Globe Life Inc (GL) 2004 Q3 法說會逐字稿

Good day everyone and welcome to the Torchmark Corporation’s Third Quarter 2004 Earnings Release Conference Call. Please note that this call is being recorded and it 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.

Good morning everyone and welcome. Joining me this morning 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 go through them, you can view them on our website, www.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, please refer to the company’s 10-K which has been filed and is available.

Our operating income for the quarter was $120 million or $1.08 per share, an increase of 10 percent over the $.98 in the third quarter of last year. We are pleased to report that the quarter was our nineteenth consecutive quarter of increasing EPS (ph). Our return on equity was 16.3 percent and we ended the quarter with a book value of $26.69 and a debt-to-capital ratio of 22 percent.

Now turning to our insurance operations and first, life insurance. Our first-year premiums increased 5 percent to $58.6 million and total premium income increased 6 percent to 30 -- $349.8 million. Our underwriting margins increased 9 percent to $88.9 million. Our Direct Response operation again produced strong results with first-year premium increasing 17 percent to $18.5 million and total premiums increasing 10 percent to $96.7 million. The Direct Response underwriting margin increased 10 percent to $23.8 million and was 24.6 percent of premiums. Even though the margin, as a percentage of premium, was lower than we expected for the quarter, the underwriting margin for 9 months was 25.0 percent of premium versus 24.6 percent through 9 months of last year. The 9-month results are evidence that our underwriting margins in Direct Response are improving.

Our close block of United Investors high face amount business continues to negatively impact our margins in Direct Response. The UI block generated a loss of $570,000 on $1.2 million of premium income. Excluding the UI block of business, our Direct Response margins were 25.5 percent of premiums for the quarter and 25.9 percent for the 9 months.

At American Income our first-year premiums increased 3 percent to $19.1 million and total premiums increased 11 percent to $88.4 million. The underwriting margin increased 16 percent to $27.3 million. Our producing agent count at the end of the quarter was 2,050. No change from the beginning of the quarter and down 300 agents from a year ago. The low growth rate in the first-year premiums is directly attributable to the decline in producing agents. We have simply dropped the ball with respect to recruiting but we are addressing the problem.

At Liberty National first-year premiums and total premiums declined 2 percent and 1 percent, respectively, but underwriting margins increased 8 percent to $18.6 million. We continue to see the positive effect of the acquisition expense reductions at Liberty National. Acquisition expenses were 29.0 percent of premiums during the quarter compared with 30.9 percent of premiums a year ago. Although our premiums declined by almost $650,000 for the quarter, our acquisition expenses declined by $1.63 million. Not surprisingly, the Liberty National agent count declined 150 during the quarter to 1,656 agents. We don’t anticipate any further reductions, excluding the effect of a possible shutting down of some of the Liberty National district offices during the balance of the year.

With respect to our military operations, first-year premiums increased 14 percent to $7 million and total premiums increased 13 percent to $47.5 million. Our underwriting margins increased only 4 percent to $10.8 million and was less than expected due to higher policy obligations. Paid claims for the quarter due to Iraq/Afghanistan hostilities were the highest since the war began and were $1.68 million. Since the hostilities began, paid claims have totaled $4.45 million . Now I’ll call on Mark for additional comments with respect to our life insurance operations. Mark?

Thank you, C.B. I’m disappointed in the results of both American Income and Liberty National for the quarter. At the beginning of the year I projected double-digit growth in first-year premiums for the third quarter for both companies. Even three months ago I expected to see high single-digit growth.

At American Income our agent count is down 241 or 11 percent from the first of the year. During the first 9 months of 2004 we have added 3,159 new agents; down 453 or 13 percent from the same period a year ago. This is unacceptable. During the first 9 months of this year, responses to our internet recruiting ads were down 51 percent from a year ago; dropping from over 7,000 per month to less than 3,500. Internet recruiting has been our largest and most cost-effective means of recruiting new agents. While it is true that there is more competition on the these recruiting websites, we failed to react by placing ads more frequently to keep them near the top of the list.

During the quarter we’ve centralized the recruiting function for all of our captive agency operations in Oklahoma City to take advantage of our Direct Response expertise. They are now responsible for all ad development and placement on internet as well as newspapers. We will also be expanding our direct mail recruiting efforts and testing new media such as radio and TV. In October our internet ad responses at American Income will be over 7,800; up 128 percent over the average for the first 9 months and up 11 percent from our 2003 average. I’m confident that our Direct Response personnel can consistently generate double-digit growth and new agent applicants as they’ve done in our direct sales for the past 20 years.

The numbers at Liberty National follow the same pattern. Our agent count is down 489 or 23 percent for the first 9 months and our new agents recruited are down by 866 or 39 percent from the same period a year ago. While recruiting activity has consistently increased from 373 new hires in the first quarter to 494 in the third, it is still at an unacceptably low level. Again, I am confident that our Direct Response expertise can dramatically increase the recruiting activity at Liberty National going forward. In October our internet responses will be up 96 percent from the average in the January to August time frame.

On a positive note, the cash acquisition expenses at Liberty National were down over $3.3 million from -- for the third quarter versus the average quarter of last year on relatively flat sales and premiums. Over half of this savings is deferred and will be recognized over the life of new business we sold.

Those are my comments on the life, C.B.

All right. Turning to the health insurance, our first-year premiums increased 14 percent to $42 million and total premiums increased 2 percent to over $259.6 million. Our underwriting margin increased 6 percent to $44.1 million. United American General Agency operations first-year premium increased 13 percent to $17.5 million with net sup. first-year premiums increasing 6 percent to $6.3 million and other health first-year premiums increasing 17 percent to $11.3 million. Both total premiums and underwriting margins increased 1 percent to $114.8 million and $21.9 million, respectively.

In the branch office operation of United American our first-year premiums increased 22 percent to $16.7 million, med. sup. first-year premiums declined 28 percent to $5.1 million and other health first-year premiums increased 74 percent to $11.6 million. Total premiums increased 3 percent to $80.2 million and underwriting margin increased 2 percent to $11.6 million. The branch office operation ended the quarter with 1,701 agents; 21 more than at the beginning of the quarter and 205 more than a year ago.

With respect to Medicare supplement market, our UA distribution systems will begin introducing new products in 2005 that are dramatically different than the products we have offered in the past. Mark will offer some additional information on this subject shortly.

At Liberty National the underwriting margin was $4.5 million; 50 percent higher than a year ago. Our paid claims loss ratio for the 9 months, what we call the cancer class business, was 100 percent of premiums compared to 111 percent of premiums during the first nine months of 2003. In addition, we have experienced loss ratios in our other cancer business so far this year.

With respect to the class business and the proposed settlement that we described during the past conference calls, it continues to slowly proceed but we really do expect this settlement to be implemented any day now.

I’ll call on Mark now for additional comments with respect to our health insurance operations. Mark?

Thank you, C.B. Well, as C.B. mentioned, at United American we will be introducing a new Medicare supplement plan in January known as a high deductible Plan F. While this product has been one of the standardized Medicare supplement plans for roughly six years, very little has been sold up to this point. The reason is fairly simple. When it was initially added to the standardized plans the deducible was set at $1,500 per year while the typical difference in annual premiums between the no deductible and high deducible plans was in the $800 range. Most seniors were not willing to accept a $1,500 deducible for an $800 reduction in their premium.

We believe that now is the opportune time to introduce this product because the premium savings is now equal to or greater than the deductible. Going forward the premium differential will continue to grow much faster than the deductible increase of roughly 2 percent a year. For example, the current deductible for 2005 has been set at $1,730. Our average premium savings for the high deducible Plan F versus a no deductible Plan F for 2005 will be $1,798 at age 65. That’s -- our average nationwide premium for the no deductible plan is 2,466 versus the high deducible plan will be $668. The savings at age 70 is $1,829 and at age 75 it’ll be $1,842. So in all cases the difference in premium between the two products now exceeds the deductible amount. Preliminary discussions with both our captive and general agency operations at United American have shown a very high level of interest and excitement about this product introduction.

Also by mid-year we should be able to introduce two additional products with cost-sharing features and lower premiums. I now believe that we will see significant growth in our Medicare supplement business beginning in 2005 and beyond. C. B?

Now turning to our annuity business and administrative expenses. Our yearly margin increased 7 percent to $3.2 million for the quarter and was in line with our guidance provided last conference call. Administrative expenses increased 8 percent to $35.3 million. Litigation expenses at United Investors and Liberty National were $1.7 million versus last year’s $1.1 million with over $.5 million of the $1.7 million being attributed to our ongoing litigation with Waddell & Reed (ph). Hopefully the bulk of the Waddell & Reed litigation expenses are now behind us. Excluding litigation expenses, administrative expenses increased 6 percent over last year and were 5.4 percent of premiums; somewhat higher than expected but within reason.

Turning to our investment operations. Excess investment income increased 5 percent to $83.9 million but on a per-share basis, which reflects the effect of our ongoing share repurchase program, excess investment income increased 9 percent to $.76. For the quarter, we acquired investment grade bonds with annual effective yields of 660 basis points; slightly less than during the second quarter of this year. Even though we continue to grow the new cash that we generate within our operations, our growth in excess investment income is disappointing due to the interest rates remaining low and to the ongoing calls on the bonds; on bonds that were yielding over 100 basis points more than what we are currently invested. I’ll ask Gary now to make additional comments on our investment operations. Gary?

Good morning. As shown on page 13 of our supplemental financial pages, the schedule entitled, “Fixed Maturities”, Torchmark has $7.9 billion of fixed maturities at amortized costs which comprise 94 percent of investment assets. These assets are carried on the balance sheet with a market value of $8.5 billion. The $6.49 million excess in market value over cost includes $679 million of unrealized gains and $30 million of unrealized losses. At amortized costs, the $7 billion of fixed maturities are investment grade and have an average rating of A-. The low investment grades are $11 million dollars and have an average rating of BB-. At 8.5 percent of sole invested assets, the percentage of the low investment grade bonds is the lowest it has been since the second quarter of 2002.

Regarding new investments, due to the long-term nature of our policy liabilities and also the low interest rate environment, we invest primarily in investment grade corporate securities with long maturities. In the third quarter we invested $250 million in bonds yielding 6.6 percent and having an average maturity of 22 years with an average rating of BBB. Although the yield on these investments is comparable to the yield on second quarter investments, this marks the sixth consecutive quarter that we have invested new money at a lower than the overall portfolio yield which has declined 30 basis points during that one and a half year period. Contributing to this decline in the last six quarters, one-third of the $2 billion of bond purchases have been the investments as proceeds of called bonds. The called bonds that C.B. mentioned were yielding 110 basis points more than the new bonds that replaced them. As a result, we ended the third quarter with our fixed maturity portfolio having a yield of 7.2 percent and an average life of 12 years.

Now I’d like to make a few comments regarding excess investment income which is shown in the financial reports on our website is our net investment income plus the interest costs associated with the net policy liabilities and our debt. Excess investment income of $84 million in the third quarter up 5 percent from a year ago, on a procure basis which takes into account the foregone interest from cash used for stock repurchases, excess investment income increased 9 percent.

Looking at the components of excess investment income, that investment income was up 5 percent; lower than the 6 percent increase in average investment assets due to the lower yields on the investments. The lower investment yield was partially offset by the lower costs of the interest-bearing liabilities. Although net policy liabilities increased 7 percent, the interest credited on those liabilities rose only 5 percent because we had reduced premium rates where possible. Interest on debt and the income from the interest rates lost were approximately the same as last year at higher short-term rates were offset by lower borrowing and the addition of two new swaps.

Although lower investment grades continue to restrict the growth in the excess investment income, we plan no major changes in our investment strategy. We will continue to invest in investment grade corporate securities, the long maturities, due to the long-term nature of our liabilities we can maximize our yield without creating an asset/liability matching problem.

Before concluding I want to comment briefly on the swaps. I mentioned that we added two new swaps to the third quarter. They have a combined notional amount of $199 million and replace a $200 million swap that expired at the end of the third quarter. If you want more details of our interest rate swaps, see the swap schedule and the financial reports on our website. Unfortunately, the schedule loaded last night had incorrect Libor spreads for the new swaps. We’ve corrected that and the revised schedule is now available on the website. Those are my comments. C.B.?

And last night I just looked where I thought we were going for the year compared to where we thought we were going for the year back in January and it’s been an unusual year with some changes or things that we didn’t expect. I was looking down the major items. In our life insurance operations we thought our margins would grow 9 percent for the year; it looks like it’s going to be 7 percent and the reason for the shortfall was primarily the unanticipated higher claims in the post-war Iraq; in the military operation. Plus even though we’ve had improved margins in our Direct Response business, they’re not as much as we thought they would be due to the drain from the United Investors (inaudible) business.

On the positive side, in health insurance we thought our margins would grow 4 percent for the year; it looks like it’s going to be 7 percent for the year. The primary reason there is better than an expected cancer experience on our class business, as I mentioned earlier, for the 9 months the loss paid claims is 100 percent of premium versus 111 for the 9 months of last year.

In addition, in our annuity business we were guessing the margin would be $10 million for 2004; it looks like it’s going to be around $13.5 or $13.6. Overall, for our underwriting income or our margins after administrative expenses, our underwrite income are going to increase about 8 percent for the year versus 7 percent that we thought at the beginning of the year.

Where we have been disappointed is in our investment operations. We estimated at the beginning of the year that our excess investment income excluding the effect of the stock repurchase would be at $348 million. If we add back for the year the $9 million loss of interest as a result of our stock repurchase program, we would end the year with about $340 million of excess investment income; some $8 million less than we thought 9 months ago. As Gary mentioned, this is a result of both declining interest rates plus a much higher than anticipated bond calls.

So where does that take us for the year? Assuming no additional stock repurchases, which are unlikely, assuming no stock repurchases, we think our earnings will grow for the year somewhere between 9 and 10 percent and be in the 422 to 424 range, again excluding stock repurchases. In looking at some of the consensus numbers, I’m inclined to believe people may have overlooked the fact that we are losing $2 million net on the interest rates lapsing the fourth quarter. But again, that aside, excluding a stock buyback, I think we’ll be somewhere between 422 and 424.

Those are my comments this morning and I’ll turn it back to Pam for questions.

Thank you. For those of you joining us by telephone, the question-and-answer session will be conducted electronically. (Operator Instructions.)

David Lewis, Suntrust-Robinson Humphrey:

Let me just ask a question. Have you received any subpoenas or inquiries from regulators or the Spencer office?

No. This is Larry. I just only received none.

Okay.

And that is -- what is happening with AIG, Morris Mac (ph) and the others -- we’re nowhere near that type of business. We have no relationships like that. That can’t happen within our operation.

I understand but interestingly he’s mentioned about segment within the insurance business so --

Well, he’s mentioned a lot of health insurance but I don’t think he’s mentioned health insurance companies like we -- we’re in. He’s mentioned mostly the HMOs that I’ve seen or people who participate in that business.

Right. And just on the health insurance business; two questions. One, can you discuss your anticipation of margin -- regarding margin outlook for the new product versus the current book and two, is there any margin differential that you’ve seen over the past year between the current Medicare supplement book and the HIP (ph) policies being (inaudible)?

No, I really can’t. I’ll ask Mark to comment in a moment. I don’t -- there isn’t a great deal of difference in the margins between the under age and the Medicare. The under age has a little higher margin -- somewhat higher margin because it doesn’t have the 65 percent mandated loss ratio. But over the life of the business, as I’ve said many times, the total profits are about the same because the under age business has a shorter life than the Med. sup.

As far as the pricing of the new products are concerned, we’re still subject to the 65 percent loss ratio requirements. We’ll be changing commission structures to have a more uniform commission structure at United American versus a lot of different contracts now. I suspects margins in the business that we produce in the future although I haven’t seen the numbers yet, will probably be about the same as they are in the UA and the branch. Mark, any additional comments on it?

I think you pretty well covered it, C.B.

Thanks very much.

Nigel Dally, Morgan-Stanley.

First question. We’ve been seeing a lot of press regarding inappropriate sales practices of life insurance policies to military personnel. Hoping you can comment on how potentially this affects your business; and second, the with regard to bond purchases. Average rating for this quarter was BBB; last quarter it was BBB+; last year it was A-. Should we assume from this that you’re comfortable at this juncture some additional credit risk that (inaudible) your investment yield?

Well, I’ll address the military question and I’ll let Gary address the bond question. In the military market, as you know, we do business exclusively with First Command who has been named in The New York Times articles but First Command markets life insurance exclusively to commissioned and non-commissioned officers, pay grades E6 and above. The other companies that have been attacked and rightfully so, I might add, target the enlisted personnel in the lower pay grades with lower face amounts than what First Command sells. First Command has not had any attacks by the regulatory world or the congressional world on their insurance products. We have only had, to my knowledge, one insurance department that has inquired and nothing has happened from that. Where First Command has been criticized really is in their mutual fund sales. They do have a contractual (ph) plan that -- they have a first-year loaded plan, over 50 percent of the first-year contributions is paid in commissions.

I think what people fail to recognize is that’s an average annual contribution of $3,000 and it’s a 15-year savings plan. So First Command collects about $1,500 in commissions on that mutual fund plan. No financial planners touch that military market because those people don’t have $50,000 of assets. First Command has done a great job in providing wealth -- creating wealth -- for their clients and I believe when the GAO study is done they’ll come out of that looking pretty well.

But it’s had no impact on our business. We haven’t seen any impact on the sales. The new apps coming in. Oral apps rates and I’ve talked with the folks at First Command and they don’t see anything negative happening with respect to their 100 percent block of business which we only have about half. Gary, I’ll let you address the bond question.

Okay. Nigel, to answer your question, we are willing to accept the risk to go to BBB bonds but we’re not doing it -- we’re doing it on a collective basis. We are looking at the companies -- looking at their financial statements of the issuers of the bonds that we’re buying. Overall though our investment grade portfolio is at an A- and I think that you’ll see us maintain the investment grade portfolio at right at the A- level so, you know, at this point in time, you know, we are looking for yield but we are not going to take undue risks to get it.

So just going forward we should expect the average rating to increase somewhat?

Well --

If you’re going to maintain that A-?

Well, I think it was either at the BBB or above.

Thank you. That was very helpful. Thank you.

Ed Spear (ph), Merrill-Lynch.

I have a few questions. First starting with Top Line. The premium growth in life and health was a little less than I would’ve thought and I know the sales -- there are some sales that were a little bit less than you guys had expected but could you talk a little bit more about the premium growth? Because you have had strong sales and I’m wondering was there any change in lapse rates or just a little more discussion on the premium growth.

Well, the first-year premiums at American Income were 3 percent -- grew 3 percent this quarter versus 10 percent the second quarter; 13 percent in the first quarter; 17 percent in the fourth quarter and as I mentioned, we just dropped the ball in recruiting and Mark addressed that. That slow down there has affected the American Income operation as far as growth in total premiums. Liberty National has not grown as we had expected for the year. The first-year premium is down 2 percent for the quarter. So those two areas have been disappointing. We continue to have good growth in the Direct Response and in our military operation. Things are on track there. Some of our other minor distribution systems, general agency and branch office with respect to life insurance have had significant drops in growth and premiums. So yeah, the -- we thought we would have 8 percent growth in life premiums for the year, Ed. It now looks like it’s going to be 7 percent. And again, the major factor is American Income and Liberty National.

I guess, C.B., I’m talking about the earned premium and I’m thinking back to, I think, the rule of thumb being, you know, today’s earned premium, you know, last year’s sales and I’m not sure why some of the sales slow downs of the first-year premiums slow downs here would lead to the kind of earned premium growth slow down that we saw in the third quarter.

Well, if we were reporting sales -- annualized premium sales -- I think you would have seen a decline in American Income throughout the year so it’s been quite a drop off. In fact, those first-year premiums just stalled. If we were looking at annualized premium sales it -- you wouldn’t have seen them falling off this quarter, you would have seen that in other -- falling off in earlier quarters. And also with respect to Liberty National, if we were tracking those numbers.

Okay. And then could you talk about some of the factors a little bit more than are impacting margins, both positively and negatively, and should we expect these things to continue? And specifically, I mean, the runoff of the United Investor’s block and Direct Response? Is there -- is this something that we’re going to have, losing the kind of money we saw this quarter for a number or years or is there some end in sight? And then on the hostilities in Iraq and Afghanistan, you mentioned the cash losses, could you just maybe help us understand what the gap impact might have been?

Well, first on the UI business, the premiums were $1.2 million this quarter and that’s about what they’ve been every quarter of this year. I expected that business to run off the books a little faster than it has. Secondly, I do believe the -- even if doesn’t I believe the claims will go down in time as we get out of the select period. Most of the time in this business your select period, you have very low mortality and then your return to normal mortality. We were selected against in the UI business and that anti-selection should wear off in time. We’ve had discussions with our Chief Actuary, Rosemary Montgomery, and she likewise believes it will -- mortality loss ratio will improve. So the block should go down in terms of volume of premiums and the loss ratio should improve but I can’t tell you when that’s going to happen. We expect it in the near future.

On the military, those cash claims went directly to the bottom line and, as I said, it was $1.680 million versus $950,000 in the second quarter and our other quarters, since hostilities began, have been around $.5 million. They will go down when the situation improves, primarily in Iraq. I don’t know when that’s going to happen. I was surprised that the claims were this high and I don’t think they’ll be this high going forward. It’s quite an increase but I can’t predict it. Any other margins -- Mark, did you have any additional comments on the premiums?

No, not too much. You know, obviously, particularly at Liberty National, there was -- there was some impact from all of the hurricanes and weather they had down there because they are so consolidated in the Southeast. It definitely cost us at least $1.5 million in new sales. It’s really hard, Ed, to really figure out. We extended the grace periods on products in the affected areas but the Liberty National premiums -- we’re somewhat less than we expected and the Direct Response premiums were a little less than what -- what I had expected but it’s just impossible to measure what effect that -- the weather down there ha for the quarter. But in both those areas the numbers were a little less than what I would have anticipated.

Ed, on the other -- I don’t think there’s any material chances in margins outside of the cancer business at Liberty National. I’ve explained that and of course that’s -- that’s going to all change when this settlement goes through. We’ll have a whole new ballgame there.

Well, I guess on -- on the health side, I mean, the -- the cancer results, excluding the settlement, have been better than expected all year and is that something that’s sustainable? And also, the expense ratio in health was down, you know, I think a fair amount from what it had been running at and is that -- is that -- is that a sustainable level as well? I think it was 18 percent in the quarter.

Well, part of the reduction in expenses had to do with the reduction in costs we’ve made at Liberty National. It’s impacting both the health and the life insurance. So I -- sustainable? Yes. I think we’re going to see lower acquisition costs going forward at Liberty National. As Mark said, some of these costs that have been cut are capitalized and spread out over time so you don’t see the impact of those reductions today; you will in the future.

With respect to the -- to the cancer business, our loss ratios are lower in the non-class business and we’ve got two other big blocks of cancer business at Liberty National and in both cases the loss ratios are running at least 10 points below where they were through 9 months of last year. That business has been subject to rate increase and I think we’re going to have lower loss ratios there going forward in time. But as far as the class, we’ve got a big dramatic change coming up when this settlement goes through.

Colin Devine, Smith Barney.

I have three questions for you gentlemen. You talked about the earnings outlook, obviously, for the full year or I guess really the fourth quarter. Given where interest rates hit today, I was wondering if you might provide some color on what you -- how we’re looking for next year; just some general direction. Secondly, I was wondering if you might be able to comment on -- well, I know you noted that you hadn’t received any subpoenas or formal inquiries from the A&G, if one, I guess, industry change that comes out of this is a move towards a level commission structure, your thoughts on how that might impact your business.

I can’t imagine a level commission structure in the life insurance world. I don’t think that’s possible. What’s happened with American Income and Morris Mac and the fellow up in New York -- that’s an entirely different world unrelated to anything that we’re doing and I’m just really not that familiar with it.

I’m focusing more on contingent commissions. I’m not saying that (inaudible) or anything like that is going on in the life (inaudible).

Contingent commissions? We don’t --

Contingency bonuses.

Well, we have that in all of our -- all of our operations. That -- that -- there’s no bribery going on or there’s nothing -- there’s nothing to do with bidding going on. We do pay bonuses based on performance but it -- there’s nothing illegal about that so it’s just apples and oranges; it really is, Colin.

I don’t think -- I’m not in any way suggesting there’s anything illegal and I don’t -- I’m not sure the Attorney General has suggested that. I think he’s questioning the practice of it, C.B.

Well, there is some activity going on in those operations that is questionable and wrong, it sounds to me, from what I’ve read. I just -- I don’t think it -- there’s any -- it applies in any way or form to the rest of the -- to our industry or at least to our business.

Well, then -- okay. Perhaps, in terms of -- if we’re looking at your -- you mention you pay persistency bonuses and such which some would classify as a contingent commission. How significant are those for (inaudible)?

I can’t put a dollar amount on that. We do pay bonuses in all of our agency distribution systems. We even pay bonuses in our Direct Response operations to key management based on performance. If -- God, I can’t -- you’re having me talk about something I can hardly even imagine but if that all changed we would -- we would, of course, adapt.

As far as your question of 2005 -- we haven’t done any projections. I’ll get back with you folks in the next conference all. But, as I said earlier, excluding the loss of interest or adding back the loss of interest on the stock repurchase program, our investment income is still about $8 million less for the year than what we -- what we thought it would be and that’s because of this lower interest rate environment and it will no doubt impact us going forward.

One quick follow up. What is your position on the -- I guess the -- the move in Washington right now to go to a public charter for insurance?

I -- there are a few things to be gained by that. Uniform licensing of agents and quicker approval of products. That’s all that’s going to be gained and I’m not sure that that’s even going to work. Now we’re going to have one giant gorilla and 50 monkeys. I don’t think much is accomplished -- those states are never going to relinquish the power -- the things that affect us in our daily business so I don’t care one way or the other whether it happens.

Vanessa Wilson, Deutsche Bank Securities.

Excuse me, just -- I expected the schedule off on the interest rates swaps and you did this with us last quarter and gave us I think good guidance. I just want to be sure I’m reading this right. The one that goes away is the one that you earned $3.1 million from this quarter and then the two new ones together earned you about $800,000. So that’s the $2 million that you’re giving us guidance for in the fourth quarter? That’s how we put it all together?

Gary, you want to --

Vanessa, you’re right. The one that expired was $3.1 million in the third quarter. That will be 0 in the fourth quarter. The two new ones we had, as you said, $800,000 in the third quarter. They were adopted halfway during the quarter but we will have $500,000 more from those swaps in the fourth quarter. So we’re losing $3.1 million and picking up an extra $500,000 when comparing the fourth to the third. So it’s -- the difference there is $2.6 million.

And then so do we take $2.6 and multiply it by 4 for 2005?

Let’s see. Well, for the year the swap that expired, it was $9.8 million and for the -- at today’s rates the two new swaps will give us about $5.4 million next year. So the shortfall there between the two will be $4.4 million --

Okay.

-- after taxes, be right at $3 million.

Okay. Great. That’s helpful. And then C.B., I just want to go back to Ed’s question about the premium growth and I also looked at that and kind of backed into maybe a -- sort of a general persistency rate on both the life and health, is there something going on in the mix of the business that maybe the Direct Response sales, which has been a very, you know, robust part of your sales in recent quarters, maybe those particular sales have lower persistency than some of the other business -- the agent-sold business? And on the health side -- I think the supplemental health that you’re selling does have a much lower persistency rate than the Medi-Gap and could you give us a feel for how different it is?

Mark, do you first want to comment on that?

Well, you know, after -- Direct Response doesn’t have significantly worse persistency. Once -- after the initial introductory offer then I don’t -- I don’t see any major changes. In fact, the persistency at Liberty has improved significantly from a year ago and I don’t see any negative in persistency in Direct Response.

Mark, you might comment -- the fastest growing segment in the Direct Response is the coop business. Maybe that does have a little lower --

Yes. That’s true. Among the different -- within the Direct Response, the mix of the business is having some impact because again, the true direct mail business that we’re doing does have slightly better persistency than what we’re generating as C.B. labeled coops. These are -- well, we’re inserted along with a number of other offers. You’ve seen Val-Pak or these coupons things that are mailed out. And that has become a bigger part of our direct response business. But within the different segments there’s really been no change. And at Liberty the persistency is actually substantially better than a year ago.

Okay.

On the health business, yes, the other -- the non -- the under age 65 business runs higher lapses than the Med. sup. and therefore if we write -- the more we write of that business all of our -- overall lapse rate in health insurance will increase.

Could you just give us a feel for how different it is?

Oh, let’s see, combine the branch office and the general agency on a first-year, for example, I think we’ve been running about 46 percent first-year lapse rate and on the under age 65 business the market’s a little lower so 40 percent --

That’s right, C.B.

And then how does that trail down, C. B, when you have a, you know, a sort of more seasoned say (inaudible)?

Well, often the lapse rates get fairly low in both -- both cases but the way I have looked at it in the past is that the Med. sup. business has a present value -- discounted value -- life of about 5 years. The under age 65 business is about 3 years -- 3 and a half years.

Okay.

Part of that is also because the under age 65 doesn’t have the rate increases that the Med. sup. has but it does have higher lapses.

Okay.

Eric Berg, Lehman Brothers.

You know, C.B., when I think of your life business I think in good measure taking my cue from you folks, I think of the, you know, I think of Globe and (inaudible) and I think of Direct Response, pardon me, of American Income and in the military operations and, you know, similarly on the health side, when I think of it I think of United American. But it occurred to me, reviewing the results, and my question will ultimately be is this a fair assessment? But even though these are the most important distribution channels on the two dissected businesses, that collectively the other businesses do count for -- these other miscellaneous grab bag areas -- do count for a material amount and that -- I’m just wondering whether, you know, one, whether that is a fair assessment, and two, whether you feel that perhaps too much attention has been paid to the core distribution channels allowing the secondary ones, say, United American on the life insurance side or the other distribution channels on life or non-United American health -- whether not enough attention has been paid to developing those businesses?

Well, the big four in the life are Direct Response, American Income, Liberty National and the military. The other distributions really we’re talking about United American, GA and branch office. Those two distribution systems are primary health insurance distribution systems and they are just not going to be successful in generating (inaudible) life insurance. In fact, the margins right now, if you look at them, are very disappointing. You know, we’re -- those margins are too low. We’re not going to be able to grow those materially. They’re supplemental businesses to the health insurance sales. American Income, same thing. I don’t want to grow the health; I want it to be a supplemental business to the health insurance and American Income because the profitability in the long run on that life business exceeds what we can generate off of health insurance.

Dropping down into the -- to the -- to the health operations, we have to do some -- we’re growing the Direct Response health. But again, the margins there are nothing like we’ve got in life insurance and I don’t want to -- I don’t want to concentrate anymore than we are on health insurance and nor does Mark. Our effort has got to be on life insurance. These other minor distribution systems or subsets of existing distribution systems, they’re there and they impact the overall results but we’re not going to spend a great deal of time trying to grow them.

I guess as a follow up and it’s a related question, how should we think of Liberty, you know, your Alabama company at this point? I mean, for sometime I believe it has been experiencing flatness in premium and enforce -- it is material to the enforce of the -- of the -- of the life business; it’s not a small company, it really matters. Can -- can it be -- what is a realistic expectation in terms of the management of and the timetable for resumption of growth?

Mark, I’ll let you --

Okay. That is difficult, Eric. You know, I had hoped -- I’m disappointed in the results. I had hoped to see better results by now. I still absolutely believe that Liberty National can grow and I believe it can grow in the double-digit range. How long that’s going to take, I can’t say. One of the things that I’m really committed to doing on the coming year -- in 2005 -- is we’re going to open some new offices in new geographic areas that -- outside of the traditional six states that Liberty’s been in. We’re going to do away with service hours and we’re going to use that money to -- through our Direct Response channel to generate leads and I absolutely believe we can grow into new areas that Liberty has not traditionally been in.

I’m -- at this point the problem I have is I don’t really know how long this is going to take but I still am absolutely believe that we can get renewed growth at Liberty; whether it’s going to take six months or a year, I just can’t -- it’s hard for me to predict at this point.

Eric, let me just add one comment.

Please.

I know Liberty is growing slowly or even negatively as far as revenues are concerned. One objective we have and we are being successful is growing the earnings and we’ll continue to address expenses in that operation to generate more cash and more earnings.

Jeff Schuman, KBW.

First of all, I want to see you talk a little bit more about your optimism for increasing Medicare supplement sales next year. I mean, (inaudible) countless examples of the HMOs now and not only cutting premiums but increasing benefits and I think up to this point you’ve had a pretty, I guess, have been confident that consumers were maybe disenchanted by past disenrollments but I think (inaudible) if you had the offer on the product and pricing prime (ph) so why are you still so optimistic?

Okay. Well, again, HMOs have high market penetration in certain areas, primarily urban. Most of our Medicare supplement sales -- Medi-Gap sales -- come from primarily rural areas. If you look at the locations of our captive as well as our -- the bulk of our general agencies, we don’t write a lot of business in urban areas. It’s still -- HMOs -- if they get to 20 percent of the Medi-Gap market, I mean, I think that’s the high end. There will always be a substantial market for Medi-Gap. But the reason I’m so optimistic, we’re going from an average premium on the -- almost $2,500 a year to something that’s under $700 a year. That -- that brings a lot of people who would have basically been priced out of the market back into a product that they can afford. And I think it’s a good product for consumer and in talking with our agency force, I think we will see rather rapid growth next year in our Medi-Gap sales.

Yes, I want to add to that, I have been saying for years that there needed to be changes in the Medi-Care supplement products that were being offered. As Mark said, we’ve got a $2,500 annual premium for a 65-year-old. That’s $5,000 a year for a household. And with rate increased of 8 to 12 percent a year, we’re not -- if nothing changed we would be selling a $10,000 product down the road.

Well, now what we’re doing -- we’re embarking here on an entirely different marketing plan that’s not dissimilar to what happened in the auto industry when deductibles were introduced and I’m really excited about it. We’re going to have to sell it differently and explain to people and report claims differently to them but I’m excited about the opportunities here.

A couple of follow ups. The urban/rural part makes sense because I’m just remembering the past history when HMOs disenrolled people that seemed to translate into a lot of growth for you so I -- I -- I guess I’m not sure why that wouldn’t reverse and then secondly, if you’re selling the lower premium policies, does this mean that you might show strong sales growth based on policy count but that it would be more difficult to grow sales in terms of premium dollars?

Well, there’s no doubt that our per -- that our policy count growth will be much greater than our premium growth because we’re only selling a third of the premium so we’re going to have to sell 3 times as many policies to get the same premium but I think we’ll sell far more than that and I think we can expect good premium growth as well.

As far as the HMO disenrollees, when you look -- if we look geographically at where those came from, they -- the business we picked up was highly concentrated. For example, in Atlanta where we have an office, they -- the bulk of the HMO disenrollees that we picked up were -- were very isolated pockets where HMOs disenrolled and we happened to have operations there. But still the bulk of our captive operations are not in major urban areas.

Okay.

John Hall, Prudential Equity: I have a quick question on the balance sheet. I noticed a couple of new line items concerning securities lending. I was just wondering if you could go over what’s going on there?

Gary?

Excuse me. We implemented the securities lending program during the quarter and it is, you know, just a very typical type program that you see out there. We’re working through one of our banks. We’re loaning some of our securities and -- we loan those securities as collateral equals 102 percent of the market value is placed with us. If you see on the balance sheet we show it both as an asset and a liability. The bottom line to the income statements is we’re picking up a little bit of incremental income and that income is coming from the income that’s received off the collateral. We’re at $135 million. We’re not going to loan much more than that at any point in time. The income that we’ll pick up from it will be about $300,000 to $400,000 a year. It’s just a way to pick up a -- a safe way to pick up a little bit of incremental income.

Great. Thank you very much.

I was wondering if you could give us some sense of what your new money yield is today and I’m going to back to sort of all the regulator stuff. Don’t you think that there’s an important distinction that will ultimately be made here between broker-sold business and agent-sold business? I mean, isn’t the issue in your mind, I mean, I’m sure you’ve been looking at this -- isn’t the issue then that, you know, that brokers are supposed to, you know, legally be representing the insurance buyer where the agents are representing the company?

On that -- on the second question, yes. We’re not in that brokerage business as AIG and the others are so it -- there is just no -- it is truly apples and oranges. To me it’s foolish even discussing the subject.

With respect to the yields, you know, Gary, what was it, 660 basis points? That’s the new money yield?

Yeah, that was the new money yield for the second quarter and that was -- or, excuse me, for the third quarter and that was possible (inaudible) on the second quarter.

I guess what I’m trying to get at is what about today? I mean, has there be a, you know, rates have come down, the credit spreads have widened a little bit so I’m just wondering if you look at what you’re buying today, how much different is it than that 660?

Well, we haven’t gotten very far into the quarter but it’s actually -- it’s been just a little bit under 660.

In September, Ed, it was -- it was a little under the 660 so it’s not -- it’s flat.

Okay. Thank you.

Tom Gallagher, Credit Suisse First Boston.

Two questions. First is just related to your buyback. Do you still expect about $260 million in free cash flow this year? And according to my calculation that would leave roughly $25 million for the balance at a year. So are those numbers correct and if so, would you consider using borrowing to increase buyback?

Tom, the -- actually the free cash flow for this year is going to be $270 million and -- but using your math over the $235 million that we used for stock buyback, that leaves $35 million and yes, we would be -- we would strongly consider using short-term debt. Our short-term debt is at $130 million level which is about $50 million lower than it was at the beginning of the year. Our debt-to-capital ratio is low so it, you know, if we felt the need to spend more than the $35 million we could easily borrow money to do it.

Okay. And -- and -- should we think about a cap and how much you could borrow? Would it be -- could you have up to $50 to $100 million? Is that a reasonable ballpark?

Oh, it’s more than -- we could do more than that.

Okay. Just a broader question for C.B. Yesterday California’s Insurance Commissioner talked about implementing greater disclosure rules for commissions on every type of insurance product. Now one of the things I’ve always thought about life insurance is that, you know, relative to almost any other product it has very high commissions relative to first-year premium. Now this first question is, C.B., do you think that this will move in that direction where an agent will be required to disclose fully the commission that he’s being paid? And if so, given how high it looks, at least, you know, to somebody who really doesn’t maybe understand the financials of the business, do you think that could have a dampening effect on sales for you and for the whole life business?

I don’t -- the disclosure I hadn’t -- I hadn’t heard that, Tom, but I don’t think if it had to be disclosed that anyone would pay too much attention to it. And in a worst-case scenario, it was mentioned, what if you went to levelized commissions as we do in Medicare. Well, that could work, too. We would just have to have loans, advance programs to get more money up front by one means or another. I’m really not concerned about it at this point. I’m really not.

Okay. So you’re not -- you haven’t heard any word from your regulators on this topic?

No. No.

Thanks very much.

Thank you and at this time we are standing by with no further questions. Mr. Hudson, I’ll turn the conference back over to you for any additional or closing comments.

Well, thank you very much for joining us this morning and we’ll be talking to you in three months. Thank you.

Thank you and this concludes today’s conference. We appreciate your participation. You may now disconnect. ??

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