Globe Life Inc (GL) 2005 Q1 法說會逐字稿

Good day everyone and welcome to the Torchmark Corporation first quarter 2005 earnings release conference call. Please note that this call is being recorded and is also being simultaneously webcast. At this time, I would like to turn the call over to the Chief Executive Officer, Mr. C.B. Hudson. Please go ahead.

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 may view them on our Website at torchmarkcorp.com at the investors relations page.

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

Operating income for the quarter was 121 million, or $1.12 per share, an increase of 9% over the $1.03 in the first quarter of last year. We ended the quarter with a book value of $27.77 and return on equity of 16.2%.

Now turning to our Insurance Operations, first Life Insurance. Our first-year premiums were 57 million, down 3% from a year ago. Total premiums increased 6% to 363 million and underwriting margins increased 10% to $93 million. In our Direct Response operation, first-year premiums increased 7% to $20 million and total premiums increased 11% to $105 million. Our underwriting margin increased 13% to $26.9 million. The 25.6% margin for the quarter was the highest percentage of premium margin than we have reported in over four years and is additional evidence of the higher profit margin business that we've been putting on the books in the past few years.

At American Income, our first-year premiums declined 4% to $19 million but total premiums increased 9% to 92 million. The underwriting margin increased 11% to $28 million. Our producing agent count at the end of the quarter was 2145, up 55 agents from the beginning of the year but still down almost 150 agents from the start of last year. The decline in first-year premium is directly attributable to the decline in producing agents that we experienced in 2004, a problem that we believe we have fixed and we expect continued growth in the producing agent count down and a turnaround in the growth in the first-year premium as the year progresses.

At Liberty National, first-year premiums declined 10% to $9 million and total premiums declined 1% to 76 million, but underwriting margins increased 15% to 19.1 million. We continue to see the positive effect of the acquisition expense reductions at Liberty National. Acquisition expenses were 27.0% of premiums for the quarter compared to 30.5% of premiums a year ago. Although premiums were down by almost 0.5 million, acquisition expenses were down by $2.8 million. In the past, our efforts didn't grow the top line at Liberty National and we still aren't growing the top line today, but at least we're making more money for our efforts.

Furthermore, there is hope on the horizon. We ended the quarter with 1859 agents, up 84 agents since year-end and up 200 agents since six months ago. In light of the fact that we made some dramatic changes in the sales force compensation in 2004, we are pleased with the progress in our agent growth.

With respect to our Military operation, first-year premiums declined 2% to 6.5 million and total premiums increased 10% to $49 million. The underwriting margin increased 15% to 10.8 million. Although our policy obligation ratio was only slightly higher than in more peaceful times, it continues to be affected by the hostilities in Iraq, Afghanistan. Paid claims directly due to the hostilities were $995,000 for the quarter compared to $681,000 a year ago.

Now turning to Health Insurance, first-year premiums were down 7% to $38 million and total premiums declined 1% to $267 million. Underwriting margins were up 1% to 45.5 million. In our United American General Agency operation, our first-year premiums declined 15% to $14.7 million. Med Sup first-year premiums declined 18% to 5.2 million and other health first-year premiums declined 13% to $9.5 million. Total premiums in underwriting margin declined 3% to 119 million and 21.5 million, respectively.

In the Branch Office operation at United American, our first-year premiums increased 5% to 15.9 million. Med Sup first-year premiums declined 22% to $4.5 million and other health first-year premiums increased 21% to 11.4 million. Total premiums in underwriting margin were flat at 83 million and 12.1 million, respectively. The Branch Office operation ended the quarter with 1777 producing agents, up 100 agents from the beginning of the year.

At Liberty National, the underwriting margin was 5.3 million, up 13% from a year ago. With respect to the Cancer Class business, we began in March the implementation of a settlement that we discussed during the last conference call. The implementation had little impact on the first quarter financial results. On a GAAP basis, the Class Premiums and the policy obligations for the quarter were 16.4 million and 16.8 million, respectively, for a loss of a premiums claims of 400,000. With the planned rate reductions of 30% that will take place over the course of the year, we expect the premiums to be around $13 million in the second quarter on this closed block of business and then further declining to about $11.5 million in the fourth quarter. However, throughout the balance of the year, we expect policy obligation to be around 85% of premiums instead of the 102% we experienced in the first quarter.

After deducting other expenses, we believe that this closed block of business will be about breakeven for the balance of the year instead of generating losses comparable to the $2 million-plus loss in the first quarter. Although the settlement will not result in the Class business ever being a profitable block of business, the Class business should no longer be a source of increasing loss. Now I will call on Mark for additional comments regarding our Insurance operations.

Thank you, C.B. Good morning. Direct Response had another good quarter with life premiums up 11% and underwriting margins up 13%. First-year premiums grew by 7%, slightly less than expected. We have seen some positive results in some of our first quarter tests which will add some additional first-year premium growth the second half of the year. First Command, the general agency which produces our Military business, saw an 8% decline in our agency force during the quarter as a result of the negative publicity originating from the New York Times article in 2004. They have now changed the mutual fund products which caused the controversy and are not Torchmark affiliated and have begun the rebuilding process. Even with the recent downturn in new sales, it should be pointed out that total premiums for First Command still grew 10% for the quarter, a reflection of the outstanding persistency of their business.

I am satisfied with the progress we're making in all of our Captive agency operations. All three saw significant growth in agents during the first quarter, which due to the year-end holidays has historically been our worst recruiting quarter of the year. Responses to our Internet recruiting efforts were up 129% from a year ago and up 85% from the fourth quarter of 2004. We continue to make great progress in finding more people who have an interest in coming to work for us.

Another important enhancements to our recruiting efforts is the implementation of a recruiting management system which we internally developed to track all of these potential recruits. United American branch office operation began using the new system in January, followed by Liberty National in March and American Income will be up and running next month. When this system is fully implemented, we will see a higher percentage of these recruiting responses converted into producing agents.

As C.B. mentioned, the active agent count at American Income was 2145 at the end of the first quarter, up 55 from year-end and up 118 from a year ago. Due to the holidays, we actually dropped 50 agents in January, but we grew by 105 in February and March. While we're still down from our peak level of 2003, we should exceed that by midyear and see strong double-digit growth in agents by year end.

At Liberty National, the active agent count was 1859 at the end of the quarter, up 84 since year-end. We are still down 35 from a year ago, but we have grown 201 since our low point in August of 2004. We recruited 751 new agents during the quarter, more than double the number we recruited in the first quarter of 2004 and more than any first quarter in the prior 10 years. As a result, the growth in agents for the first quarter was also greater than any first quarter in the prior 10 years.

While it took us some time, we have overcome the effects of the discontinued subsidy for new agents which we implemented in January of last year.

Our expansion plans at Liberty are also on track. The two new offices in North Carolina are making good progress we're opening this month new offices in Missouri and Texas. The United American branch office operation had an excellent quarter in agent growth, growing by 100 to 1777. New agent recruiting was up 24% from a year ago and was the best recruiting quarter in more than three years. We currently have 87 branch offices, up three from year end and up 10 from the first quarter of 2004. During the first quarter, we introduced the new high deductible Medicare supplement policy in 37 states.

During our last call, I was asked how would we motivate our agents to sell the new policy when the premiums and commissions were less than a third of our existing policy. That concern was valid. It has been very difficult moving our veteran agents to the new product. With the level of commissions required in this market, agents with substantial lots blocks of in-force Medicare supplement premiums are reluctant to generate the activity necessary to grow their incomes by selling the lower-priced products. The same is not true of newly-hired agents.

Our lead responses are at all-time highs and we're seeing closing ratios exceeding 50%. As a result, our new agents are much more eager to sell the high deductible product.

I am encouraged that our new Medicare supplement sales in the branch office operation for the past four weeks are up almost 10% from our 2004 weekly average and up 27% from our fourth quarter of 2004 average. I continue to believe that the branch office will have double-digit growth in new Medicare supplement sales for 2005 although it will be the fourth quarter before we see any growth in first-year collected premiums and it will be mid-2006 before we see double-digit growth in first year collected premiums in this market.

The General Agent operation at United American represents an even bigger challenge. We are experiencing the same reluctance from veteran general agents as we're seeing in the branch office. We are currently looking into offering non-commission incentives to stimulate interest in this new product. At the present time, I'm projecting no growth in new Medicare supplement sales for this year in the General Agency operation with first-year collected premiums being flat by the fourth quarter.

First-year Collected Health Premiums were down 15% in the General Agency operations, a continued reflection in the quality of business standards which were implemented in mid-2004. I expect to see a similar decline in the second quarter with gradual improvement the second half of the year. During the second quarter, we are introducing a new Underage 65 Health product which is being favorably received. While not radically different from our current policies, it combines several of our current coverages, plugs some of the benefit gaps our agents have requested while giving us better project protection from exorbitant provider charges. Those are my comments, C.B.

Thank you, Mark. Our administrative expenses for the quarter increased 4% to $36 million but were in line with expectations. Litigation expenses were 1.1 million versus 800,000 a year ago, but still below the 1.9 million that we average per quarter for 2004. With the cancer class settlement behind us and lower expected litigation costs related to Watt Allen Reed (ph), we think the litigation expenses will run about 1.1 million per quarter for the balance of the year.

Now turning to our investment operations, excess investment income was flat at 82.4 million but on a per-share basis which reflects the effect of our ongoing share repurchase program, excess investment income increased 6% to $0.76. Continued lower interest rates on new investments and the absence of an interest rate swap that existed a year ago negatively impacted our excess investment income. For the quarter, we invested in fixed maturity assets with an average annual yield of 641 basis points, the same low yield that we have enjoyed for some time. Now I will call on Gary for additional comments regarding our investment operations. Gary?

Good morning. As some of the (ph) fixed maturity schedule in the supplemental financial pages, the Torchmark has $8.2 billion of fixed maturities at amortized cost which comprise 95% 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 $530 million. At amortized cost 7.6 billion of the fixed maturities are investment-grade and have an average rating of A-. The lower investment-grade bonds are $646 million and have an average rating of doubled B minus. The dollar amount of below investment-grade bonds declined for the third consecutive quarter. As a percentage of total invested assets, below investment-grade bonds are at 7.5% compared to 8.6% a year ago and is the lowest it has been since the third quarter of 2001.

Regarding new investments, we invested $262 million in bonds having an average maturity of 25 years and an average rating of Triple-B. The yields on these bonds are just under 6.5%, the same as the average yield for all 2004 investments. However, this marked the eighth consecutive quarter that we have invested new money at a lower than the overall bond portfolio yield which has declined 35 basis points during that period at 7.1%.

Contributing to this decline around $760 million of bond purchases in the last years have been from the reinvestment of the proceeds at called bonds. The call bonds are yielding 110 basis points more than the new bonds that were placed (inaudible). On a positive note, the amount of the bond calls in the first quarter was $59 million, down from the quarterly average of $100 million in 2003 and 2004.

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 cost associated with the interest-bearing liabilities which are the net policy liabilities and our debt. Excess investment income was $82 million in the first quarter, the same as a year ago. On a per-share basis, which reflects the effect of our stock repurchase program, excess investment income increased 6%. Looking at the components of excess investment income, net investment income was up $7 million or 5%, lower than the fixed percent increase in average invested assets due to lower yields under the investments. But completely offsetting the increase investment income was the increase in the cost of the interest-bearing liabilities, which were also up $7 million. Interest on the net policy liabilities was up $2.8 million or 5% which is in line with a similar increase in the average liabilities. The remaining $4.5 million increase in the cost of the interest-bearing liabilities was due to higher financing costs, primarily the $3.8 million reduction in the benefits received from the interest rate swaps that was caused by the expiration of a lucrative swap in late 2004 and higher short-term interest rates in the first quarter of this year. For more information on the swaps, please see the related schedule in the financial reports section of our website.

Thus, with the offsetting $7 million increases in invested income and the cost of the interest-bearing liabilities, excess investment income was $82 million, the same as the first quarter of 2004. The lower long-term interest rates and the flattening yield curve continued to restrict excess invested income. The biggest concern is the continued low interest rates on new investments. When interest rates declined dramatically in the second quarter of 2003, we extended the maturities of bond acquisitions in order to maximize yield. In 2002 before the rates declined, we invested at 7.5% with an average maturity of less than 14 years. However, since the second quarter of 2003, we have invested money at an average rate of 6.4% and have had to extend the average maturity to 24 years to achieve that rate.

During 2003 and until late 2004, the interest rates on long maturities were low but provided a significant spread over shorter maturities. For example, the spread of the 30-year Treasury rate over the five-year rate ranged from 150 to 215 basis points. Today, this is a flattening of the yield curve, that spread has declined to just about 60 basis points. We are now in a position that the compensation we are investing long has been cut significantly. In addition, we were having some difficulty finding longer maturity bonds to buy without increasing the holdings of certain bond issuers. For these reasons, we are reevaluating our investment strategy. We will still invest in investment-grade maturities, but we will consider shorter maturities when making new investments. Those are my comments. C.B.?

Thank you, Gary. Now for our final comments before questions. We will attempt to give some earnings guidance for the full calendar year. In our last conference call, we stated that assuming no stock repurchases in 2005, our best guesstimate was that operating earnings per share would increase 8% off of the $4.23 in 2004 and would be about $4.50 in 2005. Well, some things have changed, not the least of which is the fact that we purchased 3.2 million shares of our stock in the quarter at a cost of 171 million.

On the other hand, our life underwriting margins will likely be less than we earlier thought due to a slower recovery at American Income. Also, our health underwriting margins will likely be less than we earlier thought due to our UA General Agency operations. So taking these events into consideration but ignoring any possible change in our investment policy because we haven't determined a change yet, and assuming no further purchases of our stock during the balance of the year, we now guesstimate that our operating earnings per share will be in the range of $4.59 to $4.61, up about 9% over the prior year.

Those are our comments this morning. Now I will call upon Jamie to open it for questions.

(Operator Instructions) Eric Berg, Lehman Brothers.

Thanks and good morning. My question concerns the recruiting issue, and it is -- why do you think that it is just a matter of numbers? You have provided in the past a data showing the trend in your number of agents and it goes up, it goes down. You're moving in the right direction. Why do you think it's just a matter of numbers and that the issue is not really either the quality of the people that you're getting and their ability to sell or the training? Why are you as focused as are you on the sheer numbers?

I'll take that. Well Eric, I don't think it's entirely numbers, but the big reason we were seeing a decline in the last year or so was not because our training had changed or that the quality of people we were getting had changed, but the number of people who we were attracting was down. So our first priority was to bring that number back up, which we've done very successfully.

Now our big challenge going forward is to try to turn more of those agents or those potential recruits into producing agents. That is one of the reasons why we're putting this system in so that we can track those people and find out where we're losing them and why we're losing them so that we can do a better job of converting those potential recruits into producing agents. It's not just numbers. We know we have to do a better job of training at helping people get licensed, but this system will help us do that.

And my second and final question will be -- I realize that it's early days, both in your efforts to do a better job in your Internet recruiting and in the systems that you reference. But what signs would you point to as being encouraging that the steps you're taking are working? Are there are some early positive signposts?

Well, I look at in all of the distribution systems, our new sales follow our agent count, active agent count. When our agent count is roughly the same as it was a year ago, lo and behold, our new sales, our new applications coming in, are about the same volume. If we have a 10% growth in our activations, it is reflective of what our sales are going to do. So the fact that all three of our captive operations are getting growth in their agency forces, I do feel very comfortable that the sales will follow, and they are following.

Thank you.

David Lewis, Suntrust Robinson Humphrey.

Thank you and good morning. C.B., first of all on the repurchase program, you're pretty aggressive in the first quarter. You spent probably over half of your free cash flow for 2005 that I estimate is going to approach $300 million. Would you consider, if you had the opportunity in the market, to continue at that pace to lift your debt to capital from the 23.5% for repurchases?

That would depend on the stock price. We still have at least 130 million to go as of the end of the first quarter before we eat up the cash flow that's available. And the answer to your question, it would just depend on the stock price but we are in a position to borrow additional funds if we chose to do so.

David, we could do that borrowing too under our short-term borrowings. Under our bank line, we have another $250 million available to us that we haven't used yet. So we could do that through short-term borrowings as opposed to long-term debt.

That's helpful. Gary, can you help me understand what the short-term impact of a 50-basis point rise in rates would be if the yield curve held fairly flat? I guess the way I'm looking at it, longer-term, clearly it's a positive for your company to get the higher rates, but given the longer duration of your portfolio and that about 25% of your debt is short-term related, wouldn't there initially be a negative impact on earnings?

Well, there would be from the standpoint of our short-term debt right now, which is in commercial paper, is $220 million. If rates go up today 50 basis points, within the next 30 to 40 days, we will be turning that paper over and we will be paying 50 basis points higher. It also impacts the $530 million that we have out in swaps. But as I've mentioned before, it doesn't hit you immediately because those swaps reset semi-annually -- one quarterly and the other semi-annually. But when they reset, if the rates are still 50 basis points higher, our cost there would go up as well.

And obviously you wouldn't get as quick an impact on the other side so we can look at what the 50 basis point impact on the 220 million is and then very modest impact just on the reinvestment rate.

Right, because if the rates went up on reinvestment, it does take a little while to phase that in. Although the numbers are quite different, we're having 700 million show as a short-term debt in the swaps, we're investing over $1 billion here so we get a little help by in having more to invest. But you're right, it does take a little while because we don't get all of that money to invest immediately. It comes in over a period of time.

Great, thank you very much.

Jamminder Bhullar, J.P. Morgan.

Thank you. Could you discuss the productivity of new agents and how long it generally takes for an agent who was newly hired to get up to the level of existing agents, in terms of sales? And then second, I'm assuming that you guys are going to defer options expensing to 2006 now given the new SEC rules, right?

Yes, we will.

I'll take the first one. It is really a fairly short period of time once they obtain their insurance license. Most of the people we are recruiting in our agency operations are new to the insurance business. So we do see a 6- to 8-week lag from the time we originally interview them and they express an interest in coming to work before they can produce business. Once they are able to produce business, the timeframe is pretty short. Really within two to three weeks after they're training, they can be producing at a level that a veteran agent is, if not higher.

And just to follow-up on your Med Sup sales, how long do you think it will take for sales on the new high deductible product to completely offset the loss and volume on the Plan F (ph) product?

Well, I think it will continue to grow for a number of years. But if I look at, particularly in the branch office, I think in January we had three applications submitted. It grew to 432 in February, 754 in March. We should do roughly 1000 in April. That's going to continue to grow rather rapidly. So I don't foresee it stop growing at some point, but I think it's hard to answer. I think it will just continue to grow month over month for a number of years to come.

And then finally, I just had one other -- there was in the first quarter a proposal to increase -- the government provided that benefit to people in the military. Do you have an update on that?

I think that is being increased from roughly $12,000 to $100,000 while they are active on active duty. First Command endorses that. First Command does long-term financial planning. They sell whole life products, not term insurance.

So you don't think it impact you guys a whole lot or?

I don't believe it will have any impact, no.

Okay, thank you.

One comment I will make on the Med Sup. We're committed to the high deductible Plan F, the product that we've introduced. I believe the traditional Plan F product, which is still the most popular with particularly the old-time agents and probably with the public, is a dying products. It has no future. The new product that we're selling is going to -- is taking off slower than we thought and it's going to be a struggle for a while. But it is the only option.

Okay, thanks.

Jason Zucker, Fox-Pitt, Kelton.

Great, good morning, thank you. One question, and that has to do with some seasonality. And I was hoping you could just maybe discuss how we should view seasonality at UA, given the amount of Med Sup product. My thinking was, as the -- that there was seasonality in the deductibles as we go through the year, so I was actually expecting loss ratios to come down a little bit in maybe the first, second quarter, higher in the third and fourth quarter.

We reserve these -- we recognize that because we have deductibles in the early part of the year that claims are lower and they are higher in the latter part of the year. But the way we reserve that business, you will not, you should not -- we see it in the cash claims, but you won't see it in the financials, or you shouldn't see it in the financials.

Okay, so you anticipate it each year and then you put up the appropriate amount of reserves, so it smoothes itself out?

Yes.

Great, thank you.

Tom Gallagher, Credit Suisse First Boston.

Good morning. First question is on the Med Sup rollout of the new product. Is there a risk that you are either seeing or likely to see weaker persistency as some of those older agents may be transitioned to sell other companies' more expensive products as you are ramping up the higher deductible? Is that anything you're seeing right now or that we should be thinking about?

Well, I think the levelized commissions that we have, they don't eliminate replacement, but they've got a long way to reducing replacement of business. One of the things in favor with the new product and we just don't have the experience yet is that we think it will have considerably better persistency than the old product, the Plan F. And the lapse rates on the old product have been going up the last several years, not only first-year but in the renewal years, particularly as we implement those rate increases. So the new product -- right now, the agency's a premium (indiscernible) that's a third of the old product, the commissions that are a third of the old product, not taking into consideration that it's a much easier product to sell because of the lower premium and he isn't taking into consideration the better persistency that is going to cut that gap from a third or from two-thirds of the old product. Unfortunately, we cannot demonstrate. But I think as time passes, we will be able to.

And C.B., if you're expecting higher persistency on the new product, is it fair to say that you should have at least slightly higher margins on a GAAP basis? I'm just thinking about the DAC (ph) amortization on the FAS-60 (ph) product, and that it's directly related to persistency?

No, very little. Remember, we still have to operate at a 65% loss ratio, whether we've got good persistency or bad persistency. We also pay levelized commissions, although we don't pay on rate increases. So there will be a little bit -- if better persistency will give us a little more margin on the commissions over the life of the business, that's true, and our fixed costs are pretty small, there will be some benefit there as well. But I'm not -- it's going to be so small that I don't put much value on it at the moment.

Got it, okay. Another question on the new purchases in terms of the investment strategy and I appreciate you're still sort of evaluating it but your comment was really just directed to potentially shortening duration just because you don't see the relative value based on the flattening of the curve. If you look back over the last two years, you have also been heavily focused on Triple-B bonds. Is there any consideration being given to the relative value from a credit quality standpoint? And would you consider upping the credit quality just based on that same relative value argument?

We're looking at that. We're looking at maybe moving into the A, A-minus range, not higher than that, but a little bit higher than what we have been buying.

We've just begun on this and we're going to be doing a lot of it over the next few weeks. There's a possibility that we could enter into additional swaps that might soften the below of going shorter term on lower yields. We're just looking at everything. The world has changed. We're no longer being rewarded for going out long. I think we do a better job than other folks in buying bonds, irrespective of the rating. I know we do a better job than some folks that used to manage our portfolio. So we look at what we're buying and don't rely totally on ratings, but things are changing.

Got it. And just one last question. Any consideration given to changing pricing on your traditional life products to reflect lower interest rates?

Not yet, it's too early. February of 2003 when I can remember the day the interest rates fell below 7% as far as our new investments. That's two years. We still have a portfolio that's yielding 7%. There may be changes in pricing, but we won't even think about that until next year sometime.

Got it, thanks a lot.

Bob Glasspiegel, Langen McAlenney.

Good morning. It seems C.B. there were at least three products or segments that I heard you talk about -- Direct Response, Med Sup, your new high deductible product and Military where you said sales were coming in below expectations. There might have been a fourth segment too. And I know you have fixes in place and you are optimistic at the short-term issue. But is there anything you can do on the expense side to deal with potentially less revenues? I know it will take time for the sales to work their way through because I know you work the administrative expenses hard continuously. But what are some of the contingent plans you have if these trends continue?

First of all, we have made a big dent in total expenses, not administrative expenses. But what you're seeing at Liberty National, much of our margin is coming through there. We don't think our expenses are going to be about the same -- our administrative expenses -- will be about the same this year as they were last year. That's about 5.7%. That is an area where we need to make improvement but we haven't to date. So we continue to look at that but we haven't accomplished much. I am not aware of any other areas. Mark, Gary, do we expect any great reductions of expenses?

On the acquisition side, obviously if we don't start seeing some results, and we are seeing results, I shouldn't say that. But if sales are down, we're sure going to go in and reduce our expenses accordingly. And we have done so as C.B. mentioned at Liberty, but we would do the same in our other agency operations if we don't get growth. But I don't see that as a real issue at this point because I fully expect to see the growth and we are seeing the growth.

That's right, Bob. None of these operations are we expecting anything but an improvement in first-year premium. We will grow them. Our cost, I will mention, our cost per unit in the Direct Response was $0.02 lower $0.60 per unit of sale in the first quarter versus 62. So we're controlling the costs, costs are in line for what we're doing.

Just to follow-up, am I overreacting to those three segments where you said sales were coming in below expectations? Do you think the sales were fine, or were you disappointed with the first quarter launch to the year?

I had thought American Income would have stronger first year premiums than they did, but I think by the end of the year, they're going to be where I thought they would be and where Mark thought they would be. The Military, it's in a recovery mode. There was an damage done to that operation but it's an outstanding organization. It will recover, it's just going to take a little time.

And in Med Sup, you're confident you have the fix there?

Well, we're confident we have the product and it's the only product going forward. It may be a tough ride for awhile but we're not going to abandon that product.

And Direct Response, which I thought you said was below, Mark said was below where you thought you would be?

Well, the premiums and the margins were right where we thought -- in fact, premiums were actually slightly better. The first-year premiums were down slightly, but nothing -- it really didn't affect our forecast for the year.

Okay, thank you very much.

Joan Zief, Goldman, Sachs & Co.

Thank you. I just have two questions. First is the goal on your agent count. Awhile ago, Mark, you had mentioned that you had hoped that agents would be up, agent count would be up 20% by the end of this year. Do you think given what you're seeing that is still possible, or do you think that that may be aggressive? And then my second question is -- what do you think the biggest risk to your earnings guidance might be?

On the agent count, I still feel very good. Actually, the United American branch office based upon what I'm seeing right now, I think they will exceed that by a good margin based upon what I'm seeing. Liberty I think is right on track to hit the 20%. American Income might be lagging a little bit, but I would still expect to see at least 15 and I really believe they can still hit 20. If it had not been for January where we had the drop, they would be right on schedule to hit the 20.

As far as guidance Joan, as I said earlier, I think American Income will probably be a couple of million less underwriting margin than I thought at the beginning of the year but I see no additional risk there. On the Health side, the softness in our General Agency operations, I think the margin will be down a million there for the year, but I don't see any other risk. So in insurance operations, we have already given you what we think is going to happen and I don't see much exposure. We continue to buy back stock I believe, you can pretty much count on that. I'm concerned about the investment income because this is a change and that is -- I don't know what the impact would be on that at the moment.

Let me just ask on your expectation for the underwriting income. Is the fact that the underwriting income might be a little bit late, is that more a function of what premiums you now think you're going to get in the door versus the claims?

No, it's just premiums, the premium income and margin. It's not claims, it's not affected by the claims. With the policy obligations as far as a ratio is concerned, we don't see any change happening there.

Okay, thank you.

Ed Spehar, Merrill Lynch.

Thank you. I had a couple of questions for Mark and then I think a couple for C.B.. Mark, I was wondering if you could go back to the sales outlook comments you were making on Health in terms of '05 and '06 by the branch and the General Agency in terms of when you think you were going to turn with the new product? If you could just go over those maybe a little bit more slowly?

Okay. Well again, I think you understand that when we see new sales actually business issued, it takes four quarters for that to really be reflected fully in our first-year collective premium. First-year collective premium is really reflective of what we've done in our new sales for the past 12 months. So as I mentioned in the Branch Office side, even on the Medicare, we really bottomed out the second half of last year and we are already producing at roughly 10% more than what we did on average last year, even though it's still down a little -- we're still down in first-year collective premium. And we expect that growth in Medicare to continue as well as the Underage Health. As our agent count is growing and we are seeing good growth in our agent count, new sales are following that. But it takes 12 full months for that to really be reflected in our first-year Collective Premium. So that's when I say mid-2006 before we see double-digit growth in our Branch Office, that is the reason. We are getting good agent growth today and production is -- new business coming in the door is coming up, but there is a lag before we actually see that reflected in our first-year Collective Premium.

When you say mid'-06 before you think you will see double-digit first-year premium growth in the branch, are you talking about total Health or just (multiple speakers)?

I think it will be true of both Medicare and as well as total Health.

And how about the same math for the General Agency?

Well there again, we're still suffering the impact of changes we made middle of last year. That's why we're seeing the 15% decline in our first-year collected Premium there. That leveled off the second half of last year. So I do expect by the second half of this year for our first year collected premiums to flatten out.

Now we are doing some things -- I think our premiums will grow. Our new sales coming in the door will grow from the level they're at today and where they've been at for the last two quarters. But again, it will take -- I think we will be flat by the end of this year in first year collected premiums and then we will see some growth next year. But right now, I think that's the best I can really hope for.

So in terms of total health for this year, it sounds like pretty flat?

I think that's reasonable to expect, Ed. I think we will see some pretty decent growth in '06, but for this year we're not projecting any significant growth in health premiums at United American.

Okay. And then in terms of the comment you made about a close rate greater than 50%, was that on the new Med Sup product?

Yes.

And what is that versus the typical close rate for the stuff you've sold in recent years?

Well what I had heard on the regular Plan F and the No-deductible Plan, we were seeing closing rates of 10% or less. So it really is, when you look at the money involved, if someone is setting 10 appointments where they were selling one, now they are selling at least five if not six or seven. So the money is there, it's just getting our veteran agents has been very difficult. I think once we get some new agents, and that's what we're focusing on is training our new agents that sell the product; once some of those really see some good success with it, I think some of our veterans will flip to the product.

Is the problem with the veterans the concern that -- it looks to me like a veteran agent could look at this math and see that maybe they would make more money selling the high deductible plan if they could really close four or five times the level that they're doing currently. But is the concern that if you're a veteran agent if you start selling all of this high deductible stuff that it's hard to justify keeping your in-force book at the low deductible and high premium?

It's hard for me to respond to part of that. I'm sure there's some of that, but there's definitely no financial incentive for -- in fact, there's a big disincentive for an agent to take someone who already has a Plan F, or No Deductible, and move them to the High Deductible. We're not going to see much of that because of the big financial disincentive. But it comes down to with the level of commissions, unfortunately what we have is a situation where agents that have been with us a significant period of time have such a block of renewal commissions coming in, said it's hard to get them motivated to try something new and go out and do something new. Where we're having much more success is with new people. I think some of the veterans will come around as time goes on, but we're really going to focus on training our new people to sell the product.

And if you're looking at the agency force, the number of agents that you have in those two channels, what is the lifecycle if we think about if we start today with 100% veteran agents, you know, five years from now, what does that mix look like? Do we have 50% of the new guys who are used to selling the High Deductible? How does that work?

It actually happens much quicker than that, Ed. At any given time, we are writing more business in the Branch Office from first year agents than we are from veterans. So that change will happen fairly quickly. Over the next 12 months, we will see a big shift of that product and we are seeing it. It's going up significantly month over month over month, so it's coming along.

That is encouraging. C.B., just a couple of quick questions if I could. I want to make sure, the comment about lower margin guidance in Health for American Income and United American General Agency, if I'm hearing that correctly, that's like a $2 million after-tax or like a couple of penny a share kind of thing, right? There wasn't something else you're talking about.

No. Between those two say $3 million dollars -- a couple of million at American Income on underwriting margin and $1 million at UAGA.

And those are pre-tax numbers?

Those are pre-tax numbers and they're related to premiums. I don't think the premiums are going to be -- it's not any changes in the claims, I just don't think the premiums are going to be what we thought they would be two months ago.

Okay, thank you very much.

(indiscernible), Deutsche Bank.

Hi. This is actually a follow-up question to David's question earlier and I was wondering that if in light of the interest rate swaps that you put in place in late '04 being less beneficial and also even in Fed tightening (ph), I was wondering if you can talk about your assumptions of the impact of the two on your financing costs?

As far as what we've built in our guidance, we've built into what the rates are currently. And I think earlier in the year or at -- when we came into the year, we thought we would benefit by about $11.5 million on the swap and now it looks like it's going to be closer to 9.3 million for the whole year.

Okay. Thank you.

Al Capra, Oppenheimer & Co.

Good morning. I was just wondering, given your cash generation capabilities what your philosophy is on buybacks versus potentially increasing the dividends, given that your payout ratio is about 10%?

Well, Joan Zief asked the question last quarter when the Board made the decision that we would continue with the buyback program. We will probably increase dividends, keep the total payout the same, but on a per-share basis dividends will likely increase. I'm not looking for anything dramatic. You can go back and see that our payout has been -- the total dividend payout has been about the same since 1998, it has just been more per-share because of the buyback. And given the current price of the stock, I think we would prefer to continue buying back the stock. So the Board makes the final decision on that, but I think that is what they are headed. Believe me, if we thought it was overvalued, obviously we would not buy it back. We would have to do something else with the capital. And if it wasn't making an acquisition or paying off debt, it would be paying dividends.

I will make one other comment on the investment income. Although swaps are a little more expensive than we thought a few months ago, overall our investment income take into consideration the interest that we lost in buying back stock, we're really on schedule and we don't project any change for the year assuming no more stock buyback.

Thank you.

John Hall, Prudential.

Just a couple of questions. One, as you think about the investment policy changes, could you just share what your interest rate forecast is?

We had assumed it's going to be in the year that we would invest at 6.4%. We exceeded that a little bit in the first quarter, but that is what we had assumed for the entire year. And as C.B. as he mentioned, he did not change that in providing this additional guidance.

You don't have an outlook in terms of how things are going to change throughout the year?

Not at this time. As we mentioned, we haven't -- we've just started really to get into what the different options are and what we want to do. We have not finalized anything yet.

We're not investing much money right now. We're in a stage of passing cash up to the holding company, so we don't have to make a decision in the next two days.

Got it. And C.B., as far as your debt to capital ratio goes, how high would you be willing to see it move up if you're leveraging to buy back stock?

I think once we get to the 30% level, that's when I think there might be concerns with the rating agencies. But we could borrow I think even over $250 million and still be right around the 30% level. I don't think we're going to go higher than that at the moment.

I don't anticipate us borrowing any money unless something really major happens with that stock price, as far as decline in the stock price. We would rather just use our free cash flow and keep a consistent program of buying back stock.

Fantastic, thank you.

Joan Zief, Goldman, Sachs & Co.

Yes. Just go back on the asset quality, what do you look at to give you confidence that the credit work is being done carefully with your bond investments?

Well it's just the procedure that we go through in looking at the -- we do look at the ratings, but we go a lot further than that and look into the financial statements, we'll look closely at the cash flow, at the operation at the Company. We keep track of as we go along what's happening to those companies, keep track of their earnings and their announcements and that kind of thing.

Do you have any particular guidelines in place that would sort of maximize exposures? And could you give us a sense of what credits are your largest exposures?

As far as guidelines, we have guidelines, investment guidelines that give us percentages that we can hold certain issuers. We also have a percentage regarding ratings and we have -- it's company specific for the insurance companies and then we look at it overall on a consolidated basis and we also review that with our Board. So that's something -- we're constantly looking at concentrations that we have in certain issuers. That's one thing something I mentioned earlier, some of the longer bonds now we're getting close to our guidelines limits and with some of the issuers, that's another reason to maybe look elsewhere.

So what are -- could you just give us an idea of what credits are your biggest exposures?

I'm not sure. I don't have that. I know just the average of the portfolio. If you exclude the below invest grade, the portfolio, the investment-grade portfolio is at A-minus. I'm not sure what the highest level of buy rating would be.

Okay, that's fine. I will follow up later. Thank you.

We're standing by with no further questions at this time. I'll turn the conference back over to management for additional or closing comments.

Alright. Thank you very much for joining us this morning. We look forward to talking to you in three months. Good day.

Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation. You may disconnect at this time.