Globe Life Inc (GL) 2004 Q4 法說會逐字稿

Hi there, everyone, and welcome to the Torchmark Corporation fourth quarter 2004 earnings release conference call. Please note that today's call is being recorded and is also being simultaneously webcast.

At this time I'd like it turn the call over to the Chief Executive Officer, Mr. C.B. Hudson. Please go ahead, sir.

Thank you. Good morning, everyone. 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, you can view them on our website at torchmarkcorp.com at the investor relations page.

Some of our comments or answers to your questions may contain forward-looking statements and are provided for general guidance purposes only. Accordingly, please refer to our 10K, which has been filed.

Our operating income for the quarter was 118 million, or $1.07 per share, an increase of 7 percent over the dollar in the fourth quarter of last year. We ended the year with a book value of $27.45 and return on equity in excess of 16 percent.

Now turning to our insurance operations, first, Life Insurance. Our first year premiums were $57 million and flat compared to a year ago. Total premiums increased 6 percent to 352 million, and underwriting margins increased 10 percent to 92 million.

Our direct response operation again produced strong results, with first year premiums increasing 10 percent to $18 million, and total premiums increasing 9 percent to 97 million. The underwriting margin increased 10 percent to 24.3 million and was 25.2 percent of premium The underwriting margin for the year was 25.0 percent of premium compared to 24.7 in 2003. And the results are indicative of the continuing and expected increase in our margins as a percentage of premiums. We expect this trend to continue into 2005.

At American Income, first year premiums declined 3 percent to 19 million, but total premiums increased 9 percent to 90 million. The underwriting margin increased 9 percent to 27 million.

Our producing agent count at the end of the year was 20 thou -- 2,090 agents, up 40 agents from the beginning of the quarter, but down 200 agents for the year. The decline in first year premium is directly attributable to the decline in producing agents, a problem that we've addressed. Mark will have additional comments on this subject later.

At Liberty National, first-year premiums declined 4 percent and total premiums were flat compared to a year ago. But underwriting margins increased 20 percent to $20.9 million. We continue to see the positive effect of the acquisition expense reductions at Liberty National. Acquisition expenses were 28.6 percent of premiums for the quarter, compared to 31.3 percent a year ago. Although premiums were flat for the quarter, acquisition expenses declined by over $2 million.

With the various changes that we've made in the past year at Liberty, it wasn't surprising that for the first 9 months of the year the agent count dropped from 2197 to 1659. But we're pleased to report that recruiting is in progress and the agent count at the end of the year was 1775.

With respect to our military operation, first year premiums and total premiums increased 7 percent and 12 percent respectively. The underwriting margin increased 20 percent to $11.9 million and was favorably impacted by a relatively lower policy/obligation ratio than we've been experiencing in the recent quarters.

Losses due to the Iraq /Afghanistan hostilities were $690,000 in the quarter compared to an average of 1.1 million in each the prior quarters of this year. Since the hostilities began in early 2003, total paid claims have been 5.1 million.

Now I'll call on Mark for additional comments about our life insurance operation. Mark?

Thank you, C.B..

Direct Response: Our Direct Response operation had another good year. For the year, it accounted for 28 percent of our life underwriting margins and 19 percent of our total underwriting margins. For the year, first year Life premiums grew 10 percent, total Life premiums grew 9 percent, and Life underwriting margins were also up 10 percent. I expect to see similar growth in premiums in 2005, with slightly improving margins, as C.B. mentioned.

At American Income: American Income continues to be our most profitable distribution system, accounting for 30 percent of our Life underwriting margins and 23 percent of our total underwriting margins. First year Life premiums were down 3 percent for the quarter and up 5 percent for the year. Total Life premiums were up 9 percent for the quarter and 11 percent for the year.

Our active agent count declined 9 percent for the year, as new hires were down 15 percent.

So what happened at American Income? As I mentioned 9 months ago at the beginning of 2004, we significantly raised the sales requirements for American Income agents to earn a bonus, in an effort to increase our agent productivity. As a result, terminations increased, and our active agent count dropped by 264 during the first quarter. By the end of the first quarter, we reverted back to our old bonus levels and terminations came back in line. Our active agent count, however, only grew by 23 over the next 2 quarters, due to a decline in recruiting.

As I discussed last quarter, over the last 5 years our primary source of new recruits at American Income has been Internet job sites. In 2003, we averaged almost 6,000 responses a month to American Income's Internet recruiting ads. For the first 9 months of 2004, our responses dropped 42 percent to less than 3500 per month.

In September, we consolidated all of our Internet recruiting efforts under Glenn Williams, who is an Executive Vice President in our direct response operation. I'm pleased to report that as a result of the efforts of Glenn and his staff, American Income's Internet ad responses jumped to over 9,000 per month for the fourth quarter, up 163% from the first nine months of 2004 and up 52 percent from our 2003 average.

In January of this year, we received over 13,000 Internet ad responses at American Income, versus only 3875 in January a year ago.

During the first quarter of this year, we are implementing a new system in all of our captive agency operations to track each ad response completely through the hiring process. I believe this new system will help us to significantly increase our conversion of ad responses into producing agents. Because the vast majority of our new hires have no prior insurance experience, it takes us roughly 60 days for new hires to obtain their license and go through training.

While we made progress in our active agent count during the fourth quarter at American Income, I expect to see at least 20 percent growth in American Income 's active agents in 2005. However, because we are beginning the year with fewer agents than a year ago, it will take us some time for first year premiums to get back to double-digit growth levels.

At Liberty National -- Liberty National is our third most profitable Life distribution system, accounting for 21% of our total Life underwriting margins and 17 percent of total underwriting margins.

First year Life premiums were down 4 percent for the quarter and 2 percent for the year. Total Life premiums were flat for the quarter and full year. Life underwriting margins were up 20 percent for the quarter and 9 percent for the full year. Liberty's active agent count declined 19 percent for the year and new hires were down 35 percent.

At the beginning of 2004, we discontinued subsidizing new recruits. We also ceased paying salaries and providing benefits to new recruits prior to their obtaining their insurance license. These changes resulted in annual savings of roughly $12 million in cash expenses.

Due to the nature of GAAP accounting, there is a lag between the reduction in cash expenses and our GAAP financials, but as you can see through the -- from the fourth quarter numbers, the savings are now beginning to flow through.

As a result of these changes, I fully expected the loss of 299 active agents in the first quarter of 2004. These were merely nonproducing agents who were drawing subsidy, salary and benefits. What I had not expected was the loss of an additional 239 agents over the next two quarters. This drop was directly caused by unacceptably low level of recruiting.

Prior to mid 2003, Liberty National had done little or no Internet recruiting. Even after it was introduced in mid 2003, through September of 2004 we had averaged only 400 ad responses per month from the Internet. After the consolidation I mentioned earlier, Internet ad responses jumped over 2,000 per month in the fourth quarter, and were over 3300 in January of this year.

New agents recruited in the fourth quarter increased 40 percent from the average of the first nine months of last year, and our active agents grew by 7 percent for the quarter.

Last week we opened two new offices in Charlotte and Raleigh North Carolina. By the end of the first quarter, we should open our first offices in Missouri and Texas. With the opening of new offices and increased activity in Liberty's existing offices, I expect to see at least 20 percent growth in Liberty's active agent count for the year 2005.

Our military business is written by First Command, an independent agency based in Ft. Worth, Texas, and it accounts for 12 percent of our Life underwriting margins and 8 percent of our total underwriting margins.

First year Life premiums were up 7 percent for the quarter and 13 percent for the full year. Total Life premiums were up 12 percent for the quarter and full year. And Life underwriting margins, as C.B. mentioned, were up 20 percent for the quarter and 7 percent for the full year.

First Command received some unfavorable publicity during the year concerning their mutual fund products, which are not Torchmark affiliated, which originated from a New York Times article. We believe they have been unjustly included with some other agency operations with lower ethical standards.

The quality first -- the First Command operation can be seen in the fact that 84 percent of the business written with Torchmark persists through five years. And although they have 968 agents worldwide and over 298,000 client families, we have received only one agent-related insurance department complaint in the past eight years. That one complaint was for slow delivery of a new policy. While there's been a minor short-term impact in our new agent recruiting, we expect premiums and underwriting margins in the First Command business to grow in the 8 percent range in 2005.

Those are my comments on Life, C.B.

Thank you, Mark.

Now turning to health insurance, our first year premiums were flat at $40 million and total premiums declined 2 percent to 255 million. Underwriting margins also declined 2 percent to $40 million for the quarter.

In our United American General Agency operation, first year premiums declined 1 percent to $16.1 million. Med Supp first year premiums declined 5 percent to 5.8 million. And other health insurance first year premiums increased 1 percent, to 10.3 million.

Total premiums and underwriting margin declined 4 percent, to 112 million and 20.4 million, respectfully.

In our UA branch office operation, first year premiums increased 9 percent to 16.2 million. Med Supp first year premiums declined 27 percent to 4.9 million, but other health premiums and first year premiums increased 38 percent to 11.3 million.

Total premiums were flat at 79 million, and underwriting margins declined 3 percent to 11.1 million.

The UA branch office operation ended the quarter with 1677 producing agents, up 167 agents for the year.

In January, we began introducing United American both in the GA and the branch office, our high deductible Plan F Medicare Supplement. This product brings the principle of insurance back into our Medicare supplements and we believe this product will revitalize Med Supp sales as the year progresses.

Turning to Liberty National, the underwriting margin was 3.5 million, up 38 percent from a year ago. For the full year, our paid claims and paid premiums loss ratio on the cancer business that we refer to as the Class business, was 109 percent of the 71 million of premiums. The Class settlement has been finalized. In early March, claims will begin to be processed based on reasonable charges, versus unreasonable bill charges. And on early -- and in early March of 2006, all claims will be processed based on reasonable charges.

In late March we will begin introducing premium reductions that will result in a 29 percent overall reduction over a 12-month period. Although this settlement will not result in this closed block of business being a profitable block of business, the Class business will no longer generate losses.

Now I'll call on Mark with additional comments regarding the health insurance operation.

The primary health distribution system within Torchmark continues to be the branch office and independent agencies of United American. Together, they account for 76 percent of our health underwriting margins and 26 percent of our total underwriting margins.

In the branch office, first year premiums were up 9 percent for the quarter and 19 percent full year. Active agents grew by 11 percent during the year.

On the independent side, first year premiums were down 1 percent for the quarter, but up 10 percent for the year.

The fourth quarter decline was an expected result of initiatives we took during 2004 to improve the quality of the business written. For the past several years, growth in premiums and margins at United American have been inhibited by decline of Medicare supplement sales and premiums. While we have offset these declines with increases in our under age 65 supplemental health products, it has been difficult to grow total premiums and margins, due to the poor persistency on the under age 65 products.

We believe that the downward trend in Medicare supplement sales, premiums, and margins will reverse in 2005.

As I mentioned last quarter, we are introducing a low priced, high deductible Medicare supplement product this quarter. The product was first released three weeks ago and is now available in 30 states. The initial response to this product has been extremely positive on both the branch office and independent agency sides. As we introduce the product, we are also providing our agency forces with the names of over 100,000 former policy holders, the vast majority of whom left us for one reason, and that's cost. We believe we can recapture many of these former customers.

I remain very optimistic about United American for 2005, but I will withhold any projections until next quarter. It's just too early to tell what impact the new product will have. I will project that we intend to grow our branch offices from 84 to 100 during 2005, and grow our active agents by at least 20 percent this year.

Those are my comments, C.B.

Thank you.

Turning to the annuity business and our administrative expenses, our annuity margin increased 35 percent to 3.8 million and was in line with our expectations. Administrative expenses increased 6 percent to 36 million. Litigation expenses were $2.1 million, and higher than we expected, due really to some Waddell Reed related expenses that were actually incurred in the prior quarter.

Now that most of the cancer Class and Waddell & Reed legal expenses are behind us, we expect litigation costs to decline from this year's level of 7.5 million at Liberty National and United Investors.

Turning to investment operations, excess investment income declined 1 percent to 81.1 million. On a per share basis, which reflects the effect of our ongoing share repurchase program, excess investment income increased 3 percent to $0.74. Continued lower interest rates on new investments and the termination of one of our interest rate swaps negatively impacted excess investment income.

For the quarter we invested in fixed maturity assets with an average annual yield of 650 basis points, the same low yield that we've enjoyed all year. The good news is that the calls were only $49 million for the quarter, compared to almost $300 million in the first nine months of the year.

Now, I'll call on Gary for additional comments on our investment operations. Gary?

Good morning.

As shown on page 14 of our supplemental financial pages, the schedule entitled "fixed maturities," Torchmark has $8.1 billion of fixed maturities at amortized cost, which comprised 94 percent of our invested assets. These assets are carried on the balance sheet at their market value of 8.7 billion, which reflects net unrealized gains of $649 million. At amortized costs, 7.4 billion of the 6 maturities are investment grade and have an average rating of A minus.

Below investment grade bonds are $670 million and have an average rating of double B minus. The percentage of below investment rate bonds, the total invested assets, is 7.8 percent, compared to 8.9 percent a year ago, and is the lowest it has been since the third quarter of 2001.

Regarding new investments, due to the long-term nature of our policy liabilities, and also to the low interest rate environment, we continue to invest in investment grade corporate securities with long maturities. In the fourth quarter, we invested $325 million in bonds, having an average maturity of 24 years and an average rating of A minus.

As C.B. mentioned, the yield on these bonds is 6.5 percent, the same as the average yield for all 2004 investments. However, this marks the 7th consecutive quarter that we have invested new money at lower than the overall bond portfolio yield, which has declined 35 basis points during that period, to the current 7.1 percent.

Contributing to this decline in the last seven quarters, almost a third of the $2 billion of bond purchases have been from the reinvestment of the proceeds of called bonds. The called bonds are yielding 114 basis points more than the new bonds that replace them. On a positive note, the amount of the bond calls declined in the fourth quarter to $49 million, and that's compared to an average of over $109 million for the previous six quarters.

Now I would 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, less the interest costs associated with the net policy liabilities and our debt.

Excess investment income was $81 million in the fourth quarter, down 1 percent from a year ago. On a per share basis, which takes into account the foregone interest income from cash used for stock repurchases, excess investment income increased 3 percent.

Looking at the components of excess investment income, net investment income was up 2 percent, lower than the 5 percent increase in average invested assets, due to the lower yield on the new investments. Now, on prior quarters the lower investment yield was partially offset by lower costs of the interest bearing liabilities. But in the fourth quarter, the net financing costs of our debt were $11 million dollars, up $3.5 million from the fourth quarter 2003. Net financing costs include the interest expense on the debt, less the benefits received from interest rate swaps. The fourth quarter increase in net financing costs is due to the reduced benefits from the swaps.

If you go to the investor relations page of our website and click on "financial reports," you will find the schedule that gives the details of the swaps. It shows that we had four swaps where we received six payments and paid floating rate payments on notional amounts totaling $529 million. The cash benefits from the swaps were $3.5 million in the fourth quarter, compared to $6.7 million in the fourth quarter, 2003, a decline of $3.2 million.

In the third quarter of 2004, a $200 million swap expired and was replaced by two new swaps totaling $199 million, but with less favorable terms. The new swaps provided a combined benefit of $1.2 million in the fourth quarter. However, that was $2.1 million less than we received from the expired swap in the fourth quarter of 2003. In addition, the two carryover swaps from 2003 yielded a million dollars less in benefits in the fourth quarter, due to the higher floating interest rates paid.

Looking to next year, at current rates, the pre-tax benefits from the swaps in 2005 will be around $12 million, $11 million less than we received in 2004. Almost the entire reduction will come from the loss of the $10 million benefit we received in 2004 on the expired swap.

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

Those are my comments. C.B.?

All right. I'll have a few final comments and provide guidance for 2005.

After shareholder dividends and interest on debt, our 2004 free cash flow at the parent level was $275 million. And we spent 268 million repurchasing 5.2 million shares of our stock.

For 2005, we estimate that free cash flow will be no less than 300 million. And there is a high probability that we will use the full amount to repurchase stock. However, with respect to the following guidance for 2005, we have assumed that no shares will be repurchased.

With respect to 2005 Life underwriting margins, we expect an increase of 9 percent to roughly 383 million. We expect improvement in margins as a percentage of premium in our direct response operation, in our Liberty National operation, and in our United American operations. With respect to health insurance underwriting margins, we expect an increase of 6 percent to roughly 184 million. And a large majority of this increase will come from the Liberty National business that we've defined -- described earlier in the class settlement.

We are guesstimating that annuity margins decline from 14 million to 13 million. There will be no significant change in other income, and administrative expenses are projected to increase 3 percent to 146 million. The relatively small increase in administrative expenses is primarily due to lower expected litigation expenses, somewhere in the neighborhood of $4.5 million compared to 7.5 million in 2004.

In summary, we expect underwriting income to increase 9 percent, to around $437 million.

Our investment operation is another story. We've assumed that there will be no upward trend in new money investment rates, and again, these estimates assume no stock repurchase activity.

Net investment income is expected to increase 6 percent to 611 million, and interest on net policy liabilities and on debt is expected to increase 4 percent to 281 million. However, as Gary mentioned, we estimate that income from our swaps will decline from 23 million in 2004 to 12 million in 2005. The net result is excess investment income of roughly 342 million, an increase of 3.5 percent.

Parent expenses will remain at the $10 million level. The bottom line is pre-tax and net operating income of roughly 769 million and 503 million, respectively, with the latter being a 6 percent increase over the 473 million in 2004.

Giving that our outstanding diluted shares remain at the 110 -- remain at 110 million throughout the year, we therefore estimate earnings per share to be around $4.57, an increase of 8 percent over the 4.23 in 2004. And again, I remind you this assumes no stock repurchases during the year.

Those are our comments this morning, and now I'll call upon Lori to open in for questions and -- for questions.

Thank you Mr. Hudson. For those of you joining us on the telephone today, if you would like to ask a question, please press star, 1 on your touchtone telephone. We'd like to remind you, if you're joining us on a speaker phone today, make sure that your mute function has been turned off so that your signal my reach our equipment. Once again, that is star, 1 for your questions.

And we'll go first to David Lewis with SunTrust.

Thanks very much. C.B., make sure I'm up to speed on the benefits from the Class. You said that you hit 109 percent claim on the -- was it 71 million of premiums? Was that for the full year?

Yes.

So, you got a $6.4 million pre-tax benefit? That should be zero or positive in '05, is that correct?

Well, let me just -- let's take a snapshot on the Class cancer. Right now, or for the end of the year, we had 71 million of premiums. We had 77 million in claims. $4 million of administrative expenses, and that's at a percentage of 5.5 percent. And we had $4 million of other expenses, percentage of premium expenses, in the form of commissions and premium taxes. Add those up and that's a $14 million cash drain.

Now, let's go a year down the road. It's going to be an uneven ride when we get there. But let's just -- what's it look like in theory down the road, a year, after we've implemented the 29 percent rate reductions on the business, and let's assume nobody lapses. Then we'll be at $50 million of premiums. We'll have an 85 percent loss ratio, which is 43 million of claims. We'll still have 4 million of administrative expenses. And our percentage of premium expenses will decline to 3 million. Add those numbers up and it's basically zero.

So, what we've done is we've taken a bad situation that was generating a $14 million loss and turn -- and we'll have it at a later point in time at a $50 million premium block of business with zero gains.

That, in theory, is what is supposed to happen.

I know it's a guess, and I sense it will be a little lumpy as you through, but should we assume that maybe we get half the benefit in '05 and the other half in '06, is -- kind of a good starting point?

I think in the GAAP -- in terms of the GAAP financials, starting with the second quarter, we should see an 85 percent loss ratio on that business. So with respect to the GAAP financials, it will happen beginning in the second quarter.

On a cash basis, it will -- it's going to be negative for a while, and then much -- positive in the future. But for GAAP purposes, you should see it starting with the second quarter.

All right. Thanks very much.

We'll go next to Eric Berg with Lehman Brothers.

Two questions. First, would you say that because your business is focused on traditional insurance, you are not a major writer of variable products?

We're not a major writer of that.

Right, right, right. My question is -- I was starting off by saying that because your business is not focused on variable products, that the interest rate outlook is more important to you than it is for many of your peer companies? Is that a fair way of thinking about Torchmark?

Well, from -- yes. We're basically fixed on our liabilities, whereas the new cash we bring in is a source of income to us and investing at 6.5 percent hurts. We want interest rates to go up. We've been thinking they would for some time, but they haven't. So, it's very important to us.

Okay. And my -- that's what I thought and I wanted to just confirm that my general thinking about the Company was right.

With respect to the important changes, with the seeming turn-around that you're getting in recruiting of agents in Birmingham and at your, I guess, your Waco company; what are you doing differently that has turned the situation around? You've obviously put a new person in charge. Are you just advertising more, advertising quicker, changing the copy? What's happening that has produced this improvement?

Mark?

It's all of those things, Eric. We're basically using some of the discipline we have in the direct response and we're testing a wide variety of things. It's how often we put -- we place new ads, but it's also the ads. We test different ads. There's even multiple pieces of that. The headline that you put affects how many people click on your ad, but then the copy of the ad affects how many people actually respond to the ad.

But we're really making it more of a science and we're learning how often and at each different market, which different classification you run under. Which ones produce, which ones don't. And the ad copy is a factor. As I mentioned earlier, now our big challenge this quarter is to increase the conversion of the ad responses into actual producing agents.

But we're learning an awful lot about it. And we are just using our direct response discipline to become smarter at what we're doing.

Thank you.

Moving on, we'll take our next question from Colin Devine with Smith Barney.

Hi. A couple of quick ones. First, with respect to your outlook for the portfolio yield: How much do -- are you sort of projecting now that that's in decline, I guess quarterly or for for the full year in '05?

Secondly, I noticed you've basically sold out of your mortgage portfolio, albeit it was fairly small to begin with. Was there something going on there?

And then lastly, C.B., could you update us with respect to where you stand for expensing stock options.

I'll take the first two. First of all, as far as the yield on the portfolio, it's doing -- the yield is just under 7.1 percent now. If we continue to invest at 6.5 percent through the rest of the year, which is what we assume in our projection, then we'll be around 6.95 at the end of the year.

The second question on the mortgage loans, the mortgage loans, first of all, were a little over $100 million. It wasn't -- we didn't have a sizable investment there. We just felt that the return on those mortgages weren't what we were looking for and so we've elected to sell them. There was nothing other than that. We'd rather have that money invested in bonds

Was there any kind of gain on the sale of those mortgages that floats for earnings?

No. It's -- well, we had a slight gain, a net of I think it was about $1 million.

And is that in -- go into investment income or capital gains?

No, it goes in capital gains.

Okay. Thanks.

And we won't be investing in mortgages as we go forward. We'll pretty much be strictly to corporate bonds.

On dispensing the stock openings, we have options that begin vesting in the second quarter of this year, at the time when companies must expense, and we'll do so below the line. I just want to mention one thing about the expensing of stock options. There's no cash in the income statement.

And furthermore, it does not reduce equity, which to me is an idiotic adjustment. If it does -- no cash involved in the income statement and it -- if it's an expense that has zero impact on equity, I don't even know why we're doing it. But we are. It will continue to be dilutive if prices go up, just as it's been in the past. So I really think, down the road, people are going to see this as a silly adjustment. But, yes, we will expense them starting in the second quarter.

Okay, C.B., then just quickly follow up, what would have been the expense in '04 looking back, and with respect to the guidance you've given us, does that factor in the cost of expensing options or not?

No, I consider that expensing a fictitious, below-the-line, nonsense item. So I don't -- that isn't operating cash or operating earnings, as far as we're concerned. As far as what it would have been for 2004, Gary, do you know?

Yes. It would have been about $0.07 a share. And that's pretty consistent. It's been about $0.06 to $0.07 a share the last -- actually, the last 5 years, I guess, here at Torchmark.

Okay. But then, just as you're reporting operating earnings over the last half, we are going to look for them to be impacted relative to your guidance?

They're not in -- I have excluded them from consideration. That will be a below the line item to me that's totally meaningless. I don't give a [expletive] one way or the other.

Thanks, C.B.. Okay.

Moving on, we'll go next to CSFB and Tom Gallagher.

Good morning. Couple of questions. First is the -- C.B., I heard what you said about the expected growth in the Health line in terms of margins. What's your assumption around premium growth there? I know it declined a little bit this quarter. I think previously you had said one to 2 percent. And I'm sorry, I may have missed it if you mentioned something about that earlier on the call.

No, I didn't. Premiums in the health insurance in 2005 are probably going to be flat. Keep in mind that we expect the premiums on the Liberty business, the Liberty National business, which were about 164 million in 2004, we're estimating that they decline to 149 million in 2005, due to the rate reductions. So that taken into consideration, we think overall premium in [inaudible] Health insurance in 2005, our guess at the moment, it will be flat.

Okay. Okay. So, it's going to at least reverse this short-term blip that you got in 4Q? You're expecting a little bit better of a trend than we've seen this quarter?

Yes. Yes. We had a decline for the quarter.

Okay. The next question I had is, just so I better understand this on the Med Supp side, is your view that -- if I'm hearing you correctly, it sounds like it's not an environmental issue with regard to HMO reimbursement rates going up, or that there's aggressive competition. It sounds like it's more a product transition as why the sales are temporarily more weak than you thought. Is that a fair assessment?

I think cost. Yes, the cost has gotten so high. And we've gotten out of insurance. We've got into prepayment of expenses, and it's a very expensive prepayment plan.

Let me give you a simple example of where we are and where we're going. Our Plan F coverage today, for a 65-year-old -- and Plan F has always been the most popular Medicare supplement and it pays for all medical and hospital expenses not covered by Medicare. Throw out prescription drugs. That isn't covered. The premium for that policy is roughly $2,500 for a 65-year-old.

Let's take two situations: A person who has no claims and a person who has $10 million of claims. For no claims, the person is, their cost for the year is $2,500. The person who has 10 million in claims, we pay all of that, their cost is still $2,500.

Now let's go over to the new policy. It's a $700 annual premium with a $1,700 deductible. For the person who has no claims, they're out $700. And for the person with $10 million of claims, they're out $2,400. A hundred dollars better than the old Plan F.

How can you do this? Well, it's back to insurance. We have been covering everything at a 65 percent loss ratio, and it simply doesn't make sense anymore. It's not insurance. We're getting back into insurance and I -- it may take some time for the world to recognize this, but this $700 premium policy with a $1,700 deductible makes all the sense in the world.

We're finally getting around to doing what the auto companies did 30 years ago, introducing deductibles. At the moment we seem to be the only company interested in doing this, so I'm excited about it. I know it's where things are going in the future, we just don't know how fast it will get there.

So, is it fair to say -- and I know you may not have statistics around this -- is your sense that for the time being, as you transition you may lose some share as companies continue to write what seems to be, at least in you're mind -- forgive me if I'm putting words to your mouth -- but, you know, an inferior product.

So as you transition to this different product, better value product, that maybe you'll lose some share for a little while, or do you think it's going to be shorter?

I don't -- I -- I -- Mark, what are your thoughts?

I don't think we're going to lose any share at all. I think we've hit bottom. I think the transition will be very quick.

I expect our Medicare sales, shortly after we introduce the product, will increase from the levels they've been the last several years. I don't expect to lose any share at all. In fact, I really expect this year to see our Medicare sales go up significantly.

If we continued to sell the old Plan F, the 2500 -- which five years from now will be 4,000 -- what we would be doing is driving people away from fee for service, from freedom of choice, we would be driving them to HMOs for cost. Throw in that 65% loss ratio, and you can see that's what we've been doing. Now, getting back to insurance, I think we will bring people back to the Med Supp market.

Got you. And then just -- sorry, last question. So even though the premium is a lot lower and you're going to have to sell a lot more units, you still feel like you're going to improve sales with the new launch?

Yes, I do. I think the increase volume of new policies, new applications coming in, will more than offset the decline in premium.

Great. Thanks.

Our next question comes from Joan Zief with Goldman Sachs.

Thank you. Hey, C.B., what -- have you thought about maybe taking a little bit of that cash flow and increasing your dividends?

I thank you for the report that you sent me, Joan. Well, the board meet next week, that's a board decision and I'm sure it will be discussed.

Okay. Okay. Do you have any other? So -- that's fine. Okay. Thanks very much.

Uh-huh.

We'll go next to Jimmy Bhullar with J.P. Morgan. And Mr. Bhullar, your line is open. Please check your mute function. And hearing no response. We'll move on to Ed Spehar with Merrill Lynch.

Good morning. I have a few questions.

First, C.B., I'd like to get some some some clarification on your comments about importance of interest rates. I think maybe one of the things that is a little different, and I want to hear what you think, is that you've got a significant portion of earnings that are driven by insurance margins. So yes, the interest rate decline is important for spread, but 60 percent of your profit is coming from insurance margins, it looks like. So, I mean, I was wondering if you could sort of clarify how you think about the importance of interest rates for your business mix, versus what you know to be the, sort of the situation for the industry as a whole.

Then some specific questions on the Med Supp. You know, I guess a skeptical view would be, you know, you got agents out there who get paid for selling higher premium products, and now they're going to be asked to sell a product where they're going to get, you know, less than half of what they've been getting before. So, you know, why do they want to do that?

And the final thing I guess, just to comment -- I mean, I understand your view on options, but I think from a comparability standpoint, I think you're going to have a significant problem if you try to define that as a nonoperating item in terms of the estimates you're going to see for your company and imply the variation in numbers that is going to be driven just by -- people including it or people excluding it. So, I mean, as one person would suggest, I would suggest you just put it in operating and just explain to people what it is each quarter. Thanks.

All right. On interest rates, yes, underwrite -- hello? Underwriting income -- I'm sorry, I'm getting an echo here.

Underwriting income is a key portion of our total earnings and we're not -- we don't rely on interest rates or interest income as our only source of earnings. But still, with the -- just with the enormous, the cash that we're generating, we're generating more cash every year in this company, and that's a priority for us. And we had counted on investing that money, that which we can't pass to the parent at higher yields than we're getting today. But it's not critical -- it's not crit -- it's not our only source of earnings, as you well point out, Ed.

On the Med Supp, Mark? Comment about the easier sale?

Sure. I mean, and that's -- that's basically it. The Medicare supplement market has for a long time been lead driven, Ed. And the reason why we've seen seen such a shift from the Medicare to the under-age-65 is the closing rate. Out of 10 leads, the closing rates just got so low that agents couldn't afford to spend money on the leads. Their money was better spent generating leads for under-age-65 products.

With this product, they should have a much higher closing ratio. So even though the commission per sale will be less, I -- we will see a lot of agents get back into the Medicare supplement market with this product.

I mean, is it -- do we, just looking at this, do we look at it and say they're going to get, whatever, 10 percent, 15 -- I don't even know -- a 10, 12 percent commission on $700, versus 10 to 12 on $2,500?

That's basically right. But the --

And what's the closing rate now versus what it was, let's say five years ago?

Well -- and I don't have actual numbers. I know at one time, Ed, we were closing 20 to 30 percent of the leads. And just from what I've heard from agents, that that dropped down to less than 10 percent of the leads that we generated an agent could close in the Medicare market. You know, hopefully if it goes up to where they can close 30 percent of them, then we'll see a huge influx of new business there.

Ed, I'll make another comment on the Medicare supplement. We had gotten to the point where, you know, a 2- family -- a 2-person family, 65 years old, extracting $5,000 a year from that household, that has gotten to be so expensive. We've seen people going to self-insurance. Not choosing to go HMO or to have a Med Supp, but to just self-insure. That makes sense at the cost. We've gotten back to insurance again. And it will be an easier sale for the agents, and they will sell more of it.

On your recommendation on options, I'll simply say that we report realized capital gains, capital gains and losses below the line. I can assure you, since 1998 for tax purposes, we end up each year with zero capital gains and losses, even though that isn't what these financials show. So I consider that misleading, realized gains and losses. And I think the expensing of stock options is misleading, too. I will be voting that we put it below the line and treat it as an idiotic nonsense item that I fully believe it is. But thank you for your recommendation.

And just --

(LAUGHING.)

Yes, I guess the only think I'd say, C.B., is people buy this because I think one of the reasons is stability of earnings. And if you have half the people including options and half the people excluding it, the numbers that people are going to look at are going to imply more volatility in your numbers than what there really is. And unfortunately, some people don't dig into the numbers as much as you would like them to.

And just on the Med Supp, I'm still confused, because if this new product is a $700 premium and what you're selling is $2,500, you know, you're going to have to have the close ratios go up three and a half times just to be even on sales, it would seem.

Well ,we're not totally selling Plan F. We have moved away from Plan F. The agents have, and the customers, to plans that have deductibles, part A deductibles that aren't covered and part B expenses that aren't covered. That isn't the average size premium we're selling today in the Med Supp market.

And Ed, the other part of that, is agents have just gotten out of the Medicare supplement market altogether, because if they have to go on 10 interviews and they're generating less than one sale, they've just moved to the under-age-65 market. If they can go on 10 interviews and make 3 sales, this has become, again, a market where they can make a good living at. And will do so. Plus, the response rates on our lead mailings are up substantially from what they were three or four years ago.

What you're saying is absolutely true, but I still believe that we will see agents move back into this market, and new agents that we bring in will get into this market going forward.

Okay. Thank you very much.

And I would like to remind our audience, if you do have a question at this time, to please press star, 1.

We will go next to Vanessa Wilson with Deutsche Bank.

Thank you.

C.B. and Mark, on your new money yield, the 6.5 percent -- could you just -- does that have some credit in it for the swap? Or could you just talk to the pieces of that? Because the 30 year treasury right now is, you know, like, 440. So that's a 200 basis point spread over the 30 year treasury.

Well, the annual -- the annual -- when I say 650 basis points, that is the annual effective yield that we are getting on the new investments. Obviously we're not buying treasuries. Gary described earlier the investment quality of the bonds. They're investment grade, low investment grade, and long maturities. But it is a 6.5 percent annual effective yield. Gary?

Yes. The nominal yield would be around 640. But again, as C.B. mentioned, there are low maturities and they're at, they're A-minus this quarter. For the year, it's triple B-plus.

Okay. And so there's no credit in that 640 for the swap?

No, not at all.

Okay. And then my other question, C.B., it sounds like part of the growth strategies for '05 and '06 is to work on recruiting, but also to increase the number of offices, and the expenses are expected to go up, you know, just the low single digits for the corporation. Is that growth of the office count incorporated into that expense forecast?

When I was talking earlier of administrative expenses, everybody is not going to be impacted by the growth in the offices. That's an acquisition expense. But as Mark said earlier, we have stopped subsidizing agents at Liberty National. We have reduced expenses overall in Torchmark and that will continue, and the fact that we're going to grow the agents who we don't subsidize or open some offices, both in the branch and at Liberty National, that won't have much impact on total expenses.

Okay. When you open an office, is it on your ticket?

Yes. Mark?

Yes. At Liberty and United American, it is on our ticket. But one of the things that makes us successful in those operations is how tightly we control expenses. And as C.B. mentioned, they are -- we take a percentage of the premium that is being attributed to acquisition expense and we have an allowance that we know what we can spend on office expenses, and we very tightly control that.

Okay. Thank you.

We'll take our next question from Jeff Schuman with KBW.

Good morning. Going back to the economics of selling the new -- the Med Supp product, how much does an agent typically pay to acquire a lead?

Mark?

Well in our branch office operation, we have a lead allowance. For every thousand dollars of premium they sell, we take part of -- again, part of our acquisition cost is going to providing leads to those agents. Where in -- 5 years ago, those response rates on our lead mailings had gotten down to less than 1 percent response rate.

What I'm hearing now from people who are starting to order Medicare leads, that the response rates are up in the 5 percent rage. So they're -- if we're spending $300 per thousand for mailings and getting 50 back, that lead cost is down to about to $6.00 a lead. That's -- I can't remember in the last 15 years when the cost per lead has been that low in the Medicare supplement world.

So the independent agents, what do they pay.?

I would assume they're paying about the same. If they're buying them outside, they're paying a little more, but I would think if they're getting that kind of response rate, that their lead cost would probably be no more than $8.00 a lead, which, again, is very low, historically.

In that market , do you have a sense of how many interviews or calls they can make in a day?

Well, that just depends on how hard the agent is willing to work. They can, they could easily make 10 a day. Again, in that market, one of the nice things about that market is they're daytime sales versus most life insurance is sold on evenings and weekends. So, they could make calls all day long.

A typical appointment, I think most agents allow about an hour for an appointment. So it's just how many hours in the day is he willing to work.

Okay. That helps. Thank you.

And we'll go back to David Lewis with SunTrust with a follow-up question.

Yes. C.B. and Mark, I guess the question is, you've had a little bit of challenges over the past couple of decades from time to time, I guess in agent recruiting and different parts of the business, and kind of, you know, rejiggering how you're going to do it. It sounds like you're kind of moving more toward the, you know, Internet recruiting in some areas.

Do you think there's any major disadvantages in a rebounding employment growth environment in that recruiting? That's one.

And two, can you give us an idea of what either a Liberty National or American Income agent makes in the first year versus second year, is it getting ramped up?

With respect to the economic -- the economy, David, I've been in this business for 30 years and it doesn't make -- the economy has no impact on our recruiting and our sales forces. It's just a nonevent. Mark, on the agent earnings?

Well, I don't have those numbers in front of me. I can get those for you.

But that is -- what C.B. said is absolutely true. We have -- I know our average agent, I don't have it broken down between first year and longer term agents, but our average agent is make over $50,000 a year. And for someone with no education or specific training prior to come coming into this, there's no shortage of people out there looking for an opportunity. But I don't have a breakdown of the income between new agents.

Someone who is just starting can make as much as -- can make $50,000 or more a year. But I don't have the averages now.

Okay. [Inaudible.] Thanks.

There are no further questions at this time. Mr. Hudson, I'll turn things back over to you for any additional concluding remarks.

All right. Well, those are my -- our remarks this morning. Thank you very much for joining us and have a good day.

Once again, that does conclude today's conference. I'd like to thank everyone for joining us today