Globe Life Inc.
Q4 2008 Earnings Call Transcript

Published: 5 Feb 2009

[Operator:]

Good day, everyone and welcome to the Torchmark Corporation Fourth Quarter 2008 Earnings Release Conference Call. Please note that this call is being recorded and is also being simultaneously webcast. At this time I would turn the call over to the Chairman and Chief Executive Officer, Mr. Mark McAndrew. Please go ahead, sir.

[Mark S. McAndrew:]

Thank you. Good morning, everyone. Joining me this morning is Gary Coleman our Chief Financial Officer, Larry Hutchison, our General Counsel, Rosemary Montgomery, our Chief Actuary and Mike Majors, Vice President of Investor Relations. Some of my comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2007 10-K which is on file with the SEC. Net operating income for the fourth quarter was $119 million or $1.40 per share, a per share decline of less than 1% from a year ago. Net income was $137 million or $61 per share, an increase of 14% from a year ago on a per share basis. For the year, net operating income was $5.80 per share an increase of 6%, while net income per share declined 7% to $5.11. Net operating income for the year was less than our previous guidance, as a result of three significant variances. First there was this $0.05 attributable to higher than expected losses on our variable annuity business, $0.02 was attributable to lower than expected investment income as a result of Management's decision to increase our holdings of cash in short term investments. $0.03 was attributable to higher than expected administrative expenses during the fourth quarter. Excluding FAS 115 our return on equity is 15.3% for the quarter and our book value per share was $39.17 up 8% from a year ago. On a GAAP reported basis, with fixed maturity investments carried at market value, book value is $26.24 per share. In our life insurance operations, premium revenue grew 2% to $401 million for the quarter. And life underwriting margins increased 3% to $112 million. Life insurance net sales were $77 million for the quarter, up 13% from a year ago. At American Income, life premiums grew 5% to $119 million and life underwriting margins was up 13% to $40 million. Net life sales increased 17% to 28 million with first year collected life premiums growing 11% to $21 million. The agents accounted American Income was up 21% from a year ago to $3085. American Income continues to show a very positive growth in net sales and underwriting margins. Premium revenue was roughly $3 million less than expected in the quarter due to the weakness in the Canadian Dollar. For 2009, we expect to see continued double digit growth in net sales at American Income. In our direct response operations, life premiums were up 5% to $126 million and life underwriting margin grew 7% to $31 million. Net life sales increased 8% to $31 million. Despite the difficult economy, we expect continued growth in direct response net sales in the 5 to 10% range for 2009 while maintaining our current underwriting margins. At Liberty National, life premiums declined 1% to $71 million and life underwriting margin was down 13% to $18 million. Net life sales grew 29% to $13 million and the agent count was 3778, up 53% from a year ago. For 2009, we expect net life sales to continue to grow in excess of 20% continuing momentum we have... we had in 2008. On the health side, premium revenue excluding Part D declined 11% to $225 million and health underwriting margin was down 9% to $42 million. Health net sales declined 49% from a year ago to $30 million but grew 4% from the third quarter of 2008. The branch office and independent agency channels that unite American continue to experience significant declines in net sales and premium revenues, while these distribution systems accounted or contributed 26% of our premium revenue for the quarter, they account for only 14% of our insurance underwriting income after administrative expenses and 8% of our net operating income. While we intend to continue to produce sales in our current health insurance markets, we will continue our focus on selling more life and supplemental health products which have higher margins and better persistency. Premium revenue from Medicare Part D was down 18% to $43 million, while our underwriting declined 25% to $5 million. Net Part D sales for the quarter increased 95% to $16 million. While not currently marketed we do have a relatively small block of variable annuity business on our books. At the end of the third quarter, these assets totaled $890 million, but declined to $676 million by year end. $167 million of this decline was attributable to changes in the market values of the asset sales. As a result we experienced a larger than anticipated underwriting loss of $8.8 million on this business in the fourth quarter, compared to a $1.6 million gain a year ago. Administrative expenses were $43 million in the quarter, up 11% from a year ago and almost $4 million higher than our previous projections. The increase is due primarily to some timing differences and higher than expected litigation expense as a result of settlement of two law suites during the quarter. For 2009, we expect administrative expenses to increase in the 7 to 8% range as a result of the $9 million increase in our pension expense this year. I will now turn the call over to Gary Coleman, our Chief Financial Officer for his comments on our investment operations.

[Gary L. Coleman:]

Thanks Mark. I want to spend a few minutes discussing our investment portfolio, liquidity in capital and share repurchases. First regarding the investment portfolio, on our website are three schedules to provide summary information regarding our portfolio as of December 31, 2008. They are included under supplemental financial information in the financial reports and other financial information section of the Investor Relations page. As indicated on these schedules, invested assets are $10.2 billion including $9.6 billion of fixed maturities and amortized costs. Combined equities, mortgage loans and real estates are $36 million, less than 1% of invested assets. We have no counterparty risk as we hold no credit default swaps or other derivatives. In addition, we do not operate a securities lending program. As the $9.6 billion of fixed maturities, $8.9 billion are investment grade with an average rating of A minus. The low investment grade bonds are $712 million with an average rating of B plus and are 7.4% of fixed maturities compared to 8.1% a year ago. Overall, the total portfolio is rated BBB plus compared to A minus, a year ago. Net unrealized losses in the fixed maturity portfolio were $1.8 billion, up from the $1.4 million at the end of the third quarter, but lower than the $2.2 billion of October 31. By sector, the largest losses are in the financials which comprise 41% of the portfolio, and 56% of the total net unrealized losses. From the third quarter, net unrealized losses on bank securities declined $76 million but that was offset by $170 million increase in net unrealized losses on the fixed maturities in the insurance sector. As the $357 million increase in net unrealized losses during the quarter, 94% of the increase related to bonds from which there was no downgrade in the ratings. Accordingly, we feel that most of the unrealized losses reflect the current illiquid market that has contributed to a significant spread widely on the bonds that we feel are likely be money good. Obviously this is not a market for us to sell bonds. However due to the strong and stable positive cash flow generated by our insurance products, we not only have the intent to hold the bonds and maturity but more importantly we have the ability to do so. Now I would like to discuss the asset types and sectors within our fixed maturity portfolio. As the asset type, 78% of the portfolio is in corporate bonds and another 15% is in redeemable preferred stock. All of the $1.4 billion of redeemable preferreds are considered hybrids securities, because (inaudible) characteristics of both debt and equity securities. However, all of our hybrids have a stated maturity day, in other characteristics that makes them more like debt securities. None of them are perpetual preferreds. The remaining 7% of the portfolio consists primarily of municipals and government related securities. There is no direct exposure to subprime or Alt-A. We have only $40 million in RMBS and CMBS securities, all rated AAA. Our CDO exposure is a $131 million in which the underlying collateral is primarily bank and insurance trust preferreds. The average rating of these securities is A minus with non-rated less than BBB. Regarding the sectors, as I mentioned the financial sector comprises of $4 billion or 41% of the portfolio, within financials the life health probably cash for (ph) insurance sector is $1.8 billion and banks are 1.7 billion. Financial guarantors and mortgage secures totaled $180 million less than 2% of the portfolio. The next largest sector is utility which accounts for $1.1 billion or 12% of the portfolio, the remaining, $4.6 billion of fixed maturities is spread among 242 issuers in a broad range of sectors. Now to conclude the discussion on investment, I'll compare with portfolio yield. In the fourth quarter, we invested $157 million in investment grade fixed maturities, primarily in the industrial and utility factors, we invested an average annual effective yield of 7.8% and average rating of 8 and an average life depending on future calls between 22 and 23 years. This compares to the 7.1% yield, A minus rating and 18 to 38 year average life of bonds acquired in the fourth quarter of last year. This is the fourth consecutive quarter that new money yield was 7% or higher, and 7.8% is the highest we've achieved since the first quarter of 2002. The average yield on the portfolio in the fourth quarter was 6.97%, virtually the same as it has been the last four sequential quarters. Now regarding liquidity and capital. Our insurance companies primarily sell basic protection life and health insurance which generates strong and stable cash flows. In the fourth quarter, only $3 million or 0.5% of premium revenue came from asset accumulation products where revenue and underwriting margins are subjected to changes in equity markets. Regulatory capital remains sufficient to support our current operations and rating, the RBC ratio at year-end 2008 was 329%. At that level, we have approximately $110 million more capital than required to achieve our target RBC ratio of 300%. At the holding company level, free cash flow remains strong. It was $343 million in 2008, the fourth consecutive year that free cash flow has been at least $300 million. Due to the $68 million of bond impairments in 2008, and with 70% related to Lehman bonds, the amount of dividends that insurance subsidiaries can pay up to the holding company in 2009 will be the less than in 2008. In spite of this, we expect 2009 free cash flow to be in excess of $300 million, probably in the range of 320 to $330 million. Now there are several potentially uses for the 2009 free cash flow. One possible use is a strategic acquisition, but given the current state of debt and equity markets, such a transaction in near-term is unlikely. In August, we have a $100 million debt issue that matures, and we will set aside cash to fund that maturity if necessary. Our preference would be to refinance, either through an issuance of debt in the public market or issuance of commercial paper. But if financing terms aren't favorable, then we will have a $100 million available to retire that debt. Given current economic conditions, we expect that the likely use of our available cash will be the possible retirement of the maturing debt issue along with share repurchases and to a lesser extent to the reduction of short term debt. Those were my comments, I will now turn it over to Mark.

[Mark S. McAndrew:]

Thank you Gary. With so many unknowns in our current economy, it is much more difficult for us to provide accurate guidance. Our best current estimates project 2009 net operating income per share to be in a range of $6.05 to $6.25 per share, an increase of somewhere between 4 and 8% for the year. Those are my comments for this morning and I will now open it up for questions. Patricia?

[Operator:]

(Operator Instructions). We will take our first question from John Nadel with Sterne, Agee.

[John Nadel:]

Hi good morning everybody. Couple of quick ones for you, just what's the average duration of your outstanding commercial paper currently?

[Gary Coleman:]

The average duration now is about 60 days, we're all of our papers under... commercial paper are the federal programs.

[John Nadel:]

And the max, there is 90 days if I understand correctly?

[Gary Coleman:]

Right.

[John Nadel:]

Okay. And so, you guys know where I'd been on this issue, I guess I'd like to understand, what's your backup plan? I mean obviously there is space capital ratio is very strong, probably enough to continue to support the ratings but S&P (ph) are out, they are with their negative outlooks and S&P I guess just yesterday saying that they are taking a stress test, an incremental stress test view on life and health companies. So, who knows what that means, but obviously if there is a negative move on your rating, the CPFF access is very limited at that point if available at all. I guess I'd just like to understand from your perspective, what the back up plan is to deal with the potential loss of access to that program?

[Gary Coleman:]

Well there we could go out into the market, people are placing commercial paper in the market, and we've talked to our bankers, we are not anticipating a downgrade but we've talked to them the fact if we did have a downgrade would we be able to issue commercial paper and they tell us that we can do that.

[John Nadel:]

A2P2?

[Gary Coleman:]

Yes, that's what we represented to them.

[John Nadel:]

Okay.

[Gary Coleman:]

And so we can do that. If for some reason that was closed off, we could still... we could take down our bank loan and that runs through August of 2011, so that's another source of liquidity there.

[John Nadel:]

Okay. The question for you on... then on impairments, I certainly appreciate the stability of your business and the whole, the maturity approach, probably one the most stable books of business in this space. But I guess my question is, especially given the focus and exposure and BBB and below corporates as well as preferreds, I guess I'm wondering, how when we're seeing the kind of impairment and investment loss activity that we're seeing in very similar names, in very similar credits, across the industry, how you feel comfortable that everything you own is money good?

[Gary Coleman:]

Well first of all, I can't speak to what other people... what judgments they are making regarding similar bonds. I can just tell you that, we look at the other... the OTTI issue, we look at the accounting literature, we look at the length in time in which bonds are the in low... market has been below book, we look at the financial condition and we look at the prospects of the issuer. But when... we look at each one on a bond by bond basis and we make a determination as of today, and we've made a termination that we think these bonds are going to be money good. And that could change in the future, but... as conditions change, either with the issuer or the general economy, but again we feel like bonds are money good, or we would have taken OTTI.

[John Nadel:]

Okay. And then just to get a sense for the assumptions underlying the 605 to 625 guidance for 2009. Understanding that it's a really difficult environment to give sort of any real predictions. But just wanted to get a sense for what's embedded in your assumptions around capital management activities? Does it assume, Gary, as you sort of pointed out, the idea of repaying the $100 million that matures in August '09 with cash on hand, how much in buybacks is sort of assumed in that 605 to 6 in the quarter?

[Gary Coleman:]

Well there is various levels of buybacks, ranging from minimal to up to $300 million worth of buybacks. We'll say this though, we if we spend the 300 million, it'll be weighted such that a third of it might be spent in the first half of the year, and so that we have $100 million available, so we actually have $200 million for the rest of the year. That way we know we have $100 million available if we have to pay down that maturity in cash.

[John Nadel:]

Got you.

[Gary Coleman:]

But...

[John Nadel:]

Okay.

[Gary Coleman:]

As far as our projection, we did it both ways, whether to pay it down or refinanced it, and that's all that's built into the range.

[John Nadel:]

Okay. Okay, okay understood. Thank you very much.

[Operator:]

Our next question comes from Steven Schwartz with Raymond James.

[Steven Schwartz:]

Hey. Good morning everybody. Looking at towards Mark (ph), the numbers have always been good and it's stable, everybody knows that. One of the thoughts I have been having watch... the economy rolled itself out in the way it is, is the effect on you customer base and your customer target market. We all know that's very different from a lot of the other companies that are public and we all track. I'm interested if you are seeing any increase in lapsation and the reason why I ask is that it looks like the annualized premium enforced at year-end for the Life Insurance business slightly decreased from the third quarter's end and I've got numbers going back to 2002 in my model and I haven't seen that before?

[Mark McAndrew:]

Steven, I'll address that. A couple of things. First off, at American income, as I mentioned in my comment, the premium growth there both collected as well as enforced was less than what we anticipated it would be, because of the Canadian Dollar, we have a little over 60 million of Canadian premiums enforced and I recall the Canadian Dollar went from $0.96 to $0.82, in the quarter, which instead of having something in excess of 10% growth in our Canadian premiums we actually saw over a 10% decline in our Canadian enforced (ph) premiums during the quarter. And we have not seen any noticeable difference in our renewal year persistency. As I've mentioned in prior calls, direct response, we did see some small declines in our first year persistency on a segment of that business which was primarily what we call our insert media which, those changes we've now reversed as a result of some rate test that that we did and actually for 2009 we'll see our first year persistency improve in that marketplace. At Liberty National, we have seen some declines and again in our first year persistency, not really on the basis of the economy but when we switch to laptop sales presentation and electronic application, we start collecting the initial premium with those applications and as a result of that, we have seen some deterioration in our first year persistency at Liberty National. We are taking steps to turn that around. I can't... I really don't think that has anything to do with the economy, I think it has more to do with the change we made last summer in the electronic application and not collecting the initial premium with the application.

[Steven Schwartz:]

Okay, no, I appreciate that, I heard you said about that Canadian thing but I did not put two and two together. Thank you.

[Operator:]

Our next question comes from Randy Binner with FBR Capital Markets.

[Randy Binner:]

Hi thanks. On the variable annuity piece, obviously, there was an outside loss there. Do you hedge that exposure and how can we think about what might happen there from a loss perspective, if we continue to see downside in the S&P 500?

[Mark McAndrew:]

Gary, you want to...

[Gary Coleman:]

Well first of all we don't hedge that exposure there. And I think when we looked at in our guidance and various S&P 500 levels, the loss for next year could be somewhere between 2 and $9 million.

[Mark McAndrew:]

And Gary, the two were based worth... the $9 million loss, we're assuming the S&P is, at what level?

[Rosemary Montgomery:]

We're assuming its 875.

[Mark McAndrew:]

875.

[Rosemary Montgomery:]

At the $2 million loss, we would be assuming it 1000.

[Randy Binner:]

Okay, and so obviously, that's implicit in the guidance that you've provided.

[Mark McAndrew:]

Right

[Randy Binner:]

Okay, and then beyond that any plans for that segment in light of it's own hedge position and kind of not a fit with the rest of the stability of the business?

[Mark McAndrew:]

Again that's a declining... book of business has been a declining book of business for a number of years. We had looked at trying to sell it in the past. Again, we think it will continue to run off, when the market does turn around, we would expect the possibility of a turn around. We will look into the possibility of hedging it, but at this point there is no immediate plan to do so.

[Randy Binner:]

Right, okay, fair enough. And then just one more, if I may, with Gary. Can you discuss the matching impact or the additional capital call requirement that will happen as BBB, or if BBB credits get downgraded below investment credit? Is there a rule of thumb we can use to think about the additional capital requirement that that kind of rating move would have?

[Gary Coleman:]

Randy, I don't have the ... as far as individual charges have moved down the way, we do stress there so regarding our BBBs and we have $4.6 billion of BBBs and 1.2 billion is BBB minus and 2 billion or BBB of that. And I'll stress this, the entire 1.2 billion BBB minus plus 900 million of the 2 billion of the BBB could all move down under below investment grade and we would still be about 300% in RBC. So that gives you an idea how much movement we are going to have downward and still maintain the capital at 300%.

[Randy Binner:]

So just to clarify so the 1.2 billion of, you said BB all of that would move to below invest, I am sorry, could you just run through that?

[Gary Coleman:]

Let me run through that again, okay. We have 4.6 billion in total of all BBB. Of that amount 1.2 billion are BBB minus.

[Randy Binner:]

Got it.

[Gary Coleman:]

And 2 billion are BBB with the remaining 1.5 billion BBB plus. What I was saying is the entire 1.2 billion of the BBB minus plus about 900 million of the 2 billion of BBB, all could move down to below investment grade. It could all be downgraded and we would still be a 300% RBC.

[Randy Binner:]

Excellent, that's very helpful, thank you.

[Operator:]

Our next question comes from Colin Devine with Citi.

[Colin Devine:]

Good morning. Just a couple of questions. If we look at life premiums this quarter, I think it's about the lowest growth we have seen in about 10 years year-over-year in total of 2%. Are we starting just to see the impact of the economy comes through here and as you are looking out for '09, is that the sort of level we should start to be thinking about? Its question one. Question two, if you could talk about agent recruiting trends, since I thought a tougher economy is generally helpful to you that way? And then lastly, on excess investment income, the required interest for policy liabilities. That was just biggest jump again in I think the last 10 years, up 11%. Is there something going on there or is that just some year-end reserve showing up?

[Gary Coleman:]

Colin, I'll take that one. That wasn't true enough. We had ... in that $17 increase that we have, 1.6 million was a catch up adjustment for the year.

[Colin Devine:]

Got you. Premiums and agent recruiting?

[Mark McAndrew:]

Our the agent recruiting, our agent recruiting is very strong, Liberty American income continues to be very good and we continue to expect to see the same type of growth we've seen this year going forward in that. So, I'm not sure if the economy is really helping us but it's definitely not hurting us. As far as life premiums again, we would been 3% or closer to 3%, if not for the decline in the Canadian Dollar, but I think, in fact, I was just looking to see what are... in our projection for next year, I think we're still just assuming somewhere in that 2 to 3% growth range for next year again. Again we're assuming that the Canadian Dollar in our expectations does not improved significantly, in fact on the low side we're expecting it continues to go down somewhat from its current level. So I think that's about where we are at right now.

[Gary Coleman:]

So maybe selling just a little bit but not much and really what we saw this quarter that was just the currency coming through.

[Mark McAndrew:]

We would have had better growth this quarter without the Canadian, again those 60 over 60 million of life premium enforced there that dropped substantially during the quarter.

[Colin Devine:]

Thank you, that's very helpful. Thanks.

[Operator:]

Our next question comes from Eric Berg with Barclays Capital.

[Eric Berg:]

Thanks very much, good morning to everyone in Texas. I have a few questions, starting with the investment portfolio. With respect to the BBB portfolio, could you give me a ball park sense of where it is trading and your judgment relative to amortize the cost?

[Gary Coleman:]

Well, at year end it was about $0.80 on the dollar.

[Eric Berg:]

That would be across the BBB plus BBB and BBB minus?

[Gary Coleman:]

Well the BBB plus I think it would $0.081 and probably through the BBB and the BBB minus is more around $0.70.

[Eric Berg:]

And am I correct when I say that you recorded a realized capital gain in the quarter, and I did not see any reference to OTTI at all? Am I right when I say that you have not recorded at really any OTTI on the BBB portfolio?

[Gary Coleman:]

No. The first of all gain the realized gain we had in the fourth quarter was, we hedged we took an impairment loss in the third quarter, of about $70 million which I mentioned before was primarily our investment and your former employer alumni (ph).

[Eric Berg:]

Right.

[Gary Coleman:]

And we had set that evaluation allowance at that time for accounting purposes, because we didn't have unrealized gains and that to support tax benefit, unrealized gains and bonds that had unrealized gains and portfolio increase in that that we were able to reverse that evaluation allowance in the fourth quarter and that was $10 million of the $11 million of gains that were... so there was essentially was no gains or losses for the quarter. Now so, the impairments that we've taken this year, the biggest I want mention, in the third quarter, and Lehman's were ready (ph) by the time we took it was impaired. The other impairment we had some smaller impairments earlier in the year and I think those were right below our investment grade. So, to answer your question, we had... in 2008, we did not take any parameters that I am aware of are BBB.

[Eric Berg:]

Right. So essentially if things now stand, the BBB portfolios amortized cost, putting aside amortization of premium and discount. It sounds like the current cost basis, or the current amortized cost of the BBB portfolio is unchanged from what it was when you acquired these securities. It's essentially, they've not been written down at all.

[Gary Coleman:]

Yes, I think that's correct.

[Eric Berg:]

My final question, I was just hoping we could go over in a little bit more detail than we' provided the pension issue, Mark referenced the pension issue, from a technical point of view, what's happening? Is this a discount rate issue, is it an issue of actual return falling short of expected returns, what exactly is happening that will lead to higher pension expense in 2009, and then would otherwise have been the case? Thank you.

[Gary Coleman:]

Eric you are right in both the instances, as both the discount rate and recognizing loses in the portfolio, but primarily the discount rate is a minor change but the biggest change is due to the poor performance of the portfolio, we're having to amortize those loses under the accounting rules and the amortization of those loses make a 8... I think it's 8 million or the 9 million of pension expense will be up this year.

[Eric Berg:]

Thank you.

[Operator:]

Our next question comes from Tom Gallagher with Credit Suisse.

[Thomas Gallagher:]

Hi. Just had a broad question on... thoughts on risks management and cash flow, I guess to go back to John Nadel's earlier question, knowing that there is a risk, I don't know how you define it high, low, medium that you potentially could get bumped out of the government's CP program, and then also just considering looking at some of the perpetuals you have on your balance sheet, names like SunTrust, the Third (ph), Region Financial, the common equity of which is trading below between 1 and $4 per share. Why would you even consider buying back stock right now? It seems, seems that the environment is sort of crumbling to some extent and I understand your cash flow is holding up better than others. But when I think about potential sources and uses of cash, it would seem to me that buying back stock doesn't make a whole heck of a lot of sense right now. But just curious what you think about that?

[Gary Coleman:]

Well, first of all, I will just talk about why we would buy back stock excluding other issues that we are seeing at lowest multiple I can remember that we are selling at, and we still think that our business is strong and so it's compelling ... that's a compelling reason to buy the stock. We are going to be careful, and as I mentioned we're... in our projections, we are showing using only a third of our free cash flow in the first half of the year. And I don't know how much of that will be buyback versus maybe paying down short term debt or other things, we just will have to see that as we go. But one thing to keep in mind is that, as I mentioned we have $100 million of excess capital at statutory level. We got 320 to $330 million of free cash flow at the holding company. And if necessary we could direct some of the money back into the insurance companies if we needed, that's over $400 million of funds that available. We have done some stress testing on our portfolio and we went back and looked at the fall rates that were back to 1900s, picked the worse year that we could find, I think it was 1933, we applied those default rates to our portfolio and came up with losses of $200 million. We could suffer $200 million of losses, not put any money back into the insurance companies and still be a 300% RBC. If it exceeded that we could redirect some of that money back down there.

[Mark McAndrew:]

But also, Tom, we have been conservative, I think in January Gary, we purchased 200,000 shares?

[Gary Coleman:]

Yes.

[Mark McAndrew:]

So we have significantly slowed down our share repurchase at this point. But we expect to take it back up here as the year progresses. But we are going to make sure that we have plenty of cash on hand to pay our debts and to run our business.

[Thomas Gallagher:]

Okay.

[Gary Coleman:]

And Tom, the only thing I would add to that is that there's some... maybe some timing impact there but we're going to generate... the other $330 million of cash isn't a one time thing, as I have mentioned 2008 was a fourth year in excess, consecutive years in excess of 300 million. That cash is going to replenish as we go forward. So I agree with what Mark said, I'm just saying that I think we could withstand some pretty high impairment losses with the cash position that we have.

[Thomas Gallagher:]

Got it. And I guess my only thought on the matter would be... it seems like the only real issue here is that short term $300 million, beyond that there is no... not a lot of sensitivity to Torchmark, so just given that that's kind of a looming issue out there. Is there any way to consider taking care of that in a more proactive manner as opposed to having to react? And the reason I say that is we've seen a laundry list of other financial companies that have talked about tapping their back up credit facility as a back up plan and anyone that actually does it to use their stock get taken out to the woodshed.

[Gary Coleman:]

Well, but I'll say this, one reason we're at the $300 million is not... we're not just buying the stock, that's what we qualified under the federal program was the max of 300 million. That's why we went to 300 million because we've... and as we mentioned earlier in the call, we held cash, we held some of that cash but we want to make sure it got to the maximum, there as a program. But again, as I mentioned early in the comments, that one of the uses of cash maybe to reduce that debt. As we've said in the fourth quarter, when were buying the stock is that we might be pre-funding purchases for 2009 and that 2009 cash flow could go towards reducing that short term debt. I know what you're saying, we don't want to draw on that bank line either, that is a fall back. But we do think the market out there other than the federal program is open, and so we'll... I think there is a fall back but I agree with you that we want to keep as much flexibility as we can and if that means reducing in the short term debt, then we will.

[Thomas Gallagher:]

Okay, thanks.

[Operator:]

Our next question comes from Jeffrey Talbert with Wesley Capital Management.

[Jeffrey Talbert:]

Hi, good morning, and thanks for taking my question. One piece of information you've provided in your third quarter Q were supplemental marks for the portfolio as of the end of October which I thought was quite helpful. Could you give us some indication of what the net unrealized loss of portfolio would be as of Jan, at the end of January please?

[Gary Coleman:]

I don't have that number, I was looking at...

[Jeffrey Talbert:]

I don't think ant particular, just present on BBB financials have widened out quite bit just the 12/31, there has been a pretty significant move in that?

[Gary Coleman:]

Yeah, I would think... I was going to say, I've seen the spreads, and not so in BBBs but in looking at financials, this spreads have widened a little bit since year-end and so I would expect it to be a little bit higher, I don't have that number though.

[Jeffrey Talbert:]

Got it. Is there something you can get back to, something offline or in your release, it would just be a very helpful thing for us get?

[Gary Coleman:]

Yes,

[Jeffrey Talbert:]

Okay, great, thank you very much.

[Operator:]

Our next question comes from Seth Glasser with Barclays Capital.

[Seth Glasser:]

Good morning gentlemen, thanks for taking my call. I was wondering if you could speak a bit more about your preferred portfolio, particularly since the end of the year till now, this is obviously an asset transfer evaluation to fall significantly over the past four weeks, and I think that's been the case even for non-perms (ph). So, just wondering if there is a risk or more significant impairments in Q1 and if you can comment about the potential downside to book value, over pressure on your credit ratings, if we do see increased impairments, it is a pretty significant percentage of your tangible book, and we've obviously all seen what's happened to Aflac around this issue?

[Gary Coleman:]

Well, we have a different issue than Aflac. First of all, these aren't perpetual (ph) preferreds, that's they are more or like bonds, as far as tolerance for impairments, I think I mentioned earlier what we stress testing that we've done, the redeemable preferreds are again wider towards the banks and financials... I mean the banks and insurance companies, and I really can't comment on impairments there. Again 12/31, we didn't feel that they were impaired and we'll just have to wait and see.

[Seth Glasser:]

Okay. I guess not to beat the liquidity issue too much more but I'm wondering if you have a target for cash or total liquidity either at the growth (ph) or company you're iteming, I guess I would echo on the sentiments that have been voiced already on the call, which is that if you were unable to lower your CP using the federal program, I'm actually on the debt side and I think it would be a lot harder than you are indicating to issue A2P2 paper into the private market. So, if you did have to draw that bank line, I think that draw coupled with any LOC capacity that you had used up on the line as well as the 100 million August maturity and share buybacks, could start to leave you with a much tighter liquidity position. And I think as we've already discussed on the call, that's tended to be looked at pretty unfavorably. So, I wonder if you have specific sort of enterprise liquidity or cash number that you're going to shoot to maintain as this year goes on?

[Gary Coleman:]

We don't have a specific cash number targeted that we are going to keep but as I mentioned we will definitely have a $100 million of cash on hand the day that that August maturity occurs.

[Mark McAndrew:]

But also Gary at the insurance company level, we also have very strong cash flows. We generate Gary it's... somewhere around a $1 billion of free cash at the insurance company level. So close to a $100 million of free cash at the insurance company level each month.

[Gary Coleman:]

Right. Mark... yeah I was just getting there, (inaudible) actually wanted to say is that at the insurance company level, we are generating just under a billion dollars a year of new cash and that's not including the maturities. That's just cash from operations. So, we're constantly having cash come in, and if we invest that cash in bonds, but if we need the hold back some of that cash, we can do that. But that as the liquidity and insurance companies are extremely strong, and there's been consistently at that level, so there's no reason to expect that... there's nothing going to change there.

[Seth Glasser:]

But the CP is at the old co, correct? So given that there is sort of limited cash flow, not that it's a small number, but it is a limited number that you could get up to the old co, with potentially some interesting cash calls at that entity. So, that won't be just a debt but I do think that it's an issue that that should be thought about with a lot of care as we go into the next few quarters because the market really on the debt side is a lot more volatile than I think you maybe giving it credit for.

[Gary Coleman:]

Well, again, as far as whether we could borrow as an A2P2, we've explored that. We feel that maybe there is more than opening, better than you think, but we're still going to... we're just beginning the year, we're going to work through this and as conditions change... the good thing is we've got the cash coming in that we can hold. We've got 300 million coming in. If we use all of it to pay down the 100 million maturing and then pay the rest of it to pay down short term debt and we didn't... if we went a year without buying stock, that's not the end of the world, our interest still increase. And then starting again in 2010, we start over. And we've got another 300 plus million of free cash flow coming in, so we're... as Mark mentioned earlier, we're going to make sure that... we pay our debts, and that we don't get ourselves strapped for liquidity. But we have great liquidity in our insurance companies, and we have got flexibility where we can just hold in liquidity.

[Seth Glasser:]

What you are saying is fair. I appreciate your time on the call today.

[Gary Coleman:]

Okay.

[Operator:]

Our next question comes from Dan Johnson with Citadel.

[Daniel Johnson:]

Thanks, Thank you very much. Wanted to follow up on a couple of things you have mentioned in the call; one around the BBB down grade scenario. Can I assume that that on RBC there's a numerator and a denominator, the impact you are talking about still holding the 300 RBC is picking up the increased capital charge from the higher amount of BBBs. But is it also assuming a commensurate decline maybe on a no OTTI basis that would result from an environment that would see that amount of your BBBs put into below investment grade?

[Gary Coleman:]

No, Dan you are right, we were just affecting the denominator. We weren't assuming that they were impaired. We did really looked at the possible downgrades and as I've mentioned earlier, we looked at the effect of impairments but we didn't combined the two there.

[Daniel Johnson:]

Alright, so I guess that do you really feel comfortable about that sort of scenario, shouldn't we be doing both?

[Gary Coleman:]

Well we... I think we could look at that, I mean there, I guess if you look at the impairment issues, if they get downgraded and some of them get impaired, that's dollar to dollar. We could look at that, I don't know, again as I mentioned earlier we were doing stress testing, we came up with $200 million just kind of a, what's been a worst case default rates over the years and I'm saying we can tolerate almost two times that much. So, knowing that we didn't really it's necessary to expand the test, put the downgrades and some of them being impaired.

[Daniel Johnson:]

The 200 million and I am assuming that's after-tax losses in your 1933 or 1934 scenario?

[Gary Coleman:]

No, there is no the tax benefits to that. We also didn't assume any liquidation value.

[Daniel Johnson:]

Okay, so 200... so basically or roughly about 2%, just to the bond portfolio is what would have happened back in 1933 or 34.

[Gary Coleman:]

Right.

[Daniel Johnson:]

Okay. I'll have to go and take a look at that. I wasn't around.

[Gary Coleman:]

And if you make it 10% liquidation value that will be maybe 230 million, rising our impairments when we get some of that back but.

[Daniel Johnson:]

But the 10% liquidation value is, you get $0.10 on the dollar of the defaulted bond?

[Gary Coleman:]

Yeah, but again we assume no liquidation value and no tax benefit and that with the full $200 million would be 100% loss to us.

[Daniel Johnson:]

Right, okay. So basically saying we're going to have roughly 2% default rate and it's all going to go, there is no recovering, no tax benefit?

[Gary Coleman:]

Right. All of that will happen in one year.

[Daniel Johnson:]

Got it. And then, just a couple of quick ones. On the CDOs, are we still expecting the... I think you a carrying something like $0.10 or $015, is that still coming back to par and what's the right time frame for that?

[Gary Coleman:]

Yes, they are trading... you are right about what they are trading at and we think that just the poor condition of the market, and looking at them where we stand versus the collateral there, we think they are adequately collateralized or we're going to... we feel like we'll collect all, not only principal but interest also.

[Daniel Johnson:]

Is there something unique about these CDOs and I am certainly no CDO expert, is there something unique about these versus what we see elsewhere where those people don't expect a full recovery?

[Gary Coleman:]

Well, one thing that's different about these is that there is no subprime or other really the troubled asset classes you hear about, these are trust preferreds of primary banks and insurance companies.

[Daniel Johnson:]

Got it, got it. And then lastly, I caught the billion eight in terms of the unrealized loss, can you remind me what statutory capital is at the end of the fourth quarter and how much that changed versus the third quarter?

[Gary Coleman:]

Statuary capital in the fourth quarter was billion three, just under billion three, 1.281 billion was the number, and I don't remember what was that in the third quarter.

[Daniel Johnson:]

That's okay, I can look that up. Thank you very much for taking my questions.

[Gary Coleman:]

Okay.

[Operator:]

Our next question comes from Mark Finkelstein with FPK.

[Mark Finkelstein:]

Hi, good morning. Just a couple of follow ups on a few things. One is, what did you say that the short term debt would stay at during 2009, can you remind us of that comment?

[Gary Coleman:]

I don't remember saying where it would stay at, we were accounted at 300 million and I said earlier that we might ... we will consider paying some of that down during the year. We don't have a target for that.

[Mark Finkelstein:]

Okay, I thought on the last call you said that you were going to build up the short term and then start paying it down in 2009, is that?

[Gary Coleman:]

Well Mark, yeah, I would think that you'll see reduction in the short term, I just can't commit that what dollar amount at this point in time, because what we said last quarter was in buying the stock we could borrow and as I've mentioned earlier pre-fund, maybe 2009 purchase in 2008 because we got prices attractive at the time. And so that was... that's coming into this year that's something that is on our list as uses for our free cash flow. It's just hard right now to say what the combination of all that's going to be.

[Mark Finkelstein:]

Okay, and then just to clarify on the revolver. I know you have a 150 or so million supporting LOCs, are there any other potential calls on that revolver that you can foresee over the next 12 or 18 months, other than coming back stock the short term?

[Gary Coleman:]

No, not at all. Let me mention that, we have increased the LOC is $600 million line, 300 million is dedicated to LOC and that other 400 million for borrowings, and there is no other call on that. And we could also... the LOC are really doing inter company, doing reinsurance in-house. If we chose to go outside to do it, debt for 200 million, if we chose to do that, we do it in house because we can do it cheaper.

[Mark Finkelstein:]

Okay.

[Gary Coleman:]

Because that would be a source of increasing the liquidity on the line without actually having to expand the line.

[Mark Finkelstein:]

Okay. And then just real quick on operations. I mean can you just talk a little bit about expenses in the health business? Obviously, persistency is lower in that business. Sales weigh down. I mean how do you manage expenses down, in concert with kind of where that business is going? And do we foresee kind of one time charges or anomalies that we should be thinking about in 2009?

[Mark McAndrew:]

We don't anticipate any one time charges. As that business declines, we will manage the expenses downward. We've never, to my knowledge had to layoff our restructuring charge. We... any staff reductions, we've always taken... we've managed to do through, strictly through turnover and attrition. So, there will not be any charges there. We would expect our, as far as the salaries related to the health insurance business, we'll come down as the year progresses in line with the premium decline, but there will be no charges.

[Mark Finkelstein:]

Okay. Thank you.

[Operator:]

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

[Robert Glasspiegel:]

Good morning. I guess we at Wall Street are great at hammering last year's issues, and may I see year-to-date high yields have been a terror. And so to me it's not clear that your overall portfolio would be down in January. Am I wrong on that assumption, I mean if you wind down (ph) treasuries and you wind on high yields this year?

[Gary Coleman:]

Yeah Bob only thing that I looked at is and... I can't remember which index, it breaks out financials and industrials and utilities and it shows the treasuries in the spreads and it seems to me that the rights... the yields were up a little bit I think in financial areas and since we are so heavily weighed towards financials. That's why I said that maybe we would see an increase, I don't know, I don't haven't looked at it in very much detail.

[Robert Glasspiegel:]

Well how is your high yield portfolio performed off late, I mean is it fully participating in this really, in the last two months?

[Gary Coleman:]

When you say high yields, does that mean below investment grade, I haven't, I really don't have an answer to that, it's not something we actively manage, its, that portfolio is going about down grades and...

[Robert Glasspiegel:]

Great. And I think Wall Street would like you to be owning all treasuries and no high yield right now.

[Gary Coleman:]

Yeah I think..

[Robert Glasspiegel:]

If you are listed in the Wall Street to run your portfolio that may not be the right approach but I am interested in how you do run the portfolio. Can you tell us a little bit about investment impairment, the seasoning, how their performance is measured, how they've done over long periods of time?

[Gary Coleman:]

Well I think over a period of time, they have done very well. The person who heads up our investment department is an actuary, was an actuary by turning, was an actuary for long time. He understands our products, the cash flows of our products and that's a great help in determining our investment strategy and we, and I think if you look at, we had every opportunity to get involved in the subprime business and some of the of the other troubled asset class and we just didn't... they didn't meet our risk profile and we stayed away from them. So, I feel and I feel very good about our portfolio and where we are at.

[Robert Glasspiegel:]

You said they've done a good job or they've had good numbers, I would appreciate and I think a lot of people on this call would appreciate substantiation of how you measure them and what the long-term performance in the portfolio has been?

[Gary Coleman:]

Well we look at the risk adjusted yield in our portfolio. We are... our philosophy is first of all we want... we're crediting interests to our reserves... we are not, Tell me about it... policy can about sometime about funding reserves. We want to make sure that we're investing at a spread over that. But... we don't want to take a lot of chances, to press back to your principle is important. So, those are the things that they are measured on. And they did a great deal of credit research not only selecting the bonds they were buying but monitoring adverse and again determining whether it's all risk yield related, should we continue to hold bonds or should we sell them or whatever. It's important to us that we have a spread over what we are creating the reserves but at the same time we'll protect the principle of our investments.

[Robert Glasspiegel:]

Are there some other tools like buying treasuries or increased reinsurance, I mean, Hartford ph] did that and was able dramatically improve your RBC, I mean are there some other vehicles available in the disaster scenario?

[Gary Coleman:]

Yes, I think reinsurance is a possibility, we just don't obviously don't see a need for it, going forward but I think that would be a possibility.

[Robert Glasspiegel:]

Okay, appreciate it.

[Gary Coleman:]

Okay.

[Operator:]

Our next question comes from Ed Spehar with Banc of America.

[Edward Spehar:]

Good morning. A very quick question, could you just give a sense, Rosemary, what would happen to the annuity line if we had S&P at 700 or even less, I mean what is the sort of, I know it's a small portion of the company, but just how bad could it be in a 700 or maybe even lower S&P?

[Rosemary Montgomery:]

Well we had looked... as we said earlier, we had looked at when we were coding the range for 2009, we had $2 million to $9 million loss that could result from that and that equated to the $9 million loss and particularly equated to an S&P 500, 875. We didn't actually do a calculation taking it down any lower than that, but obviously you could extrapolate from that it would be just lower than the $9 million, not probably, just to get a ballpark estimate, just to extrapolate between those two numbers.

[Edward Spehar:]

I guess the issue and what we're seeing with companies who obviously have a much bigger bet on these businesses, that extrapolating on a linear basis for a decline is not the way to go and I'm assuming you don't have the living benefit guarantee piece, I think.

[Rosemary Montgomery:]

Right

[Edward Spehar:]

So that's one positive. But there is also the issue that debt benefit which also does seem to have this exponential impact as well. So I think it would be helpful for all of us if you could give us may be some color about how bad could it be in the 700, 600 scenarios? I mean none of us may be around to see 600, you may have to call me at home to tell me that.

[Rosemary Montgomery:]

No, I was trying to give you a ballpark amount, obviously we would never try to go in and actually calculate that number, we would never just do it that way but I was just trying to give you ballpark.

[Edward Spehar:]

We can look at it.

[Rosemary Montgomery:]

We just did not go down to that level when we did our calculation but we obviously could.

[Edward Spehar:]

Yeah I mean I guess I would argue that in this environment certainly it makes sense to do it. Thanks.

[Operator:]

(Operator Instructions). Our next question comes from Jeff Schuman with KBW.

[Jeffrey Schuman:]

Good morning. Gary, I was wondering, come back to liquidity for a second, is the holding company just like borrowed from the operating company and is there any capacity to do that, as kind of a short term measures you need there?

[Gary Coleman:]

Yes Jeff, we can do that and we do that from time to time. At this point, we don't have any significant amount borrowed but we can't do that, for us, for short term that's a good point, for short term cash needs we could borrow from the insurance companies and then pay it back later.

[Jeffrey Schuman:]

Yeah, just kind of a cap in mind, typically they just don't like you to go there too hard?

[Gary Coleman:]

Yeah, we know, there is as a matter fact, each domicile there is a percentage of I think assets that has to be met, but we never, I don't think we ever approached those percentages, we don't borrow that much between companies. Just had the need to, the only times that we've really done is when there is just been short term timing type of these.

[Jeffrey Schuman:]

But order of magnitude is something that could say a couple of 100 million or?

[Gary Coleman:]

I am trying to, yeah, I think we could go, I think we could go that high. I don't think we ever have, but I think we could.

[Jeffrey Schuman:]

Alright and then on the capital side, I think you like a lot of companies have deferred tax assets that are not admitted on a statutory basis. The State of Iowa has granted some release there for Iowa companies, has there been any discussion in Nebraska of your purchases in Nebraska about similar approach in that?

[Gary Coleman:]

No we haven't.

[Jeffrey Schuman:]

Is there some thing that... is there a reason sort of not to pursue that, I mean what's part of (inaudible) proposal, I mean if there is some latitude individual states to deal with a sort of a reason sort of not to go there?

[Gary Coleman:]

No. That's a good idea, we just haven't done that, but that's something that we can explore.

[Jeffrey Schuman:]

Okay and at this point are, which... are you staffed in Nebraska now or where are you domiciled?

[Gary Coleman:]

Our major, expect for American Income, it's in Indiana but the United American Liberty and Globe are in Delaware... or Nebraska, excuse me.

[Jeffrey Schuman:]

Okay, thanks a lot, Gary.

[Operator:]

There are no further questions at this time.

[Mark McAndrew:]

Alright, well thanks for joining us this morning and we will talk to you again next quarter, have a great day.

[Operator:]

This concludes today's conference call. Thank you for joining us, have a wonderful day.