Globe Life Inc (GL) 2004 Q2 法說會逐字稿

Good day, everyone and welcome to the Torchmark Corporation second quarter 2004 earnings release conference call. Please not that this call is being recorded and is also being simultaneously webcast. At this time, I will 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 and Operations; Gary Coleman, Chief Financial Officer, Larry Hutchinson, General Counsel and Joyce Lane, Vice President of Investor Relations. For those of who have not seen our supplemental financial reports and would like to follow along as we go through them, you can view them on our website at www.torchmarkcorp.com at the Investors 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 please refer to the Company's 10K, which has been filed and is available. All right.

Our operating income for the quarter was $118.5 million, or $1.05 per share, an increase of 11% over the 95 cents in the second quarter of last year. We are pleased to report that the quarter was our 18th consecutive quarter of increasing operating earnings per share. Return on equity was 16.3%, and we ended the quarter with a book value of $26 per share, and a debt to capital ratio of 22.5%.

Now turning to our insurance operations, first life insurance: Our life insurance first year premiums increased 10% to $61 million, and total premium income increased 7% to over 350 million. Underwriting margins also increased 7% to $86 million.

Our direct response operation again produced strong results. With first year premiums increasing 26% to over $19 million, and total premiums increasing 12% to $98 million. Our underwriting margin increased 16% to almost $25 million and was 25.4% of premium, the highest percentage of premium margin since the second quarter of 2001. Our closed block of United Investors high facing out business continues to negatively impact our direct response margins.

Premiums for the UI block were 1.3 million for the quarter and the underwriting was a negative $500,000. Excluding this block of business the direct response underwriting margins were 26.2% of premiums for the quarter. At American Income, first-year premiums increased 10% to $20 million and total premiums increased 12% to almost 87 million. The underwriting margin increased 11% to $26 million, and was in line with expectations.

Our producing agent count modestly increased during the quarter to 2,051 agents versus 2027 agents at the beginning of the quarter. Turning to Liberty National, both first year premiums and total premiums were basically flat to a year ago. At $10 million and $77 million respectively. However, underwriting margin increased 11% to $17.6 million and was 23.0% of premiums. We are beginning to see the effects of the acquisition expense reductions at lIberty National.

Commission and acquisition expenses were 28.9% of premiums, 150 basis points less than last year's second quarter. Additional expense reductions will occur during the balance of the year. The agent count at Liberty during the quarter declined from 1898 agents to 1809 agents. And we may see further decline in the third quarter, as marginal producers either increase their production or leave the company.

With respect to our military operations, first-year premiums increased 17% to $7 million, and total premiums increased 13% to 46 million. Our underwriting margin increased only 1% to $10 million and was less than expected due to higher policy obligations. Aid claims for the quarter due to Iraq hostilities were the highest since the war began, and were $950,000.

In the past 18 months, the paid claims due to deaths in either Afghanistan or Iraq have been almost $2.8 million. But only in the last 2 quarters have we seen any impact on our policy obligations. Now, turning to health insurance. First-year premiums increased 20% to almost $43 million and total premiums increase 3% to over 263 million.

Underwriting margin increased 15% to over $45 million, and exceeded our expectations due to improved results in all of the Liberty national cancer business, including the block that we refer to as the Class. At our United American General Agency operation, first-year premiums increased 16% to $18 million. MedSup first-year premiums were flat at $6.4 million, and other health insurance first-year premiums increased 28% to 11.6 million.

Both premiums and underwriting margins increased 1% to $118.5 million and $21.4 million respectively. At the United American branch office operation, first-year premiums increased 27% to $16.5 million. MedSup first-year premiums declined 32% to 5.5 million, with other health insurance first-year premiums increased 121% for 11 million.

So total premiums and underwriting margins increased 3% and were in line with our expectations. The branch office ended the quarter with 1680 producing agents, 40 more than at the beginning of the quarter. At Liberty National, our underwriting margin was $5.9 million, almost $5 million more than the second quarter of last year. Incurred claims are lower, not only with respect to what we refer to as the class business, but also with respect to other cancer business at Liberty.

The combined effect was a 70% policy obligation ratio in the second quarter, compared to an 80% ratio in the second quarter of last year. With respect to the class business, the proposed settlement that we described during the last conference call is proceeding. Slowly.

Larry will have additional comments on this later in the call. Now, turning to our annuity business and administrative expenses. Our annuity margin increased to 37% $3.6 million. In January, we guessed that the annuity margin for 2004 would be about $10 million.

It now appears $14 million is a more reasonable estimate. Administrative expenses increased 14% to 35.6 million. Litigation expenses at United Investors and Liberty National increased from 1.1 million in last year's second quarter to 2.8 million in the current quarter.

1.7 million was due to our continuing litigation with Waddell and Reed. And about half of the remaining litigation expense for the quarter was related to our cancer class action settlement. Excluding litigation expenses, administrative expenses were somewhat higher than we expected, but still 5.3% of premium income, which is what we experienced for the full calendar year of 2004. Turning to the investment operations: Excess investment income increased to 7% $83.2 million.

But on a per share basis, which reflects the effect of our share repurchase program, excess investment income increased 10% to 74 cents. For the quarter, we acquired investment grade bonds with an annual effective yield of 665 basis points. Our excess investment income has been disappointing.

Beginning with the second quarter of last year and ending with the current quarter, we have invested $1.7 billion with an annual effective yield of 6.34%. And 575 million of those funds represent the proceeds of bonds that were called and were yielding over 7.4%. The lower yields and the calls are having a greater impact on our earnings than we expected at the beginning of the year. Gary will have some additional comments on this.

Now, before my final comments, including guidance for the year, we'd like to provide some additional information as to the details of our operations. First, I'll call upon Mark McAndrew to talk about the insurance.

Thank you, C.B. The direct response operation at Globe had another excellent quarter. With first-year collected premiums up 26% for the second quarter versus 22% growth in the first quarter. Total life premiums were up 12% for quarter versus 10% in the first quarter, and life underwriting margins were up 16% for the quarter versus a 12% growth rate in the first quarter.

When asked if we can sustain these growth rates, I can only point to the history at Globe. New life sales and direct response have doubled in the last 5 years. They have quadrupled in the last 10 years and they have grown by over 20-fold in the last 20 years. Total life premiums have doubled in the last 7 years and quadrupled in the last 12 years. And are 9 times greater than they were 20 years ago, In the last 20 years our mailing costs have increased a total of only 23%. If I eliminate postage increases, our production costs in direct response have actually decreased 26% over that time.

For the balance of this year, we should continue to see first-year premium growth in the mid-20% range. I am confident that we will continue to see double-digit growth rates in both premiums and underwriting throughout 2005. American Income, as C.B. mentioned, continued its double digit growth in life first-year premiums, total premiums, and underwriting margins.

After declining the first 5 months of this year agent count at American Income grew by 36 agents in June. I believe we have turned the corner at American Income and we should see renewed double digit growth in our agency force over the next 12 months. For the balance of 2004, first-year premium growth could slow slightly to the 8% to 9% range, depending upon how quickly we can accelerate the growth in our agent count.

At Liberty National, 15 months ago, Liberty National had several major problems which had to be addressed. Lief underwriting was declining due to deteriorating persistency and mortality. And acquisition expenses were growing faster than new sales and premiums. In mid-April of 2003, we eliminated 25 of our new sales when we stopped accepting cash payments for initial premium on new business. This business was unprofitable due to extremely high lapse rates. As a result of this change, we have improved the 4-month persistency at Liberty National by 12%.

And the 7-month persistency by 15% when compared to the business written in March of 2003. So why are these improvements in persistency not showing up in premium growth? I'll try to explain why. I will use the first quarter of 2004 new business compared to the first quarter of 2003.

New life sales for the first quarter of this year a Liberty National were down roughly 3% from a year earlier. The year ago quarter contained 25% of the high lapse unprofitable business. But for every $100 of new monthly premium we wrote last year, in month 1, we collected $100 of first-year premium.

This year, we collected only $97 of first-year premium in month 1 due to the decline in sales. In month 2, last year, we collected $88 of the $100 in new sales, whereas in this year in month 2, we are also collecting $88 of the $97 issued. In month 3, last year we collected $82 of first-year premium per $100 written.

Versus this year, we're collecting $84 per $97 of new business written. In the first 3 months after issue, last year we were collecting $270 of first year premium per $100 of new business issued. Versus this year, we're collecting $269 of first year premium per $97 issued.

For the first 3 months after issue, there has been no growth in first-year premiums. However, in month 4, we will collect $81 of first-year premium of the 97, versus last year we could only collect 75 of of the $100 issued. That's an 8% increase. By month 7, we will collect 73 of $97 issued this year versus only $65 of the $100 issued last year. That is a 12% increase in first-year premiums. By month 13, we should collect $64 of the $97 that we issued this year, versus only $56 of the $100 issued last year. That's a 14% increase.

So why is the business we wrote in the second half of last year not resulting in more first-year premium growth? Unfortunately, new life sales last year were down 8% to 10%, instead of the 3% we saw in the first quarter of this year. So in the first month, we were collecting 8% to 10% less first-year premium in the second half of last year and instead of it taking only 4 months to offset the decline in sales, it was taking 7 months for us to catch up in first-year premium.

Now if you look at sequential quarters at Liberty National you will see that first-year premium dropped 4% in the third quarter of last year versus the second quarter. And another 3% in the fourth quarter. For the second quarter of this year, we are up 7% in first-year premium from the fourth quarter of 2003. We will see accelerated growth in premiums at Liberty over the next 12 too 24 months, even if sales remain flat because of the improve persistency.

Although we will not be satisfied with flat sales. Over the last 6 months we have also repriced some of our lie products at Liberty. As well as tightened our underwriting standards to improve mortality. Now as C.B. mentioned, we have also made substantial expense reductions, which are starting to flow through to the bottom line.

The changes that needed to be made at Liberty National to improve our underwriting margins are now in place. For the first half of 2004, our production per agent has grown by 24% for first-year agents at Liberty, and 5% for [revieweural] agents. Our [revieweuarl] agent count has grown by 9% over the last 9 months. Our last remaining challenge is we must increase our recruiting.

This will be our primary focus the second half of this year and into next year. At United American, first year health premiums continue to show strong growth in both the general agency and branch office with 16% and 27% growth respectively. Due to the continued demand for our limited benefit under age 65 health products.

A recent report was published stated that 82 million Americans had no health insurance at some point in the last 12 months. While our Medicare supplement competitive situation has improved in most states, I expect the shift in nonmedicare sales to continue. Currently it is a much larger market with less competition and most importantly it has a lower cost to generate a lead.

This is particularly true in our branch office operation, where we provide a lead allowance to our agency force. As long as the cost of the lead is substantially less in under-age 65 health insurance, they will continue to spend the money on those leads. The new standardized Medicare supplement plans continue to move forward, although it is impossible to predict an implementation date.

My best guess would be currently it is still another 12 to 18 months. Until then, I wouldn't expect see any major changes in the mix of our health business at United American. Those are my comments, C.B.

Thank you, Mark. Now I'll ask Gary to speak on our investment operations.

Good morning. As shown on page 13 of the supplemental financial schedules, the schedule entitled fixed maturities. Torchmark had $7.7 billion of fixed maturities with assets that amortize cost which comprise 94% of invested assets. These assets are carried on the balance sheet at their market value of $8.1 billion.

The $393 million excess of market over costs includes $483 million of unrealized gain and $90 of unrealized losses. Of the $7.7 billion od fixed maturities, $7 billion are investment grade and have an average rating of A minus. The low investment grade bonds are $732 million and have an average rating of BB- . These bonds have a total market value of $752 million and over 70% of them are rated in the BB category.

At 8.9% of total invested assets, the percentage of low investment grade bonds is lower than the 9.2% at the end of the second quarter, 2003. It is worth noting that since the third quarter of 2003, below investment grade bonds have declined $28 million because dispositions had 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 second quarter, we invested $256 million yielding around 6.6% and have an average maturity of 24 years with an average rating of BBB+.. The yield on these investments is 60 basis points higher than the 6% yield on new investments in the second quarter of 2003. And is the highest new money rate since the first quarter of 2003.

Although we have seen recent improvement in the new money rate, the lower yields have had a negative impact on excess investment income. Excess income is our net investment income less the interest costs associated with the interest-bearing liabilities which are the net policy liabilities, and our debt.

Even though the new money rate for this quarter is higher than prior quarters, we have invested money at lower than our portfolio yield for the last 5 quarters. In addition as C.B. noted, 575 million of the $1.7 billion of bond purchases in that period represented the reinvestment of the proceeds of bonds called that were yielding 100 basis points more than the new bonds that replaced them. As a result, the yield on the $8.3 billion of total invested assets were 6.97% in the second quarter of 2004, compared to 7.1% in the year ago quarter.

The lower yield on the $4.9 billion of invested assets that support our interest bearing liabilities was offset by the lower crediting rates on the policy liabilities and the lower financial costs. Such that, the 204 basis point spread in the second quarter this year was comparable to the spread earned in the second quarter of last year. However, the lower portfolio yield has had an impact by reducing the earnings on the remaining $3.4 billion of assets that we refer to as our equity assets.

Although average equity assets were up 7% over the year ago quarter, the income on these assets increased just 5%. In spite of lower rates, we plan no major changes in our investment strategy. Our cash rate remains strong, and we will invest an excess of $1.3 billion this year. In spite of the lower yields we will continue to invest in investment grade corporate securities with long maturities. Those are my comments. C.B.?

Thank you, Gary now I'll ask Larry to update us on the cancer settlement.

As C.B. stated we're proceeding with the cancer class settlement. Since the last earnings call, we have mailed the settlement notice to all the class policyholders. And a fairness hearing was held on July 15. A small number of objectors were represented by approximately 7 law firms. We will continue to work on this settlement during the next month and we remain optimistic that a final judgment for proving this settlement will be entered in September. C.B.?

Thank you, Larry. We have had a good quarter. Our earnings for the first 2 quarters of the year were basically close to what we expected them to be as noted in the earnings release, we acquired 1.8 million shares during the quarter at a cost of $92 million, and for the 6 months we have repurchased 3 million shares at a total cost of $153 million.

Although I expect us to continue in our share stock repurchase program, any additional comments I make going forward in this call assume no additional shares repurchased. Now, let's talk about the guidance for the year. First of all the, we started the year with 113.9 million shares outstanding on a diluted basis.

Although we acquired 3 million shares, so far during the year and assume for the full year. Primarily due to stock appreciation and the resulting dilution, our average outstanding shares at the end of the year is projected to be 112.7 million. Assuming again, no additional buyback and no change in price. Therefore, we will have only experienced a 1% decline in the outstanding shares going from 113.9 to 112.7. In the first quarter conference, when we provided guidance, we believed that on a pretax basis that our earnings for the year, our operating earnings, would be about $732 million, pretax.

What's changed? 1. in our life underwriting margins, we think we're going to have a shortfall of about $3 million. So a negative $3 million, and primarily that's related to our military operation And the higher claims we're experiencing than thought we would in Iraq.

And to a lesser degree in our smaller life operations. 2. in our health margins, we think they'll be about 9 million higher than we anticipated at the beginning of the year, due to better performance and lower loss ratios in our Liberty cancer business. In our annuity business, we're looking as I said earlier, we think our margins will be 4 million higher than we estimated at the beginning of the year.

With respect to excess investment income, it's going to be $13 million, we think, less than we had projected at the beginning of the year. Remind you at the beginning of the year, we assumed no stock buyback. Of that 13 million shortfall $7 million is due to the lost interest on the funds that we used to repurchase the stock.

Lastly, because of the continuing Waddell Reed litigation and the cancer settlement, we think our administrative expenses primarily due to the litigation, will be about $3.5 million higher than we projected at the beginning of the year. If you sum those numbers up, the result is a $6.5 million shortfall, which is just about the effect of the lost interest due to the stock buyback. So consequently, we still believe that on a pretax basis, our earnings going forward, assuming no stock buyback, will be about $6.43 per share, roughly, and that's what we were saying at the beginning of the year.

So we still believe that for the year we're looking at 9% growth in earnings per share. That's our best estimate. And that finalizes my remarks this morning. We'll open it for discussion. Lisa?

Thank you. If you are joining us by telephone and would like to ask a question, please press star 1 on your touch-tone telephone. If you're using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is star, 1 to ask a question. We'll go first to David Lewis with SunTrust Robinson Humphrey.

Thank you. Good morning.

Morning, David.

C.B. or Gary, can you help me a little bit with kind of the timing differences if interest rates continue to rise? I know you cheer on higher rates for the portfolio yield, but I guess I would think that in the short run you would end up having a little more negative impact due to the variable debt costs versus the immediate impact on the portfolio. Can you work through that with me please?

Gary, why don't you respond to that?

David, we have three swaps. One of them is the $200 million swap that fills up monthly. And as we talked about before that terminates at the end of September, so we only have 1 more quarter of that. The 2 slots we have that will be ongoing. We have a $180 million swap that resets every 6 months. And at last reset the we set the rate at June 15.

So we know what that rate is going to be for the remainder of the year. In the second quarter, the benefit from that swap was $1.7 million. The benefit in the next 2 quarters will be $1.4 million each so it's going to be $300,000 less in each of of the quarters. The last swap, we have a $150 million swap that resets every 3 months. It last reset on May 15. So it will reset twice in the last half of the year on August 15 and November 15.

We earned $1.5 million on that swap in the second quarter and based on where rates are today that's about what we will earn on each quarter going forward. And as I mentioned, the $200 million swap, we earned $3.3 million in the second quarter. Where rates are today, that would be $3.2 million in the third quarter, and then it's gone.

As just as far as kind of the - - what's the percentage of the variable debt on the balance sheets as a total?

Well we have $537 million in swaps and $150 million in short-term debt. So, it's $680 million of variable debt.

Okay. And 1 final question. Can you give us an idea of why you think you're seeing the benefits on the cancer block in the quarter? Why you expect that to continue?

The benefits is not just on the class. It's on all of the cancer business. There have been changes in the - - we made last year in the calculation of certain benefits dealing with prescription drugs. And that's impacted it.

Again, we've had rate increases not this year on the class. So we're holding off on those, but we did have rate increases last year. And we've had rate increases by the way on the other $36 million in premiums that represent the non-class. So that's impacted the loss ratios. On an incurred loss ratio basis, the class is running on incurred loss ratio, we ran 111% last year on the class, incurred losses. This year, we're running 106.

So there is a 5-point improvement there and we're having about a 10-point improvement on the loss ration in the other cancer business. I don't expect the loss ratio to change on the other cancer business at least for the balance of this year. And of course with the class settlement coming up, hopefully in September, we're into a whole different ball game.

Did you figure your predictions assuming that the class settlement occurs?

Actually, I don't. Because don't know exactly what happens when that settlement occurs. So I'm assuming this results continue on for the year.

Great. Thanks very much.

Up next, we have Eric Berg of Lehman Brothers.

Thanks good morning, a couple of questions. First even though you're reporting very strong health sales at the United American Company, premium growth in your health business continues to be pretty slow, I would think. I think it was up about 3%. Earned premium in the GAAP financials was up about 3% compared to the year earlier quarter, and premiums actually declined in your health business in June versus the March quarter. My first question, and I guess I'll give you both, my first question is; do you believe that you can increase the premiums at a healthy clip in this health insurance business? And then entirely separately, it looks to us like the decision by the Company to continue to invest very long-term is having a pretty significant impact on the unrealized gain in your bond portfolio. I think it was reduced by about a half from what it was, maybe a little bit less. It was reduced significantly from what it was a year ago. Now, this wouldn't make a difference if you were holding all your bonds to maturity. But our analysis concludes that you are trading some of your bonds. And this poses the risk of realized capital losses and not having as much funds to reinvest into the higher rate environment if you were, as if you were investing short-term. Is our 2 totally separate questions, but deal with them in whatever order you wish. My question would be is our interpretation of your trading strategy and risks correct or incorrect? Thank you.

Hell, Eric, boy you've done more analysis than we have. We're just buying bonds here. I'll let Gary answer that in a moment, I'll first address the health insurance.

Thank you.

Our first-year premiums are growing, but it's true and I've said this before, that we haven't enough growth yet to have significant impact on the total premium income. Premium income increased 1% in the GA business and 3% in the branch office for the quarter. We do need to get sales at a higher level to get more growth in premium income in those 2 operations.

But we are seeing more growth than we saw in 2003, so it's improving. As too your comment about the decline in premiums in the second quarter versus the first quarter this year; that happens every year, Eric. We implement most of our rate increases in the first quarter. Premiums jump up, and then fall off in the second quarter. That's really not a fair comparison. I think if you'll go back in time, you will see that happening over the last several years. Gary, I'll let you deal with the investment operation.

Okay. Eric, I think if you're seeing that kind of sales activity, you must be looking at our statutory statements.

We are.

Okay. And that's misleading because we have quite a bit of sales activity of our bonds between companies. And there are some good reasons to do that, just for cash management and tax purposes. But overall, those bonds aren't leaving the Company. They're just staying within the Company. They're moving within the operating Companies.

We really don't sell that much in terms of bonds and the primarily ones we have sold in the last couple of years, we sold 138 million last year and 121 million the year before of the below investment grade bonds. But our total sales activity is not as high as what you're seeing by looking at those statutory statements.

Thank you. That answers my question.

Eric, I'll just make further comment on that. Our objective is to have 0 realized capital gains and losses for tax purposes. When we sell a bond at a loss because of credit risk and trigger the taxable loss, it is permissible for Liberty National to sell a bond to United American that generates for tax purposes for a realized gain. But does not generate a realized gain for GAAP purposes.

Thank you.

Our next question today will come from Nigel Dally of Morgan Stanley.

Great. Thank you. Good morning. 2 questions. First with direct response, I understand a lot of your life insurance sales growth is coming from cross sales to parents of juvenile policy holders. I was wondering how we should think about the opportunities to make further cross sales. My guess is that at some point is that these opportunities will taper off making greater sales growth more challenging. So I'm hoping you can first discuss that. Second, just with your net investment income, just wanting to clarify whether this quarter included any prepayment penalty income or coloration of discounts? Thank you.

Mark on the direct response?

Well on the direct response, yes, it is true that most of our highest margin business is the upselling and cross-selling once we sell on a juvenile policy. 1 of the reasons, if you look back 4 or 5 years ago, that our margins were declining was the number of new juvenile sales had been declining. We had gone from 450,000 new juvenile policies being issued a year down to roughly down to 250,000.

The nice thing about it in the last 3 years, this year we issue close to 750,000 new juvenile policies and our new juvenile sales are growing double digits and I expect them to continue to do so. So the opportunities are actually I don't think we've seen all of the benefit yet from our increased juvenile sales. Our parent sales so far this year, are up more than they were a year ago. In fact, I don't have the numbers here in front of me, but we're continuing to see very strong sales in cross-selling and upselling and should continue for the foreseeable future.

Is there any metric you can put around about what percentage of juvenile policy holders you have been able to upsell to?

I don't have those numbers in front of me. I can get the number for you and I'm sure Joyce can send it to you. But I don't know that number right off the top of my head.

One other comment I'll make Nigel, on that. When we make a sale of a juvenile policy, the selling to the parent doesn't just happen within the next 6 months. As long as that juvenile policy is on the books, we continue to offer coverage to the parents. And we continue to have responses. So it goes on indefinitely. So there isn't going to be any drop-off in our add-on and cross selling. Gary, you wish to address the second part of his question?

Nigel, The prepayment penalty for us is immaterial. We have less than $150 million of assets that are even subject to that.

Thank you.That's great. Thank you. Thanks.

Next up, we'll move to Bob Glasspiegel of Langen McAlenney.

Good morning. C.B., for the first time in my 20-plus year , I'm actually starting to see some signs that market conditions could be improving in the life insurance industry. I mean, there's talks of the reinsurance marketplace hardening. And I think the "The Wall Street Journal" article this week sums up some positives that are out there. Recognizing that some of these improvements may be in segments of the business that you've not been in, for most of your time involved with Torchmark, the question I guess I have is: are you seeing any of these improvements working into your niche markets? And is the improvement sufficient for you to maybe consider going into newer businesses that you have never really directly wanted to operate in?

Well, I haven't read those things, I assume it to be true, Bob, but the rest of the insurance industry is in markets that we're not in, as you mentioned. We have no desire to get back to the variable annuity or the extremely high face amount. We don't have much reinsurance, so the reinsurance, whatever is happening there means nothing to us. And we have an interest in getting into those markets? I think they are extraordinarily competitive. In fact, I question whether margins exist at all in some of those markets. So no, I don't think we have any interest in getting in there.

Well just the second half of my question is, have you seen any change in any of your markets in the industry competitiveness that you do compete in?

No, I really can't say that in life insurance I've seen any change I can think of in the last 10 years. People still need insurance. They need basic protection, and we're providing that. Nothing has changed.

Okay. That's what I expected you to say. Appreciate it.

Mm-hmm.

Our next question today comes from Joan Zief of Goldman Sachs.

Thank you. Good morning. Just a few questions. On the improvement in the cancer experience, are you seeing an actual improvement in the paids as well as maybe what you're reserving for? Or is it really just an improvement because of certain changes in assumptions on the reserve side? That's my first question. The second question is can you just update us on what you think your excess cash flow is going to be in the second half? And then the third question is actually: I just want to go and talk a little bit more about what Bob just asked, and that is, granted, when it comes to some of the mainstream products, you're not in that. You wouldn't desire to be in that. But you've had a lot of success with this hospital indemnity product. And I was wondering if there was any extension of maybe a supplemental health side that you're actually exploring? Whether it's some sort of minimal long of-term care policy or taking that hospital indemnity policy and making it short-term, sort of GAAP related. If there's any opportunity there that you see?

First, with respect to the cancer, the reason I didn't - - first, we our experience has improved on the some $36, $37 million of non-class business, partly because of changes in the claim practices, our payment of claims, and also rate increases. And we have seen an improvement in incurred loss ratio in the class, primarily because of changes in dealing with certain benefits. The reason I didn't use paid claims, Joan, is that during this quarter, we have moved the claim processing from Oklahoma City, Globe Life to United American with respect to Liberty National's class business.

We're doing this in anticipation of the settlement. And as a consequence, we're behind on the payment of claims. But we have fully reserved for that, and so on an incurred basis, when I said 106% versus 111%, that's accurate. But those are the only things that are happening on the cancer. As far as excess cash flow, Gary?

Yeah. Joan, this year we're going to have around 270 million of free cash flow in total for the year, and we repurchased 153 million of stock in the first quarter, so that leaves right around 115 to 120 million for the latter half of the year.

Mark, would you like to address the health insurance question m request.

Okay. Okay. Joan, could you repeat that question for me?

All right. Well, you seem to have success in the sales for the standard non-medsup hospitalization indemnity. I was wondering if you were thinking of any adjunct product introduction that might relate to that? Either some sort of long-term care, maybe a short-term hospitalization to cover some gaps in coverages. Just something related to that, that might offer a new product opportunity.

Okay. Well, first off, long-term care is really, while we have products out there, we underwrite them very tightly. And it's not a market that we intend to get into with any volume. As far as short-term, I know there are companies out there that write start-term coverages for people that are temporarily unemployed. That's not really a market we really care about. It's 1 of the reasons why we do see poor persistency in that.

Some of the business written is obviously for people who are temporarily unemployed. Don't really envision - - we are always doing some product development, but nothing radically different than what we're doing today. We do hope to do more in the coming year on a work site pretax dollar basis versus what we have done in the past. But other than that, I don't see any major change in products or markets there.

Thank you.

I think we had a call the other day from a fellow named Steven Hillbert who has some ideas on major medical we're going to be exploring here in the near future. Outside of that, nothing new happening. [Laughter]

We'll take the next question today from Ed Spehar from Merrill Lynch.

Good morning. I don't know how to follow up on that one.

Probably going to get sued because of that remark.

Okay. There goes my litigation assumption. If you could talk, C.B., a little bit about the other distribution channels on the life side, the margin decline? If I missed this at the beginning, apologize. But was there some unusual reserve issue or anything at like say United Investors Life? And then in terms of the outlook for the Waddell and Reed litigation expense, if you looked at the - - I guess both, the Waddell and Reed piece and the class settlement piece, if you're thinking about kind of a normalized level for that, what should we be looking at? Was there front-end loading of some of that litigation expense in the second quarter? Or is that something you're going to expect in the next 2 quarters as well?

Well, we have a trial scheduled with respect to Waddell and Reed, I think starts the first of August or the latter part of August.

The latter part of August.

In Kansas city. That is where they have sued us. And we have another trial, involving, I believe it's nationwide, that will probably happen, I think in September. So there's more litigation there. And yes, the cancer settlement will involve additional litigation, although that may be spread over a very short period of time.

Because we will be running a higher expense for the first 6 months if that settlement goes through. Higher claim expense as well as litigation. But that's gray area. I don't know. We're just thinking that overall the, expenses are going to be higher for the year than what we thought Ed. With respect to the claims, I mentioned the military.

Our claims are up earlier, if you missed that part of the call, we had 950,000 this quarter, related to Iraq. It's the highest quarter we've experienced, and last quarter was the highest quarter, and I think it was 531 or 535. We are anticipating that trend to probably continue for the balance of the year. Hopefully, no longer than that.

Our UAGA margins are down. That's of concern, but it's related to some older business. It doesn't deserve further comment. It's a small piece. At United Investors, yes, I failed to mention, we have been analyzing our claim liabilities there for some time, and there's been disagreement as to whether we had adequate claim liability, and we concluded we didn't. So the margins were affected this quarter.

We strengthened the claim liability by about $1 million. What impact will that have going forward? We had been reporting an underwriting margin I think for the last couple of years of about 30% in United Investors business. That will drop down going forward to 29%, maybe 28%. But this quarter did take a hit.

Okay. And then 1 quick follow-up. On this nonmed sup health business, do you see any changes in the major medical market? I guess that that's been the key driver here, the absence of the kind of coverage that people might like to get, so they have to settle for maybe less expensive, less generous types of limited pay products. Do you see anything going on in terms of that market coming back, new entrants, prices coming down, anything like that?

No, I haven't, Mark, have you?

No, we're not really seeing anybody getting into that market. If they are, they are very small players. And I wouldn't anticipate - - I don't know of anyone that's been in that market long-term who has made any money at major medical. So I would be surprised to see any new players get into individual major medical.

We're slow learners in insurance business Ed. But I think after 20 years, people have decided maybe major medical doesn't work.

Thank you.

Next we'll hear from Thomas Gallagher at CSFB.

Good morning. First, just a question I guess for Mark. I just wanted a little more specificity. You had mentioned at Liberty National that you expect growth. And I know you went through the example in terms of how the premium is getting affected. If I look a the 1% growth on in force, that you had this quarter, when that starts turning, will that be 2%? 3%? Can you just give us a ball park estimate of how you think that can actually start growing?

Well again, if you're looking sequential quarters, if you're looking at trends. When we eliminated the high lapse business, mid-April of last year. Third quarter our sales were down in the 8%-10% range. First-year collected premiums dropped 4% in the third quarter. Dropped another 3% in the fourth quarter. We're now up 7% from where we were in the fourth quarter.

We will continue to see growth sequentially quarter over quarter the balance of this year and into the next. Whereas last year, we saw the 4% and a 3% decline the second half of the year. So I really expect, as this year goes along and into next year, we can achieve double-digit growth in first-year premiums. I would hope in the fourth quarter, but definitely by first quarter.

And your comment is related to first-year premium. How about the overall book of business? Do you think we will start to see an improvement on total premiums?

That's what's going to be very interesting. Because if you look at the change in persistency even though if you look at the business we wrote in the first quarter of this year, we wrote 3% less business. But we should see, by the first quarter of next year, when that business gets to the 13th month, we should be collecting 14% more premium, versus the business we wrote a year ago. So it's going to take some time, but yes, it should start flowing through - - we should actually see more growth in the second and subsequent years on that business than we see in the first year.

Right.

It's just going to take some time for that to flow through.

We're just realizing the impact on the premiums on first-year premium in the changes in persistency that we're experiencing. I understand your question is, what about the total - - how much is of 76, 77 million in premiums going to be growing. And we can't answer that at the moment. It depends on how much recruiting we do. We have to recruit. We have kind of the same problem there that we have in the the health business. We're not at a high enough level of production to have any substantial growth. So - - we just don't know, but it's not going to be double digit in the top lines in total premiums.

Got you. Okay. And then just 1 other question, actually 2 other questions as it relates to free cash flow. Should we expect, then, that based on the 270 million number the max buyback for the balance of the year would be about 115 million? or do you think you could go beyond that? And then also if you look at the statutory earnings trend thus far in '04, I don't know if you have any updates for second quarter '04. But when I just look at the first quarter number, it was quite strong year over year. It looks like it could come in, if we just straight line it, close to $400 million. Is there anything unusual in the statutory earnings, or is that, you know, should I take that to be kind of a normal number? Therefore you could have another good, strong year in statutory earnings growth, '04 versus '03?

Gary?

Tom, first of all, on the statutory earnings, you're right. I don't have the second quarter earnings. But also, our earnings are a little - - they're not even - - we're going to have strong earnings. I'm not sure it's going to be as high as you mentioned, but we will have strong statutory earnings.

Your question about the free cash flow about having $115 million available, that, as far as just looking at cash coming in, that's what is available. But we have reduced short-term debt down to 150 million, where it is generally around 200 million. Part of that is because we had a lot of our dividends occur right at the end of the second quarter. So not only do we have the 115-120 million in free cash flow, we could borrow up to $50 million and not even be as high in short term debt as we were last year.

Okay. So you could leverage up a little bit on the short end to buy back stock as well?

Yes. Definitely.

One final comment, whatever those statutory earnings are for this year, that represents next year's cash flow to the holding Company, not this year's.

Understood. Thanks.

Next, we'll hear from Deutsche Bank's Vanessa Wilson.

Thank you. On your hedges that - - I'm sorry, yes, the hedges that are going to be rolling off. How should we think about some offsets I guess in the second half of this year? You'll have kind of a tough comparison particularly in the fourth quarter. And then ' 05 versus '04, if I added it up correctly, the swing is about 10.5 million pretax?

Vanessa, yeah it's been running about 3.25 million a quarter, and yeah that goes away in the fourth quarter. We have taken that into consideration in doing our guidance.

When I said the 13 million for the year, that did not - - we already took consideration in January that that swap was going off the books.

Okay. I guess that -- so it's all in the pluses and minuses, C.B., for '04 that you gave us. But then if we think forward to '05, which I know it's a little bit early to do, it's a big swing, you know it's $10.5 million year over the year. Do we hope for higher interest rates? Or what would be something to think about for an offset?

Well first off, you've got me thinking too far in the future. Secondly if you sum up the absolute value of those adjustments making it mid-year, I think that's about $25 million. So our projecting is not perfect. We certainly hope interest rates go up, and Gary is looking at other swap opportunities, are you not, Gary?

Yes, we're still considering those. And we're not going to find anything that will replace that swap. That's where we were receiving 9.18% and we'd been paying out less than 2%. But we might be able to replace it, say, with a third of the benefit that we've got off the old ones. And that's what we're looking at, at the current time.

Okay, so there's some opportunity to mitigate that a little bit?

Yes.

Okay. And then on the annuity business, just looking at the few numbers that we get, there is a negative net policy obligations line. And what is the genesis of that? Is that surrender fees or - -?

Vanessa, the annuity lines includes both fixed annuities and variable annuities.

Mm-hmm.

On the fixed annuities, we credit that - - the policy obligations with the interest spread that we're earning. That's the only time - - the only distribution line that we do that in Torchmark. Normally that goes to excess investment income.

We do that with the fixed annuities because we have to amortize our assets based on the gross profits related to that business. And by adding that interest spread into the policy obligations, it's an offset to the policy obligations. And that's what causes the negative.

If you look back at last year in the second quarter we had a positive there, and that was because of the effect of the variable annuity line. We had last year higher guaranteed minimum death benefits and also the effect of the equity markets, it hurt us there. What you're seeing in the second quarter is essentially what we saw in the first quarter, and that's more of a normalized basis where you will have a negative policy obligation. And that negative is due to adding the spread on the assets into that line.

Okay. So this should be a sustainable result, this isn't really driven by some 1-time event?

No, again, it's consistent - - I know the first quarter, I think maybe the fourth quarter of last year. That's what we normally have seen in the past. Last year was the anomaly because of the variable business.

Thank you very much.

At this time there are no further questions. Mr. Hudson, I will turn the conference back over to you for any additional or closing remarks.

All right. Well thank you for joining us today, and we'll see you in 3 months. Good day.

That does conclude today's conference. We'd like to thank you all for your participation. Have a great day.