Globe Life Inc (GL) 2005 Q4 法說會逐字稿

Good day everyone and welcome to the Torchmark Corp. fourth quarter 2005 earnings release and conference call. Please note that this call is being recorded and is also being simultaneously web cast. At this time, I will turn the call over to Chief Executive Officer, Mark McAndrew. Please go ahead, sir.

Thank you, good morning, everyone. Joining me this are Gary Coleman, our Chief Financial Officer, Larry Hutchison, our General Counsel and Joyce Lane, Vice President of Investor Relations. For those of you who've not seen our supplemental financial reports and would like to follow along, you can view them on our website at torchmarkcorp.com at the investor relations page.

Some of our comments or answers to your questions may contain forward looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2004 Form 10-K, which is on file with the SEC.

Operating income for the fourth quarter was $122 million, or $1.17 per share, an increase of 9% over the $1.70 in the fourth quarter last year. Operating income for the year was $486 million, or $4.59 per share, also a 9% increase over the $4.23 for 2004. At year end, our book value was $30.41, and our return on equity was 15.9%. In our Life Insurance Operations, which generate over two thirds our underwriting margins, premium revenue increased 5% for the quarter to $369 million, and underwriting margin rose 8% to $99 million.

As a percentage of premiums, life underwriting margins were 27% for the quarter, up from 26% one year ago. Life first-year premiums declined 6% to $53 million, while life insurance net sales declined 5% to just over $64 million. In our direct response operation, life premiums and underwriting margins both grew at 9% for the quarter to $106 million and $27 million respectively. First-year premiums were 3 percent to $19 million and net sales grew by 1% to $26 million.

For the full year, direct response life sales grew by only 1.5% compared to higher than normal growth of 14 and 28% the previous two years. I am encouraged over recent developments in direct response and expect 2006 to see renewed growth in Netlife sales of at least 8% to 10%. While we have made improvements in our first quarter product offerings, we will not begin to see the benefits in our reported net sales, which reflect only policies that pay beyond the initial introductory offer until sometime in the second quarter of 2006.

At American Income, life premiums grew 8% for the quarter to $97 million, while underwriting margins grew 13% to $31 million. Life first-year premiums declined 5% to $18 million and life net sales fell 7% to $20 million. American Income producing age account that decline to 2,027, down 125 for the quarter and 63 for the full year. New agent recruiting declined 8% from the same quarter a year ago. It was a disappointing year at American Income.

At this time last year, projected double-digit growth in both our producing agents and net sales for 2005. The problems at American Income turned out to be more complex than I had anticipated. We have been and will continue making the changes necessary to get American Income back on track. I have, however, my lesson, and we will not be making projections at this time, for 2006 concerning growth in producing agents or sales at American Income.

At Liberty National, life premiums for the quarter were $75 million, unchanged from a year ago. Life underwriting margins grew 3% to $22 million. Life first-year premiums declined 5% to $9 million, although life net sales grew by 8% for the quarter to $12 million. Liberties producing agent counts stood at $1,781 at year end, a drop of 54 for the quarter, although still an increase of 143 or 9% for the year.

I am very unhappy with Liberty's performance for the second half of 2005. After experiencing rapid growth during in our recruiting and producing agents during the first six months of 2005, we fell apart during the last six months. There are no excuses. Major changes are needed and will be made at Liberty National.

The first needed change has already occurred with the appointment of Andy King as President and Chief Marketing Officer of Liberty National. Andy has headed up our United American branch office operations for the past 10 years and is extremely talented. During the first half of 2006, we will move Liberty National from what I consider to be a somewhat socialistic compensation system to a more capitalistic approach.

All agency compensation will become performance based, and to those individuals who add to the growth and profitability of Liberty National will benefit. In turn, those who continue to be a drag on Liberty's results will see their compensation decline. We are raising the minimum production requirements for agents at liberty. Due to the salaries and benefits currently provided to Liberty's agents, approximately 25% of the sales force is not producing enough business for the company to make a profit. This is unacceptable.

The changes being implemented will result in either growth in new sales, improved margins, or both. Due to the magnitude of these changes, I am unable at this time to protect liberty's agent growth or sales growth for 2006. In our military business, premiums grew 4% for the quarter to $50 million, while underwriting margins declined 8% to $11 million.

First-year premiums declined 34% to $5 million, and net sales fell 35% to $4 million. Claims resulting from the hostilities in Iraq and Afghanistan totaled $1.1 million for the quarter, with all the debts occurring Iraq. This is an increase of $400,000 from the fourth quarter 1 year ago.

We have also seen our first year lapse rates increase in the military from 5% to 7% to 8% range. While still excellent, this deterioration has had a negative impact on our underwriting margin. Net sales in the Military operation appear to have leveled off at the $3.5 to $4 million range. My current projection would be for that level to continue through 2006.

On the health side, premiums were down 4% from a year ago to $246 million for the quarter with underwriting margins up 6% to $43 million. The increase in health underwriting margin is attributable to the lower loss ratios on Liberty National's class cancer business as we previously reported. First year health premiums declined 4% to $38 million with net sales increasing 24% to $53 million. 85% of our new health sales are generated at our United American subsidiary, 59% coming from the branch office and 26% from our Independent Agency operations.

A bright spot for the quarter was our branch office operation. Health premiums grew 3% for the quarter to $81 million and underwriting margins for 6% to $12 million. First-year premiums grew 17% to $19 million and net health sales grew 62% to $31 million. We ended the quarter with 2,166 producing agents, up 29% for the year. We grew by 12 branch offices during 2005, ending the year with 96.

For 2006, I expect to see agents in sales to continue to grow at a rapid pace. Premiums and underwriting margin will see accelerated growth during the year, reaching double digits during the second half of 2006. The Independent Agency side of United American has seen less progress. Premiums for the quarter declined 7%, and underwriting margins declined 11%.

First-year premiums declined 25% to $12 million, and net health sales were down 17% for the quarter to $14 million. In 2004, one large independent agency accounted for 55% of our health sales in this distribution system. In 2005, net sales from this agency fell 62%, and now represent only 26% of the total. Excluding this one agency, net sales grew by 7% for the year and a 17% for the past six months.

2006 will be difficult to project due to the high concentration of the business in this one agency. While we hope they have begun to turn around, I am estimating that sales in this distribution will be flat to modest single digit growth in 2006. We began enrollments for the new Medicare prescription drug program on November 15, with the first coverage effective on January 1.

As of January 31, we had 121,000 enrollees confirmed by CMS, including 14,000 dual eligible auto enrollees. While the pace has slowed somewhat since a January 1, we continue to see several thousand new enrollments per week and expect to see an upturn as the May 15 deadline approaches. We currently expect to see 200 to 250,000 enrollments by May 15, with 2006 revenues and the 175 to $225 million range.

Assuming we achieve a 6% profit margin, Medicare program Part D program should contribute $0.06 to $0.09 to 2006 earnings per share. I will now turn the call over to Gary Coleman, our Chief Financial Officer, for his comments on our investment operations, followed by Larry Hutchinson, who will comment on the status of Liberty National's race based litigation. Gary?

Good morning. I want to discuss our investments and excess investment income and make a few comments on share repurchases. First, investments; Torchmark has $8.4 billion of bonds at amortized cost, which comprised 94% of invested assets. These assets are carried on the balance sheet at their market value, which reflect new unrealized gains of $425 million.

Investment-grade bonds total $7.7 billion and have an average rating of A minus. Low investment grade bonds are $671 million, same as one year ago, and have an average rating of double B minus. Overall, the total portfolio was rated triple B plus, same as a year ago. Regarding new investments, 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%.

But otherwise, we invest in short maturities. Since April, we invested almost $600 million. $424 million in short bonds, yielding 5.2%, and having an average maturity of five years and $168 million in long bonds, yielding 6.8%. In total, the average yield was 5.6% and the average life was just under 10 years. This compares to the 6.5% yield and a 24 year life of bonds that were purchased in 2004 and through the first quarter of 2005.

The lower investment yields continued to negatively impact the portfolio. The fourth quarter marks the 11th consecutive quarters that we have invested new money at lower than the portfolio yield, which has declined by a little over 40 basis points during that period to now towards the 7%. Contributing to this decline has been the reinvestment and lower rates, the proceeds from call of bonds, however, the calls have declined.

In 2005, the average $55 million per quarter compared to the $100 million per quarter we experienced in 2003 and 2004. Now, I will make a few comments about access investment income, which is our net investment income less the cost associated with interest-bearing net policy liabilities in debt. Excess investment income was $80 million in the fourth quarter, $1million less than a year ago.

However, on a per-share basis, excess investment income increased 4%, which reflect the effect of our stock repurchase program. Looking at the components, net investment income was up $6 million or 4%. However, that was lower than the 5.6% increase in average invested assets, due to the lower yield on the investments. Offsetting the $6 million increase in invest income was a $7 million increase in the cost of the interest-bearing liabilities. Interest on the net policy liabilities was up $3 million or 6%, and that was in line with a similar increase in average liabilities.

The remaining $4 million increase in the cost of our interest bearing liabilities was higher financing costs. $2.7 Million was due to reduced benefits from the interest rates lost, and $1.2 million resulted from higher rates paid on short- term debt. Now regarding the swaps, due to the rising in short-term interest rates, the benefit from the swap has declined steadily in the last few years.

As late as the second quarter of 2005, we had four slots with a combined notional amount, or you might say face amount of $530 million. In the third quarter, we terminated the two least profitable of the swaps that had a combined face amount of $200 million. And we did that due to the likelihood that their semi-annual cash payments would become negative in 2006.

That leaves us with two swaps that have a combined face amount $330 million. And one of those will expire in late 2006, at which time we will likely have just the one remaining swap of $150 million. Based on current rates and the reduced face amount of the swaps, it appears the pre-tax benefits from the swaps in 2006 will be around $2 million, which is about $5.5 million less than we received in 2005.

For more information on the terms, please see the related schedule in the financial reports section of our website. Overall, regarding the excess investment income, the lower long-term interest rates and yield curve continue to restrict it. Going forward, we will continue to buy investment-grade corporate bonds, and as long as rates remain where they are today, we would expect to make significant investments in bonds with shorter maturities, probably around five years.

And obviously, we are not happy with the lower yields but where rates are today, we still believe this is the best strategy. Now I'd like to make a few comments regarding our share repurchase program. As you know, Torchmark began its program in 1986, and has repurchased shares each year since then except 1995.

During that period, the company has bought back 57% of its outstanding shares. We use our excess cash flow at the holding company to fund the stock repurchases. Excess cash flow and the previous year's statutory earnings of our subsidiaries that is dividended up to the holding company, plus the dividends we've paid our shareholders and less financing costs.

In 2005, our excess cash flow was $300 million. We use that to repurchase 5.6 million shares. It is worth noting that as recent as 2000, excess cash flow was only $135 million, indicating the strong growth of Torchmark's cash flow. Share repurchases have had a positive impact on earnings per share. For example, at the 2005 cash flow had alternatively been invested in bonds, investment income would have been higher by about $8.8 million after-tax, and net operating income would have come in at 450 a share.

But with the buy backs, due to the reduction in the number of shares outstanding, actual net operating income per share was $0.09 higher at $4.59. In 2006, we expect free cash flow to be at least $320 million. With our debt at what we consider an appropriate level and as long as stock is valued such that repurchases provide a superior return over other investment alternatives, we expect that the stock repurchases will once again be the best use of our cash flow. Those are my comments. I will now turn it over to Larry Hutchinson.

Than you Gary, on the February 3, Torchmark filed an AK reporting the federal court's preliminary approval of Liberty National's class action relating to the price of insurance over African American policy holders in the period prior to 1966. The settlement provides Liberty National will enhance policy benefits of those plans by stated percentages.

This enhancement relates to approximately 55,000 in force policies and other policies in which policies in which plans were filed in the past. Additional relief in the form of the reinstatement procedures who are the policyholders, with [lash] terminated coverages. Total benefits provided in the settlement are subject to a $6 million cap.

Torchmark reported a non operating after-tax charge of $7.1 million in the fourth quarter for these benefits, related expected attorneys' fees, and other miscellaneous costs associated with the litigation. A fairness hearing is scheduled for March 31. If the court gives final approval to the settlement following the fairness hearing, substantially all the class action issues related to the race sustained pricing litigation will be resolved.

All that remain are certain individual mental anguish and punitive damage claims previously asserted by approximately 2000 individual plaintiffs. Liberty National did not include these clans in the settlement because the company believes these claims be barred by defenses. The company will defend those claims if pursued in federal court.

We are pleased with the settlement. We believe is in the best interest of Liberty National's policyholders. In summary, the two most important facts about the settlement are first, the total benefits of the settlement are capped at $6 million. And secondly, all class policy holders, whether past or present, are eligible for this relief. Mark?

Thank you, Larry. Due to the uncertainties involved in several of our distribution systems as well as the new Medicare prescription drug program, we did not give a precise earnings per share estimate for 2006. Also, unlike prior years, we included the impact of our ongoing stock repurchase program in our projection. Our current projection for 2006 earnings per share is in the range of $4.90 to $5, not including a $0.04 per share stock option expense.

This represents growth of 7% to 9% over the $4.59 earnings per share for 2005. The major components of our earnings per share projections, our underwriting income should be in the range of $443 million to $453 million, including the benefit for Medicare part D. Excess investment income should be in the range of $320 to $325 million, assuming we continue our stock repurchase. This also assumes the $5.5 million reduction in benefit from our interest rate swaps as Gary previously mentioned.

Net operating income before stock option expense should be in the range of $495 to $504 million, with an average of approximately $101 million outstanding diluted shares for the full year. Those are my comments. Rebecca will now open it up for questions.

[OPERATOR INSTRUCTIONS]

The first question comes from Jamminder Bhullar of J.P. Morgan.

Hi thank you, I just have a couple of questions. First if you could you speak about Liberty National, give us some more details on some of the changes you are making? And what gives you assurance that you are not going to have a bunch of people leave as you implement higher productivity requirements? And then also, Mark, on legal expenses, I think you have legal costs of about $5 million in 2005. What is your outlook for 2006 now that most of your outstanding issues have been settled?

Well, I'll let Larry make his projections on the litigation expenses. Both American Income and Liberty National, many of the changes we are making have not been announced to our sales force. I am not at liberty to discuss some of those. But at Liberty National, one of the things is we don't know how many agents will leave.

As I mentioned, we are raising the minimum production standard. Those 25% of the agents that are basically unprofitable today, only producing about 5% of the business at Liberty, we have no idea. We are giving them 90 days to increase production level to a level to a level where the company is at least making money.

But we have no idea how many of those agents will increase that production or how many of those agents that will leave. Either way, the margins at Liberty National will improve the second half of this year. So if all of this agents increase production, we will see growth in new sales. If none of those agents increase their production, it could cost us 5% of the existing sales. But either way, the margins at Liberty National will improve as a result of that change.

And what's the timing on American Income and Liberty National's changes that you are implementing? Is it first quarter of 2006?

Most will occur in the second quarter, definitely by mid year.

We should see what ever impact on sales in the third quarter then?

By the end of the second quarter, we should have a much better feel for what is going to happen at both Liberty and American Income.

Okay.

If you would like more details on some of this changes, if you would like to call Joyce Lane after the conference call, I'm available the rest of the day and I'll be happy to discuss it in more detail.

Okay, thank you.

Mark, I think $4 to $5 million is it reasonable estimate for legal expenses next year. The difference is we are a plaintiff currently in three lawsuits at Liberty National. It is much different being a plaintiff than a defendant. That is a reasonable estimate for legal fees in the next 12 months.

Okay.

And our next question comes from Tom Gallagher with Credit Suisse.

Good morning. Just, I first wanted to ask about the Part D guidance. If I understand the numbers correctly, does your guidance assume you are going to have 200,000 to 250,000 enrollees by the May 15 deadline? Is that basically the way we can translate the $0.06 to $0.09, would that translate into 200,000 to 250,000 enrollees?

We expect to see 200,000 to 250,000. That is with an assumption that we will have a 6% profit margin on that business, but that is correct.

Okay and I just want to kind of trace to those, how we get to those numbers. You had 121,000 signed up January 1, and you said you had been running at several thousand per week.

We had 121,000 at the end of January that were confirmed by CMS. Those are people that we absolutely know, but we are continuing to enroll people every week. In fact, our total enrollment as of this morning was right at 150,000. A number of those have not yet been confirmed by CMS. The 121,000 that we reported were only the ones that had been confirmed by CMS as of the end of January.

So then really to get your guidance and I realize these are not hard numbers yet, you would need about an extra 50,000 enrollees by May 15 or so?

Yes.

Okay and based on the trends your seeing right now, you are getting roughly 10,000 a month?

We are currently enrolled in more than that. That's why the range is 200,000 to 250,000. Even though it has trailed off somewhat, I think the 200 is on the low end. I would hope it is closer to the 250,000, but it should be somewhere in that range.

Okay and it sounds like the X factor will be if there is a surge around the time of the May 15 deadline. Is that kind of fair to say?

Well, even without the surge, we should see the 200,000. If we see the surge, it should be closer to the to the 250,000.

Got it, okay. And is there any way of knowing or any kind of leading indicator for whether there will be a surge?

No, I do not know what that would be. Everything I have seen is there is still a lot of people out there in the surveys that CMS has put out that are in no big hurry because they don't have a huge prescription expenses, but they know they need and intend to enroll before May 15.

Got it, okay. And just a question on the sales assumptions embedded in your guidance for health insurance premium growth. The health premium growth guidance is 0% to 2%. I was curious on what kind of sales results, ballpark, you would need to see to get to those numbers, because I believe the medical products you have been selling is somewhat lower persistency than the meds.

It is lower persistency and actually if anything, we're probably a little conservative on the sales projections on the branch office in coming up with that assumption. If anything, we may do better than that.

Okay, so you feel pretty good about the 0% to 2% premium growth guidance in light of what you're seeing right now on the sales front?

Yes.

Okay and I guess just the last question I had is I guess around American Income, I understood what you said about Liberty National, with the problems were, how you are addressing those. What of the real underlying problems at American Income and what really has surprised you, disappointed you, and what are you doing there to really affect things?

Well, again, if I could, I think it would take me at least 15 minutes to 30 minutes to explain in detail of what I see as the challenges at American Income and what we are doing to fix them. I really would prefer if you would call Joyce Lane sometime after the call, any time today. We would be happy to take a little more time and explain to you.

Okay, I'll do that, thanks.

And next from Langen McAlenney we'll hear from Bob Glasspiegel.

Good morning. I'm going to go ask more questions on the D, probably Tom's questions. If you do 220,000, and it works out to about $256 million in first-year sales, is that sort of a fair, rough number, $25 a month, or you won't necessarily have them all for 12 months. But on the sales side...

Again, I think the projections we are making on revenue for 2006 is somewhere between $175 and $225 million.

Right

Yeah, see, the annualized premium on that business will be higher than that. But again, some of those are effective February 1, March, April, May, June. And we will obviously see a few lapses during the course of the year. So, the annual premium on those will be higher than what the revenue projection is.

I'm just thinking about 2006, looking into 2006, which you haven't guidance for but I think, I mean 2007, rather, which we're all going to be modeling for, there's going to be a decent number, it seems like the earnings contribution in 2007 will be decent but higher than 2006, because you'll be earning those premiums for a full year and that there should be some more sales in 2007, correct?

There will be another open enrollment period at the end of 2006. I have no idea how many people we might enroll there, and we will constantly be enrolling people as they turn 65. Again, the nice thing about our direct response operation is we know who those people are. So we will actively be soliciting people as they turn 65 during the course of the year. But yes, next year if we had the same number of enrollees, we will see higher revenues because we will have them for the full 12 months.

Okay, your $320 million of excess cash flow, could you explode sort of the pieces, we've got just a rough sense of what the statutory earnings was in 2005? I assume the tax gain, does that feed into statutory or not?

Well, that is primarily a non-cash gain, the tax gain. That was liability that we set up that we pulled down.

I got you.

As far as the components of the cash flow, our statutory earnings should be around $420 million, we haven't finalized those yet, but that's what it looks like they will be, somewhere around that level.

How does that compare to 2004?

That is it that the 10% increase.

Okay.

One thing, our interest costs on our debt will be a little bit higher. To get from the $420 to the $320 is $100 million of interest expense and the dividends to the shareholders.

Okay, the buyback is sort of cut into the increase in dividends. That shouldn't change much.

Yeah, it doesn't change much. Three years ago, the dividends were just under $350 million. Next year they will probably be $46 to $47 million.

Okay and anything on the debt side we should be considering prospectively?

Well, we've got $180 million [six and a quarter] debt that matures in December of 2006. And in addition to that, we've got $150 of trust preferred securities that become callable in late November. Where rates are today, it looks like we'll refinance both of those and we'll refinance them into a combination of debt and similar trust preferred securities.

That will have an impact because where rates are today; it looks like our debt cost will be reduced on that $330 million by about 100 basis points. Also, as I mentioned earlier, by the end of 2006, instead of having $530 million swaps as we had throughout most of 2005, we'll only have $150 million at the end of 2006. So the combination of both those should lead to an improvement. Just the refinancing itself should lead to maybe $2 million after tax improvement in our financing costs in 2007.

I look forward to that. Thank you.

And our next question with KBW is Jeff Schuman.

I guess I'd like to come back to the Part D a little bit more. Can you give us a little bit of color on how the sales have emerged by customer? Was it mostly brand new customers towards customers or what extent did you have you gotten from Medicare cross sell? And then, have the sales actually come out entirely from direct response or has there been some contribution from the agent channels as well?

We have actually derived these from a number of sources. I should have those in front of me, but I can get them fairly quickly here. Most have come from direct response. I am trying to recall the numbers from a couple of weeks ago. We had a little over 30,000 of our existing customers, who we signed up through direct response. We have also had I believe it's right around of 25,000 that our agents had signed up. The balance, other than the 14,000 auto enrollees, our people that we have signed up through our direct response operation that were not existing customers.

Okay and as the market has developed in the last couple of months, has your share been about what you expected? Better or worse? What kind of surprise do you plus or minus about the nature of the competition?

I would have to say it is about where we thought we would be. I would believe a quarter though, we were looking at spending $8 million to $10 million and hoped to sign up, we really, our target was to sign up 100,000 people. We actually spent $13 million in the fourth quarter, and we ended up at the end of January with $121,000. So it's about what we anticipated and we will end up by May 15 right now, we expect to spend about $18 million to sign up the 200,000 to 250,000 people which is in line with the allowance we have made for acquisition cost.

And of the $13 million, how much of that was capitalized?

Right now, it has all been capitalized. It will be spread - it will be gapped over the estimated life of that business. So none of that has been recognized in the fourth quarter, although on the administrative side, we did add roughly 90 people on our customer Service Center, which is included in our administrative expenses for the quarter. But none of the acquisition expense, direct response expense has been recognized at this point. It will start to be recognized in the first quarter.

Okay and lastly, thinking about the administrative expenses and the ramp up there, should we think of the earnings contribution through the course of the year pretty much following the premiums or will there be some higher sort of initial expenses that you need to recover as you go through the year?

We will see some increase in our administrative expenses because of the Part D. As I mentioned we've added roughly 90 people thus far. But as a percentage of revenue, the administrative expenses for the Part D will be significantly less than what we have for overall business.

Okay, so I'm trying to ask, if we assume $0.06 to $0.09 contribution, should we model that is emerging in line with the developing premium or is there anything funky we should consider in terms of time?

No, we would expect reports level margins as a percentage of revenue.

Terrific. Thanks a lot.

And next with Merrill Lynch we will hear Ed Spehar.

Good morning, I had a few questions. First I guess, just one point of clarification. Gary, could you go over the numbers you gave us on the dollars invested? I think you said $424 million invested short, $168 million long. What period of time was that over?

That was started in May. Toward the end of April when we made a decision that we wouldn't go long on all or purchases as we had done in the last couple of years. And so the numbers I gave you were really familiar to the end of December.

Okay, in terms of the outlook today, it seems like new money yields should be a little bit more attractive here. Are you seeing any shift, even if it's modest, toward longer versus shorter?

Yeah, we are and it is fairly modest though. But we are seeing and we have, in the fourth quarter, we invested a little bit longer than we say in the second and third quarters.

Okay and then going back on the distribution, first question on the Liberty National. I guess when we talk about the 25% of the agents not covering their expenses, I am curious why there wasn't a change or why this issue wasn't addressed at the same time that I thought you took a pretty close look at the age of the profitability dynamics, I guess it was maybe a year ago when you eliminated some subsidies that have been paid. Why wouldn't this have sort of fallen under that category of actions?

Well, Ed, I really don't have an excuse there. I would have to say it is something I should have seen a year ago or two years ago. That is one of the benefits I am deriving from adding Andrew King out there. He has the time and the energy and the ability to dig in a little deeper than unfortunately I had.

Okay and then another related question is why wouldn't changes take place sooner than the second quarter of 2006?

Well, two things. On the raising of minimum standards, in all fairness to the people that are there, we felt like 90 days to provide them a 90 day opportunity to meet those levels is fair. So we feel like doing that. On a number of the other changes, we are shooting for May 1, simply because it is going to take us that long to get the programming done and be able to actually introduce those changes.

Okay and then on American Income, I know you said you don't want to - it's a long discussion, but I guess, I'm curious, it seems like is something, there must be at least one or two things to identify here. I guess when we think about Liberty National, this has been a problem for a while in terms of how do we get this distribution channel productive? But American Income had not been. So I am just wondering what is it...

I will try to give you as brief as I can without getting into necessarily too much detail. One of the big changes we made in our branch office operation at United American in the past year or so is we began opening new offices in cities that we already had offices. Where in the past, we only had one office in Dallas and one in Cleveland.

Now we have five in the Dallas area and three in the Cleveland area and we have four in Orlando. At American Income, right now, we have exclusive territories for all of these SGAs who are field management people. In places we don't have growth, we need more than one SGA there. Unfortunately, the SGA in the past has always controlled the lead generation from the local unions.

Well, we started in the second half of 2005 in New York and in Los Angeles, places where we did not feel we're getting enough production, where now the individuals who go out and get endorsements and get for the lead generation now report directly to the company. Now we have been able to add a second SGA in that area, in both of those areas and we're seeing more lead generation.

We are seeing growth in sales and those areas that that was not possible before. We can't in a 30 day period, we have 140 people roughly out there who go out and get these local union endorsements for us to generate our leads there. We are not physically able to manage 140 of those people all at once.

But During the course of 2006, we are going to gradually, especially in places where we are not getting growth, we are going to take that responsibility in House where we can add a second SGA and we control the lead generation. I guess that in a nutshell is the biggest single thing I see at American Income.

Okay, so that is really the change. It's just sort of the idea that now you are going to leverage the Torchmark expertise on in the lead generation side, rather than following this through the distribution?

In areas that we are not getting growth, we need the ability to add a second SGA. We are also going to be making some changes in compensation at American Income. But I'm just not at liberty yet because they had not been announced, to really discuss those here.

Okay, and then just finally, just so I'm clear, on the Part D, the open enrollment, that is only going to occur, it will end at May 15 and then will be open again in November?

Yes. Right now the plan is it's supposed to end May 15 and it will open up again November 15.

And obviously, if you are turning 65 throughout the year, you can enroll in this plan?

Yes.

What are the numbers of your customers, do you know that turn 65 every year?

I do not know that number, Ed. We could get that. But just, particularly in our direct response, we have a number of policyholders that are turning 65 every year. But I just do not have that number.

Okay, just one final quick one, on the Medicare Part D margins, I think you had said 8% previously and you're saying 6% now. Is 6% the long-term expectation or is there a reason to think that 6% goes to 8%?

We are being a little bit conservative. We hope to make 8% but in our assumption, we have assumed 6%. We don't, again, we're just starting into this and again, if our claims are higher than what we anticipate, the first 2% we have to eat. Beyond that, Medicare is going to reimburse us for roughly 80% of the excess. So we are taking a little bit of a conservative approach here in our assumption. We still hope to make 8%, but we just have no idea at this point what that is going to turn out to be.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS]

And next from Citigroup we'll hear from Colin Devine.

Good morning Mark.

Good morning.

In looking at the situation you find yourself in, two thirds of your earnings come off life insurance and as I'm going down each distribution channel, United American, 10 consecutive quarters of declines in the general agency, the branch office, I think is the worst quarter they put up, period. The [drack] business flat lined in 2005 and the list goes on, Liberty National basically about the worst one in the last five years.

This doesn't seem to be just one product or one channel. Am I correct in saying that what you are faced with right now is the company needs a major overhaul to get this turned around and this is going to be a multi year process? Is that a fair conclusion?

No, I don't think it is a fair conclusion. If you are looking at it in total, right now, the branch office is doing very well. They never have been a life distribution system, they are primarily and health distribution system. The direct response, if I look there, again, if I look back historically, it has seen double digit growth for the last 20 years. We had a relatively small growth in new sales in 2005.

But I fully expect in 2006 and 2007 I expect to see significant growth in our juvenile new sales and the direct response this year. Which, if we see that, following that, we see significant growth in 2007 in our current sales. I feel good about direct response right now. We do have challenges at Liberty and American Income.

Liberty has never been a major contributor to growth for the past 25 years. So it is not something that has recently significantly deteriorated. It has been basically flat for a long period of time. We believe we can improve upon that. American Income is probably the biggest challenge right now. We had four years of rapid growth. We are still seeing good growth in premiums and even with flat sales, we will continue to see nice growth in premiums at American Income where I believe we had 9, let's see, we had 8% growth and life premiums this year, even with flat sales we will probably still see somewhere in the neighborhood of 7% growth in premiums in 2006. I think that can be turned around during the course of this year.

So no, I don't think it's a major, a multi year overhaul. I hope by mid-year, we have a much brighter outlook on all those distribution systems. I am just not ready to make that today.

Is the issue then that has really led in most of your channels can pretty steady declines in sales, right? Not just for one quarter or year over year but for the past couple of years, do you view your problem as recruiting or the problem is the products you have been offering or both?

It's not a product problem. In all of our distribution systems, other than direct response, it has always been, if we can grow our agents, we grow sales. In the years that we saw big growth at American Income, it was because agents were growing. The reason that the branch office is seeing good growth now is because they are getting good growth in recruiting.

The problems at American Income and Liberty National are recruiting problems, they are not product problems. And it's not that we don't have a lack of people to recruit. I know we have talked about this in past quarters. In 2004, from our Internet source, we generated 426,000 potential applicants, people responded to our efforts.

This past year, we generated over 1.6 million, four times as many, but yet our recruiting didn't go up at American Income. That's not because we have a lack of people who want to come to work. It is a motivation problem. It is a design of the compensation program. The difference is that we have in the branch office is those people are paid, we changed, I believe two, three years ago, where now they are paid a higher commission, the sales management, for new agents than they are veteran agents. And that is something that we are going to move to at both Liberty National and American Income during the first half of this year. And I think it will pay a dividend.

Okay, thanks very much Mark.

And next from Banc of America Securities we'll hear from Tamara Kravec.

Thank you good morning. Quick question, I know you cannot quantify the compensation changes that will happen, but can you give us a sense quantifiable as to what increase in productivity you are looking for? Is this going to be double what they had been doing or less than that?

Particularly at Liberty National, if I look at just the agents at Liberty National, I think between service salaries and payroll taxes, we spent almost $17 million in 2005. We are going to move from that. But if you look at raising the minimum standards, it's the average, we're asking those 25% that basically double their sales.

But again, that only represents 5% of the total. So if they all do double their sales in the next three months, it will result in about 5% growth in new sales. If none of them grow their sales and they all end up leaving, we will see about a 5% reduction in our new sales as a result of that.

Okay but at the same time, your salaries and comp will come down because the new people that you're bringing in will supposedly be on the new system, right?

Mark McAndrew. Yeah, well, if I look at the 25% of the people below the profitability line, right now they are costing us in salaries and benefits between $4 and $5 million a year. So, either the production is going to come up to where we can justify that expense or that expense will go away.

Okay and then just conceptually do you think the problem occurred as a result of the type of people that were hired in and recruited. So was it a problem at the beginning stage or was it a problem that they looked Okay by resume and you brought them in and then after their productivity just kept on declining. So do you think it's really fixing, because it seems like bringing in Mr. King that that's going to really, his focus at United American was on the Internet lead recruiting aspect of it.

There is no doubt moving Andy King out there we will see an improvement in the recruiting and new agent hiring. As far as these people that are at these extremely low production level, this has been along-term problem. It is something that has gone on for years. So it is not anything new. Some of those are veteran agents. Most of those would be more veteran agents. It has been accepted for a number of years, and it is something we're changing. So it is really not a new problem.

Okay, so more cultural. And then my other quick question was just on the acquisition of fixed maturities, it seems like you're going back and forth a little. In the third quarter you made acquisitions in the A plus category now you're kind of in the triple B plus in the fourth quarter and you made about half the acquisitions there. Are you finding that you are having to stretch per yield, the yield was obviously higher on the acquisitions you made in the fourth quarter and what are your thoughts on that?

No, we weren't stretching for yield. I think what we say when Ed asked, what we saw is that the rates did pick up a little bit, longer rates in the fourth quarter. We did invest, I think we had just about half of our investors in the fourth quarter were long bonds, where it was in the second and third quarters, this is probably a third of what our purchases were.

For most of the year, we purchased bonds in the A minus, triple B plus. Actually, from April to June, I think it averaged out two and A rating. Some of the longer bonds that we did bonds in the triple B plus range and that is why that came out that way. But we're not making a conscious effort to search for our distress for yield. What we are doing, those long bonds, we do our research and we think that it's a quality credit, then we will go ahead and take the higher yield, but it has got to be in excess of 6.5 for us to do it. Otherwise, we will go short. Again, we think long-term rates, at some point, we hope soon, will start going up. And the fact that we put so much short term money, recently we'll be in a position to take advantage of that.

Okay, thank you.

And next with Lehman we'll hear from Eric Burns.

Thank you and good morning.

Good morning Eric.

Good morning to everyone, to Mark, to everyone else. Two quick questions, first, and I will apologize, I joined the call a little late, if you already covered this, I'm noticing in the supplementary financial material that net sales at LNL were actually up in the quarter significantly. Are you suggesting that it gives perhaps not a fair impression of what is going on?

Well, they were up 8% versus a year ago quarter. I would say the year-ago quarter was kind of the low point as a result of some of the changes we previously made. I am not overly excited about that. My disappointment there is more in the recruiting side. The first half of the year, we grew by several hundred agents. We have seen the agent count decline the second half of the year, which is not a good trend.

If that continues, we will not continue to see that 8% growth. We have got to turn that around and get renewed growth in our agent count or we won't continue to see the growth in new sales. So, my disappointment is more in the recruiting efforts and the decline in the agent count in the second half of the year.

The second question relates to the military. It would seem to be a deteriorating situation rather than a stable one. I think we all understand, certainly most of us understand what has happened there, the change in compensation in 2004 leading to an exodus of agents. What are you doing as we speak or what have you done to try to stem the decline here?

Again, that is a little bit of a frustrating situation. It is an independent agency. We are now trying to assist them. We are assisting them in trying to increase their recruiting using our Internet resources, but we don't control what they do. That's why I am not going to project growth there. We do believe that it has pretty much leveled off in that $3.5 million to $4 million sales range, which is far less than what it was two years ago.

We don't expect to see any additional deterioration, but at this point, I am not overly optimistic that we're going to see any significant turn around there in 2006.

All right, thank you.

I would, Eric, I would like to point out that is, by far, the smallest of the distribution systems that we have. It's relatively, if you look at, it is about 7.5% of our underwriting margins. It is not that it is not important to us and we want to see it grow, but the American Income and Liberty National direct response are the three big life operations that will drive our growth.

Yeah, they are the engines. Very clear. Thank you.

[OPERATOR INSTRUCTIONS]

Mr. McAndrew, there appears to be no further questions at this time.

That's our comments for today. Thanks for joining us and we'll see you in three months. Thank you.

That does concludes today's presentation. We thank everyone for their participation and have a wonderful day.