Globe Life Inc (GL) 2005 Q2 法說會逐字稿

Good day everyone and welcome to the Torchmark Corporation second quarter 2005 earnings release conference call. Please note that this call is being reported and is also being simultaneously webcast.

At this time for opening remarks and introductions, I would like to turn the call over to your 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, Torchmarkcorp.com, at the investor relations page. Some of our comments or answers to your questions may contain forward-looking statements that are provided for guidance purposes only. Accordingly, please refer to our 10-K which is on file with the SEC.

Our operating income for the quarter was 121 million, or $1.14 per share, an increase of 9% over the $1.05 in the second quarter of last year. Our book value was $28.56 and return on equity was over 16%.

Now turning to our Insurance operations, first Life Insurance. First-year premiums were 57 million, down 6% from a year ago. The total premiums increased 6% to 370 million and underwriting margins increased 9% to 94 million.

In our Direct Response operation, first-year premiums increased 4% to $20 million and total premiums increased 11% to $109 million. The underwriting margin increased 10% to $27 million. The 25.1% underwriting margin as a percentage of premiums was somewhat less than what we expected, but still more than we experienced for all of last year. For the full year of 2005, we expect double-digit growth in both premiums and margins with a growth rate for the latter exceeding that of the former.

At American Income, first-year premiums declined 4% to 19 million and total premiums increased 9% to 95 million. The underwriting margin increased 9% to $28 million. AI's producing agent count ended the quarter with 2138 producing agents, up 87 agents from a year ago but down seven agents from the first quarter. Agent growth has been disappointing, but we're optimistic of greater growth in the last half of the year.

At Liberty National, first-year premiums declined 13% to $9 million and total premiums declined 1% to $76 million. The underwriting margin increased 2% to 18 million. Higher claims and the currents (ph) that has been common in the second quarter of recent years impacted our underwriting margin. We continue to experience lower acquisition expenses and we expect higher percentage of premium margins for the balance of the year. The agent headcount at the end of the quarter was 2194, up almost 400 agents from a year ago and up over 300 agents from the end of the first quarter this year. As a result of the agent growth, we believe the second quarter is the low point with respect to first-year premiums at Liberty National.

With respect to our Military business, first-year premiums declined 17% to $6 million, but total premiums increased 8% to $50 million. The underwriting margin increased 17% to $12 million. The higher margin was partially due to lower than usual claims -- 500,000 -- related to the Iraq-Afghanistan hostilities. The producing agent count at the end of the quarter was 596 agents, down 82 agents from a year ago but down only nine agents from the first quarter.

First Demand, the independent agency that produces our business, also markets mutual funds in conjunction with life insurance. They have converted their mutual fund sales from a front-end loaded product to a more traditional fee over the life of the fund product. The initially lower funds available for immediate Asian compensation have temporarily adversely affected all sales. First Command is addressing this problem and we expected an improvement in sales volume as the year progresses.

Now turning to the Health Insurance. First-year premiums were down 16% to $36 million and total premiums declined 4% to 253 million. Our underwriting margins decreased 1% to 45 million. For the United American General Agency and branch office operations combined, first-year premiums were down 18% to $28 million and total premiums were down 4% to $191 million. The combined underwriting margins were 32 million, down 5%. Our United American General Agency operation is challenging at the moment. The high deductible Plan F has met resistance. The ratio of Plan F sales, the most popular product over the years, to high deductible Plan F sales are 10-to-1 in the general agency operation.

Furthermore, the drop in production from a large general agency has impacted under age 65 sales.

In the Branch Office operation, the ratio of Plan F sales for high deductible Plan F sales are about 2.5-to-1 -- better, but not where we would like to be. Although first-year premiums are down in the branch office operation, we expect improving results as we continue to grow the sales force. The United American branch office producing agent headcount at the end of the quarter was 1915 agents, up 138 agents from the end of the first quarter. Later, Mark will elaborate further on what is happening in our UA Health operations.

At Liberty National, the underwriting margin was almost $7 million, up 11% from the last year's second quarter, which was the highest quarter of underwriting margin in 2004. The margin has improved as a result of the cancer class settlement which was implemented late in the first quarter. As expected, premiums have declined as we have implemented rate reductions on the class cancer business in accordance with the settlement. Premiums collected on the class business for the quarter were 12.7 million compared to 18.1 million a year ago.

Although premiums on the class business will continue to decline during the year as additional rate reductions are implemented, we expect the underwriting margin for the Liberty National Health business in total to be between 6.5 to 7.5 million per quarter for the balance of the year. Now I will call on Mark for additional comments regarding our insurance operations.

Thank you, C.B., good morning. We obviously did not have a good quarter in first-year premiums with life first-year premiums down 6% from a year ago and health first-year premiums down 16% from the second quarter of 2004. We're now seeing the full impact of the decline in our agency operations which we suffered through in 2004. These numbers will improve for the balance of 2005 and into 2006.

We have a plan for growth in each of our agency distribution systems. We've identified the problems, identified the solutions and are in the process of implementing those solutions.

Our consolidated recruiting function has vast exceeded my expectations. Responses to our recruiting efforts for the second quarter grew by 70% over the first-quarter this year and were over four times as many as the second quarter of last year. We no longer have a shortage of potential new recruits in our captive agency operations.

American Income. American Income's life first-year collected premiums declined 4% for the quarter, although total life premiums and underwriting margins grew by 9%. I'm disappointed in the progress we've made year-to-date at American Income. While the number of recruiting responses has more than tripled from a year ago, the number of new hires has not increased year-to-date and our active agent count has grown by only 2% since the first of the year.

Part of the problem at American Income has been in the hiring process itself. In the past, field management at American Income has scheduled one-on-one interviews with each new potential recruit. In fact, three separate interviews were held with each prospect before a hiring decision was made. If a candidate failed to show up for an appointment, the interviewer's time was wasted.

We're now moving to a group interview process which has been very successful in our United American branch office operation. This will allow us to centralize the employment setting and makes much more efficient use of our field manager's time.

Another contributing factor to the poor results was a delay in implementing our new recruiting managing system. This is a system we developed in-house to track each response through the entire hiring process. While United American Liberty National installed the new system in the first quarter, American Income was not converted until last month.

The results at American Income will improve during the second half of the year. I still expected to see our agent count grow by double digits by year end.

At Liberty National, life first-year premiums were down 13% from a year ago and total life premiums declined 1% for the quarter. I'm very encouraged with recruiting results at Liberty. For the quarter, new agents hired increased by 128% from a year ago, resulting in an 18% increase in our active agent count during the quarter and a 23% increase year-to-date.

New hires in the second quarter were 30% greater than in any quarter during the last 10 years. While new life sales were still down slightly from a year ago, they were up 10% from the first-quarter level and 14% higher than the fourth quarter of last year. We have opened five new offices since first of the year with at least five more scheduled to be opened in the third quarter.

Liberty National is on track to see strong growth in new life sales during the second half of this year and into 2006. The decline in life first-year collected premiums should reverse in the third quarter and should improve to double-digit growth by this time next year.

In Military, life first-year premiums from First Command, which is our military operation, declined 17% for the quarter although total life premiums increased by 8%. The decline in First Command's producing agent count slowed to 1% for the quarter after two consecutive quarters of 5% declines. As C.B. mentioned, the primary cause for the decline in agents at First Command was a change in their mutual fund products, which are not Torchmark products, from a front-end loaded product to a level load. This change reduced the front-end commission on the mutual fund sales to almost 90%.

Because the mutual fund sales are such an integral part of their financial planning, the average compensation of their sales representatives has declined by roughly 35%. During the last few weeks, we have held several discussions with First Command concerning ways offset at least some of this decline in agent compensation and I expect that something will be worked out in this regard during the third quarter.

We're also having discussions with First Command on how we can assist them in their new agent recruiting as well as new product development and lead generation outside of the military market. I expect to see an increase in First Command's agent count and new life sales during the second half of this year. We also continue to look for ways to earn a greater portion of their total business.

In our Direct Response operation, as C.B. mentioned, first-year life premiums were down 4% -- first-year life premiums were up 4% for the quarter and total life premiums increased 11%. New life sales in Direct Response have been flat for the first half of 2005 when compared to an unusually strong first half of 2004, which increased 32% over the prior year, resulting in slower growth in first-year collected premiums. While we have seen some successful test mailings during the first half of the year, we have not found what I would call a home run -- something that will assure us of double-digit growth in new sales for the next year or two. Until we find that home run, we will continue to see slower growth in our first-year premiums, although total life premiums and margins should continue to grow double-digits for the balance of this year.

I would like to point out that Direct Response has seen double-digit growth in total life premiums in 15 of the last 20 years. The smallest annual growth in total life premiums over that period was 8% in 1991. I fully expect that track record will continue.

In our Branch Office operation, first-year health premiums were down 5% for the quarter and total health premiums were down 1%. I am pleased with the results in this distribution system. For the first half of 2005, our new agent recruiting has increased by over 25%, resulting in a 14% increase in our producing agents since the first of the year. We've grown by four branch offices from 84 to 88 since January and expect to grow by another 12 during the second half of the year. While year-to-date total new health sales are still slightly less than last year, the past eight weeks, we have averaged a 22% increase over the prior year. With continued growth in our agents, I expect new health sales in the Branch Office operations to increase by more than 20% during the second half of the year. As with Liberty, the decline in first-year premiums should reverse in the third quarter with continued improvement over the next four quarters to the 20%-plus growth range.

The growth in new sales in the branch office has come from the under age 65 market. As C.B. mentioned, while the number of high deductible Plan F Medicare supplement policies issued during the quarter increased, our new Medicare supplement sales in the branch office on an annualized premium basis are still running 2% less over the last eight weeks compared to last year. I don't expect to see any major improvements in this trend during the second half of the year.

On the Independent Agency side, first-year health premiums were down 29% for the quarter and total health premiums down 5.6%. We are close to turning the corner in new health sales in this distribution system. In May, we introduced -- began introducing a new product in the under age 65 market which has been very well-received. By the end of the quarter, it had been released in roughly half of the country.

In June, we showed a 17% increase in our new health sales in the independent agency operation over the average for the first five months of 2005. While June was still 8% less than a year ago in new sales, we should see growth in new health sales in our general agency operation during the second half of this year as this new product is approved in additional states. First-year premiums, however, will probably not begin to improve until the fourth quarter of this year.

On another note, we have made application to be a prescription drug plan under Part B of Medicare. We will be partnering with Medco as our pharmacy benefits manager. We have applied to provide this coverage in all 48 states in the continental U.S. and we should hear within the next six to eight weeks whether we've been awarded a contract. Assuming we are awarded a contract, we will market this product through our agency as well as our direct response channels beginning in October of this year. We are willing to provide this coverage only because the federal government is taking most of the risk. In fact, we have calculated that our claims would have to be 75% higher than expected for us to be put in a breakeven position. It also gives us additional comfort that we can opt out of the program on a region-by-region basis after one year.

We at this point in time have no idea how much of this business we will write over the next 18 months, so I will not attempt to make any projections. By the end of this year, we will have a much better idea of what the impact will be for 2006. Those are my comments, C.B.

Thank you, Mark. Alright, turning to administrative expenses, they increased 3% for the quarter to 36.8 million and were 5.8% of premiums, higher than normal. Although litigation expenses at Liberty National and United Investors were only 800,000 for the quarter compared to 2.8 million a year ago, payroll taxes associated with the stock option restoration program that was implemented earlier in the quarter were $1.1 million. Excluding the onetime payroll tax expense, administrative expenses were 35.6 million.

Earnings at our Investment operations -- excess investment income was $81 million, down 2% for the quarter. On a per-share basis, which reflects the effect of our ongoing share repurchase program, excess investment income increased 4% to $0.77. Continuing lower interest rates on new investments and the absence of an interest rate swap that existed a year ago negatively impacted growth in excess investment income. As we stated last quarter, the spread on long-term investments over that of short-term investments has narrowed and is not sufficient reward for the risk. Consequently, instead of investing almost 100% long-term as in the past years, we invested both long-term and short-term during the quarter. The result was an annual yield on new investments of 5.9%, the lowest return on new investments that I have seen in my 31 years with Torchmark.

Now I will call on Gary for additional comments regarding our investment operations.

Good morning. As shown on the fixed maturities schedule, Torchmark has $8.2 billion of bonds at amortized cost which comprise 95% of invested assets. These assets are carried on the balance sheet at their market value of $9 billion, which reflects net unrealized gains of 729 million.

The investment-grade bonds at amortized cost totaled $7.6 billion and has an average rating of A-minus. The low investment-grade bonds are $688 million, have an average rating of double B-minus and as a percentage of total invested assets are 7.9% compared to 8.9% a year ago. In the second quarter, $69 million of our Ford and General Motor bonds were downgraded. Excluding them, the low investment-grade bonds would have declined for the fourth consecutive quarter to $619 million.

Regarding new investments, we invested $117 million in bonds having an average yield of 5.9%, an average life of 16 years and an average rating of A-minus. This compares to the 6.4% yield 24-year life and triple B-plus rating as the $1 billion of bonds purchased in the previous four quarters. In the April conference call, I indicated that we would consider investing in shorter maturities because of the flattening yield curve. In May and June, we invested long when we found bonds of a quality issuer yielding in excess of 6% as long as our total exposure to the issuer did not exceed an acceptable level. Otherwise, we purchased bonds with shorter maturities, around five years.

In total $67 million is invested in long bonds yielding 6.5% while the other $50 million was invested in bonds yielding 4.9% with maturities of around five years. The overall 5.9% yield on new investments marks the ninth consecutive quarter that we invested new money at lower than our portfolio yield, which has declined by 35 basis points to 7.1% during that time period. Contributing to this decline is the reinvestment of the proceeds from called bonds at rates lower than the called bonds yielded. However, calls have declined. In the second quarter, they were $27 million, down from the quarterly average of $100 million in 2003 through 2004.

Now I would like to make a few comments regarding excess invested income which is shown in the financial reports on our website as our net investment income, plus the cost associated with the interest-bearing liabilities which are net policy liabilities and are debt. Excess investment income was $81 million in the second quarter, $2 million less than a year ago. On a per-share basis, which reflects the effect of our stock repurchase program, excess investment income increased 4%.

Looking at the components, net investment income was up $7 million, or 5%, but lower than the 6% increase in average invested assets due to the lower yields on new investments. Offsetting the increase of investment income was a $9 million increase in the cost of the interest-bearing liabilities. Interest on net policy liabilities was up $3 million, or 6%, which was in line with the similar increase in the average liabilities. The remaining $5 million increase in the cost of the interest-bearing liabilities was due to higher financing costs, that primarily being the $4 million reduction in the benefits received from the interest rate swaps caused by the absence of a swap (technical difficulty) 2004 and higher short-term interest rates during the second quarter.

For more information on the swaps, please see the related schedule in the financial reports section of our website.

The lower long-term interest rates and the flattening yield curve continued to restrict excess investment income. Going forward, we will continue to invest in investment-grade corporate bonds. We will likely buy some long bonds that meet certain criteria as we did in the second quarter. However, as long as the spread of long rates over short rates remains low, we expect to make significant investments in bonds with shorter maturities, probably around five years. Those are my comments.

Thank you, Gary. Alright, my final comments for the quarter with regard to guidance for the year. In our year-end conference call in February, we estimated that 2005 earnings per share, assuming no stock repurchase, would be about $4.57. In the first quarter conference call and after the repurchase of 3.2 million shares, we estimated the earnings-per-share would be in the range of 4.59 to 4.61, assuming no additional purchases.

Now after repurchasing 1.25 million shares in the quarter but assuming no additional stock repurchases, which is an unlikely scenario, and assuming we continue to investment new money at these nauseating record low yields, we estimate that the full-year earnings-per-share will be in the range of $4.58 to $4.60 which translates into 8 to 9% growth in earnings-per-share for 2005.

Those are my comments in this morning. I will now turn it over to Debbie for questions.

(Operator Instructions) Jimmy Bhullar, J.P. Morgan.

I just have a couple of questions. First, if you could just assess competition in the med-sup business and whether you're seeing other companies enter the high deductible Plan F market. And second, if you could just talk about what (indiscernible) to improve sales in the life and health business. Recruiting has been steady for the past few quarters, especially in health, but we haven't really seen a pickup in sales yet. So, that's it.

Mark?

Well, as far as competition in (indiscernible) supplement market, we haven't seen other companies really push the high deductible F plan. One of the things we are seeing in that marketplace is there's actually several companies out there that to me are playing games with their rates where they are going in with new business rates that are significantly less than what they're charging their in-force block of business in an attempt to buy market share.

They accomplish this -- what we are seeing is these companies typically have multiple companies within a holding company environment. And after three or four years of selling on one company's paper, they file the same products on another company's paper at significantly lower rates and basically close off a block of business that they had issued in the prior years.

It's hard to compete with that, but we are seeing a number of companies that have significantly lower rates than we do and it's going to be a tough market there. As far as our -- not really our agency growth in most of our distribution systems, particularly at Liberty has really just begun this year. And again, we are seeing growth in new sales so it's not going to show up in first-year collected premiums really until -- it should start in the third quarter. But again, if (ph) our second quarter new life sales at Liberty are up, were (ph) up 10% over the prior quarter and 14% from where they were at year end. That's the same way in the United American branch office -- we actually saw -- didn't see any agent growth really in the second half of 2004. We have seen 14% growth in the first half of this year and our new sales, again, new health sales over the last eight weeks are running over 20% ahead of the same time a year ago.

Again, that will really start showing up in the first year collected premiums in the third quarter this year.

Okay, thank you.

David Lewis, Suntrust Robinson Humphrey.

Thank you and good morning. I have a couple questions as well. First, can you maybe review again what gives you a little more confidence that the life agent recruiting is going to continue to improve? I think it has fallen a little short of what your original expectations were. And then maybe C.B., you could give Mark's comments on first-year premiums and kind of turnaround in sales and outlook for life, and then also health earned premium growth in the second half of '05 and '06, if you can.

And then finally, I saw a Direct Response flyer that you're basically offering a $250,000 mortgage protection product now and how maybe the results are going there?

Okay, multiple part question. First off, the Direct Response product -- that's an accidental death product and it's something we've been doing for several years where we are offering -- it's an accidental death product to cover your mortgage balance. It's not a big piece of our total sales -- it's very profitable, but it's -- we were going after new mortgages offering that coverage. It's less than 5% of our total sales in Direct Response, but it's a very profitable product.

I'm sorry -- could you re-ask the first part of your question?

I guess the first part -- it just seems to me that the recruiting overall, outside of American Income, you kind of discuss some of issues there, continued to be a little slower than anticipated. What gives you confidence that you're going to continue to see that pick up to drive the sales for the second half?

Outside of American Income, actually the recruiting at Liberty National has far exceeded what I would have expected. I had hoped at the beginning of the year that they would have 20% growth in their agent count for the year, and they've already exceeded that in the first half of the year. So at Liberty National, I am very encouraged there. And again, we are expanding offices in new areas. We have opened five and will open five more this quarter.

There's no reason, again, our recruiting has just picked up. Since we discontinued the subsidy first quarter of 2004, we have seen significant improvements quarter-over-quarter in the agent recruiting at Liberty and I see no reason why that should not continue going forward.

In the Military, again, we have not really been involved in their recruiting in the past. It is something we're talking to the people there about how we can help them and I do believe that there are ways that we can help them recruit more agents going forward. So that's just something we're just now talking to them about and I think we'll see some progress there in the second half.

American Income is really the only operation that I'm a little disappointed in our results at this point.

David, on the relationship between sales and first-year premium, even though the first-year premiums are growing slightly or were negative growth at Direct Response, the Liberty National, American Income, Life Operations and the UA Captive Agency Operations, the sales volume, the new business coming in the door, what we used to report as annualized premium issued; in those distributions were the highest in the second quarter that they have been in the last -- in any of the last four quarters. So sales are coming in. The new business is increasing and we will see that effect on first-year premiums with time.

And C.B. if I could -- I think something people missed in that when our new sales, we're not collecting annual premiums. Almost all of our sales, whether it's life or health, are monthly premiums. So when our new sales go up, we see that increase in first-year collected premiums over the next 12 months, and the same when they go down. We see that decline in first-year collected premiums over the next 12 months. That's what I was trying to explain. We're really seeing the impact of really what happened in the second half of 2004 and it will be over the next two, three, four quarters where we will see the positive impact of what is happening today.

I will add one other comment with regard to Direct Response. In 2002, our first-year premiums were $50 million. In 2004, our first-year premiums were $74 million. That's almost a 50% increase over a two-year period. This year, we're looking at first-year premiums, call it $80 million, but we started the year -- 2004 premiums were 387 million, including the first-year premiums in 2004. Well, if we're putting on $80 million of first-year premiums and if you just assume a 10% lapse rate on last year's 387, we're still in good shape for 10% growth in premiums in the Direct Response operation, even though our first-year premiums for this year may grow overall 8% from last year.

We have reached a level of production that we in Direct Response -- $80 million of first-year premiums now versus 50 million in 2002; we have continued growth in our Direct Response premiums for the near future. Of course in the long-term, we have the grow at more than $80 million a year and I'm confident that we will. Next question.

Nigel Dally, Morgan Stanley.

Great, thank you, good morning. Clearly a lot of the growth you expected is coming from the new recruits. So I'm hoping you can talk about how quickly new agents can ramp up their productivity and how long it takes them to reach the same level of productivity as an established agent. And then I just have a follow-up on another issue as well.

Basically, when we show a new recruit, when we show it in our agent count, these are people who are licensed and are producing business. Unfortunately, we do have a very high turnover in that first year. Again, we're losing roughly 85% of those people turnover. But as far as the 12 to 15% of the people who survived, they become productive very quickly.

When we are showing the number of new agents hired or the growth in the agent count, those are people who are licensed and able to produce business. We don't count them when we first just interview them and agreed to hire them because that is a good six to eight weeks at least that we go through the hiring process. But once we are showing them as an agent, they have gotten their license and they are able to produce and they become producing very quickly.

Our average first-year agent production is significantly less than our veteran agent production only because we have such high turnover. If you look at the people that survived that first year, that 12 to 15%, those people's average production is very close to the same as our veteran agents.

Okay. Second question. I just wanted to get a clarification on some numbers. I think you mentioned some of these numbers. You had talked about the annualized premium issues both in life and health and how it has changed in the second quarter versus both the third quarter and second quarter '04. Just hoping you can review those numbers with us once again. I'm not sure I (indiscernible).

We didn't throw out numbers. We don't report annualized premium issued any more; we use first-year premiums. But what I said was that in the Liberty National operation, in the American Income Life operation, Liberty National Life operation and in the UA captive agency operation, the annualized premium sales, the volume of new business coming in the door, was greater in the second quarter this year than any of the other prior three quarters. So we will see growth in first-year premiums.

The other one thing I want to clarify, Mark mentioned that we report producing agent counts -- people who have produced in the last 30, 60 days. Liberty National is an exception to that. The 2194 agents is a headcount number. Beginning in the third quarter, we'll have producing agent count numbers after we gather some experience.

I believe, C.B., that number was 1900 and roughly 80 that were producing agents at the end of the quarter at Liberty.

Last question just on excess capital. I think you were targeting 300 million of stock buybacks for the year. Given some of the rate (indiscernible) that we've seen in first-year premiums, I'm guessing there's not a lot of demand under your capital just to deport (ph) organic growth until things pick up. So I'm wondering whether there's any potential to potentially remove that rate of repurchase somewhat higher (indiscernible) the remainder of the year.

As far as this year, we expect it will have just under $300 million of free cash flow. The dividends that we're getting from the insurance companies of course are based on 2004 statutory earnings and that's the main source of the free cash flow. But yes, we still plan on having the 300 million, which after buying back to $236 million worth of stock so far, that leaves a little over 60 million for the rest of the year.

Okay, guys, that's great. Thanks.

Tom Gallagher, CS First Boston.

Good morning. First question for the Gary. Where do you expect new money yields to trend for the next several quarters? I got what you said about the change in the investment philosophy going -- potentially buying more short-term. Are you seeing more opportunities on the long end now, or right now, are you investing more on the short end?

Tom, right now, we're vesting more on the short end. Going forward, we're expecting to be somewhere around the 5% range, although I think it might be higher because when we do find long bonds, we will by them. But in June, I think our average maturities were just under five years as a matter of fact.

So going forward, it's going to be a combination but right now, it looks like it may be a little bit more shorter than it was in the second quarter.

So Gary, would a reasonable new money yield expectation, assuming no dramatic changes in the environment, be kind of 5, 5.5%?

Yes, I think 5 at a minimum. I'm not sure about the 5.5%, but yes, I think 5 would be the minimum.

Just a related question. Given that -- I believe you're still pricing new life insurance products with embedded 5.3% interest rate guarantees. Doesn't that sort of imply that you guys are writing new business at 0% investment spreads or even potentially negative investment spreads? And would you -- if I'm right on that, would you consider raising pricing on your products to account for this?

Well, that's right. We have interest assumptions in our products being sold, as far as GAAP is concerned, at higher rates than the disgusting 5, 5.5% Gary just mentioned. But remember, first of all in health insurance, it has no impact. It does in life insurance, but it's over the life of the business. If these rates stay at this level, if they're at this level by the end of 2006, we may look on repricing some products. But it's much too early to react to it at this point in time.

And C.B, just one last question. Maybe this is a bit too short-sighted, but when you consider what marginal returns on equity are at Torchmark, doesn't this sort of imply that new business returns are well less than your current ROE? Granted it may be temporary in nature, but if you just kind of think about the asset liability matching principal, wouldn't it imply right now that you're writing sort of sub-par ROE business?

Well, if you really dig into it deep on an actuarial basis, it's the old business on the books that's taking the hit. The new business that we write in life insurance has negative cash flow initially, so there's no dollars being invested there. We're paying out commissions. The strain in my mind is more on the older business we're seeing. In theory, you're seeing the spreads on excess investment income being reduced. On new business like the Direct Response where we're going to spend $120 million this year, we will have first-year premiums on that business -- call it 80 million -- it's negative cash flow. You could argue in the Direct Response, this is the time to really take risk on products because the cost of money is so low. So it's a little more complicated, Tom, than you might think it is.

No, understood, that makes sense. Thanks a lot.

Bob Glasspiegel, Langen & McAlenney.

Good morning. Let me ask maybe Tom's question just a little bit differently. I'm trying to sort of distinguish the sort of -- you characterize the sales as disappointing. How much of the factors is self-inflicted gunshot wounds, which is sort of the agent recruiting and I think a few of the second quarter missteps that you identified, Mark? And how much of it is just due to industry conditions? In general, let's talk about the Medicare things you cited, and perhaps as Tom was saying, maybe the industry not pricing for lower interest rates during your targeted returns. If it's the former, I'm confident that the fixes are in place and we're off to normal goods sales numbers before too long. If it's the latter, maybe some prudence in looking for sales improvement is needed.

Again, I think the only market that we're in really a competitive marketplace is the Medicare supplement. There's no doubt in the Medicare supplement market, the competition, both HMOs as well as competing companies underpricing new business has affected, will continue to affect our sales there.

On the life side in the market's that we're in, whether it's Direct Response, Liberty National, American Income or the Military, we're really not in a competitive environment. At American Income, we are looking this quarter to file some new term products which we hope will be a little more competitive and will get a little higher average face amount, a little higher average premium. But we're really serving middle income America. We're not out trying to compete for the $1 million, $5 million term products. And I really don't see any impact of competition there.

Bob, I will add to it. It's disappointing, the high deductible Plan F, which I think is a wonderful product and is in the best interest of the consumer. It has not been fully accepted in the marketplace, more specifically by agents. They're still driven by the higher commission dollars available on Plan F and some of the other plans. This is going to be a much slower change and I had hoped for, than any of us had hoped for. But it's still the right way and we're going to keep promoting that plan and I think it will pick up in sales as time passes.

So it's too soon to declare to declare defeat, is the message -- (multiple speakers) it is the right product. And in fact, this is the first time I've had some concerns that we were selling a product that was not in the best interest of the public.

And another reason why we are actually getting into the Part D prescription drug coverage next year in Medicare is again to try to provide the product to our agency force, try to get more interest back in the Medicare market. So I think that will fit in well with the high deductible plan and it can't hurt our Medicare supplement sales and hopefully will help them next year.

So there's nothing structural that would keep you from getting new double-digit sales growth in '06 at this point? I know it's too early to give guidance, but you think you to can things by on track to grow your sales at your historic levels before too long?

I think in the GA and the Health and General Agency side, it's going to continue to be somewhat challenging and I think the rest of our distribution systems are in good shape.

Vanessa Wilson, Deutsche Bank.

Thank you, good morning C.B. You have talk a little bit about the high deductible Plan F and that you were disappointed with the reception. Could you just go over it for me one more time? Last quarter, I think you talked a little bit about this disparity between seasoned agents and new agents' eagerness to sell the product?

Yes, the Plan F policy is -- call it on average a $2400 premium and the high deductible Plan F is a $700 premium. They both have the same commission rates, so right there, no further explanation and explain the problem from the point of view of an agent in income.

Actually C.B., part of what we have seen in the branch office too, when we introduced our new underage health product in May and in June, again, that has a much higher average premium. It's actually a much easier sale at this point in time. It's hard to get someone to go sell a $700 average premium when they could sell a $2000 average premium.

And then this new prescription plan product that you will be launching in October -- what is the premium on that?

Again, we have to assume that we're going to be awarded a contract. And with the situation there, Medicare is paying 75% of the premium. The cost to the consumer will be about $35 a month. We're not going to see agents make a living off selling this in fact because it has to be priced at a higher than normal loss ratio for us. There will be very little, if any, compensation in it, but we do see it as a door opener for agents who want to sell Medicare supplement products.

I guess I'm thinking in terms of both of these products, the dollar sales per agents per hour of the agent's time. How do you work with them to leverage their time and their ability to get enough premium in the door to make enough income?

That is a challenge and we have been working hard to do that and we have seen some individual agents and individual offices who have seen some success there because there is a higher closing rate on it. But it still comes down to -- particularly now there are so many uninsured people under age 65 in the health insurance market that that has become a much easier sale to -- not only to identify people who need the coverage, but it's an easier sale and pace (ph). An agent's going to make more money selling that product right now than selling the high deductible Plan F.

Okay. And then my final question, you went through for us your free cash flow and the amount of share repurchase you've done year-to-date. How much debt would you be willing to take on in the second half if you (indiscernible) all of cash in share repurchase?

I think that would be related to share price. If the market collapses and the share price goes to $5 a share, we would probably borrow -- how much could we borrow, Gary?

Just under our line, we could borrow $250 million. But again, like C.B. said, we probably would not do that unless there was a drastic change in the price.

Thanks so much.

Edward Spehar, Merrill Lynch.

Good morning, everyone. I wanted to go back to the new money investment yield questions. Gary, I think you said that you're probably going to be buying a lot of five-year direction, did you say, or maturity bonds?

Maturities.

Five-year maturity, okay. I guess the question is -- it seems pretty clear that you are making a bet on rising interest rates then, because you're writing life business where the duration of these liabilities would be significantly longer, and therefore, I guess is that what you're doing? Is that what you're consciously doing or --?

That's precisely what we're doing, Ed. The spread between the long-term and short-term doesn't reward us for the risk. And consequently, we just are just -- decide to hunker down here and out money in short-term for a while. And yes, we are betting on interest rates going up.

So in terms of thinking about returns here, I think it would be -- we have to factor in that there is almost like a parking of funds in your mind as you wait for hopefully that rates rise. But at what point do you -- how risky is this bet to make? No one thought rates would stay low for as long as they have, yet they have. Is it right to bet on an interest rate outlook?

Well, there isn't any question about it; we're speculating. We don't know what interest rates are going to do. If the spread between long-term and short-term were not as narrow as they are now, we would not hesitate going long-term really no matter what interest rates were. It's the spread that guides us.

Also Ed, in the last two years is where the rates have been low where we've been investing below 7%. During most of that period of time, up until really late in the first quarter, the spreads were there. Even though loan rates were low, the spread was still there that made it more attractive to invest long. It's only been a short period of time that the spreads have been as narrow as they are now. So I think this is what our approach is at this point. I won't say that we're locked into it forever, but as time goes by, we will just continue to reevaluate.

Another way to think of it, Ed, is that most of this money that we are investing; think of it as our $3 billion of equity that we cannot pull out of the companies, and that's a growing number. Just think of it as, we are parking equity at lower rates right now than we would like. The effect on the policy liabilities and the pricing of the products, although there is an effect, it's just not that significant at this point in time.

So I guess the conclusion about what your return on equity is on new business, it would be incorrect to assume that it's as low as what it may imply by investing in five-year bonds, because if rates were low this is low five years from now and you decide mea culpa you would buy bonds that would have significantly -- or not significantly, but at least somewhat higher yield than a five-year maturity.

Yes, that is right. There isn't any question. The return on the business that we're producing today is affected by -- any return is the present value of all of the cash that you're going to get out of that business. And you discount that cash you have as interest rates that you earn on that cash. And certainly, if those rates are low throughout the life of that business, then that's less cash than if interest rates are high and that would result in a lower return on investment.

If I could, just a couple of other questions. You mentioned some work that you are doing with the military distribution channel to try to boost sales and working with them in terms of dealing with this issue of lower compensation overall for their agents. Should we make any assumption here that you're willing to pay more to First Command to sell your products and therefore that --?

No.

No? Okay.

This was a chock to First Command make -- this was a change they needed to make and it's a shock to the agents and it's impacted the income of the agents. And we think and they think there are solutions to that to help get the agent back to the level that he was before -- close to it, not entirely. And it's a decision that they will make, that they have to make, the management of First Command, and I believe they're going to come up with a solution here and we're helping them do so.

Just a final question. Mark, I was wondering if you could maybe summarize a little bit about the outlook here in terms of premium first year and earned premium in the health businesses. I guess the comment you made about in the last eight weeks UA branch up 22%. I'm assuming you were talking about sales. And it also sounded I guess like the driver for the branch would be a combination maybe of med-sup and the underaged product, where as the driver of GA is going to be the underaged product?

I think Ed, as far as new sales the second half of this year, it's still -- I am not expecting growth in Medicare supplement sales in the branch. I think they will stay relatively flat, but I'm not -- I think the growth in new sales will come from the underage side in the branch also. I think for the year, we are still expecting total health premiums to be down roughly 2.5% for the year in total.

The branch side will turn around quicker, just because their agent count has grown, the new sales coming in are now growing at a very nice pace, and I think their first year collected this quarter was down only 5%. So that's going to turn around. In fact again, if we continue that 20% growth in new sales, four quarters from now, we will be at a 20% growth rate in first year collected premiums.

So I think it's a reasonable assumption that if that growth in new sales continues, you can go from the 5% decline that we saw this quarter to a 20% increase four quarters down the road, and it should be pretty much a straight line improvement. General agency is down significantly more. It's going to take more time. It will really be fourth quarter and into 2006 before we start to really see improvement there.

Okay, thank you.

Eric Berg, Lehman Brothers.

Thank you and good morning. I wanted to follow up on the health-related questions. Why is it -- C.B. described the general agency operation as challenged, and I have a sense that you're not as optimistic from Mark's last answer about it as you are about the branch business. What is it about what's going on in the general agency side of the health operation that is different from the branch? And I guess the flipside of the same question would be -- which specific product is selling as well as it is to produce the type of sales growth that you posted in I think you said June in the branch?

The big difference in the two is on the independent agency side. Most of these people represent multiple companies, and particularly in the Medicare supplement world. Where they are representing multiple companies, whoever happens to be the lowest rate at that point in time tends to get the business. It is much more price competitive. And the sales in the General Agency side are much more volatile because of that reason. Those people can change overnight to a different carrier. In the branch office side, those are people that we have recruited from outside -- typically the insurance business -- that sell strictly for United American.

But Mark, if I could just interject for a minute. What you're saying has always been true, right?

Yes, but the reason that we had much more control over our captive agency operation. The other difference is the renewal commissions on the general agency side are vested. So they leave us, they continue to draw those renewals. On our branch agency operation, those renewal year commissions do not vest for a number of years. That is why once an agent gets into that second and third year, we see very little turnover there because he has a significant amount of renewal commission that he would lose if he left. But we just had much more control in any of our captive operations than what you do in an independent agency operation.

We had one large general agency on the GA side that put in quality controls and resulted in a drop in agents and a drop in production there, and that has impacted the GA side.

It sounds like going back to an earlier question that was answered, it sounds like competition is having a bigger impact that it had been having on your GA business in the Medicare supplement. It sounds like that is the -- intensifying price competition is the core of the problem on the GA side in med-sup.

That has been true for several years now. We have seen our Medicare supplement first-year premiums and sales going down for a number of years now.

Well, I will add to that Mark. I have seen that some prices that some companies have out there on their Plan F, for example, on new business, which are lower rates than what they're charging on renewal business. And some of those rates are extremely low. I believe they are really just trying to buy market share and then somehow raising the rates on the business later on.

To that extent, that's something that in my thirty years, I've seen low rates before, but I've never seen some rates that are as low as what I am seeing. There's something new going on out there and I really don't fully understand it.

Thank you.

Joan Zief, Goldman, Sachs.

Hi, thank you. My question really relates to again, in the low interest rate environment, why aren't you being more aggressive with your capital structure? You said that you have a little room for debt. Would you consider re-tranching your equity with perpetual preferreds again if you think that the stock is really undervalued here?

We have looked at that; we have not come to a conclusion on the perpetual preferred. As far as adding debt, we do have -- our debt to capital right now is around 23%. We do have a little room to add some additional debt and still retain our ratings, but those are things that we're looking; at we just haven't decided on any one thing at this time.

I guess my last quick question is -- C.B., have you changed your mind at all about shareholder dividends?

No. As long as we believe the stock is undervalued, we would prefer to use the money to buy back stock as opposed to pay dividends. Obviously, or not obviously, but of course if the stock were overvalued, we would feel differently about that. I don't think we would take on any additional debt unless there was an exceptional opportunity. We would like to just keep the debt where it is outside of that exceptional opportunity and use our free cash flow to buy the prices, to buy the stock while it's undervalued. If it's exceptionally undervalued, we would think differently.

Okay, thank you.

Steven Schwartz, Raymond James.

I would like to follow up a little bit on Part D if I could. Were there any costs associated with Part D in the quarter, and does the projection CD that you offered up assume any costs for Part D going forward?

No, there really isn't any cost (indiscernible) we've done some work on it -- no, there's nothing that we've built into what we think is going to happen with respect to Part D. For all of our guess-timates of what's going to happen for this year, we're assuming Part D doesn't exist.

And then just to follow up, I'm just wondering from something that you said occurred to me when you were talking about pricing on med-sup getting as low as you have ever seen it. Do you think maybe people are kind of using maybe a one-year rate as a cost leader, if you will, to get Part D business?

I don't think what I'm seeing is related to Part D because it has been going on longer than we have known that Part D was going to come into existence.

And then a question for Mark. Mark if you would, could you talk about the interview process again at American Equity versus the other distribution channels? I didn't quite get where you were going with individual versus group interviews.

Just historically and the way at American Income, the hiring process there and what everyone has been taught to do is they schedule one-on-one interviews. We provide them with all of these names of people who have responded to our ads, they schedule one-on-one interviews with them. In fact, they conduct three interviews with each candidate before they make a decision whether they want to hire the person. Well, even now as I mentioned, we have tripled the volume of the people who have responded to our ads at American Income, but because we have a limited number of field management people out there, that increased volume hasn't been translated into increased recruits because they cannot handle the sheer volume of them.

What we're doing at United American and in some of the offices at Liberty is we're conducting group initial interviews where we have anywhere from 10 to 30 people come in at the same time for an initial orientation where they are at least able to present the opportunity. And it's much more efficient use of management's time, plus it allows us -- one of the things we're doing now for some of the offices at Liberty in the branch office is we're going ahead and scheduling those group interviews for them so that we know that every response there, we attempt to make contact and set up this group interview. So we're getting far more people coming into the office to be interviewed than what we are seeing at American Income. We have had people at American Income actually go observe what we're doing in the other marketing organizations, and they are very quickly moving to that process.

Alright, thanks.

Al Capra, Oppenheimer.

My questions have been answered. Thank you very much.

Eric Berg, Lehman Brothers.

A couple of questions. Since first-year collected premium really in an important way looks back in time, it is dominated by -- as I understand it, it is just as the words imply -- all premiums collected from all policies in their first year. What do you think is the best way for us to keep score on the current quarter's production results since we're getting sort of a picture now that's kind of looking back in time?

There isn't anything, other than just watching these first-year premium, even thought is' a little more hindsight than with our old method of annualized sales. But annualized sales has had so many problems to it. It's looking at the first-year premiums, Eric, and then being guided by what Mark and I say on the volume of new business coming in the door that gives us comfort that those first-year premiums are going to be growing.

Also, at First Command, is the number of agents down, or do they essentially have the same number of producers and they are just producing less than they did?

No, their agents are down. In last year and prior, we reported the total number of agents in First Command in the agency itself. Now, we're reporting the producing agents for Torchmark. And as I said earlier, that number is 596. In December of 2003, it was 696, so they are down 100 agents. Most of that decline, or that decline comes from two reasons. One is the bad press that they received last year. They suffered from that and lost some agents, particularly newer agents who couldn't handle it.

And then secondly, it has been difficult as part of that bad press, criticized for the front-end load mutual fund; unjustly criticized, in my opinion. hey converted to a more traditional funds with level fees and they have not -- that has cut the income to that agents and they've lost some agents from that and they have to find a solutions to it.

Thank you again.

Mr. Hudson, we have no other questions at this time.

Alright, thank you very much for joining us this morning and we will see you in three months or talk to you in three months. Good day.

Ladies and gentlemen, thank you for joining us for the Torchmark conference call. That does conclude the conference for today and we ask that you now please disconnect.