more like a $1.2 billion. I mean, for example, this quarter you had $375 million that you invested, right?

Yes. Last year it was $1.4 billion. Some of that was due to additional calls on our bond portfolio and that’s one reason we were $375 million this year. When we say $1 billion that’s really [indiscernible] from operations. But, the way we’ve started out we would expect it to be excess of $1 billion. If rates go up we should have less calls.

OK. So, if we take that $500 million, let’s say it’s $1.2 billion less $700 million, there’s $500 million where you get the benefit from let’s say a parallel shift of up 100. Why can’t I just take that $500 million and multiply it by one percent tax affected and come up with like a few cents a share?

Well, there’s a little bit of timing there. The $1.2 billion would come in over a 12-month period. It wouldn’t come in all at once. The swaps don’t all reset at one time either, but they do reset — the short-term debt resets immediately; the swaps, some are monthly, one is quarterly, one is semi-annual, they’ll reset during the year. So there’s a little bit of timing as far as when we get the money in and invest it.

OK, but in terms of sort of the ongoing impact after we work through all the timing issues, what I’m doing is sort of close?

Right, what you’re doing is correct. After that, yes, it’s in excess of $500 million that we’re earning the extra 100 basis points on.

OK. And then, another sort of numbers question, C.B., you went through this example of how this would work in terms of the cancer block, and if we’re looking at this and saying that — let’s say it does go into effect for the second half of this year. If you’re losing money using ’03 as a base year, it’s a little bit under $4 million a quarter, and then you go to a $10.6 million loss, which — I know it’s not going to be straight-lined, but then we drop down to say $2.7 million a quarter.

$2.7 gain a quarter. The second 12 months after…

Oh, I’m sorry, I’m still talking about the first 12 months.

OK, I’m sorry. I beg your pardon.

OK. So now — and then we go into the second 12 months where we’re making $2.6 million on an annual basis, or [indiscernible] $700,000, right? So, if we’re thinking about ’05, aren’t you going —you’re going to get a pick-up that looks like it’s more than a nickel a share.

Well, I haven’t — keep it simple for me, Ed. Yes, we’ve gone from something that was a $15.5 million cash loss and GAAP loss to something that’s going to be a $2.6 million gain. Again, if there are no lapses in the business, it’s a much improved situation. These numbers won’t work out exactly because there will be lapses, but the objective was just to make it much improved and it will increase the margins of Liberty National’s health business. You won’t notice it, again, until the second 12-month period, but there’s no question that it’s going to be beneficial. That’s the whole idea.

OK. And then, going back to — so, on an ongoing basis I guess that’s like 10 cents a share ultimately. I know it’s illustrative, but…

Yes, pre-tax, something like that, I guess.

Now, the Life margins, you referred to a number of things that were unusual. And I think, if I wrote them down right, they seemed like they were small negatives to a few distribution channels. Have you looked at — have you looked at what the margin would have been making the adjustments for the military side, the double expenses at Liberty National, and the closed block of the high face-amount of direct response?

Oh yes, we have some idea of that impact going forward, but first of all, on the military, strangely enough our claims have been higher since the end of the war than they were during the war. The $531,000 that we had in the first quarter, and by the way we had $450,000 in the fourth quarter, we’ll just have to wait and see what happens there. We hope naturally for the nation and our soldiers that the claims go down, but we don’t know. The claims are just higher. Outside of that, as I said, it was an aberration.

Liberty National, for the last couple of years the claims have just been higher in the first quarter. They go down through the year and that’s why we know the margins — or we believe the margins will improve there. Plus, there isn’t any question that we’re going to see the effects of the reduced expenses as the year progresses. I can’t tell you exactly what those — how much additional margins that will be, Ed.

The direct response, there’s no sense in dwelling too much on what they would have been if we didn’t have that business because we do have that business. One of the reasons that United investors’ losses were worse this quarter than in the four quarters of last year is that all that business is now out of the contestable period, so it is for a period going to run a higher loss ratio than it has in the past. It is a declining block of business and as we grow the direct response business it’s going to have less and less of an impact. But it did impact us this quarter.

Could you just go over one more time the numbers you gave us on — I think you — on the direct response loss ratio, or margin, excluding that business. What were those two numbers you gave us, and the time periods?

First quarter of this year we reported 25.0 percent. Excluding the United investors’ business it would have been 26.0 percent. In the first quarter of last year we reported 24.7 percent. It would have been, without the United investors’ business, 25.4 percent. For the entirety of last year we reported 24.7. It would have been 25.5.

And at what point do you think this closed block stops as a drag?

Well, it will never not be a drag. The first quarter should be the worst. We’re all out of the contestable. It shouldn’t be any worse than this, let me put it that way. We had $1.3 million of premiums and about $650,000 of negative underwriting margin. We shouldn’t have any quarter with the underwriting margin in theory is any more than $650 because the block is shrinking and the underwriting — the negative margin should go down.

This doesn’t have the anti-selection to it that our cancer business has had, where we’re increasing rates 25 percent a year, driving off a great deal of business [indiscernible]. There’s no rate increases involved on this United investors’ block and it will be a declining piece of business.

OK, thank you.

We’ll now move on to Bob Glasspiegel with Langen McAlenney.

C.B., good morning. I’m probably over-analyzing what may have been just a throwaway comment that you made, but I’m trying to tie together your comment with Nigel and Ed’s pursuit on interest rates. Interest rates are up nearly 50 basis points since the end of the quarter and 15–20 basis points year to date. You were saying you’re worried that you might not make the investment income number because of lower yields. Might that just be a first-quarter phenomenon that’s going to reverse, or is that in fact the higher yield negative to the swaps [indiscernible] the second quarter.

Yes, investment income and excess investment income was lower than our expectations. And we’ve seen the effect of the lower yields.

That was a first-quarter phenomenon that’s over at this point.

Well, from our point of view we haven’t really seen any change. As Gary said, for the last three quarters of last year we invested at 630 basis points of annual yield and that’s what it was the first quarter of this year. So, we haven’t seen a change in our investments and we have seen some excess investment income that’s less than what we expected. So, I suspect, without a rise in interest rates, it’s going to be a little less than we expected at the beginning of the year for the remainder of the year.

I guess I’m asking, C.B., whether your input is stale because we’ve seen a pretty significant increase in the second quarter and maybe Gary can jump in and say whether that’s all impacted new moneys rates now and — whether that input has been fed back to C.B. because rates are higher than they were going into the year. And maybe you were using a more forecast that had rates going up more than they’ve gone up, but I’m a bit confused.

Let me interject. The guidance was given based on investing at the 6.3 percent. When we do our projections we don’t try to interject what we think interest rates are going to do because quite frankly we don’t know. We have invested a little bit higher, but in this quarter, it’s early in the quarter, but not that significantly higher. What C.B. mentioned was based on the rates staying at 6.3. To the extent that rates go up, we will benefit.

So, he may have been a bit premature to give up on investment income for the year?

Well, again, based on what we know today, that’s our best guidance. Again, things seem to point toward interest rates going up, but that’s not what it’s done the last four quarters. We’re hopeful that it will, but we’re basing our thoughts on more of where we have been investing.

OK. And the last question is, the guidance should not factor in any cancer block benefits in ’04, which I guess will be more of an ’05 [indiscernible] anyway, but…

We have — we haven’t changed — we haven’t redone our projections and the cancer block will have an impact. Certainly the premiums are going to be less, but that’s not bad at all. It’s hard to say what that first — if it’s implemented in June, probably the first six months the claims will remain at a higher level than the 105 percent we expect for a full 12-month period.

And there’s no way to get the expenses down prospectively if the claims do come down?

Well, the same — the reason I used $4 million, it’s a block of 51,000 policies and if there are no lapses I don’t think expenses are going to be any less on that block than what the premiums are.

But there will be lapses, right?

Yes, that’s the unknown to it, is what the lapses will be. And when we do a settlement like this we’re going to be making a mailing to our customers. They’re going to get what I call a ‘Prospectus’, which no one will read very much of and they’re going to be notified of these rate reductions. It may cause some — it may accelerate lapses. We just don’t know. We don’t have much experience in these kinds of things.

OK, thank you very much.

Up next is Tom Gallagher with CS First Boston.

Good morning. First, a follow-up on the cancer block issue. The — C.B., can you just comment on why this settlement will be different and it tends to raise rates in prior years and kind of why that didn’t fix the problem and how materially different this will be, just from a pure rate standpoint? Because I know [indiscernible] the past, that you’ve gotten rate increases on a cancer block, but due to adverse selection it didn’t really fix the problem.

That’s right! Those 25 percent a year rate increases are giant rate increases, but we also had an anti-selection in the lapse rates that followed. Well now, because the charges will be based on Medicare, which are rising very slowly, Medicare-approved charges, which have risen very slowly compared to hyper-inflation billed charges, the increases there, is going to result, hopefully, in no rate increases. And it will be a stable block of business that will have normal low lapse rates without the accompanying severe anti-selection.

Probably there will be some small rate increases, but infrequently, five or 10 percent every two or three years. I don’t know what it’s going to be, but it’s going to be a much more stable block of business with a much lower loss ratio as we go forward.

No matter what happens, it is inconceivable to us that we haven’t taken something that was a very bad situation, both for our customers and the Company, and turned it into a better situation. That’s the bottom line.

OK, got you. And then, a question on Medicare Supplement, can you just elaborate a bit more on what effect do you think the change in reimbursement rates to HMOs is going to have on that business? Do you think that we may see persistency decline dramatically? Is it not going to change a lot? You’ve already commented on the sales picture, but I just want to get a sense for what’s going to happen to your block of business.

Mark?

Well, I don’t anticipate any significant changes in our persistency. In fact, our first-year persistency should improve just because we’re having more rate increases, but even though we picked up a number of HMO disenrollees, most of those people, I don’t expect a large number of those people to move back, and that’s still a small percentage of our business.

Most of the areas, particularly in our branch office operation where we write business, are rural and they’re not — there is not that many HMOs that operate in rural areas. I’m not anticipating any change in our — or any significant change in our persistency on that block of business.

Is there any way to quantify what percent of your book you would view as vulnerable versus not vulnerable?

To say — no, I mean, I could go back and get numbers of what percentage of our total block of business had belonged to HMO previously, but I don’t have those numbers in front of me.

I’ll follow up with you. Thanks.

Jeffrey Schuman with KBW has our next question.

Good morning. I was wondering if you could just, I guess, confirm that the — on the cancer settlement, that the cash results that you had talked about and [indiscernible]?

We’re not exactly sure ourselves how that will — it will probably map both cash and GAAP, but we’ve just got to kind of see how it starts to work out. There may be some spreading of the claims, knowing that we’re going from 105 to an 82 percent loss ratio. There could be some smoothing of the claims, so to speak, kind of like treating it as an acquisition cost. But it’s too early. We’ve just go to see how that develops.

And…

Jeff, from my point of view, the cash is what’s important. Yes, the GAAPing of it could be a little different, but it’s too early to tell.

And are there any material risks [indiscernible]? Do you have any parties that might object to this or any reasons not to embrace this?

Sure, that could happen. We don’t think it will, but certainly, anything is possible.

Should that happen, and we think it’s a low probability. We do have a backup plan if this falls apart.

And those backup plans are proceeding. I’m not going to comment on those, but we are moving forward with some other plans to try and deal with this issue.

OK, thank you very much.

We’ll now hear from Vanessa Wilson with Deutsche Banc.

Thank you, good morning. On the interest-sensitive liabilities, could you talk about what duration those would be or what — I guess what part of the yield curve would those be tied to?

Gary?

Vanessa, our interest-sensitive liabilities, there’s $2 billion of — $1.2 billion of those interest-sensitive Life business that has been on the books for awhile. Quite frankly, I’m not sure what the Life is there. The other $800 million is in annuities and there again, I guess I don’t have a good answer to the duration of those. I’m sure that it would be pretty comparable to other companies and their annuities.

Do you have a sense of where you have the assets relative to those liabilities?

Relative to the $800 million?

Well, both — the whole $2 billion. Are they matched with their investment portfolios, or is there a duration mismatch there?

There may be a duration mismatch with the $800 million, but the other $1.2 billion, the interest-sensitive Life business, again our business has not been competitive. That functions more as its Ordinary Life insurance and as we’ve talked about before, in Ordinary Life insurance we haven’t matched assets and liabilities because those liabilities are very long term.

With respect to the annuity business, when and if rates do rise we will move rates up on that business, just as we’ve moved them down as rates have declined.

I guess I just want to be sure, you’ve laid out a scenarios where you have a little bit of a duration mismatch on the billion or $1.2 billion of cash, whatever it is, where your costs of funds seems to rise a little bit earlier than what you’ll be able to invest that cash at. And I just wanted to be sure in the rest of the balance sheet there wasn’t a duration mismatch that would result in a similar impact.

No, I don’t look at it as any mismatch on the $1.2 billion of the interest sensitive. This is seasoned. We haven’t issued interest-sensitive of any volume in years. You can think of this as just Ordinary Life business.

On the annuities, yes, there is — you can say there is a mismatch there, but that business isn’t going to go off the books day after tomorrow. If interest rates go up 300 basis points, then we will be moving the crediting rate up on that business.

OK. And then, prepayment income, or call income in the quarter?

Prepayment income was very little. As far as calls, we did have $94 million of bonds that were called during the quarter.

And to the extent that goes away, does that affect the excess investment income?

Yes, it does, because the yield on the $94 million that was called was a little over seven percent, and so we were reinvesting that money at 6.3, so that’s the impact.

OK. And then, I think you had a charge — I hope I’m not messing this up — [indiscernible]?

Yes.

And could you just talk about, was that all GMDB or was there other pieces in there?

No, it’s all related to Guaranteed Minimum Death Benefit.

OK, thank you.

I’ll now move on to Al Capra with Oppenheimer.

Good morning. Your non-Medicare health insurance does remain pretty strong. I’m assuming that’s a limited benefit hospital and surgical policies. What I’m curious about is how the loss ratios of the business that you’ve written over the past, say a year, has developed versus your pricing?

There haven’t been any surprises there. It’s not business — new products that we’ve introduced. We’ve been issuing this type of business for years. It runs a slightly lower loss ratio than the Medicare Supplement. It has lower loss ratio requirements than Medicare Supplement, but there haven’t been any surprises there.

OK. And, just as a follow-up, have you given any consideration, given the strong demand for the product, to perhaps increase prices?

Well, we still have minimum loss ratios that we have to adhere to, so the only reason we would increase prices is if claims were deteriorating.

OK. And then just one other quick follow-up. In terms of excess capital, where do you stand on that? And also statutory earnings for the quarter?

Gary?

I don’t have the statutory earnings for the quarter. As far as the excess capital, first of all, [indiscernible] the insurance companies, the companies are well capitalized. Our RBC ratio for the companies is 322 percent and that’s 314 the prior year. We’ve been very consistent there. As far as the holding company, we’re estimating that we’ll have $260 million, maybe a little more than that, of excess cash flow for the year. Of course, that’s a source of our buybacks. In both, at the [indiscernible] company and the parent company we’re well capitalized.

Thanks very much.

And at this time we have no further questions. I’ll turn things back over to you, Mr. Hudson, for any additional or closing comments you may have.

Alright, thank you. Again, we’re most pleased with our results for the quarter and we think we’re going to have a good year. Thank you for joining us and we’ll see you three months from now.

Good day.

Thank you. That does conclude today’s conference call. You may now disconnect.