Globe Life Inc (GL) — Q1 2015 Earnings Call Transcript

Thank you. Good morning, everyone. Joining the call today are Gary Coleman and Larry Hutchison, our Co-Chief Executive Officers; Frank Svoboda, our Chief Financial Officer; and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2014 10-K and any subsequent Forms 10-Q on file with the SEC. I will now turn the call over to Gary Coleman.

Thank you, Mike, and good morning, everyone. Net operating income for the first quarter was $134 million or $1.04 per share, a per share increase of 30% from a year ago. Net income for the quarter was $122 million or $0.95 per share, a 3% decrease on a per share basis. With fixed maturities at amortized cost, our return on equity as of March 31 was 14.7%, and our book value per share was $28.44, a 7% increase over a year ago. On a GAAP reported basis with fixed maturities and market value, book value per share increased 22% to $38.17. In our life insurance operations, premium revenue grew 5% to $513 million, while life underwriting margins were $141 million, up 1% from a year ago. Growth in underwriting margin lagged premium growth due to higher claims primarily in direct response. For the full year, we expect life underwriting margin to increase 3% to 5% over 2014. Also in the quarter, net life sales increased 17% to $104 million. On the health side, premium revenue grew 4% to $229 million, and health underwriting margin grew 4% to $52 million. For the full year, we expect health underwriting margin to increase 2% to 4%. Health sales increased 2% to $32 million, excluding groups business; individual health sales increased 22%. Administrative expenses were $47 million for the quarter, up 7% from a year ago and in line with our expectations. The primary reason for the increase in administrative expenses is due to higher pension and IT costs. As a percentage of premiums, administrative expenses were 5.7% compared to 5.6% a year ago. For the full year, we anticipate that administrative expenses will be up around 6% to 7% and around 5.8% of premium. I will now turn the call over to Larry Hutchison for his comments on the marketing operations.

Thank you, Gary. We are very pleased about sales activity at Torchmark. We have had year-over-year increases in net life sales in each of our major life distribution channels for five quarters in a row. Now, I will go over the results for each company. At American Income Life, premiums were up 9% to $202 million. Life underwriting margin was up 4% to $62 million. Net life sales were $47 million, up 24% due primarily to increased agent accounts. The average agent count for the first quarter was 6,317, up 19% over a year ago, but the same as the fourth quarter. Our producing agent count at the end of the first quarter was 6,541. We expect life sales growth for the full year 2015 to be within a range of 9% to 13%. Our Direct Response Operations at Globe Life had life premiums up 5% to $187 million, but life underwriting margin declined 5% to $43 million, and net life sales were up 11% to $45 million. We expect 4% to 7% life sales growth for the full year 2015. At Liberty National Life, premiums were $68 million, down 1% from a year ago. Our life underwriting margin was $17 million, the same as the year-ago quarter. Net life sales grew 16% to $9 million, while net health sales increased 8% to $4 million. The average producing agent count for the first quarter was 1,464, up 5% from a year ago but down 7% from the fourth quarter. The producing agent count at Liberty National ended the quarter at 1,544. Life net sales growth is expected to be within a range of 6% to 9% for the full year 2015. Health net sales growth is expected within a range of 4% to 7% for the full year 2015. At Family Heritage, our premiums increased 8% to $54 million, our health underwriting margin increased 6% to $11 million, and health net sales were up 18% to $12 million. The average producing agent account for the first quarter was 784, up 19% from a year ago but approximately the same as the fourth quarter. The producing agent count at the end of the quarter was 881. We expect health sales growth to be in a range from 7% to 10% for the full year 2015. At United American, general agency count premiums increased 6% to $83 million. Net health sales declined from $14 million to $12 million. Excluding our group business, net health sales grew at 30%. For the full year 2015, we expect growth in individual sales to be around 15% to 20%. As we discussed last quarter, we expect lower group sales in 2015 due to an unusual number of large group cases we acquired in 2014. Premium revenue from Medicare Part D declined 4% to $79 million, while the underwriting margin declined from $10 million to $5 million. The decline in underwriting margin was in line with our expectations and was due to the increase in Part D drug costs discussed on our previous call. We expect Part D premium of $310 million to $320 million for the full year 2015, with margins as a percentage of premium to be approximately 6% to 8%. I will now turn the call back to Gary.

I will spend a few minutes discussing our investment operations. First, excess investment income, which we define as net investment income less required interest on policy liabilities and debt was $55 million, a decline of 3% from the first quarter of 2014. On a per share basis, reflecting the impact of our share repurchase program, excess investment income increased 2%. We have discussed on previous calls the effect of Part D on excess investment income. Excess investment income is negatively impacted by Part D to the excess of $2 million in the first quarter of 2015. Excluding the negative impact of Part D, excess investment income would have been flat with the year-ago quarter, but up about 5% on a per share basis. For the full year 2015, we expect excess investment income to decrease by about 1% to 3%; however, on a per share basis, we should see an increase of about 2% to 3%. At the midpoint of our 2015 guidance, we're expecting to drag on excess investment income from Part D of approximately $7 million. Regarding the investment portfolio, invested assets were $13.5 billion, including $13 billion of fixed maturities at amortized cost. Out of the fixed maturities, $12.4 billion are investment-grade, with an average rating of A-; below investment-grade bonds are $604 million compared to $552 million a year ago. The percentage of below investment-grade bonds to fixed maturities is 4.7% compared to 4.4% a year ago. With the portfolio leverage of 3.6 times, the percentage of below investment-grade bonds to equity, excluding net unrealized gains from fixed maturities, is 17%. Overall, the total portfolio is rated A-, the same as the year ago. In addition, we have net unrealized gains in the fixed maturity portfolio of $1.9 billion, approximately $256 million higher than at the end of the fourth quarter. To complete the investment portfolio discussion, I would like to address our investments in the energy sector. We believe the risk of realizing any losses in the foreseeable future is minimal for the following reasons. Over 96% of our energy holdings are investment-grade. At the end of the first quarter, our energy portfolio had a net unrealized gain of $173 million, that’s 8% of our energy holdings, which are in the oilfield service and drilling sector. We have reviewed our energy holdings and concluded that while we may see some downgrades, we believe that the companies we have invested in can withstand lower oil prices for an extended duration. Regarding the investment yield in the first quarter, we invested $292 million in investment-grade fixed maturities, primarily in industrial sectors. We invested at an average yield of 4.5% and average rating of triple B+ and an average life of 29 years. For the entire portfolio, the first quarter yield was 5.87%, down 5 basis points from the 5.92% yield in the first quarter of 2014. At March 31, 2015, the portfolio yield was approximately 5.86%. The midpoint of our guidance for 2015 assumes a new money yield of 4.5% for the second quarter and 4.75% for the last two quarters of the year. One last thing on past analyst calls, as we have discussed in detail the impact of the prolonged low interest rate environment. As a reminder, an extended low interest rate environment impacts our income statement, but not the balance sheet. Therefore, we primarily sell non-interest sensitive products accounted for under the financial accounting standards. We don't see a reasonable scenario that would require us to write off DAC or put up additional GAAP reserves due to interest rate fluctuations. In addition, we do not foresee a negative impact on our balance sheet. While we would definitely benefit from higher interest rates, Torchmark will continue to earn substantial excess investment net income in an expanded low interest environment. Now, I will turn the call over to Frank to discuss share repurchases and capital.

Thanks, Gary. First, I would like to briefly discuss a few items impacting our 2015 earnings guidance. As Gary mentioned, growth in life underwriting income lagged behind the growth in premium in the first quarter primarily due to higher policy obligations in our direct response operations. In the first quarter of this year, policy obligations that have direct response were 49.1% of premiums versus 46.9% in the first quarter of 2014. Looking back, the first quarter of last year was low as the policy obligations for the full year 2014 ended up at 48.1%. As we discussed on our last call, this percentage was trending higher than prior years primarily due to actual claims coming in higher than our expectations on policies just issued in the early 2000s. We also noted that we expected the policy obligation percentage for 2015 to be around 48%. Based on the additional claims experience we found in the first quarter and further review of the emerging claims trends, we now believe the direct response policy obligations for the full year 2015 would be in the range of 48.5% to 49% of premiums. This increase in the expected policy obligation of direct response is the primary driver of the $0.2 reduction in the midpoint of our guidance. In addition, we revised our expectations for the Canadian foreign exchange rate, which have caused the earnings from American Income Life to be somewhat lower than previously anticipated. On a positive note, we do anticipate our premium income will be higher than previously estimated primarily at American Income due to the strong first quarter sales. The net effect of these three items results in the reduction in the midpoint of our guidance from $4.30 to $4.28. Now regarding our share repurchases and capital position. In the first quarter, we spent $90 million to buy 1.7 million Torchmark shares at an average price of $53.20. So far in April, we have used $18 million to purchase 328,000 shares. For the full year through date, we have spent $108 million of parent company cash to acquire 2 million shares at an average price of $53.57. The parent started the year with liquid assets of $57 million. In addition to these liquid assets, the parent will generate additional free cash flow during the remainder of 2015. Free cash flow results primarily from the difference received by the parent from the subsidiaries minus the interest paid on debt and the dividends paid to Torchmark shareholders. We expect free cash flow in 2015 to be around $360 million, which included the $57 million available from assets on hand; we currently expect to have around $417 million of cash and liquid assets available to the parent during the year. As previously noted, to date, we have used $108 million of this cash to buy 2 million Torchmark shares, leaving around $309 million of cash and other liquid assets available for the remainder of the year. As noted before, we will use our cash as efficiently as possible; if market conditions are favorable, we expect that share repurchases will continue to be a primary use of those funds. We also expect to retain approximately $50 million to $60 million of liquid assets at the parent company. Now regarding RBC at our insurance subsidiaries. We plan to maintain our capital levels necessary to retain our current ratings; in the last two years, that level has been around an AIC RBC ratio of 325% on a consolidated basis. This ratio is lower than some peer companies, but it's efficient for our companies in light of our consistent statutory earnings, the relatively lower risk of our policy liabilities, and our ratings. As of December 31, 2014, our consolidated RBC was 327%; we do not anticipate any significant changes to our targeted RBC levels in 2015. Those are my comments. I will now turn the call back to Larry.

Thank you, Frank. For 2015, we expect our net operating income to be within the range of $4.20 per share to $4.36 per share, a 6% increase over 2014 at the midpoint. Those are our comments. We will now open the call up for questions.

The margins in your Direct Response segment were discussed, but I've noticed that American Income's margins are significantly weaker than they have been recently. Could you explain what led to this and what your expectations are moving forward? Additionally, regarding agent count growth, while the average number of agents decreased, the total ending number increased across all channels. Can you provide some details on what you're doing in each business channel and your expectations for growth in the agent count?

Okay, I'll start with the margins at American Income. The margins were slightly lower than we expected due to higher claims. If you review the fourth quarter of last year, the claims were low at 31% of premium, whereas this quarter they rose to 33%. We anticipate them to average 32% for the year, which suggests it's more about timing. In 2014, we achieved a 31.7% underwriting margin, and we expect to reach a similar margin for 2015.

The agent count, we saw the increase in agent recruiting and better agent retention in each of the distribution units as we moved through the first quarter. The trend after the first quarter has been positive. We continue to see strong agent recruiting and better retention in each of the distribution units.

Could you elaborate on your capital situation? I've noticed that your RBC is lower than that of other companies, but it appears that your business operates differently. Previously, S&P raised concerns regarding preferred stock and the possible changes in how they may be treated. Have you had any conversations with them about this, and what are your thoughts on how it could impact your capital management strategy?

Sure, we have not had any recent discussions with them regarding that. At the time when we had discussions last fall, there was contemplation that there would be some time to address the situation. We discussed in prior calls that we're taking a look at our various options and really don't have any update as far as what we're going to do or how we're going to address that going forward. I think the bottom line is we don't think at this point in time that we need to or that any resolution to the issue would impact our stock buyback. We think we can address the issue through other forms of financing, other options that we would have available, and that we could look toward maybe the latter part of this year or the first part of next year to really get some resolution to that.

Hi, thank you. I want to begin by discussing Direct Response margins. In previous conversations, you mentioned that margin pressures were primarily linked to the older block. Could you provide an estimate of the size of that older block and share any insights on what you’re observing there that may also apply to other areas or vintages within the Direct Response business?

Yes, Erik, in our previous call we mentioned that this business block was established over 10 years ago and the claims are coming in slightly higher than we anticipated. Currently, this block constitutes about 18% of our total Direct Response premium, but it is declining at a rate of about 6% to 7% each year. As it continues to decline and as we introduce new business, both factors will ultimately reduce the impact of that block on our policy obligations moving forward.

Got it; and is there anything unique about that block that you've identified that will cause the margin profile to be different?

Not anything in particular; it's certain, it's in those products that we settle. We've taken a look at that; we haven't seen anything that is troublesome there, but we will say this: our current pricing, the pricing the last few years, we feel is adequate to the point we won't have this problem going forward.

Great, thank you. And just one last question on your sales guidance changes, are those mainly just to reflect sort of where you've seen stronger recruiting at American Income than you'd expected? And I think that was probably the biggest change for, you've raised the sales guidance there?

That's the American Income making a stronger agent recruiting, agent retention earlier than anticipated, and that’s reflected in our guidance.

Just a question on margins again; did you see any weakness due to a more severe flu season? If you have any comments on that, that would be helpful.

No, we really haven't seen any impact from that.

Follow up on Eric's question in terms of American Income's increased sales guidance. The agent recruiting obviously has a go-forward benefit. First quarter sales seemed particularly strong; was that significantly higher than what your expectations were? And how much did that lead to the increased sales guidance?

So we probably had strong recruiting and then an increase in agent count in the third and fourth quarter. We think sales will improve in part because the agent recruiting the last half of 2014 has gained experience and become more productive.

I guess just a couple on the agent count. So one would be, you mentioned agent retention improving in a couple of text; I was wondering if it was possible for you to quantify how that got better than wherever it was before. And then on the data that’s been provided now on the average producing agent count. I was just curious whether it was flat on a linked quarter basis, meaning in the first quarter '15 relative to the fourth quarter '14. Is that a normal first quarter versus fourth quarter dynamic if you look back at that data set historically?

It's looked like that’s really agent increase. First of all, I think the strength of American income is we have increased our agent activity through better training and new technology. As you have higher agent activity, a better retention rate because the agents are making more money, and they stay with agents longer.

Regarding the average agent counts, we began compiling that data in the first quarter of last year. Based on the trends we've observed, I believe the average agent count for the first quarter will not drop below that of the fourth quarter in previous years since the latter part of the fourth quarter has typically seen low recruitment rates. As Larry mentioned, we have strong recruiting during the third and fourth quarters, so we are likely to maintain a similar level. I consider that an improvement.

Experience, Gary because of holidays in each of the distribution units.

Yes, that was my question. We also lack data, which helps explain the normal seasonality in recruiting. Regarding retention, can you provide any quantification on how much it has improved now compared to before, based on your internal measurements?

We measured internally and we checked it on a monthly basis; it’s like thirteenth month retention. It's one of the factors. We have had higher agent activity which means we have more submitting agents, so it’s not just agent retention; it’s greater activity related to our greater percentage of agents that submit every week, and that results in higher retention for us. I don’t want to mislead that just retention is driving the increase in sales. It's a combination of better training, better recruiting, our focus on retention. It’s changing our compensation models to drive those behaviors.

So just on the yield assumption for the second half, 475 basis points, how long can you stick with that before having to revisit it?

We'll keep looking at it as we go forward. That’s not something we're just sticking to because we want to. We're looking at all the projections of somewhat interest rates are going to be. We're looking at the consensus and treasury rates and where we think spreads will fall in. Right now, we're comfortable with the four and three-quarters, but that’s something we revisit constantly.

Have a couple of questions; one on the revised sales guidance. It seems like in Direct Response Life and also in Liberty National, you're actually lowering the top end of the guidance despite very strong first quarter sales. So I was wondering if you could maybe give a little more color on what was behind that.

We did have a strong first quarter in Direct Response, but we’re starting to get again stronger quarters in the second, third and fourth quarter of 2014. So I think that reflects the sales guidance for the whole year being in the range of 4% to 7%.

So would that mean that initially you'd expected recent even stronger quarter in the first quarter?

I'll say the first quarter was a little stronger on the side with growth in the first quarter. For each of these agencies and for Direct Response, you go back to 2014 and you saw there was a significant increase in our net sales in the second, third, and fourth quarters. We’ll be measuring against those quarters as we go forward.

And then with regards to agent growth, Family Heritage clearly showed a very significant improvement in first-year agents, or is there anything in particular that drove that?

We had the recruiting push; just a focus on recruiting. Basically, the benefit is to use our internet recruiting; it is now up 25%, and the recruit over 400%, which is personal recruits. So that's been a plus at Family Heritage, and we’ve managed new agencies, and they are coming here regionally showing the positive impact of an increased number of agencies at the Family Heritage system.

Okay. And a quick numbers question; I know it’s on the balance sheet, the cash number was actually quite low, about $3 million. Is there anything in particular going on there, and should we expect that to increase?

Yes, I think that is just I think just a quarterly fluctuation and just kind of a timing issue with respect to the end of a particular quarter. I do think that it is on a normal basis would be a little bit higher than that; it just happened to hit both during the quarter.

Hi, good morning. Just a question about the level of life insurance sales production in particular and maybe health sales too. I guess it's sort of an issue that we haven't really had to grapple with for some time in this high-quality issue. I mean how strong do life sales have to be before it actually does negatively impact your expectation for free cash flow generation? I.e., you need more capital to support the fact that you're growing faster than you might have otherwise expected to grow.

John, this is Larry. Your questions are a little hard for us to hear, but I think your question was as we see higher life sales, what impact does it have on our capital requirements and then turn on our free cash flow? Was that your question?

Yes, one of the reasons statutory income is down compared to 2014 and 2013 is the drag on cash, particularly in our expected free cash flows for 2015 versus 2014. This is primarily due to several strong sales we had in 2014, which create a statutory drag at current levels. While we are pleased with those strong sales, this drag means you will see free cash flow flattening as long as these sales continue, rather than allowing free cash flow to grow.

John, I would add that I might still see a drag in the first year, but as we enter the second year, we begin to turn into a positive cash flow situation. This is at a favorable price and while it may be a temporary drag, we want to secure as much business as possible. That will generate growth in our in-force, and due to the high underwriting we've experienced, this will eventually contribute to free cash in the future.

Yes, I don't think it's wrong; I like what you said: high-quality problem, right? Can you remind us how fast on the statutory basis you are licensing showing sales? Let's say sales in year one, at what point do you get back to sort of the cumulative break even on the statutory basis?

Yes, I think, John, I think it's in about somewhere in that 6- to 8-year time frame.

Okay. There have been instances in the past when it seemed like the share price of Torchmark was nearing your internal estimate of embedded value. Do you have any updated thoughts on this? I know you mentioned that shareholders prefer the buyback to a significant increase in your dividend yield.

Well, John, what we've indicated previously is that at some consolidated value, we will pause the share repurchase. Our goal is to return cash to shareholders, which may involve transitioning to a dividend, possibly a special dividend. We aim to position our stock price towards the higher end of its book value, but as we have discussed before, we need to reassess our calculation of intrinsic value. We are examining market trends over time, and at this point, we don't believe that buying shares at the current price is advantageous. Therefore, we plan to continue purchasing shares while remaining committed to returning cash to shareholders without diluting the shares. We don't think we've reached that threshold yet, but if we do, we'll likely consider implementing a special cash dividend.

Frank, can you kind of give us, I guess, did you know the effect of the Canadian dollar both on the change in premium in force for the life business between year-end and quarter-end and maybe talk about how that might be playing into new sales guidance?

Yes, I can provide some clarity on the difference between the quarter and year-end. The average exchange rate affects the reported premium and underwriting results from these premiums. In 2014, the average exchange rate was approximately 90.7%, and we now expect the average rate for all of 2015 to be around 80%. This is based on Canadian premiums, which are just over $90 million in Canadian dollars. For all of 2015, this results in an estimated $10 million impact on American Income's reported premium. For the first quarter of the year, the average exchange rate was approximately 88%. This will have a continuing effect; we did not experience much of a negative impact on first quarter earnings due to the lower foreign exchange rate. However, you can expect a persistent effect throughout the year, assuming that the current exchange rates remain unchanged for the remainder of the year.

Okay. And then a little bit of one-off maybe the Doc Fix for Medicare; this is a few years away, but the Doc Fix includes a proposal to do away with first dollar med supp. I'm wondering if that's an important product for you?

That's really going to kick in with regard to the med supp policies in 2020, and what they're looking at right now is the reduction in incentivizing our first dollar coverage. But primarily with the hospital elimination of the Part D deductible. I mean we still maintain that it's not affecting our current policyholders and it's hard to estimate; it's hard to know exactly what other changes there might be going down the road in future budget talks or further Medicare reform, but that is something that we are watching very closely.

I had a couple of questions, first with respect to the average policy size you're selling now; clearly been very successful as recruiting and much stronger than I think most of your peers. Are you starting to move up the average policy size and thinking I guess on average is well about 30,000; and is around 17? Is that starting to trend up? That’s the first question. The second question is they can turn back on the capital issue; unless I’m mistaken, I do believe S&P, with the changes for the capital model, has Torchmark on criteria watch. If you can perhaps elaborate on what the issue is that they're looking at and how that may impact potentially on buybacks. And the next one would be, as you well aware, the NAIC is changing the base factors on fixed income securities this year. I had heard that on average RBCs are going down about 50 points from the NAIC. That would think that’s probably about fair estimate for Torchmark, and I would assume that based on what you said that you don’t want your RBC sort of really dropping much below 325. So again, what are you going to be doing to start addressing that? Thank you.

This is Larry; I’ll address the agency question first. In terms of the size of the policy, we're seeing some impact in the American Income. We talked last year about introducing our new senior life sales, and the average premium for senior life products is $720 versus the average premium for non-senior life products, which is about $470. So there is a significant difference; a percentage of our sales of senior life has increased from 15% to 20%. At American business, we've seen a positive impact from the size, but I think the real change in the industry is not in the size of the premium model or the base amount. I think what really impacts it is the strong leadership we have in our agencies. From a home office perspective, we have very strong leadership in American Income, Liberty National, and Family Heritage; we have strong leadership in the field, and the owners of those agencies, the SGAs, and the sales directors provide the ideas for better training and better technology. They work with their whole office staff, and I think that’s where the impact is; they worked together in 2014. We're seeing the benefit of those actions in 2015.

You're asking about average stake amount; it varies by company, but American is over $40,000 average base amount. What we're seeing is a new increase really in the base amounts in Direct Response. Direct Response has been lower than the $40,000 in the past. We're starting to sell some higher base amounts, up to $100,000, and that we see it hasn’t been a dramatic increase yet, but we are seeing an increase there. However, when you compare to other companies, our prices amounts are pretty low; American Income around a little over $40,000, and Globe is still under that.

It's not structured like in 2017, but I want to understand if the success you've had in recruiting is also leading to higher amounts and premiums. So it's not just about adding more agents, but you're really bringing in more productive and likely more profitable agents. That seems to be a fair assessment.

Rather, effective at the start of 2014 was growth in middle management. We saw growth in middle management in each of our sales systems and in each of our agencies. You should grow your middle management; you have better training. Those middle managers are then recruiters, and that sends another positive impact from 2014, as follow-through to 2015.

I will start by addressing the S&P situation. You are correct that S&P placed us on a negative outlook last fall. This decision is based on their assessment of certain inter-company preferred stock that is part of our insurance company's capital structure. This preferred stock has been in place since 1998 and has not changed significantly since then. However, S&P uses its own capital model and has altered its view on the credit given to that preferred stock. Essentially, they are providing us with slightly less credit compared to what we receive in our RBC model. We are exploring various options to meet the additional capital requirements they would like to see within the insurance company. We understand that S&P ratings are not critical to our marketing efforts; even with a potential one-notch downgrade, we still expect to remain a notch above many of our peers, which wouldn't have a significant cost impact. We are considering different methods to resolve this situation, which may include various forms of financing or increasing external financing to replace some of the inter-company preferred stock in the insurance company. We believe this change may not negatively impact the RBC within the companies and could potentially improve it. Regarding the bonds and the initiatives at TNIC, we have been monitoring the situation. Currently, it is not expected to affect us significantly until 2017 or 2018 once fully implemented. While it could have a meaningful impact on our capital considerations and RBC levels, we do not foresee any implications for 2015. However, I do not have specific numbers to provide at this moment, but it is something we will need to keep an eye on over the next year or two.

Okay, just to revisit S&P for a moment. I noticed that you went on criteria watch, which will influence the outlook following the announcement of the capital model changes at the end of March. While my understanding of that process is somewhat technical, it may lead to actions in the next six months. Regarding the preferred, could you clarify how much we're actually discussing in terms of dollars? I recognize there's a financial implication; they are considering XML and if it is incorporated into the capital structure, I'm assuming that documentation will specify this. If you could provide a figure, that would help since it appears this needs to be addressed by the end of the third quarter.

I don't think we need to resolve the additional capital amount by the end of the third quarter. We will have discussions with them, which are usually scheduled for the later part of the second or likely the third quarter. The total amount of preferred stock in the insurance companies is around $300 million, but we don't believe that entire amount needs to be replaced. The figures we think we would need to address the situation are much lower than that. However, as we explore the options, we're not at a point where we can specify exactly what we will need to replace it with.

Okay, and I guess the final clarifications is just to be certain. Does S&P use any sort of captive reinsurance to fund held in reserves and/or statutorily?

We have an offshore captive insurance company that holds some redundant reserves, but these are not classified as Triple X or A Triple X reserves. They are not economic results that we are required to maintain for the company, and we do reinsure a few hundred million dollars of that.

Okay, thank you for joining us this morning. Those were our comments, and we will talk to you again next quarter.