Globe Life Inc (GL) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Torchmark Corporation second quarter 2007 earnings release conference call. Please note that this call is being recorded and is also being simultaneously webcast. At this time I would to turn the call over to the chairman and Chief Executive Officer Mr. Mark McAndrew. Please go ahead ,

Thank you. Good morning, everyone. Joining me this morning is Gary Coleman, our Chief Financial Officer, Larry Hutchinson, our General Counsel, Rosemary Montgomery our Chief Actuary, and Joyce Lane, Vice President of Investor Relations.Some of our comments or answers to your questions may contain forward looking statement that are provided for general guidance purposes only. According please refer to our 2006 10-k which is on file with the SEC. Net operating income for the second quarter $129 million or a $1.34 per share. A per share increase of 10% from the $1.22 a year ago quarter. Our return on equity was the same as a year ago at 15.8% and our per share book value increased 10% over the last 12 months to $34.20. In our life insurance operations premium revenue 3% to $392 million and life underwriting margin grew 2% to $101.5 million. Life insurance net sales were $67.4 million up 8% from last quarter but still 5% less than the year ago quarter. Life first year collected premiums were $49.4 million down 7% from a year ago. In our direct response operations life premiums grew 7% to $121 million and life underwriting margin increased 4% to $29 million. Net life sales were $29 million down 5% and life first year collective premiums declined 3%.

On the last conference call I stated that I expected to see 5-10% growth in direct response net life sales during the second quarter. I was wrong. I underestimated the time lag between increases in our insert media circulation and increases in our reported net sales. While this time lag averages 2-3 months on our direct mail side of the business, it runs 4-7 months on the insert media side. As a result we continue to be impacted by the 11% decline in insert media circulation during the first quarter of this year, as well as a 30% decline we saw in the fourth quarter of last year. As we have discussed previously these insert media sales had been controlled in prior years by direct marketing advertising distributors, which we acquired in January of this year. Net sales from new insert media inquires dropped 24% for the quarter to $10.5 million. Net direct response sales from all other sources, primarily from direct mail, increased 10.5% for the quarter to $18.9 million. On a brighter note our insert media distribution increased 6% for the second quarter versus a year ago. Our current estimates for this circulation during the third and fourth quarters or this year show increases of 27% and 36% respectively. As I just mentioned similar increases in net sales from this media can be expected 4-7 months after these circulation increases.

At a American Income life premiums grew 7% to $109 million, and life underwriting margin increased 6% to $34 million. Net life sales were up 1% to $23 million dollars and life first year collected premiums increased 2% to $18.4 million. The American Income producing agent count was up 4% from a year ago but was flat with the end of the first quarter. To achieve greater long term growth at American Income, we must continue to expand our elimination of exclusive territories for the American Income agencies. Through the end of the second quarter we had eliminated exclusivity in 17% of American Income's territories. For these non-exclusive territories net life sales have increased 47% for the first half of 2007. We are accelerating our efforts in this area and plan to double the non-exclusive territory by the end of this year.

At Liberty National, life premiums declined 2% to $74 million while life underwriting margin dropped 12% to $16 million due to higher than normal claims for the quarter. Net life sales were down 20% for the second quarter to $9 million and life first year collected premiums declined 19% for the quarter. The producing agent count at liberty national grew 11% during the quarter to 1596 continuing the turn around which began in the first quarter this year. On the health insurance side, premium revenue excluding Part D. grew 2% to $259 million and health underwriting margin also grew 2% to $46 million. Health net sales declined 1% to $63.8 million and held first year collective premiums increased 10% to $49.4 million. For the independent agency operation at United American, health premiums dropped 7% to $98 million and underwriting margin was down 9% to 17 million. Net health sales were $13 million for the quarter down 18% from a year ago. On the branch office side health premiums were up 12% to $97 million and health underwriting margin was up 7% to $13 million. Net health sales grew 8% in the branch office to 44 million and first year collected health premiums were up 26% to $32.6 million dollars. The producing agent count at the end of the quarter was 3252 and 18% increase over last year. Premium revenue from Medicare Part D was $55 million for the quarter and the underwriting margin was $6 million.

Administrative expenses were $36.9 million for the quarter, a decrease of 7% from a year ago As a percentage of premium revenue, administrative expenses declined to 5.2% versus 5.7% 12 months ago. We have again lowered our estimates for 2007 administrative expenses. We now project a 3% decline in administrative expenses for the full year 2007. I will now turn the call over to Gary Coleman, our Chief Financial Officer for his comments on our investment operations.

Thanks, Mark. I want to spend a few minutes discussing investments, excess investment income, and share repurchases. First investments. Torchmark has $9.2 billion in bonds and amortized calls which comprised 94% of investment assets. Investment grade bonds total $8.5 billion and have an average rating of eight months. Below investment grade bonds are $677 million and comprise 7% of invested assets. Overall, the total portfolio is rated A minus, the same as a year ago. Regarding our new investments, we continued our practice of investing long when finding quality bonds yielding in excess of 6.5%. In the quarter, we invested $944 million dollars at an average annual effective yield at 6.8%, and average life to worst call with 26 years with an average rating of A. This compares to the 7% yield 24-year average life and A plus rating of bond acquired in the second quarter last year. Although the second quarter new money yield was higher than the previous two quarters, it was still lower than the portfolio yield. On June 30 the average yield was 6.97%, seven basis points lower than a year ago. Now, turning to excess investment income, it was $80 million up $1.5 million or 2%. On a per share basis, excess investment income increased 6% which reflects the effect of our stock repurchase program. Excess investment income is our net investment income less the interest costs of the net net policy liability and financing costs of our debt. The year-over-year comparison of each component is as follows. Excuse me. First net investment income was up $6 million. However, taking into consideration the $266 million and municipal bonds required in March and April, total investment income on a tax equivalent basis was up $7 million. This represents a 4.4% increase in income slightly lower than the 5.1% increase in average invested assets. Next, the interest costs on a net policy liability increased $5 million or 9% due primarily to an 8% increase in the average liabilities. And lastly, financing costs were down $1 million due to the lower average debt outstanding.

Finally, I would like to comment on our share repurchase program. In the quarter, we spent $131 million to buy 1.9 million Torchmark shares. This is comparable to the $99 million used to buy 1.7 million shares in the second quarter of 2006. As we've discussed before we used our precash flow to fund the stock repurchases. In 2007, free cash flow will be around $350 million. With our debt at an appropriate level and as long as we can receive a superior turn over other investment alternatives, we expect the stock repurchases can be the best use of our precash flow. Those are my comments. I will now turn it back to Mark.

Thank you, Gary. We are again raising our estimates for 2007 earnings per share to a range of $5.40 to $5.45. This upward revision is due primarily to a $5 million reduction in our administrative expense projection. $2 million of higher investment income due to the upturn in interest rates during the quarter, and $2 million of better than anticipated revenues and underwriting margins for Medicare Part D. Those are my comments. I will now open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Jimmy Bhullar with JP Morgan

Good morning, thank you. I just have a couple of questions. The first is on Liberty National. In the light side your benefits ratio, I think 49.7% was the highest that it's been in the last several years. So I wanted to see if there's something going on in that business that you consider nonrecurring or do you expect the benefits should remain at this level going forward? And then second on -- then second, I'm not sure if you mentioned this in your remarks but what do you expect sales growth to be now in the second half of the year and when do you expect improvement? If you can assess that?

Okay, Rose Mary, I'll let you take the first part of that.

Okay. In regard to the Liberty National question on policy obligations, we did have unusually high claims this quarter. That's not really something that we expect to continue. That number does tend to fluctuate a little bit. I would say if you compared it to a year ago quarter, claims were really unusually low in that quarter. So again, nothing that we really see it going on there and we would expect a policy obligations to go back down to our expectations.

Okay. On the direct response, Jimmy, I've got to lower my projections a little bit from where they were last quarter. Not that anything has deteriorated. Again, it's more on the insert media side. There's a longer tail to that business than what I had projected. Right now, if I look at our gross sales, which are policies that we've issued that haven't paid the first full premium, our gross sales for the quarter were up 7%. That's a reasonable estimate for what growth we'll see in net sales during the upcoming quarter. Future quarters will be significantly better than that. Again, what's been dragging us down has been the insert media. Those sales were down 24% this quarter net sales. Their gross sales were only down 4% for the quarter, but now we're seeing growth in that circulation. It was up 6%. this quarter will be up 27% next quarter and 36% the fourth quarter. Again there's a lag there each quarter we will see better growth really for the next four, five, six quarters. That growth will accelerate. We still expect to see strong double digit growth by fourth quarter this year and very good growth in 2008.

Okay, thank you.

We'll take our next question from Nigel Dally with Morgan Stanley.

Thank you, good morning. First question is on aqquistions. There's been rumors that the Gerber block with direct response type businesses tend to be on the block. Given I'm interested in your appetite for aqquistions, what kind of criteria your using in assessing potential transactions and what's the maximum size of the deal you can inflate without issuing equity? Then I just have a follow-up on the health insurance sales. The 8% sales increase you saw at U.A. branch trailed the growth that you saw in number of agents which I think were up 18%. So I'm hoping can you discuss the reasons for that trend as well.

Okay. As far as Gerber, obviously that's the only primary competitor we have in our direct response operation. We would like to see it be put on the block. We would definitely have an interest in it. That remains to be seen. That is definitely a company we would take a hard look at. On U.A., United American branch, a couple of factors there. One, what's driven our growth over the past couple of years there is really our ability to open new offices and grow the agent.

Fortunately in the first quarter, we had a little more turnover in our branch managers and we only opened two new offices, in the first quarter. That did have some impact on our growth and agents and sales. We did since the end of the first quarter we opened up ten new offices. That would help going forward, so I expect that to accelerate. The other factor in there is we have put more emphasis in the branch office and trying to develop more life Insurance sales. The customer we're writing have no health insurance. And most of these people have no life Insurance. So where we're seeing growth in our life sales and we should continue to see significant growth in our life sales at our branch office, it does take some of -- it does detract from our health sales. Truth be known I'd rather have the life versus the health, if I had a choice anyway

Just to go back to the acquisitions. The number of companies when they talk about acquisitions that have very specific criteria, has to be EPS accretive in the first year or various other measures, any particular measures or criteria you're holding potential acquisitions out to?

We would definitely like to see it be accretive to earnings per share but again I think for a company that size, most of the funds could come from our insurance operations from the insurance subsidiaries. Money that we're using now to invest in bonds. I can't image than we would pay a price that would not be accretive to earnings per share assuming we can use the cash out of the insurance subsidiaries.

Right, right. And one last question just with your investments. I'm guessing it's not an issue, but can you discuss whether you're holding subsidiaries in your portfolio?

I'm sorry, ask that again?

Any subsidiaries in your portfolio.

Gary?

Nigel, we have a very small amount less than $100 million.

Great, thank you.

We'll take our next question from Bob Glasspiegel with Langen.

I want to be sure I understood your last answer properly. You guys haven't done any acquisitions. You're saying you set a screen that has to be accretive but then you sort of say that's an easy screen to follow but buying your own stock back has been and I would assume would be much preferable than just being able to pay 20 times earnings and beat the after-tax return on bonds. You have a little bit sharper hurdle than that on aqquistions right?

No, I don't expect we would pay 20 times earnings for something but--

You're saying you could pay up to 20 times earnings and have it be accretive relative to your return on bonds after tax.

That is basically true. That doesn't mean that we're going to overpay for something, but it by being able to use money out of the insurance subsidiaries, we will have a much better impact on earnings per share and not take money away from our share repurchase, that makes all the sense in the world. And for a company that size, we believe we could do that.

Bob, you know we're limited how much money we can take out and what Mark is talking about, the money that's left over in the insurance companies that we can take out, that's what we're investing in bonds. We think we could -- we just have really estimates. We could do 400, $500 million transactions within the insurance companies and not impair our ratings at all. It might be able to do more. We just hadn't put a sharp pencil to it. But again, the opportunity calls that we're talking about compared to bonds. That's for money that has to remain the insurance company that right now bonds are the best asset.

We haven't done any acquisitions in a long time so I think you've been obviously pretty rigorous in what -- there have been a lot of deals out there even in that level. So I'm just saying you're not saying is it better then 20 times earnings? Therefore it would be accretive, therefore we consider doing it?

No, obviously we have more criteria than that. We're looking for something with a distribution that we believe we can grow. We're not going to pay 20 times earnings for something. But something like a Gerber makes a lot of sense in many ways for us. Again it is a significant competitor to our Globe Life subsidiary. And we think it would be of more value to us than it would be to other companies out there because of the expertise that they have combined with the expertise and efficiencies that we have. We think we could add a lot of value to that company, but no, we're not saying that we would pay 20 times earnings for something.

Okay. Switching gears. Is there any risk, Mark, that you're being a little bit overly optimistic about what the insert turn could be given that you haven't been owning the operation for the whole time or maybe I'm missing where the shortfall to date is coming from, but are you seeing something in Q3 sales that's making you feel like you're right on this or is there a little bit of hope in this?

Well, the increases is in the circulation are pretty solid. I mean, it's really the difference in my projections from in quarter versus last quarter is really just a change in the timing that again, it takes so much longer because of the nature of those sales for the net sales to flow through, but the 27% increase in the circulation for the third quarter is a solid number. It's pretty easy to predict. We know what the response rates are One of the factors that's allowed us to increase that circulation as we've increased the maximum phasable issue from 30,000 to 50 that not only has improved our response rates but it's improved our average premium that we're seeing. So it's allowed to us increase these circulations going forward. So they're solid numbers. I'm very optimistic. I'm not overly optimistic, but I feel very good that the increases in sales are there. There just going to take a little longer than I estimated three months ago.

Okay. Appreciate it.

We'll take our next question from Eric Berg with Lehman Brothers.

Thanks I have a few questions, and good morning. Mark the first question, with respect to the pushing out of the recovery act Globe, to the extent that you have been dealing with this inserter and mailer for years, and presumably you're aware of the lag. In other words, presumably there's always been a lag and all that has happened here is that the ownership has changed, what's your best sense of why you were surprised by the lag here? What was different from what has always been the case in dealing with this inserter and mailer?

Eric, I don't have an excuse for that. I made a mistake. What I didn't take into account, one of the things was -- you have to understand the nature of these. They put an insert in, say the first of April. Those go out third class. So we get a inquiry care, an response card back in four to eight weeks afterwards. Then we send out over the next three months a series of six different packages that include product information and applications. Those are going out third class. I missed that. Instead of first class, which has pretty much overnight delivery in most places, the average delivery there is two to three weeks. So I missed it there. I don't have an excuse for that. It has been the same, you're right. It's just in my projection, my estimation of the time between the increase in circulation to the time the net sales come in, I just miscalculated, and you know, apologize for that but I don't have an excuse, Eric.

I very much appreciate your candor. That's perfectly understandable. Could I move on to expenses?

Sure.

Yes, thank you. What is really driving the lower expenses in the sense that I'm certainly aware of the fact that some time ago you eliminated the service salaries in Birmingham at Liberty in favor of higher commissions? So in concept, if one is sort of being funneled into the other, why are expenses falling at your company as much as they are?

Well, there's two things. There's no doubt the changes that we made at liberty national is a big piece of the expense savings. Those changes went in the second quarter of last year. We started to see those savings during the third and fourth quarter last year. That's why we don't expect to see the same percentage decreases in the second half of this year that we're seeing in the first half, but there's also other things. We have lowered our expenses on the Part D but also just threw other efficiencies. It's not the only reason. For the quarter, I think the savings and the costs at Liberty attributable to the changes in compensation for the field people was about $1.5 million. So it's not all of the savings.

Last question relates to the recruiting and the composition of the agents at Liberty. My question is we continue to see a decline in the number of renewal agents who are presumably the more, maybe not you can challenge me on this if I don't have this right, the more productive agents and we're seeing a tremendous increase in first-year. When's going on with the composition and how are you feeling about that composition of the agent force?

Well, and you're right there, Eric. We have continued to see a decline in the renewal of agents and they are more productive. The average renewal agent is producing about $800 a week of sales versus closer to $450 to $500 in a first-year agent. About half of the decline that we've seen at Liberty National and the renewal year agents are people that have been promoted in management. Because we had higher turnover in management, we saw more promotions than we would typically see.

That is a concern and really until we are recruiting has really picked up the last two quarters. Really it'll be the first two quarters of next year when we see significant numbers of those flow through into renewal agents, so short term we are going to continue to see a a higher percentage be first year. A year ago, I think we were at 57% of the agents were first year. Now it's 70% of the total agents are first year. That is why total sales haven't kept pace with our growth in agents at this point. But they will going forward.

Thank you.

We'll take our next question from Tom Gallagher with Credit Suisse.

First question is, Mark, related to your comments about how you potentially fund M&A out of the insurance operation. I guess listening to your answer, it occurred to me that I think the implication here is that you have some trapped capital in your insurance subsidiaries. Just wanted to get your perspective a little on that. Have you thought about running the company actually at a lower capital level because I don't view your business as particularly ratings sensitive. Can you talk a little about that balance between if you do believe there's excess capital maybe how you get at that or is it simply need to do an acquisition to get at that excess capital? Thanks.

Well, I'll make a couple comments then I'll let Gary add his thoughts. Part of that is regulatory. Right now were dividing up to the parent, our statutory earnings for the year, we haven't taken any additional capital out of the insurance subsidiaries. To do that requires regulatory approval. So it's not that it couldn't be done, but it's not something we can do without getting regulatory approval. Gary, you want to comment?

No, Mark, I agree with that. Tom, the only thing I would add is -- we do feel like there is trapped capital from the standpoint the way our operations are, our different distribution system's really fund the new business out of current operations. But Mark is right. It's difficult to get more money out than just the statutory earnings. So you know, that's why we've kept the capital where it is.

So the idea here is you can do an acquisition and potentially funding that added a life company because you would not necessarily need to upstream the money. It could be done with the cash that resides in the insurance company so you don't need to get regulatory approval. I presume it's the trapped capital issue more than anything, is that right?

I think that's a fair assessment. It would be a better use of the capital that we have to keep.

Is there any consideration underway, you know, discussions with the rating agencies to somehow get access to that capital? Because if it's really just simply the structure and the relationship to the regulation, it would seem that, you know, there's a way to better optimize your capitalization.

Again, it's not a problem with the rating agencies. We could upstream that capital without affecting our ratings. It's the state insurance department that we have to get approval from. It's really not a rating issue.

Got it, okay. Then just one question on your investment portfolio. Notice that you actually acquired more bonds this quarter than you did a year ago. Just curious if anything was going on from a repositioning standpoint or were there just more maturities taking place now that you needed to redeploy cash into or maybe just granularity for what's happened there.

You should comment on the activity we had in the quarter.

Tom, really a couple things. One thing is that, and this was expected, we had $274 million dollars of bonds called this quarter, and versus last year, I think it was only 19 million. So there's an extra 10 or 15 million of calls. We also had slightly higher maturities. We had also had $200 million in sales. We sold some bonds, low yielding bonds in the quarter that were about to mature and invested that money in much higher rates. So it's really a combination of the calls in the sale.

Got it. Thank you.

We'll take our next question from Joan Zief with Goldman Sachs.

Thank you. Just a couple questions. The first one is you've done a great job reducing your admin expenses. I guess my question is, is there more to go or do you think that you're now at the bottom level that we're going to see going forward? The second thing is you've always been able to buy back enough stock that covers your free cash flow. Are you thinking is there anything you can do to maybe upsize that buyback program any way through, you know, hybrids or as you said, you have trapped capital, anything that you're thinking about that could upside that buyback? And then my last question is you talked about wanting to sell more life insurance at the United American branch office at the expense of health. And if you are successful in increasing your Life Insurance sales, are we going to see your free cash flow shrink a bit and will that impact your ability to buyback stock?

Okay. I'll take the first one. On the administrative expenses, no, we think we have significant potential to continue to reduce our administrative expenses as a percentage of our premium. One of the things in the third quarter we should complete the addition to our building in McKinney which will allow us ample space to consolidate additional functions. One of the functions customer service we've already identified several million dollars of savings there when we have the space we will proceed with that. As well as some other functions. Vern Herbel who's now our Chief Administrative Officer, have been in that position for about a year, and I think he has a lot of abilities. I expect to see our administrative expense ratio it into come down. Gary, you want to talk about the buyback?

Sure. Joan we could upsize buyback by borrowing our debt to capital ratio is around 23%, I think, and it's well in our ratings and I don't think you'll see us do that. I think we're satisfied to keep it where it is. Where you might see it is a drop in the stock price for something out of our marketing condition or something out of our control, we might borrow to buy more there, but we're not a big fan of the hybrids. But that would -- that is a possibility but I wouldn't look for us doing that.

On the life insurance at United American, yes we can pick up hopefully a million or $2 million per additional quarter but the surplus drain there is relatively small that it would be an insignificant impact on our cash flow that we would dividend to the parent.

Great. Thank you very much.

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

Good morning. I'd like to start with a couple questions on the marketing side. First of all, can you give us an update on the efforts to stimulate the underage-65 sells in the independent channel and secondly can you give us any updated color about the med submarket in terms of, you know, levels of competition, either on insured side or Medicare advantage side please?

Okay. The first part of your question, again, Jeff? I got the second part--

You had been trying to stimulate the sales of the underage 65 independent channels, been a little slow for a while. I wasn't sure if there are any update there?

And again, we have added some agencies which have added some sales there, unfortunately it still comes down three years ago we had one agency producing 60% of our business on the independent agency side. That agency's now producing about 8% of our total business. So their sales have continued to decline whereas, we have been picking up sales from other sources. The one agency that's caused the big decline there over the last three years really is producing now a relatively insignificant amount. So we do expect to see sequential growth going forward there, but it's still not going to see the type of growth we've seen in our captive agency for us because there is more competition for those agents. On the Medicare side, our Medicare supplement sales have become a relatively insignificant piece of our health sales. Medicare advantage particularly the private fee for service plans are really dominating that marketplace right now. The big question is how long will they survive at the current levels of compensation from C.M.S.? It's hard to say. It could be a year, two years, could be even three years, but I don't see that continuing long term. It's something we're trying to get a better feel politically what is going on there. I know there's supposed to be some legislation introduced shortly about cutting those reimbursement rates, and with all of the abuses that are going on there, I expect to see something happen. I would hope in the next year that makes those plans less attractive, which would be good news for us, in that I think our Medicare supplement sales would rebound if those reimbursement rates are cut.

And thank you for that. Moving on to a couple of financial questions. Gary talked about interest costs and he referenced the year-over-year comparison. Gary, I'm a little confused about the sequential comparison because you had a big drop sequentially yet the long-term debt package was the same in short-term debt went up. So which is the number to go forward with. The first quarter number or the second quarter number?

Probably the second quarter number. Although the short-term debt ended up at $260 million for the quarter average outstanding was $250 million and that was much lower than what we had in the first quarter. The difference between the interest expense on the sequential quarter is we had $700,000 less in short-term interest. Okay. Even though we ended up at $260 at the end of the quarter. We expect to be back around the $200 million later years. I would use the second quarter more so than the first.

Okay so its an issue of the average short-term death versus the [inaudible]?

That's right.

I'm a little fascinated with this discussion about the trapped capital and ordinary dividend restrictions. We're used to seeing other companies routinely pull extraordinary dividends, [Ameriprize], MetLife, Prudential, Principal pulling billions of extraordinary dividends. Is there something about one or more of your states [domicile] that creates a problem? Why is that a difficult constraint for you?

I don't know what the other companies do. We have in the past gotten extraordinary dividends and one example is [inaudible] the money that was generated by that I.P.O. and spin-off went through Liberty National. We were able to get an extraordinary dividend for that. Again, I don't know what the other company's experience is. Our experience is when we go for extraordinary dividends, we have to have a very good reason to pull that money out and they're not real. At least they are at the states we deal with. They're not swayed by that much we think we have capital trapped in the company. And we can utilize it better to hold the company. They want to keep it there in the insurance companies. Thats been our experience . We're in domicile in several different

You have any potential just to use internal surplus notes or anything else to leverage that capital or not?

We would have that potential. We haven't really looked at that, that closely but that is something we do need to look at.

Thanks a lot.

We'll take our next question from Steven Schwartz with Raymond James and Associates.

Good morning, Mark. I just wanted to go over a number that you brought up to Jimmy way back at the start of the Q & A period. Were you saying that insert media sales on a gross basis in this quarter were up some 7%? Was that accurate?

That was total direct response sales. The insert media was still down 4% for the quarter.

On a gross basis.

On a gross basis, the total direct response sales on a gross basis were up 7% in the quarter.

So just following along the logic here than we should expect to see insert media sales down probably 4% in the third quarter and beginning to pick up as the sales pick up following the increase in distribution.

That would be reasonable. We might beat that a little bit in the third quarter on a net basis but that's pretty close to our expectations.

That's what I wanted to get to.

We'll take our next question from Colin Devine with Citi.

Thanks [inaudible]. First that I acknowledge your ability to get down expenses faster than we thought you could and also Mark your candor on the forecast issue. I've got really three questions I'd like to focus on. First, you tried a lot of things over the last couple years but growing the level of your enforce are really picking up the pace of that beyond what maybe what about 2% now, seems to remain elusive. Is there anything that we can be looking for that you're doing this that's going to start to accelerate that, that's question number one, on both the life and the health. Second, can you give us a bit of an update as to what happening at First Command, you're longer I guess break out the agent count there and just sort of when's happening would be very helpful. Then I guess instead of coming back to the trapped capital issue since it's been raised, it strikes me with some of your peers have done is to shrink the number of legal entities that they're writing through. Is there a reason that is not available to you or is that something that -- why do you need to frankly have as many writing life insurance companies as you have today?

Okay. Well, first on growing our top line growth and growth in premiums, sure, we're always trying something. The direct response, the acquisition of the DMAD going forward will help us get back to double digit growth and premiums in our direct response. Unfortunately some of the other distributions are not going to be as quick as . American Income, we have a plan. We think we can get there over the next few years. We can get back to seeing double digit growth in sales and double digit growth in premiums. Right now we're running 7% growth there. Liberty National is going to definitely take some time whether the premiums are down, 2% there, that's going to take some time for us to continue to grow the agent count there to where we can start seeing respectable growth. I do expect in 2008 we will see better growth in both life and health in force and collected premiums is what we're seeing this year. The quickest, easiest thing will be in the direct response. That should begin growing substantially here over the next quarter, two quarters, three quarters. On the first command, looks like they have at least started to turn the corner. If you look at our sales there this quarter, it's the first sequential quarter that we haven't seen a decline in, at least two to three years. So our sales did pick up a little in the quarter. I'm still not expecting to become a major growth piece for us as it were. But at least the sales are starting to pick up there. As far as a trapped capital issue and combining entities, it is something we are considering. It's something we will be discussing at our board meeting next week. There is some potential there for a number of reasons that it may make some sense to combine some of our entities including cost savings, but one of the benefits could be that it could free up some trapped

Okay. Just coming back on two quick follow-ups. First can you give us some sense, has the agent count at least stabilized at first command or are you now under 300 agents? Where are we there? And then secondly, in terms of what are your two or three key objectives in trying to, you know, run Torchmark over the next two years. What should we judge you on? In saying ok you've done a good job or maybe not so good a job. Is it enforce revenues, nominal earnings, you know? What are you holding yourself accountable to?

On the first command, the agent count as far as producers, it looks like we do put that out on a web site. It grew by three for the quarter, and it's eight less than it was six months ago. It's pretty well stabilized. On the other issue, what I judge myself on, and I think what most of the people here at the company are judged on is how we grow earnings per share. I would like -- I think we can get it back to double digit growth in earnings per share, which has always been our goal. We've run a little under that recently. How we do that is a combination of things. We can generate better internal growth than what we have seen the last couple of years. We can reduce our administrative expenses further and improve our underwriting margin. Also, I would like to see sometime in the next year, two years, three years, I think there is the potential for to us make an acquisition which can add to growth in earnings per share but still comes down to our goal is to grow the bottom line and grow earnings per share. Everything we do is directed toward that end.

Double digit then that's the metric?

I've been with the company 27 years. That's always been our goal is double digit growth in earnings per share is what's always been expected. That's always been our measure what's a good year versus a not so good year. I think the worst we've had in the last ten years is 8 1/2, but I would love to see it get back above double digits, yes.

Thank you.

--From Mark Finklestein with Cochran Caronia Waller

A few questions, thank you. On the first quarter call, I think you mentioned the expectation of double digit growth at Liberty National in the back half of the year. I can't recall if you stated your new anticipations or if there's any changes to that earlier. I want to get an update on that firstly.

Okay. Probably tone that down a little bit. We do have easier quarters to compare to in the second half of this year. We're already producing at a level that's higher than what we had in the fourth quarter of last year. So by the fourth quarter, it's reasonable to assume that we should see double digit growth in the fourth quarter. We're probably not going to hit double digit growth in the third because if you just look at the quarters we're comparing to, that may be a little difficult. Sequentially, we should see growth quarter over quarter going forward. So I would have to move back about three months my expectation for double digit growth.

Okay. I guess this is a little bit of a philosophical question. If I understand some of the changes at least in the administrative expense decline, a part of that is due to the changes that you made at L&L. I'm going back a little bit, but I thought that the idea was kind of the net cost wouldn't be that different but you were really shifting from a fixed expense structure for part of it to a fully variable structure. So what I guess I'm trying to understand is, you know, if the sales do increase at Liberty National, should you expect some of that cost shift to move into the commission expense line in that segment and therefore a slight uptick on a relative basis in that number? Or am I misunderstanding that?

Well, that's partially true. If we look at just our cash expenses, they have come down substantially at Liberty National. Some of those we have moved from a fixed expense into a variable expense. That variable expense commissions is deferred. And it's shown in acquisition expenses. So even there, if sales do -- when they do come up going forward, we may see less of a reduction in our cash expenses, but the commissions are deferred so you will still see an improvement in our profit margin.

Okay. Just finally on American Income, in terms of taking the lead generation et cetera in house, I think you stated a goal of getting to half of the territories by the end of the year, can you talk quickly about the logistics in doing that? I guess what I'm trying to get at is the whole process fully at your discretion and it's just administratively and personnel wise kind of putting it in place? Are there any elements of that, that are out of your discretion and, you know, kind of what are the points you have to clear up to fulfill?

That's a fair question because one of the things that's fueled our growth at United American was about three years ago where we basically had exclusive territories in our branch office. We eliminated those exclusive territories and we've been able to significantly expand the number of offices that we have. The difference between that and American Income is the reason we're not able to do that over night at American Income is the agencies, the SGAs, which is our top person in our American income agencies. They control the lead generation. They have control of the local unions where the bulk of our leads are generated. They have people employed which we call public relations representatives who go out and get these endorsements from the local unions and they pay for the mailings. That's what we have to take over. We have to make that a home office function. That takes time. Because as we've got these people spread out all over all 50 states as well as Canada that we have to get the management hierarchy in place and have to hire the right people to take this over because it is so important not to mess that up. It is a life blood of American income and we're not going to rush into it and do it to where we actually harm sales. We actually in the areas that we have taken over, we've actually been able to add public relations people and grow the lead generation. That's one of the reasons why we've seen such significant growth in sales in those areas. But it is a time consuming thing. I said right now we're at 17% of the territories. We hope to double that to more than in the 33, 34% of the territories by the end of this year. Hopefully, we can move that from a third of them by the end of this year to two-thirds of them bit end of next year. It's still a long-term process. We have seen great results where we've been able to do that and we are going to accelerate our efforts. We still can't do it overnight.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) We'll take a follow-up question from Eric Berg with Lehman Brothers.

Thanks very much, a couple of quick follow ups. Mark, why can't it be done overnight or something close to it? In other words, I think you have been at this process for over a year. What is it about the contracts, the sensitivity? Why is this proving to be such a protracted multiyear process?

Well it's hard to describe briefly, Eric, but again, developing those union relationships and we have to hire people and train people to go in and develop and maintain these union relationships. Plus we're dealing with unionized agents and public relations people. We do have some restrictions there. We have to get the right people in the management structure. We have 200 of these people around the company. We need to grow that number. We can't have 200 people reporting to one person. We've got to develop a management hierarchy which we started to do and we're going to accelerate that effort. We've identified more people that we are going to put into management positions, but it's still you have to take it one area at a time because we're taking areas where sales are down. In fact, the areas that we're taking over the second half of this year, their sales are down 27% the first half of this year. We're able to turn those around and get growth there, but Eric, I don't know how to simply state it other than it is a time-consuming process that we just absolutely have to make sure that we do properly. If we do anything that upsets those union relationships that we have developed, that Bernard Rappaport developed over 40 years, would be a terrible mistake. It would be something that would be -- take us years to recover from.

Last question relates to Globe again. You talked more than once about gross versus net sales. Why is that an understanding, in analyzing and understanding the progress being made at Globe, why is that distinction important?

Okay. Again in years past, if I look back five years, ten years ago, we always reported gross sales. These were the annual premiums on policies issued. It didn't affect us much except in the direct response because we have the introductory offer. We used account sales, report gross sales that was the annualized premium on every policy issued even if they only paid the dollar introductory offer. That led to real misunderstandings about the persistency of the business. Now we're only reporting policies and net sales policies that pay the first full premium. On our adult products, we still have a dollar for one month introductory offer. On the insert media we have on the juvenile products, we have a dollar for the first three months. The gross sales are policies that have been issues that have not yet paid the first full premium. The net sales that we report in our financials are policies that have paid the first full premium. We still lose about 40% of the policies we issue and never pay beyond the dollar introductory offer. So that persistency hasn't changed significantly. So when we see growth in our gross sales, we know that a month later on the adult and three months later on the juvenile that those will flow through to net sales.

Thank you.

We have another follow-up question from Joan Zief of Goldman Sachs.

Hi,Thank you. Can you talk about how the premium income is going to flow into a result in the second half from Medicare Part D and exactly why you're thinking the margins are going to be higher and, you know, how the earnings impact is going to flow in through the second half?

Rose Mary, I'll let you have that one.

Okay. We did have a higher premium than normal this quarter because we did receive a $2 million amount of money from cms to their adjustments of the risk selection factors. This is something we do twice a year. It's really hard to predict what that number's actually going to be so we're anticipating really that the premium income over the next two quarters would go back down to a level that wouldn't include that amount and actually a little bit less than that. And I believe your second question is about the expectation of the future margins. We do have an adjustment also or actually it's an improvement in our savings due to our taking over improvement in our fees due to our taking over the administrative function. That was in place the entire quarter this time. This time whereas it wasn't in place the entire first quarter. So we do expect to see that savings continue. And also, we had some improvements in our policy obligations. That was due to our improving our rebate estimate a little bit. Also, we're going to be going through a reconciliation process with CMS this summer, actually starts at the end of July. That's where you'll reconcile the passthrough money and also risk sharing. We made some adjustments to that in the second quarter. That was the cause for the policy obligations going down from 80.5 to 79.7. What we're really anticipating for the profits on this line for the third and fourth quarter of about 10%. That really is saying some of the investments were not anticipating in the third and fourth quarter.

Thank you.

It appears we have no further questions at this time. I'd like to turn the conference back over to Mr. Mark McAndrew for closing remarks.

We'll talk to you again in three months. Thank you for joining us again this morning.

Once again, that does conclude today's conference. We appreciate your participation.