Globe Life Inc (GL) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Torchmark Corporation third quarter 2005 earnings release conference call. Please note that this call is being recorded and is also being simultaneously webcast. This time I would like to turn the call over to the Chairman of the Board Mr. C.B. Hudson. Please, go ahead, sir.

Thank you, good morning everyone

Joining me this morning are Mark McAndrew, Chief Executive Officer; 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 report, and would like to follow along you can view them on our website -- Torchmark website 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 2004 10-K which is on file with the SEC. Our operating income for the quarter was $122 million or $1.16 per share. An increase of 7% over the $1.08 in the last year's third quarter. Our book value was just north of $29 per share and our return on equity was north of 16%. Mark McAndrew will provide comments regarding our insurance operations and then Gary Coleman will provide comments regarding our investment operations. Mark?

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Good morning. For the quarter, insurance underwriting income was $107.4 million. Up 6% from a year ago and up 13% on a per share business. On the life side. Premium revenue was $366 million for the quarter, up 5% from a year ago.

Life underwriting margins were $95.2 million up 7% from last year due to a slight improvement in margins from 26% of premium from 25% a year ago. Life first-year premiums were $54 million for the quarter, an 8% decline from the same quarter of 2004. At American Income, life premiums were $96 million for the quarter. up 9%.

Life first-year premiums were $18.2 million, a decline of 4%. Life underwriting margins were $31 million for the quarter, a 12% increase. Our producing agent count at American Income stood at 2,152 at the end of the quarter. Up 102 or 5% from a year ago.

While our new agents recruited during the quarter increased 9% from the second quarter, our level of new agent recruiting at American Income is still well below the level we achieved in 2003. We have a recently implemented a new incentive program at American Income for our top level sales management, which rewards growth in both recruiting and production. This program will also include substantial penalties in the first quarter of next year for under performance.

The Direct Response, our life premium grew 7% for the quarter to $104 million. Life first-year premium we're flat with a year ago at $18.5 million. Reflective of our flat new sales year-to-date. Life underwriting margins were $26 million up 10% as margins continued to show slight improvement.

During the quarter, we saw some encouraging test results in both our juvenile and adult product offerings. While we saw significant improvements in our response rates, we cannot make any projection for next year until we see in persistency numbers on the test mailings. We will be better able to do so on our next conference call. At Liberty National, life premium was $75.4 million for the quarter, the same as last year.

First-year premiums were down 10% for the quarter to $8.9 million while underwriting margins grew 7% to $19.9 million. New life sales at Liberty National were flat with the year ago quarter. Although we were running 7% to 8% ahead for the quarter prior to Hurricane Katrina.

Although it had impact on our enforce business, the Liberty National sales offices were affected by Hurricane Katrina. Not so much because of direct damage, but do to the widespread and prolonged power outages, which occurred. With 49 offices in Alabama, Mississippi and Louisiana we estimate we lost roughly $750 to $1 million of new sales as well as a decline in our recruiting efforts. All Liberty National offices have now reopened and I expect to see a 10% increase in new sales at Liberty National during the fourth quarter.

Liberty National's producing agent count ended a quarter at 1835, down 6% for the quarter but still up 12% year-to-date. In prior quarters, we have reported an active agent count at Liberty National,l which is all agents who were licensed and appointed to produce business regardless of whether they had actually produced any business. Going forward we will report only producing agents as we do at American Income and United American branch office.

While new agent recruiting at Liberty increased 80% over the year ago quarter, we saw a sharp increase in our agent terminations in July and August, following a sharp increase in our hiring in May and June of this year. Terminations have now come back in line and we should see renewed growth in our agent count going forward. We have now opened ten new offices in five additional states since the first of the year.

While I don't anticipate any additional openings in the fourth quarter, our goal for next year is to open at least ten additional offices. The Military life premiums increased 5% to $50 million for the quarter, while life underwriting margins declined 7% to $10 million. Claims from the Middle East hostilities were $1.3 million for the quarter including an unusually high $850,000 from Afghanistan.

First-year premiums declined 28% for the quarter to $5 million. Following the decline and new sales over the past year. The producing agent count after leveling off in the second quarter, declined another 20% in the third quarter to 472. On the last conference call we indicate that we had a possible solution to increase the agent compensation in the Military operation. But First Command to date, has been unwilling to implement our proposal. They're an Independent Agency.

While First Command believes that they have turned the corner, we expect to see a continued decline in first-year premiums in the Military operation in the fourth quarter and into 2006. Would like to point out that for the quarter, the Military operation represents about 7% of our underwriting margins. And it is the smallest of the -- what we consider our major distribution systems. On the health side, total health premiums were $249 million for the quarter, down 4%.

Underwriting margins were flat for the quarter at $44 million, helped by the reduction and loss ratio on the Liberty National cancer class business. First year health premiums declined 16% to $35 million. This decline will reverse during the coming quarters, as new health sales were up 7% for the quarter from a year ago. And up 18% from the first quarter of this year.

This growth in new health sales is coming from our under age 65 supplemental health products. New Medicare supplement sales continue to decline down 22% from the same quarter a year ago. For the United American Independent Agency operation, health premiums declined 7% to $106.8 million. And underwriting margins declined 12% to $19.2 million.

First-year premiums declined 32% to $11.9 million from a year ago. While new health sales in this distribution system were still down 10% from a year ago they have increased 14% from our low point in the first quarter of this year. On the branch office side, health premiums declined -- declined 1% to $79.7 million with underwriting margins flat at $11.6 million.

First-year health premiums were also down 1% to $16.4 million. New health sales in the branch office were very encouraging. They were up 27% from the year ago quarter and by far our best quarter in the past four years. I expect this trend to continue into 2006 with comparable growth in our first-year premiums by this time next year.

My last comments on the health side relate to the Medicare prescription drug program. As you probably know, we've been approved to market this coverage in 48 states effective October 1st, with enrollments beginning November 15th. We will be assigned approximately 15,000 duel eligible, low income insured in two states. We will also actively market the programs through our agents, as well as TV, radio, newspapers, and direct mail. We expect to spend somewhere between $8 and $10 million on these marketing efforts during the fourth quarter. These expenses will be capitalized and spread over the life of the business we produce.

Because enrollments cannot begin until November 15th, we still have no estimate of how much of this business we will write. We will provide more guidance on this topic on the next conference call. On administrative expenses were $36.2 million for the quarter, up 2.5% from a year ago, and in line with our expectations. Litigation expenses were $1.1 million for the quarter, a reduction of about $650,000 from the same quarter a year ago.

One other note, next quarter, we will begin reporting our net new annualized premium sales. Which these numbers will be different than what we have previously reported, particularly in the Direct Response. The numbers we had reported previously were gross annualized premium sales and Direct Response. That was the annualized premium on every new policy issued.

What we will be reporting going forward will only be the policies that pay beyond the introductory offer. So they will be a little different than what we previously reported but I believe those numbers will help you model our first-year premiums going forward.

Also at that time we will give guidance for 2006 as far as earnings. I will now turn the call over to Gary Coleman our Chief Financial Officer. Gary?

Good morning. As shown on the fixed maturity schedule, Torchmark has $8.4 billion of bonds and amortized cost, which comprised 95% of the invested assets. These assets are carried on the balance sheet at their market value $8.9 billion, which reflect net unrealized gains of $476,000,000. Investment grade bonds totaled $7.7 billion and have an average rating of A minus. The low investment grade bonds are $722,000,000, compared to $711,000,000 a year ago. And have an average rating of double B minus. Since the third quarter of 2004, dispositions of $133 million of below investment grade bonds have been offset by $143 million of net downgrades. Over half of those downgrades were Ford and GM bonds. Overall though, the total portfolio is rated a triple B plus, same as a year ago.

Regarding new investments, the flattening yield curve continues to have its impact. As begun in the second quarter, we continue to invest long when we can find bonds of a quality issuer with yields in excess of 6%. Otherwise, we invest in short maturities. In third quarter we invested a total of $328 million. $283 million in short-term bonds yielding 5.1% and having an average maturity of five years, and an additional $45 million in long bonds yielding 6.6%.

So in total, we invested $328 million in bonds at an average yield of 5.3%, an average life of eight years, and average rating of A plus. This compares to the 6.6% yield, 22 year life, and triple B rating of bonds purchased in the third quarter of last year. The overall 5.3% yield on the investment, marks the tenth consecutive quarter that we have invested new money at lower than the portfolio yield, which has declined by 42 basis points during that period to 7%.

Contributing to this decline has been the reinvestment at lower rates of the proceeds from call bonds. However, calls have declined. In 2005 they have averaged 50 -- they have averaged $50 million a quarter, which is down from the quarterly average of $100 million in 2003, 2004. Now, if a few comments regarding excess investment income which is our net investment income, less the cost associated with the interest-bearing net policy liabilities and debt. Excess investment income was $80 million in the third quarter, $3 million less than a year ago.

On a per share basis, excess investment income increased 1% which reflects the effect of our stock repurchase program. Looking at components net investment income was up 4% but that was lower than the 6% increase in average invested assets and that's because of the lower yields on the new investments. More than offsetting the $6 million dollar increase in investment income, was the $9 million increase in the cost of the interest-bearing liabilities.

Interest on the net policy liabilities was up $3 million, or 5%, and that is in line with a similar increase in the average liabilities. The remaining $6 million increase in the cost of the interest-bearing liabilities was due to higher financing cost. And of that, $5 million was due to reduced benefits from the interest rate swaps. $3 million of that was from the absence of a lucrative swap that was in -- in effect in 2004. And $2 million is due to the impact of the higher short-term interest rates on the remaining swaps.

The other $1 million of increased financing cost results from higher rates paid on our short-term debt. Regarding the swaps, in early September, we terminated two that represented the $199 million of the total $529 million [a notionable] amount of swaps that we had at the start of the quarter.

Although the terminated swaps provided positive cash income of $3.7 million in the 12 months they were in effect, we terminated them do to the risk that the semi-annual cash payments would turn negative possible as soon as next year. 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 in the flattening yield curve continue to restrict excess investment income.

Going forward we will continue to invest in investment grade corporate bonds and as long as rates remain where they are, we expect to make significant investments in bonds with shorter maturities. Probably around five years as we did this quarter. Obviously, we weren't happy with the lower yields, but we still believe this is the best strategy at this time. Those are my comments, C.B.?

All right, thank you. In keeping with our business plan for the quarter we repurchased 1 million shares of our stock at a cost of almost $52 million. And through the nine months, we repurchased over 5.4 million shares at a cost of almost $289 million, which brought our outstanding, diluted shares down to $104.4 million.

Assuming no additional purchases for the balance of the year, we expect -- expect fourth quarter net operating income to be comparable to the $122 million in the third quarter. With earnings per share at $1.17, up 9% for the fourth quarter -- from the fourth quarter of 2004. And what should take us to about $4.59 for the year, which is up 9% from the $4.23 in 2004. Those are our comments this morning. Now we'll open it up for questions. Eric?

Thank you, sir and for those joining by telephone today, the question and answer session will be conducted electronically. [Operator instructions] And we'll first go to Jimmy Bhullar of J.P. Morgan.

Hi, thank you. I just have a couple of questions. First, C.B. on the med-sup business. If you could just discuss market -- competitive environment. [audio difficulties] How much of your sales are being caused by just the the change in product design and your recruiting issues and how much of it is just the competition being a little bit too aggressive. And then second, if you could discuss disruption in the sales force and you

I think I'll defer that to Mark.

Yeah, okay. First on the Medicare supplement side, we still have challenges there. Not just from under-pricing of -- from our Medicare supplement competition, but also from managed care plans. The Bush administration has really pushed to try to privatize the Medicare and they're successful at this point. Again, we think that will reverse at some point in the future, but it's hard to say exactly when that will happen. In the meantime, we feel like we're just going to have to ride that out and when it does turn around, which will happen at some point in the future, we'll benefit from that. In the meantime, we're -- we've shifted more to the under age 65 health market. And could you repeat the second half of your question?

Just the -- the disruption in the sales force and whether the terminations are over and what your outlook for recruiting and agent growth?

Okay, well, particularly, I think the thing is Liberty National -- which I was disappointed and the performance there this quarter, although I have to take part of the blame for it. And part of that was, I ran a little competition between different marketing organizations the first half of the year as far as who would get the most growth and they're agency counts and Liberty National put on an extremely large number in May and June of this year. We weren't as selective as we should have been and we didn't do a good job training those people. And we subsequently saw a large number of terminations in July and August. Those terminations have come back down. The good part about it is we are recruiting -- even in the third quarter we recruited 80% more people than a year ago. It just wasn't enough to offset those unusually large terminations. I do -- those terminations have come back in line and I do expect to see growth in our agent count at Liberty going forward.

Okay. Thank you,.

We'll go next to Nigel Dally of Morgan Stanley.

Great thanks. First question is from -- given your new position as CEO. Hoping you can run through your key strategic priorities and just more generally [we're likely] to see any changes in the board strategy at Torchmark. Second question is, just sticking with the terminations. With terminations for season produces also running ahead of expectations or is that a problem just related to a new recruits. Thanks.

Okay. First off, as far as any major changes, you know, C.B. and I have worked very closely together now for 25 years, and he and I share the same thoughts on most every decision that's been made over the past 25 years. There -- I don't see any major change in direction for the company. I believe we have some excellent distribution systems that I believe we can grow. The share repurchase makes all of the sense in the world. So I don't see any major changes in the direction of the company. As -- now I've got off on that. Could I get you to repeat the second half of the question again?

Sure. just with the terminations for [accented language] you're seeing this quarter, were you also seeing terminations for seasoned produces running ahead of expectations or was it purely related to the new recruits.

It was the new recruits. Again that's one of the things we discovered earlier this year at Liberty National. We were counting agents who had become licensed, but not -- hadn't necessarily produced business. And we did see a huge increase in May and June of this year, and the bulk of the terminations occur within three months after hiring. And so those terminations were really -- and for the most part the people that we put on in May and June.

That's great, thank you.

We'll go next to David Lewis of Suntrust Robinson Humphrey.

Good morning, this is actually Eric Sakston calling in for David. Just have a few quick questions and I'll start off with asking about, where do you all stand with option extension?

We haven't expensed them.

No, I mean, for '06 -- your outlook for '06.

Well, we will use the Black Shoals method to calculate [operating] expense. We'll start recording at the beginning of the year. And our expense for the year should be between $5 and $6 million after tax.

Okay. My second question. You recently stated that you expect double digit sales growth for American Income, United American Direct Response, and Liberty National for '06. Is that still the case? Can you provide us with any further guidance that will make us more confident in that outlook?

Well, if I start with Direct Response -- again, I'm going to be able to give you much better projection in three months. We have seen some things I don't know if I ever projected we would have double digit growth there but we have seen some encouraging test results. Normally, I wouldn't talk about them until we were ready to roll out with them. We do have to wake wait and see what persistency looks like. If the persistency does come in at an acceptable level, three months from now I'll be able to give you a much better projection there going forward. On the Direct Response, this is not unusual if you look at the last 20 years. we've had -- when we find something that works particularly well, we see a sharp increase and -- but it has seen consistent growth over the last 20 years. Sales are up 20 fold from what they were 20 years ago. As far as Liberty National, again, I think we had -- we would have been at roughly 8% growth in sales at Liberty this quarter had it not been for the hurricane. I do believe we are on track there. We can do better than what we did this quarter, but I still expect to see 10% growth or better in both our agent count and new sales at Liberty National in the fourth quarter and into 2006. American Income is -- I'm disappointed there. It hasn't -- it hasn't happened as quickly as I would like to see. We may have to make some additional changes in compensation. I'm a big believer in performanced-based compensation. And while we've done some things at American Income we may have to make additional changes in the compensation structure in order to make that happen a little quicker. But, yeah, right now, I can't say that American Income's sales will be up double digits next year at this point.

Lastly, can you give us what your expectations are for reductions in the investment portfolio yield over the next 6 to 12 months.

Gary?

If we continue to invest at the 5.3% within the next over the next year you could see that portfolio yield decline about 10 basis points maybe 15 at the highest. That would be by the end of the year.

Okay. That's all I had, thank you.

[Operator instructions] We'll go next to Tamara Krameck of Bank of America.

Hi, good morning. Just a follow-up on a couple of comments you made in previous quarters. On your internal management system and focus on internet recruiting and how's that's going if you could give us some background on that for the third quarter?

Well, I don't have those numbers in front of me, but the -- I'm still very pleased with the results of our internet recruiting. We have an abundance of -- we do not have a shortage of any of our distribution systems of people who our inquiring about coming to work for us. It's really just implementing getting the people interviewed, hired, and trained is been -- is where the problem lies. At Liberty, for example, we added over -- we hired well over 800 agents in May and June and we have 280 middle managers to train them, and we've got to have more middle managers. We've got to get more people involved in the training process. But the -- we do not have a problem in any of our distribution systems as far as lack of people to interview and hire. I can get you more specific numbers on how many inquiries we've gotten but it is still well ahead of where we were a year ago.

Okay. Do you have an idea of what the typical candidate is that responds to some of these internet adds that you place?

Well, the only thing I know is there really isn't a typical response. They're, again, most of the people that are responding are people that are not in the insurance business. Very few of them are already licensed agents, but they come from all walks of life.

And the typical time it takes to train an agent, how long would you say that takes until they're completely producing up to -- up to standards?

Well it -- It varies a little bit by company. I think United American is probably the shortest time frame because the products we offer there and the sales process is a little simpler than it would be at American Income or Liberty. Typically a week of field training is about all that is really necessary at United American. At Liberty and American Income, it's more in the two to three week range that they spend with somebody doing field training, but there's still typically at least a four to six week process to get agents licensed. Because most of these people do not have licenses.

Okay, great, thank you.

We'll go next to Thomas Gallagher of Credit Suisse First Boston.

Good morning. A few questions. First is, are there any plans to reprice the traditional life business in light of the embedded interest rate guarantees of 5.3. And given that you're currently investing on the portfolio yield side at 5 .3? I think in prior quarters you talked about possibly doing that, but wanted to see where you stand on that now?

Well, again, during the course of next year we have to refile because of changes in mortality tables -- most of our life products. We're looking at that product by product. The effect of changing the interest rate assumption has varying effects on the premiums we would charge. So it -- we'll just have to look at it product by product. The biggest impact is in the Military and the smallest impact is really in the Direct Response. So, I can't really tell you much. There will be products that we change our interest rate assumptions next year, but it won't be on all product.

Okay. And what kind of balancing act at this stage in the sale cycle do you need to really consider in terms of price elasticity and getting -- improving margins in lite of where interest rates are. Because, obviously, it's been some what of a challenge right now from a sales standpoint. How are you kind of grappling with that decision?

Well, the easiest decision is in the Direct Response. We do numerous rate tests and we try to find the optimum pricing level. We do know that the product offerings that we have in Direct response are price sensitive. So we can't just go in and raise premiums 5% because it has a negative impact on our response rates and persistency. So, we will continue to test rates there to find that optimum pricing level, regardless of what the interest rates are. Now at the other distribution systems. Again, we're going -- as we reprice -- we will try to pick up some margins to offset the lower interest rates in some products that we don't believe it will hurt our sales or our persistency. Right now we don't have any intentions of doing it it in the Military market, which is -- it would have the biggest impact there. But in -- at American Income and at Liberty National, we will on selected products try to get it a little more margin in there as we reprice.

Got it.

Also, Tom, we've only been investing under kind of our magic 7% now for less than two years and under 6% only for less than two quarters. Long range, we've always long-term had excess investment income on the assets backing the life insurance liabilities. Still in our minds is the belief that these low interest rates will not continue forever. And we have nice -- we have handsome margins, underwriting margins in our life products. We'll certainly take into consideration these low rates but in my opinion it's still not something we should overreact too.

Sure, and C.B. on that note, is there a way -- and I know what makes you a bit different than others is the fact that you actually have pretty wide underwriting margins if you forget about the excess investment income part of the story. Is there any way to kind of do a back of the envelope, figuring out what your ROE would be with 0% spread, just thinking about if the current environment persists for another year?

Well you could -- we've got $3 billion of equity. We're going to make, if God for bid 5.3% forever, that would produce pretax 5% times $3 billion, and then you would add our underwriting income -- tax effect the thing -- and divide it by the $3 billion and that gives you -- under a worst scenario what happens to a return on equity. That's the math on it. I can't say I've sat down and done it.

Okay And then -

Tom, using last year's example. ROE of 16, the underwriting operations provided a little over 10% of that 16.

Okay, so in 0 spreads, 10 might be a reasonable number to --

Higher than that, because we're still going to get the -- on the equity the $3 billion of equity --

We'll get the after-tax yield on the equity plus the 10% underwriting margins.

Fair enough. Okay. The last question I had was just on the back amortization. I noticed it went down year-over-year. I presume most of that was being driven by realized changes in investment gains and losses. But I just wanted to get clarification if you stripped out the impact of back amortization from investment gains and losses. Did that number actually change year-over-year?.

The actual amortization didn't change. In other words, it wasn't effected by investment gains. That -- there was a change last year in the classification of certain expenses that, I think, have caused that. I hadn't had a chance to look into that but I will and I'll get back with you. but our commission acquisition expenses ahven't -- in total haven't changed

But-- but are you saying that you're actually slowing, or what exactly was the change in methodology there -- just high level?

Well we changed the way we were handling commissions at Liberty National. [this way] advancing commissions is the way it classifying them between amortization and non deferred acquisition and cost. We made that change in the second quarter of last year and I think that's impacting what you're looking at.

Oh, so, was there a one time sort of blip in the back amortization last year? Was that effectively what happened?

Well, again, it was partly the amortization, but it was also offset by what we were doing in the non deferred expenses. In other words, the net changes what we did was, you know, was flat. It didn't increase or decrease total expenses.

Got it, okay, thanks a lot.

Sure.

We'll go next to Joan Zief of Goldman Sachs.

Thank you, good morning. Just a few questions. I just want to go back to this Medicare part D. You talked about capitalizing the marketing expenses and amortizing it over the life of the policy. How -- what is the life of the policy? How many years too you think you'll be amortizing at. I mean [noise] sort of figure that out. That's my first question. My second question is, what is -- I mean what's realistically the potential for this additional product. I mean, if -- if -- if it actually takes hold, does it accelerate premiums? Is it -- I'm just curious what do you think the ultimate potential is?

Well, again, I'll addressed first part first. We don't know what the average life of that business is going to be. We believe that the persistency on it will be better than our Medicare supplement persistency. So we're going to have to make assumptions and they will be conservative assumptions. We will not assume any better persistency than what we have on our Medicare supplement business, but we haven't decided that at this point we can give you a better answer on that next quarter. The potential, again, is hard to say. If you look, the average revenue. The average premium will be roughly $100 a month or $1,200 a year per enrollee. We already know we're going to get approximately 15,000 automatically assigned to us in those two states. How many more we will write, it's difficult to say. We have 300,000 active Medicare supplement policy holders that we'll be marketing to, as well as the general public through direct response, as well as our agents. I just can't give you any estimate, right now, of how many people we will sign up for that. Three months we will know much more.

Joan, keep in mind, unlike Medicare supplement, the prescription D coverage is heavily subsidized by Medicare. Of that $100 the enrollee will be paying, roughly $35 and the Medicare will be paying a $65. So, logically it should have very good persistency. I'm always amazed though senior citizens never getting a good enough deal. But it should have good persistency, but we just don't know yet.

What is the range, what is the loss ratio range that is worked into the product? Is there a minimum loss ratio that you have to have, and as I understand there maybe a cap so that if your losses are above a certain ratio, the government kicks in?

Yes, and basically, we've priced it at roughly an 82% loss ratio versus 65 on our Medicare supplement business. So that business will have somewhat lower margins, then our Medicare supplement business. We still hope to make roughly 8 points profit. I do believe on the administrative cost side, we will see a lower administrative cost because we're not going to have to pay claims and in many cases not having to build premiums on this. So, we still hope to make about 8 points of profit on it.

Losses exceed, I think, it's 85%. There's a corridor there, maybe 5 points. Then Medicare supposedly will reimburse us for 80% of the losses in excess.

They will also reimburse us beyond -- if you understand the benefits -- there's a doughnut hole when any claim is beyond that, Medicare will reimburse us for 88% of those claims.

Okay, thank you very much.

We'll go next to Bob Glasspiegel of Langen & McAleney.

Thank you, and good morning. Your 8 points is that sort of comparable to your underwriting margin -- I just want to make sure I know which -- Is that after expenses?

We will see actually very little additional administrative expense so we might see a little bit of higher underwriting margin than the 8%, but the 8% is really what we would expect as a pretax profit margin so after administrate expenses.

So it's above 8 but it's less than your 17.

Yes, because we will not have -- we don't expect to have 5.5% administrative expenses on that business.

Okay, so we're -- and the commissions, I mean, there's going to be some that you -- is it going to be all direct marketed or --

We will market it through both our agents and as well as direct marketing. It's impossible to say at this point just what our Direct Response expense will be per enrollee. As far as our agents, we're paying a one time $50.00 commission.

Given that your sales are coming in below your expectations for the year and your earnings are coming in, you know, I think, pretty close to where you were -- you were guiding -- is the cash flow coming in a little bit better than you thought, or is that -- I guess that would be more for next year, I guess. Any sort of guidance on just an '05 cash flow and looking into '06, what we should be thinking about?

We'll have the cash. We'll tell you -- and I don't have guidance for 2006, but so far for 2005, I believe our cash flow before dividends and interest costs is on schedule. The cash that we generate within these companies, some of it belongs to customers, some of is it shareholders, is going to be about $60 million more than we generated last year. I think it's 827 last year and we're on a schedule of 887. The cash is coming in strong. The margins were actually a little below what we -- given the stock buy back as far as earning per share what we thought at an early point in time. We've seen improvement in the cancer business at Liberty National and that's offset some of the level or declines in the other health business.

Are there any sort of potential cash flow implications to the -- to your Medicare product taking off or not taking off as far as capital generation or needs next year?

You're referring to the part D? the prescription?

Yes.

No, again we've committed $8 to $10 million in the fourth quarter. We are going to know by the end of the fourth quarter whether we're having success or not. If we are not successful, I think we've qot -- we've got less than $1 million committed in the first quarter at this point. So, if our efforts -- if we're not satisfied with our marketing efforts in the fourth quarter there will be very little additional expense.

I was actually taking the other side. If you're very successful is there capital strain or is it financing.

No, I don't think -- I don't see us going beyond that level of spending in the first quarter, so that's not going to cause us any capital strain.

Okay, thank you very much.

We'll go next to Vanessa Wilson of Deutsche Bank.

Good morning. Could you talk a little bit about what part of the yield curve your debt is sensitive to and how we should think about that as short-term rates are rise?

Well, as far as out of our total, $900 million debt $220 million in short-term debt which is totally affected by the short-term rates. We've got of our $539 million debt, we do have $180 million debt that matures next year that -- we will refinance and we should benefit there by having a lower rate than the 6.25 that we have right now. Another big part of our debt is the trust defers that we have out there that are about $145 million. If rates stay where they are today, we can call those and we'll reduce our rate there. We're 7.75 now and we should be able to refinance that at less. So I think that that's the only positive we have out of these lower rates is that it will have beneficial impact on our debt.

And on your policy liabilities, the enforce business is there any, kind of, floating rate concept there, where, as rates rise there's upward pressure?

No, not really. The -- we have a small amount of annuity business, which -- that is fixed annuity business which is subject to interest rates, but again that's about $800 million of our $6 billion of reserve, so it's not a big part of our operations. The rest of it is not interest sensitive.

Right, as I thought. And on the capital position this year, C.B. you gave us the cash flow. You know, I had been thinking about a $300 million number for the year that I was thinking about and you've spent 289. So for the fourth quarter should we think about you increasing your debt level if you want to continue to buy back stock?

Yeah, I think we would -- again, we don't have -- we have about $10 million left for next -- for the fourth quarter. But if we wanted to buy more stock, yes, we would increase the short-term debt and we've got plenty of room there. I think we're $240 million under our total line there. We could borrow as we needed to if we wanted to buy stock.

Okay, and just on the cancer class, you've got a little margin help there. Is that something that could feed in and give us more help into next year?

Well it should -- we should continue to see the margins that we're reporting right now, but no, it won't be increasing. So what you're seeing is what you can expect from that business going forward.

Okay, thank you.

Our next question will come from Al Capra of Oppenheimer and Company.

Thank you, my question is about Medicare part D. What I was wondering was whether there was anything unique about your, either approach to pricing that business, or something specific about just your operational advantages that would allow you to price that business more effectively or competitively in the marketplace?

Well, again, our prices are within, in most states, within a dollar of the average. So we're right in the middle of the pack as far as our pricing there. There's no real -- we are right in line with most of the other plans that are out there. There were a couple of plans particularly Humana that came in with extremely low rates, but for the most part we're right in the middle of the pack. We do believe that our Direct Response expertise does give us some advantage there as far as our cost structure, which is the reason, I think, we will probably have a little more margin then other companies may experience. But we just don't have any idea yet of just what that will be.

And I was awfully curious to know, how the volume's been in the call centers in regards to just inquiring about the policy and how it works.

Well, heavy, through -- since October 1st, we have -- thorough yesterday we've gotten over 60,000 calls on part D. Our customer mailings really just went out this week, so most of those calls are not from our existing customers but from the non-customers. We're pleased -- well, I'm satisfied with the response we've gotten to date, but again, we don't know what percentage of those people will end up enrolling in the plan. That's the big question mark we have right now.

Okay, that's fair. And one quick follow-up to the previous discussion on cash flows and share back capacity. I guess last quarter, you made it sound like in order for you to tap into your debt capacity to buy back shares, that you need to see some material weakness in the stock. Is that still a fair assessment, or are you more willing to step up and tap into your debt capacity here?

No, I think that's still a fair assessment. When I said we could borrow more money -- we can. That doesn't mean we will. We haven't changed our strategy as to when we buy the stock. If we borrow some it will probably be a very small amount.

Okay, that's helpful, thank you.

Our next question will come from Edwards Speihar of Merril Lynch.

Thank you, good morning. I had a few questions on the sales and first year collected premiums. Mark, I think you said that, on the health side that the branch office sales were up 27% year-over-year?

Yes.

And that the UA independent were down 10% year-over-year?

They were down 10% year-over-year, but they have increased the last two quarters from our low point the first quarter, and they're up about 14% from the first quarter of this year. But they're still down from a year ago level.

Okay. I guess if I just assume, as I think you've indicated, that the sales today are an indicator of what first-year collected premium would be, let's say a year from now. It seems if you work through these numbers that, even excluding the part D, that you could be looking at high single digit health -- health first-year collected premium growths in the 3Q, 4Q of next year.

I think that's reasonable, Ed. We'll see more obviously on our branch office side. Because if anything I think there sales growth will be more in the fourth quarter and going forward than what they were this quarter, but when overall health sales for this quarter and compared to a year ago were up 7%. So if that continued for the next three quarters, a year from now that's roughly what our first-year premiums would be up.

Okay, and then on the life side, did you say first-year -- or sorry -- sales at American Income were up or down this quarter.

They were really basically flat with a year ago.

Okay. So American Income sales are flat. You think that -- I think I got from your complements in looking your agent numbers that you expected they'd be up some. I guess, next quarter. Is that not -- is that --

They should be up some, but again, when I look at year ago our agent count -- our producing agent count is up about 5% from a year ago. I wouldn't expect sales to be up any more than that in the fourth quarter.

Okay. So if we look at -- let's just say we look at the Liberty National piece where you're thinking sales could be up 10% in the fourth quarter. American Income little disappointing, but looking at the agent count numbers it still looks like 5%, maybe. Direct Response, too early to say, but I'm assuming that you would expect kind of worse case -- well not worst case -- but a disappointment next year would be Direct Response just being flat, verses up. Is that fair or --?

That's fair. I think Direct Response -- if we don't find anything new that really works in Direct Response -- that the sales next year would be roughly flat, and the thing about it at that level of sales we should still see pretty strong single digit growth in premiums and margins, even with flat sales. But if these tests that we're -- we've got out there right now don't work, we will continue to try new things and we will find something that works better. I think we have it's just going to take -- we just got to get persistency numbers on the test.

And what were the Direct Response sales this quarter? The way you're talking about the net annualized premium basis? Were they up?

No, the first three quarters of this year in Direct Response are just almost exactly flat with the first three quarters of last year.

Okay. So in terms of sort of thinking forward just based on the sales here towards the end of the year, you've got maybe American Income first year, but toward the end of next year could be up towards the mid-single digits. Liberty could be up in the potentially 10%. Direct Response kind of flat. So, I mean, overall it sounds like, you know, you could have low to mid-single digit first-year collected premium growth. I know you haven't sort of finalized the numbers. I just want to say in terms of round numbers is that the --

If I had to predict today, those -- those would be reasonable. I would be disappointed with that, but that would be reasonable based upon what we see today.

Okay, thank you very much.

Okay, Ed.

Our next question will come from Steven Schwartz of Raymond James.

Hey, good morning. I've got a bunch of little ones, and I would like to go back to part D. The first is, I guess in the latest [plenary] session of the NAIC they passed a new model act which regards to small face value life. I was wondering if that would have any effect on your business?

Well, I'm not -- to tell the truth I'm not --

Mark I'll speak up -- red that and I think it will have little impact on the Torchmark companies.

Okay, Larry.

I've read that and I think it'll have little impact on the Torchmark companies.

Okay. Going along with the little ones, the high deductible plan F, there was no mention of that this quarter, I guess the take it just didn't take?

It's time hasn't come yet. No sales of that haven't taken off and again, our total Medicare supplement sales have continued to decline and so I don't expect that to change in at near future.

Okay. And then on the option expense question that was asked earlier, C.B. do I remember correctly, I think you said that you believed that Torchmark was not going to include that expense in their operating numbers? Is that --?

That's correct.

And that still stands?

As far as I'm concerned.

Okay. And then just on active produce -- actual producing agents at L & L. I believe that decrease in the quarter from the second quarter, is that simply -- well, I don't know is that a Katrina kind of issue.

No, it's really not. It comes down to, again, they put a big push on in May and June and the recruiting level was extremely high and we just didn't do a very good job. Again, we weren't as selective as we should have been about who we hired and we also -- we didn't do a very good job of training those people. And we saw a lot of turnover in those May and June recruits. But I can't really blame it on -- there may have been some impact from Hurricane Katrina because of the downtime, but I can't blame that on Hurricane Katrina.

Okay. So, first year, obviously fell and I guess some of those people produced a little bit. So first-year producers probably fell. How about seasoned producers? Did they fall from the second quarter or did they -- how did they do?

Well, I don't have those numbers in front of me. I can get those for you if you like. But there was no significant change in the agents who had been with us more than a year.

Okay -- in effective producing. And then just to go back to part D, it is interesting that your 8 points is much higher than any of the managed care companies have reported so far most of those are in the 3-5 point range for what it'd worth. I'm kind of interested in the commission that you're looking to pay the agents on a total PAP basis of $100 a month you're talking about a 4% commission and even on the I think your average rate was 34, if I remember correctly. Even then you're still talking about a first year commission of 11.9%. Is that enough to get these people going?

Oh I don't -- again, that's why I don't think the bulk of that business is going to be written by agents. $50.00 commission is not enough for an agent to make a living going out and selling part D. I think we will write much more of that through our Direct Response channel than we will through our agents.

Okay, but does it incentive these people to get the 300,000 or so customers that they've already put on your books?

Well again -- even our existing customers, while we'll pay our agents if they go out and sign these people up, we're not relying upon that. In fact this week have mailed all of those people packages with enrollment forms and we will be following up trying to sign them up directly.

Okay, all right, those are the questions I had. Thank you very much.

Next question will come from Eric Berg of Lehman Brothers.

Thanks. Mark, my question is sort of a follow-up to Ed's. It seems that there are definitely cross-currents going on in your health business, and by that, I mean is that, the Medicare supplement continues to deteriorate. And the underage 65 is showing some pockets of weakness and of course, things are going one way if one looks at a, I guess a sequential or link quarter basis, and another way one looks year-over-year, and the situation is made further complex by the fact that you have two different distribution channels that often have conflicting trends. I guess this is sort of a round about way of saying, it's hard -- it's hard for me to distill it into a nice crystallized picture of whether things are getting better or worse or are stable in your health business. Can you do that for us? Can you make it simple and direct for us, because there's a lot going on?

Well, again, if you look at the branch office side, they're new sales are very strong. And if you look at even just the bulk of the business we're writing there is monthly premium. So if you are just looking first-year collected premium even, that number is coming up in sequential quarters. And I'm very optimistic there, that going forward those sales will continue to grow at a very nice pace. If I look at our Independent Agency side, again as I mentioned in the past, most of the decline we saw there was from one large general agency. If I look at the -- our new sales on our general agency side for the quarter, even year-over-year other than that one large general agency, we were up 24% so I'm very pleased that we're bringing in new general agencies and we're seeing growth there. As far as the one large general agency, that -- those sales flattened out in the first quarter. That agency actually produced a little more in the third quarter than it in the first and second quarters of this year. So I'm confident those sales even on the Independent Agency side have turned around. Even if the sales from the one agency remained flat, we are seeing very good growth in our other agencies.

Okay. And my second and final question relates to American Income. Again, I don't feel like I personally have a clear sense of whether you are satisfied or dissatisfied with American Income in the following sense. I think in your prepared comments you talked about a negative comparison with respect to the recruiting, but in our question period here, I think you, talked about how you were satisfied with the internet activity -- in the text of your news release I think there was a reference to the fact that agent count is up modestly. You've taken many steps at American Income to try to fix the agent count issue. Are you pleased or displeased?

Well, I'm disappointed.

Okay.

I would have expected -- well as I said in past quarters, I would have expected it to have turned around quicker than what it has. We did see some modest growth in our agent counts, but again the problem there, is not lack of people to train and hire. And the thing about -- we're going to continue. As we are -- we've introduced some new incentive programs there in the last 60 days that again, we hope is going to speed that up, but if that doesn't work we will make some additional changes.

Thank you very much.

You're welcome.

We'll go next to mark Finklesteen of [Cochran & Coronia] Securities.

Hi, good morning. A couple of quikies here. A follow-up to an earlier question. Based on your comments, is it fair to say you won't be putting out a private fee for service Medicare advantage product? I know there's a number of competitors both, in the managed care, and Medigap's base, who are optimistic about the opportunity with this product.

At this point in time we have no plans to do that. We again -- I believe that they are being over-reimbursed. Right now the government is paying more to those plans than what the traditional Medicare is costing the government. I don't think that can continue forever. At this point and time we have no intention of getting into that product.

Okay. Secondly. Just following up on another prior question on part D sales. Although the agent comp is relatively thin it was kind of viewed as a door opener for Medigap and opportunity to kind of reenergize the sales force on that product. It seems they're pessimism regarding [still] through that agent channel. I'm just curious if you changed your view on whether part D is really going to be a catalyst for Medigap sales as we kind of move into 2006.

I don't see it as being a big catalyst. Again I think the Medicare supplement market is a very difficult market competitively and we're really -- I'm really not looking at that as going to do anything significant in our Medicare supplement sales.

Okay, and just one quick follow-up. I missed it when you said is earlier. What is the -- what was the level of bond prepays in the quarter?

Gary?

We had I think it was about $60 million. Those bonds were called, as far as, pre-made payments on mortgages or whatever, we don't have those. But as far as in our bond portfolio the calls were around that amount.

Thank you.

Thank you.

[Operator instructions] Next take a follow-up from Edward Speehar from Merrill Lynch.

Thank you. Just very quickly, I wanted to talk about the options expense issue again. Going back to the whole, how do you treat it. I understand your sort of economic or fundmental view on what you think of options expense, but I guess, just as a comment I would say front page of the money and investing section of the Wall Street Journal today, is beating up a company who has decided to exclude equity related compensation and talk about pro forma numbers. And I just think relative to what every other insurance company is going to do, I think, it seems like you're just going to draw more attention to yourself and raise more questions about the company than it's worth. For a nickel a share it just seems -- I'm not sure that is the right thing to do.

Well, it may be. Who knows what we'll do, Ed. Again in our operating earnings we try to reflect what is happening in the operations of this company. The new treatment of stock options is a non-cash item. It has basically the same dilutive effect as the old method. It's kind of -- to me a ridiculous motion. It doesn't affect equity. So, it will be there. We will separate where people can see it. If they would like to add it back in or maybe we succumb to pressure and put it back in. I kind of feel about it like Goodwill. I really don't give a whole [cursing] one way or the other. But it's -- we'll see.

Thank you,.

It appears we have no further questions at this time. Turn it back to you Mr. Hudson for any closing or additional comments.

Okay. Well, thank you very much for joining us and we'll see you in three months.

That will conclude today's conference. We thank you everyone for your participation.