Torchmark Corp.Q1 2009 Earnings Call Transcript

Apr.23.09 | About: Torchmark Corporation (TMK)

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Torchmark Corp. (NYSE:TMK)

Q1 2009 Earnings Call

April 23 2009 11:00 am ET

Executives

Mark McAndrew - Chairman and CEO

Gary Coleman - CFO

Rosemary Montgomery - Chief Actuary

Analysts

Jimmy Bhullar - JPMorgan

Randy Binner - FBR Capital Market

Colin Devine - Smith Barney

Steven Schwartz - Raymond James

Eric Berg - Barclays capital

John Nadel - Sterne Agee

Mark Finkelstein - FPK

Tom Gallagher - Credit Suisse

Dan Johnson - Citadel Investment Group

Ed Spehar - Banc of America/Merrill Lynch

Jeff Schuman - KBW

Operator

Good day, everyone, and welcome to the Torchmark Corporation First Quarter 2009 Earnings Release Conference Call. Please note that this call is being recorded and also being simultaneously webcast. At this time, I will turn the call over to the Chairman and Chief Executive Officer, Mr. Mark McAndrew. Please go ahead, sir.

Mark McAndrew

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 Mike Majors, Vice President of Investor Relation.

Some of my comments or answers to your questions this morning may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our 2008 10-K, which is on file with the SEC. Net operating income for the first quarter was $125 million or $1.49 per share, a per share increase of 4% from a year ago. Net income was $77 million or 91 cents per share. Excluding FAS 115, our return on equity was 15% for the quarter and our book value per share was $40.36. On a GAAP reported basis with fixed maturity investments, carried at market value, book value was $23.88 per share.

In our life insurance operations, premium revenue grew 2% to $413 million. And life underwriting margin increased 3% to $110.5 million. Life insurance net sales were $78.5 million for the quarter, up 11% from a year ago. Life insurance now contributes 73% of the company's total underwriting margin. At American Income, life premiums grew 7% to $123 million and life underwriting margin was up 8% to $41 million.

Net life sales increased 13% to $28 million. Producing agents at American Income grew to 3,506, up 34% from a year ago and up 14% during the first quarter. For the first quarter, American Income contributed over 31% of our total underwriting margin, and as Torchmark's most profitable distribution system.

The relative weakness of the Canadian dollar versus the American dollar continued to negatively impact the sales results at American Income. Assuming the same exchange rates as a year ago, our net sales at American Income would have grown 17% for the quarter. I'm excited about the progress we're making at American Income. Recruiting and agent growth are both accelerating.

In the third quarter of this year, we will introduce new laptop sales presentation and expanded product portfolio, which I believe will add additional momentum to our sales growth. In our direct response operations, life premiums were up 5% to $135 million, and life underwriting margin grew 8% to $33 million. Net life sales increased 12% to $34 million.

Sales results and direct response are being positively impacted by pricing change in our adult products sold through insert media. The rate reduction has significantly improved both our response rates and persistency. The result is a lower acquisition cost per policy, which more than offsets the increase in our claim costs. For the balance of 2009, the sales growth and direct response will be tempered somewhat due to planned cutbacks in some of our marginal distribution.

We currently expect sales growth for the balance of the year in the low to mid single digits. These planned cutbacks will result in reduced acquisition costs of $15 to $20 million, which will directly improve our 2009 statutory earnings. Beginning this quarter, we have combined the financial results for Liberty National and the United American Branch Office distribution systems to reflect their ongoing consolidation.

We will continue to report net sales and producing agents separately for the balance of 2009. Life premiums at Liberty National declined 2% to $75 million and life underwriting margin was down 8% to $17 million. Net life sales for the Liberty National offices grew 27% to $13 million and the producing agent count also increased 27% to $3,563.

The life underwriting results at Liberty National have been impacted by deterioration in our first year persistency occurring over the last nine months. The higher lapse rates coincided with our switch to an electronic application and corrective steps are being taken to reverse this trend. Towards the end of the first quarter and continuing into the second, we have seen a major increase in our payroll deduction business at Liberty National for both life and supplemental health.

We expect this will add to our sales growth for the balance of 2009. On the health side, premium revenue excluding Part D declined 11% to $224 million. And health underwriting margin was down 10% to $41 million. Health net sales declined 51% from a year ago to $21 million.

The United American Branch Office experienced a 23% decline in health premiums to $73 million, while health underwriting margin decreased 36% to $8 million. The underwriting margin was less than anticipated due to higher than expected lapse rates beyond the first year on our under age 65 health insurance business.

We continue to believe that the transition of this distribution system to life and payroll deduction supplemental health products is in the best long-term interest for both the company and our agency force. Premium revenue for Medicare Part D was down 2% to $46 million, while underwriting margin remained flat at $5 million.

Net Part D sales increased 10% for the quarter to $10 million. The underwriting loss for annuities in the first quarter was $4.1 million compared to $1.1 million gain for the year ago quarter. This loss is due primarily to the effect of declining equity markets on variable annuity account values. If our account values remain at first quarter levels, with anticipated lapses, we expect an additional underwriting loss of roughly $5 million for the balance of 2009.

If these account values decline 10%, the estimated loss would be $11 million. If the account values increase by 12%, there would be no additional losses expected for the balance of the year. Administrative expenses were $39 million for the quarter, down 1% from a year ago.

As a result of the ongoing transition of the United American captive agency the Liberty National, we conducted in the first quarter a company wide review of expense categorizations between administrative and acquisition expenses. This review revealed several inconsistencies between our subsidiary companies. The net result of the expense reclassifications was a $2.6 million reduction in our administrative expenses for the quarter with a corresponding increase in our deferred acquisition expense classification.

I will now turn the call over to Gary Coleman, our Chief Financial Officer for his comments.

Gary Coleman

I want to spend a few minutes discussing our investment portfolio and liquidity and capital. First, on investment portfolio. On our website, are three schedules that provide summary information regarding our portfolio, as of March 31, 2009 that are included under the supplemental information in the financial reports and other financial information section of the investor relations page.

As indicated on these schedules, invested assets are $10.3 billion, including $9.6 billion of fixed maturities at amortized costs, combined, equities, mortgage loans and real estate are $36 million, less than 1% of invested assets. We have no counterparty risk as we hold no credit default swaps for the derivatives.

In addition, we do not operate a securities lending program. Of the $9.6 billion of fixed maturities, $8.3 billion are investment grade with an average rating of A minus. Below investment grade bonds are $1.3 billion with an average rating of BB minus and are 13.2% of fixed maturities, compared to 7.4% at the end of 2008.

Overall, the total portfolio is rated BBB plus, same as it was at the end of 2008, but lower than the A minus a year ago. During the quarter, we recorded other than temporary impairment charges on seven bonds. In determining the amount of the impairments, we elected to early adopt the guidance issued by the FASB earlier this month.

We recorded impairment losses of $52 million pretax or $45 million after tax. Of the $45 million of losses, $41 million were related to credit losses and were charged net income. The remaining $4 million of losses were charged to other comprehensive income. Had we not adopted a new guidance, the after tax charge to earnings would have been $5 million higher and the market value of the portfolio recorded on the balance sheet would have been lower by $27 million.

During the quarter, bonds totalling $2 billion of amortized costs or 24% of the fixed maturity portfolio were downgraded by the rating agencies. This compares to $2 billion of downgrades for the full year of 2008. As a result of downgrades of formerly investment grade securities, our below investment grade bonds are $1.3 billion, an increase of $553 million during the quarter. $400 million of this increase occurred in the financial sectors including $210 million in banks and $115 million in insurance companies.

The average rating of the below investment grade bonds is BB minus with 2/3 of these bonds rated above B plus. Net unrealized losses in the fixed maturity portfolio were $2.2 billion up from the $1.8 billion at the end of 2008.

By sector, the largest losses are from the financials which comprise 40% of the portfolio in advertised [Author ID1: at Mon Apr 27 20:34:00 2009

]ammortized [Author ID1: at Mon Apr 27 20:34:00 2009

]costs, plus 65% of total net unrealized losses. In addition, of the $430 million increase in unrealized losses during the quarter, almost $400 million occurred in the bank and insurance sectors.

As we've noted before, this is not a market for us to sell bonds. However, due to the strong and stable positive cash flow generated by insurance product, we not only had [Author ID1: at Mon Apr 27 20:45:00 2009

]have [Author ID1: at Mon Apr 27 20:45:00 2009

]the intent to hold the bonds to maturity, but more important, we have the ability to do so.

Now, I would like to discuss the asset types, and sectors within our fixed maturity portfolio. Asset type, 78% of the portfolio is in corporate bonds and another 15% is in redeemable preferred stock. All of the $1.5 billion of redeemable preferred are considered hybrid securities, because they contain characteristics of both debt and equity securities.

However, all of our hybrids have a stated maturity date and other characteristics that make them more like dead [Author ID1: at Mon Apr 27 20:46:00 2009

]debt [Author ID1: at Mon Apr 27 20:46:00 2009

]securities. None of them are perpetual preferreds. The remaining 7% of the portfolio consist primarily municipals and government-related securities.

Our CDO exposure is $109 million in six securities, where the underlying collateral is primarily bank and insurance company, trust preferred securities. There is no direct exposure to subprime or Alt-A and we only have $38 million in mortgage-backed securities, all rated AAA.

Regarding sectors, as I mentioned, the financial sector comprises $3.9 billion or 40% of the portfolio. Within the financials, the Life held property casualty sector is $1.8 billion and banks are $1.6 billion. Financial guarantors and mortgage insurers total $181 million, less than 2% of the portfolio.

The next largest sector is utilities, which account for $1.2 billion or 13% of the portfolio. The remaining $4.5 billion of fixed maturities is spread among 233 issuers in a broad range of sectors. Now, to conclude the discussion on investments, I'll cover the portfolio yield.

In the first quarter, we invested $230 million in investment grade fixed maturities primarily in the utility and industrial sectors. We invested an average yield of 7.7%, an average rating of A minus and an average life of 25 years. This compares to the 7.2% yield, A minus rating, and 22 to 35 year average life of bonds acquired in the first quarter of last year.

This is the sixth consecutive quarter that the new money yield was 7% or higher. The average yield on the portfolio in the first quarter was 6.97%, the same as a year ago.

Next, I would like to discuss liquidity and capital. Our insurance companies primarily sell basic protection life and supplemental life insurance companies, which generate strong and stable cash flows. In the first quarter, only $2 million or 0.4% of premium revenue came from asset accumulation products, where revenue and underwriting margins are subject to changes in the equity markets.

At the holding company, free cash flow remains strong. For the full year, free cash flow will be around $320 million, the fifth consecutive year that has been $300 million or higher. In the first quarter, we used[Author ID1: at Mon Apr 27 20:48:00 2009

] $47 million for share repurchases and $31 million to reduce commercial paper. This leaves $242 million of free cash flow available for the remainder of the year.

Due to the uncertainty in the general economy, and the likelihood of additional OTTI impairments and rating agency downgrades of our bonds, we have decided to suspend our share repurchase program. The remaining $242 million of free cash flow will be available to offset any asset impairments and downgrades and possibly to reduce the amount of outstanding commercial paper.

Regarding the commercial paper, we were currently issuing in both the federal program and the open market. We issued new paper to cover maturities, and as I mentioned, we reduced the amount of commercial paper by $31 million to a total of $273 million outstanding at March 31st.

If, due to our ratings downgrade or some other reason, we're unable to issue new paper, in either the federal or nonfederal markets, we have multiple sources of liquidity available to retire the entire $273 million. We could use the portion of our free cash flow along with borrowings from our subsidiaries. We have the capacity to borrow up to $390 million from our companies without having to obtain regulatory approval.

At March 31, our insurance companies had $261 million of cash on hand to provide such financing if needed. We have multiple other sources of liquidity, including our bank lines that don't expect and need them to retire debt. In August, we have a $99 million debt issue that matures.

Our preference all along has been to refinance, providing that we can do so under favorable terms. We have explored issuing debt in the public market, but are advised that executing a debt offering at a reasonable interest rate would be difficult at this time. However, we have an alternative. We have negotiated a commitment letter with two of the banks in our credit line to syndicate a new term loan credit facility for $100 to $150 million. This proposed facility gives us the right to draw down a two-year term loan at a variable interest rate based on LIBOR, and these are proceeds for general corporate purposes.

The two lead banks have committed $60 million in aggregate to the facility and we expect to have the facility fully committed by the end of May. If the public debt market does not improve by August, we will draw down this term loan and use the proceeds to retire the August maturity. This financing gives us a lower cost means of refinancing to August maturity and provides time for the market to improve before we issue a long-term debt in a public offering.

Those are my comments. I will now turn it back to Mark.

Mark McAndrew

Thank you, Gary. We are lowering our operating earnings per share guidance to a range of $6 to $6.15 per share. This guidance assumes no share repurchase for the balance of 2009, as a result of the suspension of our share repurchase program. Those are my comments for this morning. I'll now open it up for questions.

Question-and-Answers Session

Operator

Thank you Mr. McAndrew. (Operator instructions). We'll take our first question from Jimmy Bhullar with JPMorgan.

Jimmy Bhullar - JPMorgan

The first one is on your RBC. I think you ended the year at 329%. Could you comment on where you expect to be either at the end of this quarter, but the realized losses also with ratings migration with the below investment rate bonds increasing, and where you believe you have to be to maintain your ratings?

Then, the second question that I have is just your view on your sales. Your life sales obviously have been pretty strong. Do you expect an impact if the economy remains weak in terms of either lower response rates in the direct response channel or just higher cancellations, doesn’t seem like you've seen a material deterioration in the life business by the weak economy. What your view is on that?

Mark McAndrew

Gary, I'll let you take the first part.

Gary Coleman

As far as our RBC, you're right Jimmy, we were at 329% at the year end. With the impairments and the downgrades, we were still over 300%, probably in the 305% area. And as far as what we need to maintain to retain our current ratings, we need to be at or around the 300%.

Mark McAndrew

As far as the life sale Jimmy, you're right, the economy, we've seen no negative impact on our life sales. Actually, in the direct response, we had 12% growth in sales this quarter with improving persistency and improving response rates as a result of some of the rate testing that we did.

American Income, if we take away the exchange rate, actually had 17% growth in life sales this quarter. The agent recruiting and the agent growth is strong both there and at Liberty National. I actually expect Liberty National sales growth to pick up, as well as American Income.

We are cutting back a little bit in the direct response, strictly we're cutting out some of our marginal distribution and it's just not a time to be overly aggressive. And any money that we don't spend there goes straight to statutory earnings. So, we're cutting back a little bit in the direct response, but we still expect growth in sales there going forward.

So, we haven't seen any impact from the economy and really don't expect to. Actually, the pool of available recruits in our agency distribution is better because of the economy.

Jimmy Bhullar - JPMorgan

And just to follow up for Gary on the ratings, I'm assuming that you've already shared your results with the rating agencies. So, and a couple of them have negative outlooks on you. I haven't seen anything from anybody this morning. But, the 300% or remaining around 300%, is that the level that the rating agencies feel comfortable with also or is that just an internal guidance that you're giving?

Gary Coleman

Well recently, Moody's put out their report when they informed the ratings, they put us on negative outlook. And the factors that they listed that could cause downgrade would be RBC ratio below 300% and also included impairment losses in [Author ID1: at Mon Apr 27 20:53:00 2009

]of [Author ID1: at Mon Apr 27 20:53:00 2009

]greater than $200 million.

We've done some stress testing and we had a record level of downgrades in the first quarter. If we assume the downgrades and [Author ID1: at Mon Apr 27 20:53:00 2009

]go back to the levels that we're in the last year, which were really high last year, but they go back to that level. We estimate that we could withstand $225 million of impairment losses this year and that would require us putting our free cash flow back into the companies to shore up the capital.

As far as Moody's is concerned, we've exceed the $200 million of impairment losses, but we'd have the RBC ratio back at 300%. So, I don't know whether that would cause further downgrade. Now, I might add, in addition to the liquidity we have is not just the $242 million of free cash available for the year. We have multiple sources of liquidity.

As I mentioned, we can borrow $390 million from our subsidiaries without regulatory approval. We can issue preferred stock of over $335 million down into the companies without regulatory approval. In addition to that the new bank, the loan facility I mentioned, there is probably an extra $50 million there that we can tap. That's $775 million before we even tap our bank loan.

So, if the losses are higher than the $225, we've got other sources of liquidity that we can draw on to put down the companies if need be, to keep that capital at around 300%. Now, that was Moody's, Standard & Poors and Fitch and we continue to talk to them but we don't have a definitive list of factors that could cause a downgrade that we got from Moody's.

Mark McAndrew

Jimmy, I'd also point out, we certainly don't want to downgrade or we don't expect to downgrade. But should a downgrade occur, one, it would not have any impact on our distribution, and on our sales. And two, we have ample cash, if we needed to pay off that commercial paper as well as to pay off the debt coming due in August. So, it's not something we expect or definitely would not want, but we are prepared in case that should happen.

Operator

We will take our next question from Randy Binner with FBR Capital Market.

Randy Binner - FBR Capital Market

Hi, thank you. I just wanted to maybe explore this a little bit more, on the potential RBC scenario. So, if that stress test that Gary outlined came through those $225 million of impairments and that was largely offset by available cash flow.

I guess the first question is one, it seems like the first option would be to borrow debt from the subs, and on[Author ID1: at Mon Apr 27 20:56:00 2009

] the second option would be to do a preferred down to the subs. But, in either of scenario one or two, what would the net RBC effect be of that scenario going through?

Gary Coleman

Well first of all, as I mentioned, the $225, we could suffer that using our free cash flow, so it would be losses above $225.

Mark McAndrew

That's also assuming another $1.7 billion of downgrade in our portfolio.

Randy Binner - FBR Capital Market

Understood. That's what I meant to try and explore. I guess, I'm curious more directly what the RBC impact of the borrowing piece is, as it standalone.

Gary Coleman

Randy, on the inter-company borrowings, there is no charge. And when you get to the preferred, and obviously that would be what we'd do first. That's the easiest to do. The preferred is about a 30% charge, but then you got to run it through the whole formula. It may not end up being a full 30% charge. But I think the fact is, we can borrow where there's no charge up to $390 million. That's where we would go first.

Mark McAndrew

There's two different things there Randy. What we're talking about is if we had $1.7 billion of downgrades in the bond portfolio in the subsidiaries and we had impairment losses of I think Gary said 225, we would have to put the free cash we've already got at the parent, back down in the subsidiaries.

What we're talking about as far as borrowing the 390, is if we needed additional cash at the parent to pay off the commercial paper, we would use that. But, borrowing [Author ID1: at Mon Apr 27 20:57:00 2009

]barring [Author ID1: at Mon Apr 27 20:57:00 2009

]a downgrade we could cover that level of downgrades and impairments and still maintain the 300% RBC without doing any inter-company borrowings.

Randy Binner - FBR Capital Market

Understood. But, I guess the worst-case scenario would be a bigger stress test and paying back to CP. I mean, obviously that would be it, and it still sounds like there is kind of RBC charge free capacity to deal with all those potential contingencies.

Mark McAndrew

Right.

Gary Coleman

Yeah, Randy, as I mentioned, CP is 273. You could borrow 273 to pay that off and then we could have another $117 million of impairments on top of the 225 and borrow to cover those. The sum of those two loans would be the $390 million.

Mark McAndrew

Also, Randy, we would only need to pay off the commercial paper, if we were downgraded. If we were downgraded, the need to maintain the 300% RBC would go away. So, we wouldn't be as concerned about maintaining the 300% RBC, if we did indeed have a downgrade.

Randy Binner - FBR Capital Market

If the CP needed to be paid back, what would be the timing of that be? As I understands it's about 90 day rolling paper. So, do you have a sense of how that would phase out?

Gary Coleman

In late April, there are several days that sum of that would be about $200 million and then the other $73 million is in the first part of May and then there's $34 million at the end of June. So, the bulk of it'll be towards the end of April.

Mark McAndrew

That's why we're making sure that we're holding adequate cash at the insurance company level, should we need to pay that back.

Operator

We will take our next question from Colin Devine with Smith Barney.

Colin Devine - Smith Barney

Good morning. Just to make sure I'm clear on the capital, the RBC now is about 305. You're not anticipating a downgrade, but clearly you're planning for it, by building the capital and the expectation these leads to CP access. And with respect to the investment portfolio, clearly, a very disappointing performance.

Looking at the junk bond holding, did I hear that you're seriously prepared to continue to run with 13% of the portfolio on high yield? Aren't you going to have to start trimming that back? You're not going to get both, the ratings or that kind of junk bond holding.

Gary Coleman

Well, as far as trimming the holdings back, I don't think we have a plan to do that. As I mentioned, $400 million of the $550 million increases were companies like AIG, Harford, Phoenix, Band of America, Citi. We still think some of those are good credits, but I guess the feeling is we'll sell them and immediately realize the loss. If we hold them, we may not. The ones we do take losses on will be less than that.

But also, we're the first to report. I'm wondering what the below investment grade portfolios are doing with the other companies, and I think we do have an advantage in it. Our bond leverage is lower, although it worked out 20% of the invested assets. I'm not so sure, as we compare it to equity, will be that much difference than any other companies.

Of course, it may face downgrades, too. But, as Mark mentioned, if we do face a downgrade, it doesn't hurt us in marketing our products, and we've got the cash to cover the CP in case we don't qualify for the Federal program anymore. So, I think that's the way we'll continue. We'll just see how these bonds work out.

Colin Devine - Smith Barney

Just to clarify a minor point for me. In running your RBC calculation, were the downgrades from the rating agencies, have they fully flown through to what you're using from the SVO?

Gary Coleman

Yes.

Colin Devine - Smith Barney

Okay. So that's all and there is no delay here.

Gary Coleman

No. We've got their numbers and that’s what we use.

Operator

We will take our next question from Steven Schwartz with Raymond James.

Steven Schwartz - Raymond James

Good morning, everybody. Just to quickly follow up on Colin's last point before I get into my own. Split rated bonds, and holdings, where do you have those vis-a-vis you're using SVO ratings, which may or may not have taken that yet into account. Is that not true?

Gary Coleman

We're using the NAIC ratings which assume the SVO, and I'm not sure whether they have the split ratings taken care of or not.

Steven Schwartz - Raymond James

And then, if I can here, on the CP, how much of that is in the Federal program? Is that up to $200 million?

Gary Coleman

As Mark stated first, I believe all of those still in the Federal program. Since that time, some of that has matured. We moved into the open market and it's not a sizable number at this point but it's still the bulk of it's in the Federal program.

So, I will add this. Steven, in the open market, we've been issuing shorter maturities, because the Federal market is not likely 90 days. So, we've issued several times in the open market and again the shorter maturities, but we haven’t had any trouble doing that.

Steven Schwartz - Raymond James

Okay, and presumably a downgrade that might kick you out of the CPP may not affect what you can do in the open market.

Gary Coleman

Well, that remains to be seen. A lot of people say we wouldn't be able to tap the open market. We've had some banks say that they think we could. But, to be careful as Mark indicated, we've gone ahead and accumulated cash with the insurance companies, if we need to take that CP out, we'll be able to do it.

Steven Schwartz - Raymond James

And then, just a couple more stat numbers if you happen to have it. Would you happen to know for the quarter your statutory operating income and statutory net income?

Gary Coleman

No. We haven't run our statutory numbers yet.

Operator

We will take our next question from John Nadel with Sterne Agee. Mr. Nadel, your line is open, if you could please check your mute button or pick up your handset. Mr. Nadel, are you there?

Hearing no response, we'll move to the next question in the queue. And we'll go to Eric Berg with Barclays capital.

Eric Berg - Barclays capital

Thanks very much. And good morning to everyone at Torchmark. Gary, can you remind us why the company has the size of the exposure that it has to financials in general and to banks and insurers in particular?

It's a little counterintuitive in the sense that just as people working in the banking business wouldn't want to own a lot of banking stock, so as to not double up their positions, you know, have their livelihood tied up with the bank and banking stocks and so forth.

It's just a little curious that so many insurers including Torchmark have the exposure that they do to financial bonds. What's going on here broadly speaking?

Gary Coleman

Well, Eric, as you know, these bonds weren't acquired yesterday. They've been acquired over a period of time. The reason we concentrated on banks and insurance companies and also utilities which, as I mentioned earlier I think is 13% of our portfolio.

First of all, they’re[Author ID1: at Mon Apr 27 21:14:00 2009

] regulated industries, and it's difficult for cash to be taken out of those companies and also being regulated, not as subject to LBO risk, which seems kind of funny now, but two or three that was a real risk to people holding bonds.

Also, banks, insurance companies and utilities have financial statements that you know are pretty easy to evaluate, pretty easy to determine the tangible equity, the cash flows. Things we look for in looking at our credit.

We didn't foresee the current economy although I don't maybe I[Author ID1: at Mon Apr 27 21:15:00 2009

]many who[Author ID1: at Mon Apr 27 21:15:00 2009

] did. The banks like Bank of America, Citigroup and insurance companies like AIG wouldn't have the problems they have today and we felt very strong about those credits when we bought them and we still feel that overall the financial sectors will be okay.

Eric Berg - Barclays capital

That's helpful. My second and final question relates back to the conversation that we were having about future impairments and downgrades, and I think that you said that you could handle in terms of your staying within your minimum risk base capital, $1.7 billion of further downgrades and $225 million of impairments.

If I have that right, my question is this. Your BBB and A portfolio is [homing] it [Author ID1: at Mon Apr 27 21:16:00 2009

]on[Author ID1: at Mon Apr 27 21:16:00 2009

]holding on at[Author ID1: at Mon Apr 27 21:16:00 2009

] $7.5 billion. So, $1.5 billion divided by $7.5 billion is roughly 20%. What would happen if they were more broadly based?

I know one can imagine anything and my question is not meant to sort of get at extraordinary circumstances, but say 25% or 30% of your A and BBB bonds were downgraded from here, because of the rating agency's broad-based concern about the U.S. economy and perspective defaults. If you had more than the $1.7 billion, what happens then to Torchmark?

Gary Coleman

If we've more than $1.7 billion in downgrades or?

Eric Berg - Barclays capital

Yes, that’s right of downgrades.

Mark McAndrew

Eric, that was in order to maintain the 300% RBC ratio at year end with our current cash flow available at the parent. What happens if had more impairments or more downgrades than that number, we would have a more difficult time maintaining the 300% which means what would happen is there is a better likelihood, we would see a downgrade, which possibly would mean we would have to pay back commercial paper.

I don't think it would have any impact on our sales. It would add some cost to our credit, but we don't think it would be a material cost. Gary?

Gary Coleman

Yes. Eric I was just going to add, I'll have to go back to [Author ID1: at Mon Apr 27 21:17:00 2009

]and do the calculation for your scenario, I'm not sure how much impact that would have. But again, I go back to the fact that was assuming it would be okay with impairments at $1.7 billion and the $225 million of impairments. But, it'd be okay by putting the reserve free cash flow,[Author ID1: at Mon Apr 27 21:18:00 2009

] the $243 million back in.

I also outlined the other source of liquidity and when you throw our bank line in there, which Mark mentioned, when you throw that in, we've got $1.4 billion of liquidity available that we could tap and we could put into the company.

So, I think the question would be as Mark said we get to that point. First, how much the liquidity we have to tap and then whether we think it'd be necessary to take the cash and maintain the ratings or go down a notch in ratings. So, I think we just have to look at that but we do have liquidity available, if we wanted to shore the companies up. At some point though, I guess where [Author ID1: at Mon Apr 27 21:19:00 2009

]it may not be worth to maintain the rating.

Eric Berg - Barclays capital

Actually, Gary, one last quick one if I could just fit one in here, and that is I just wanted to check my definition of free cash flow available to the parent as you defined it is the dividending capability of this year from the insurance companies to the parent minus the common stock dividend, minus the corporate expenses, such as interest expense?

Gary Coleman

Yes. That's after paying all obligations to Torchmark. That's the money that's left over.

Operator

We will take our next question from John Nadel with Sterne Agee.

John Nadel - Sterne Agee

So, a couple of quick ones for you guys. First, I mean with all of this coming up here in the near term, potentially, especially in light of the extreme downgrade activity during the first quarter, what was the thought process behind another $47 million of buybacks? I mean wouldn't that $47 million of capital be nice to have right now?

Mark McAndrew

Well, again, the vast majority of those downgrades came toward the end of the quarter. And you know, hindsight is 20/20, but considering the average price we paid was $22 a share, and we felt very strongly and we still do feel very strongly that we have more than ample liquidity and capital to get through this.

John Nadel - Sterne Agee

Okay. All right. I realize hindsight is easier than during the quarter. A quick question then to on risk-based capital, I understand from Gary's comment that there's really no impact one way or another with respect to borrowings from the subs through the holding company. So that said, formulaically in the RBC ratio, it doesn't have an impact. As I understand from most of the rating agencies, they tend to look directly through that. And so, I guess my question is this, while it might not have an impact on the reported RBC ratio, wouldn't you expect it to have a negative impact on the way the rating agencies view your risk-based capital?

Gary Coleman

John, we've had discussions with rating agencies going regarding that. And lot of it depends on how long you leave it out there. If it is very short-term, I don't think it has near the impact. And that’s what we'll be looking at this as short-term. But, there is a possibility though that that could be a factor.

Mark McAndrew

The other thing is we really have no intent to do that or to utilize that unless we do get a downgrade and we have to repay the commercial paper. So, if we should make those loans up from the insurance companies, it will probably be as a result that we've already had to downgrade.

John Nadel - Sterne Agee

And then, the last one for you is how to think about impairments from here forward. I guess, have you seen the late March sort of heavy downgrade activity in financials? I guess, I just haven't been paying attention enough, but has that sort of continued into April? That would be one. And then two, as you look at the remaining CDO exposure and the preferreds that you own, is there any increased probability that we're going to see impairments come out of those two asset classes?

Gary Coleman

Well, I think that there is a possibility of both, but I think we're look closely at the CDOs and we had six of those and one of them is one we wrote down. We determined there that the collateral is not sufficient so we would not get all of the cash flows.

Working with the collateral manager and looking at the information they have and the possibility, and various stressing of potential defaults, it still looks like the collateral is more than sufficient, on the others so that we get all of our cash. In other words, no impairment, but as time goes by and if things worsen, there could be a potential therefore to write-offs.

Mark McAndrew

But also on the downgrades, particularly in the financials, we don't expect the level of March to continue. In fact, basically what we've heard is there was a big rush to reevaluate the ratings for most of the financials and that has pretty well happened. So, we don't expect the downgrades particularly in the financial sector to continue at the March level

Operator

We will take our next question from Mark Finkelstein with FPK.

Mark Finkelstein - FPK

I have got a few quick ones and I guess a longer one. I guess, I can't recall if you mentioned what were stat impairments in the quarter?

Gary Coleman

Well the stat impairments will be the same as GAAP.

Mark Finkelstein - FPK

Okay. So, those are the same.

Gary Coleman

Right.

Mark Finkelstein – FPK

And then secondly, just to make sure we're right on this. You had 47 or so million of repurchases in the quarter. Was there anything in early April?

Gary Coleman

No. As we mentioned, we have stopped our share repurchase program at this point.

Mark McAndrew

And we actually discontinued it early in March.

Mark Finkelstein – FPK

Okay, perfect. And then, I'm just thinking about the effective tax rate on the write-offs. I think your policy is to only offset taxes against where you have kind of realized gains or unrealized gains. Maybe if you could just review for us that policy? And then I guess secondly, how should we think about that on impairments going forward and are there any strategies that you can adopt in terms of maybe trying to shift earnings around or what have you to kind of create offsets?

Mark McAndrew

Well, our policy is in the past has been, for tax purposes, [Author ID1: at Mon Apr 27 21:24:00 2009

] to [Author ID1: at Mon Apr 27 21:24:00 2009

]for [Author ID1: at Mon Apr 27 21:24:00 2009

]transfers [Author ID1: at Mon Apr 27 21:24:00 2009

]is to match our gains and losses. That's in effect in a way that's going to hurt us here. We don't have any gains to carry back impairment losses, current impairment losses against. As far as shifting income, it's difficult for insurance companies, because we can't offset gains and losses against operating income. We can only offset against cap lines and so it's the major source or major assets, major source of capital gains or losses is in our bond portfolio.

So, we're limited to certain extent as to what we can do. I think this is an issue, that's going to come to the forefront, not only because it's access [Author ID1: at Mon Apr 27 21:26:00 2009

]effects us but it effects[Author ID1: at Mon Apr 27 21:26:00 2009

]protects [Author ID1: at Mon Apr 27 21:26:00 2009

] [Author ID1: at Mon Apr 27 21:26:00 2009

]other companies, is if you don't have gains to carry back the offset, you can still carry losses forward for five years. In addition, that five years doesn't run until the loss is taken for tax purposes. And I'll give you an example, we wrote down Lehman in the third quarter of last year.

That's like a $75 million write-down. The bankruptcy there though may not be finalized until early next year, and that’s when we'll take the tax loss. And we'll have five years from then to offset those losses. And if the economy improves, which we think it will, we think during that five-year time period, we will be able to generate gains to offset those losses.

Right now, the carrying literature doesn’t allow you to anticipate any gains of future. It has to be based on what you have in the balance sheet at the moment. So, that’s why you don't see a full 35% tax benefit of our impairments. We probably won't allow the other companies.

Mark Finkelstein – FPK

I guess just moving on, the UA branch agent count discontinues to I guess go down. It's about half of what it was a year ago. I understand the strategy of shifting there, and I understand that there's kind of a combination with LNL. But, I guess I'm just thinking when would you expect to see some stabilization in that agent count, and how should we think about that business going forward?

Mark McAndrew

Well, we are moving along with transition of the 85 branch offices that were United American Branch offices. We've converted I think 33 of those to date. And we'll convert the rest of them during the course of the year. I think we are starting to see a leveling off of the agent count there.

But, it's going to be new hires and recruiting there is starting to pick up. That sales force is starting to stabilize, and the people we still have left as far as management are starting to really buy into the Liberty National products and marketing and I feel good during the course of the year that we're not going to see a whole lot of additional deterioration there.

But I also would like to point out, if you look at the branch office, we had eight in the health side. We had $8 million of underwriting margin. That's before administrative expenses. Less than $3 million of that came from the under age 65 health insurance, which is the business that is rapidly running off and also that's where the sales have declined.

Medicare Supplement business is still staying on books very well and we expect that may even come back somewhat next year. In fact, I think in the first quarter, the United American office generated roughly $3 million of sales of the Liberty National products and that is growing significantly quarter-by-quarter. So, we may not replace the premium, but we'll definitely more than replace the profitability of that business that's running off.

Operator

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

Tom Gallagher - Credit Suisse

Hi. First question I have is just a follow-up on something Colin had asked earlier. I understand the view that your liabilities are sticky, so you'll never become a forced[Author ID1: at Mon Apr 27 21:29:00 2009

] seller of these bonds and recognize the realized losses. I definitely get that. The question I have though is just from a high level risk management standpoint, do you have any limits on what percent you'd be hesitant to see the portfolio get above?

We're at 13 today. Is it 20 or do you look at it more as a percent of statutory capital? As of right now, the junk bonds are greater than stat capital, just in aggregate terms. So, just curious if you're thinking about risk parameters broadly speaking as it relates to below investment grade?

Gary Coleman

No. I don't think we do look at it as a certain percentage that we don't want to exceed. I think what we're looking at is, we're constantly looking at not only the below investment grade bonds, but any other bonds where we have concerns about is, what is the likelihood that we're going to collect our money that there going to be money good. We get to the point okay, we may not get that cash, how much will we get if we sell it versus how much we get it if we hold it because in the bankruptcy, we get some kind of return on it.

It's more constantly looking at what is going to provide us the best, the best answer in terms of cash is just because $400 million of these bonds, financial bonds moved down into below investment grade bonds, doesn't mean we ought to go ahead and sell those in a moment. We need to continue to watch.

If we feel like, if we're only going to get a certain percentage on the dollar, but that's better than if we hold it and [Author ID1: at Mon Apr 27 21:31:00 2009

]will possibly going [Author ID1: at Mon Apr 27 21:31:00 2009

]go in[Author ID1: at Mon Apr 27 21:31:00 2009

]to bankruptcies [Author ID1: at Mon Apr 27 21:31:00 2009

]bankruptcy [Author ID1: at Mon Apr 27 21:31:00 2009

]then yes, we'll go ahead and sell it. I think we're looking more individually, as opposed to setting an arbitrary percentage is [Author ID1: at Mon Apr 27 21:32:00 2009

]that we're not going to go above.

Tom Gallagher - Credit Suisse

I guess, Gary, one of the reasons I ask is I think the rating agencies for sure will have tolerances. Just thinking back historically when companies exceeded very large percent of their portfolio and [Author ID1: at Mon Apr 27 21:32:00 2009

]in [Author ID1: at Mon Apr 27 21:32:00 2009

]junk bonds, I think that's typically been a big sticking point with them. And so, that was the main reason for asking.

Gary Coleman

Well, I guess, Tom, I haven't had those conversations with the rating agencies, but would they want us to go ahead and sell things at $0.10, $0.20 on the dollar just to get down to a lower ratio, I mean, that’s obviously it's a capital, whereas in the long run, you may not have any hit at all.

But, I understand your point, and I know that's right. I don't know what those parameters states or I guess we may have that discussion with them. We're just reluctant just to sell to get below a certain percentage, because of where the values are today.

Tom Gallagher - Credit Suisse

The other question I had was just on the DAC and the goodwill. Can you comment at all about what percent of your DAC, even in broad terms, and the good will would be related to the health business? And the reason I ask is you know, as that business declines, at least from a premium revenue standpoint, I wonder, you know, is there risk of any acceleration of either DAC or good will related to that?

Mark McAndrew

Well, as far as the DAC, we're seeing again, on the under age 65 health business, we have seen a higher amortization of the DAC because of those higher than anticipated lapse rates. We don't expect to see any DAC write-off, but we are seeing lower margins on that business than what we had originally anticipated. But, Rosemary, you want to comment on that?

Rosemary Montgomery

Yeah, I do. We did really a complete review of not only our policy obligations ratio but also the DAC amortization, and I don't have right in front of me what that percentage is, but we did make some adjustments to the DAC or [Author ID1: at Mon Apr 27 21:34:00 2009

]and [Author ID1: at Mon Apr 27 21:34:00 2009

]the amortization that were based on bringing 2008 experience into play. And the higher than expected lapse that we had on some of our underage business did impact that but we've made that adjustment.

And so, what we anticipate going forward on really all of the health lines, that would be the independent health, the direct response health, and then also the Liberty National exclusive agencies that the DAC percentage as the amortization percentage is that we have in there, we do anticipate that those will continue forward and we do not anticipate any additional write-offs or any write-offs.

Gary Coleman

And Tom, as far as the good will goes, we've got $423 million of good will. Almost all of that is American Income, which is not related to the health side. So, we don't anticipate a goodwill charge.

Operator

We'll take our next question from Dan Johnson with Citadel Investment Group.

Dan Johnson - Citadel Investment Group

Most of those questions have been answered. There was some questions before about split rating and the SVO. I felt like I understood your answer to Colin's question and got confused afterwards. So, help me with how you use ratings, whether the rating agency ratings or the SVO ratings in determining your OTTI process and then I have one follow-up, please.

Mark McAndrew

Well, as far as where the ratings come in, and looking at risk-based capital charges, we were using the NAIC ratings which were based on the SVO. I think they handle split rating on I guess maybe the trust preferred or whatever, I'm not sure how they [Author ID1: at Mon Apr 27 21:36:00 2009

]to [Author ID1: at Mon Apr 27 21:36:00 2009

]handle that. We recognize that what the rating agencies, their ratings don’t [Author ID1: at Mon Apr 27 21:37:00 2009

]own [Author ID1: at Mon Apr 27 21:36:00 2009

]have an impact on the RBC. I[Author ID1: at Mon Apr 27 21:37:00 2009

], it’s[Author ID1: at Mon Apr 27 21:37:00 2009

]t is[Author ID1: at Mon Apr 27 21:37:00 2009

] the NAIC ratings, and so that’s what we use. Now how they handle split ratings, I'm not sure.

Dan Johnson - Citadel Investment Group

And then, I guess the other part of that was how quickly do the SVO ratings reflect the changes done at the rating agencies? Did I understand you correctly to say that you were comfortable that all of your bonds that had been downgraded from the rating agencies had fairly quickly been picked up by the SVO and you were reflecting that?

Mark McAndrew

Yes. I feel very comfortable with that because what we saw in the NAIC, the change in the NAIC ratings was very close to what we saw just any change in there are the rating agency ratings.

Dan Johnson - Citadel Investment Group

And then, just a real quick follow-up was on the tax front. What sort of rate to follow up on Mark Finkelstein's question, what sort of rate should we be thinking about on realized losses, or OTTI going forward?

Mark McAndrew

If we continue to have impairments, it will [Author ID1: at Mon Apr 27 21:38:00 2009

]eventually get to whether there is no tax offset. Because, you've always had to demonstrate that you've got unrealized gains in your portfolio to offset, that theoretically you could sell those bonds, net gains to offset the losses.

If impairments continue to increase and our unrealized gains don't increase, then we'll get to the point where we wouldn't be able to justify taking a tax reduction.

Operator

We'll take our next question from Ed Spehar with Banc of America.

Ed Spehar - Banc of America/Merrill Lynch

Thank you. A couple of follow-ups on the scenario Gary that you're laying out. When you talked about $1.7 billion of downgrades, are you talking about from BBB to BB?

Gary Coleman

Yeah. That's what we were assuming.

Ed Spehar - Banc of America/Merrill Lynch

And then the other part of that was I think are you saying if you had $225 million of after tax impairments and you turned around and put the $242 million of free capital at the holding company back at the sub-level. Is that what you're suggesting?

Gary Coleman

Yes.

Ed Spehar - Banc of America/Merrill Lynch

So, if we're thinking about this and assuming that rating agencies take a view of more than just today and look at the statutory earnings power of the company, are we still talking about approximately a $400 million stat earnings run rate or is it changed?

Gary Coleman

Well, it would change, because $225 million in impairments would go into…

Ed Spehar - Banc of America/Merrill Lynch

No. I'm saying operating. I'm talking about pre any capital losses.

Gary Coleman

We're still up in the $450 million level or above as far as statutory operating earnings. Is that what you're asking?

Ed Spehar - Banc of America/Merrill Lynch

Statutory operating earnings after tax.

Gary Coleman

Right.

Ed Spehar - Banc of America/Merrill Lynch

I mean I think your holding company requirements, dividends and every interest corporates, or so everything else is less than $100 million, isn't it?

Gary Coleman

It is right at 100.

Ed Spehar - Banc of America/Merrill Lynch

Okay. So, doesn't that suggest that you know, the necessity of actually putting anything back in the subsidiary, if we're talking about the sort of elevated impairment scenario, I mean we're already in April, towards the end of April. Don't we have $450 million of earnings that's coming through this year that's going to help us offset any pretty significant level of impairments?

Gary Coleman

Well, as I was thinking that in consideration when I calculated the numbers, the $225 million.

Ed Spehar - Banc of America/Merrill Lynch

So, you're talking about this analysis, are you talking about a point in time as of today, are you talking about as of year end that you would take into count the stat earnings you're generating to come up with this 300?

Gary Coleman

Ed, we were talking about year end '09. The next time we really calculate RBC for regulatory purposes. So, this assumption was that through the remainder of the year, or say at the end of the year, that we could have had a total of $2.2 billion of downgrades for the first quarter and another $1.7 for the next three quarters, plus we could have $225 million of impairments, taking that into consideration and our statutory earnings, we still had to put $243 million into the company.

Ed Spehar - Banc of America/Merrill Lynch

Okay. All right. So that’s taking into account for $2.2 billion in the first quarter plus an additional $1.7 billion for the next three quarters.

Gary Coleman

Right.

Ed Spehar - Banc of America/Merrill Lynch

And then in terms of the comments, just quickly, Mark, you made a comment that [Author ID1: at Mon Apr 27 21:41:00 2009

]you thought that Med Sup might come back somewhat next year. I mean, that’s the first time I think you've said something like that in a long time I believe. I wonder if you could sort of expand on that.

Mark McAndrew

Well Ed, it's a little early to tell. There is no doubt the Medicare Advantage reimbursement rates have been cut far more than what people anticipated. Particularly the private fee for service plans, I think we're going to come under pressure. It is hard to say yet whether they'll actually be dis-enrollments. They're definitely going to lose their competitive advantage that they've had because of the over reimbursement.

So, actually, the Obama administration has indicated that they intend to eliminate that over reimbursement and they're taking pretty dramatic steps in 2010. But I don't think until June 1st that companies have to file their intentions for next year, as far as what plans and what areas they intend to offer their products, but I think there is a possibility you'll see some dis-enrollments from Medicare Advantage plans, but regardless, as far as new enrollees, I think you'll definitely see them lose their competitive advantage next year.

Ed Spehar - Banc of America/Merrill Lynch

And then, just going back to this statutory stuff Gary, the $225 million impairment, that is an after tax number, correct?

Gary Coleman

Yes. Yes, it is.

Operator

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

Jeff Schuman - KBW

Gary, I was wondering on this bank facility that you're putting together, is the completion of that base on any particular ratings or financial metrics that we should keep in mind?

Gary Coleman

No. Not as far as the completion of it. As a matter of fact, all the due diligence that the banks did were based on the first quarter numbers, so that’s up to date. The only thing regarding ratings is the interest rate is a LIBOR rate plus spread. If we got downgraded, then we would pay, you know, a little bit more in that spread. But, it's not that bigger amount. What we're looking at, if we issued it today, we're talking about an all end rate of around 5%. And that's one thing that appeals to us this is a very low cost way of paying down that August maturity but at the same time, it's also providing us time for the debt markets to open up.

Jeff Schuman - KBW

And then next, I am wondering given the fact you're already kind of maintaining fair amount of still cash and that you feel like you can pretty readily lend up to the holding companies. You thought about just upstreaming some cash and buying in the debt instead of maturing at a par?

Gary Coleman

Yeah, we have thought about that. It's a little hard to do. There's not much of it out there. We have looked at that and if we can get it at a good price, we will.

Mark McAndrew

And we've also looked at the possibility of short-term paying down with commercial paper, because we're basically not earning anything on the cash that we're holding.

Jeff Schuman - KBW

Then lastly, I guess help me maybe kind of reconcile what seems to be a little bit of a mixed message. It seems like you've painted a picture of fair degree of comfort and confidence about your sources of capital and liquidity, but then I also thought I heard you say at the beginning of the call that you're kind of dialing down maybe some of the growth and direct response, which I think it was being very high quality, very profitable business that generates a lot of value.

First of all, did I understand that correctly to kind of managing that down in an effort to consist that’s why capital? And if that’s true how do, I kind of reconcile that against the bigger message that you're pretty comfortable with your capital situation?

Mark McAndrew

I'll try to explain that. The direct response, everything we do, we calculate a return on the investment. We invest money up-front in acquisition expense and we look at the present value of profits that that business generates. Overall, we run 23%, 24% return on investment, overall in direct response for every dollar that we spent. But within their there are segments that generate significantly higher returns in that and there are some that return lower returns. So we've got some of the programs that we're doing that are down in that 10% to 12% return on investment.

Now we're saying is, we're going to cut back on some of the lower return on investment programs that we're doing for the time being. The nice thing about it when we do let some of that circulation rest, as we would call it, if we let it rest for six months or 12 months, when we started back up response rates improve just because it hasn’t been hit as many times.

So it's just one of those things that in the current environment we don’t feel like it's a good time to be overly aggressive in the direct response and the circulation that we're going to be reducing is the least possible of that. So if anything we'll see our overall margins go up as a result of that.

But, we just think it's not a particular good tome to be aggressive but again we're I think last year we spent a $139 million direct cost in the direct response. So we're working at cutting about $15 to $20 million out of that this year, but we're really cutting out just the lowest profitable business within that.

Operator

We'll take a follow-up question from Steven Schwartz with Raymond James. Please go ahead

Steven Schwartz - Raymond James

Okay, great. Ed confused me. Can we go back to the capital calculation and I think it might be easier to start since we have real year end numbers. You had $1.2 billion, 1248 of total adjusted capital at year end. You had $379 million of company action level required capital which was your 329. Your statutory operating income should be around $450?

Gary Coleman

Right.

Steven Schwartz - Raymond James

That's correct. And less how much that's going to have to be up to the holding company in order to pay off interest expense and other expenses?

Gary Coleman

What goes up to the holding company is based on last year's earnings.

Steven Schwartz - Raymond James

Right.

Gary Coleman

Last year's statutory earnings. And that's coming out of the insurance companies this year. That's $363 million.

Steven Schwartz - Raymond James

Okay.

Gary Coleman

Now our earnings are going to be about $450 million for this year.

Steven Schwartz - Raymond James

Okay.

Gary Coleman

What I was doing, is I was starting with that beginning capital, the 1.281 that you mentioned, adding in the earnings, subtracting out the dividends. And then,[Author ID1: at Mon Apr 27 22:23:00 2009

] from there solve for,[Author ID1: at Mon Apr 27 22:23:00 2009

] assuming that the downgrades are going to be $1.7 billion over the last three quarters added to the $2.2 billion we had in the first quarter, that we had that many impairments for the year. I mean downgrades, excuse me.

And then once I got that number, and knowing what I'd have to have to have 300% RBC, then I'd back into how much of impairments I could have and still be at the capital needed to be at the 300%.

Steven Schwartz - Raymond James

I understand how you're getting there, but here's how I'm looking at this thing. You've got 1248 less 225 of impairments. That's yours. I'm just trying to engineer backwards your number.

Gary Coleman

Okay.

Steven Schwartz - Raymond James

That’s 225 of impairments plus how much of retained statutory operating income?

Gary Coleman

Okay, lets just break it down the numbers. The beginning numbers, 1 billion 281, that was our capital at the end of last year.

Steven Schwartz - Raymond James

Okay

Gary Coleman

Add 450 of earnings, take 363 of dividends out.

Steven Schwartz - Raymond James

Okay so that’s still then go to go up to the holding company.

Gary Coleman

And that leaves me a 1 billion 368 of capital. And what we're estimating our capital to be is our risk-based capital was 389. At the end of the year, because of the downgrades, we're saying it will be 463 at the end of the year this year. That gives you 295.

Okay, so we're still close to the 300. And I was just trying to figure out how much we can have impairments knowing that by having impairments, I'm going to have, might put cash in at some point, because I'm already below the 295. And so that’s, so I've got 242 million available to put in the company.

So, once you have that, I forgot what you said, capital was, I think it's 368. You add 242 into that. Then you find out what amount it is that you can have impairments and still be at the 300% level.

Steven Schwartz - Raymond James

Okay and the 242 was what again?

Gary Coleman

That's our free cash flow that's available for the rest of the year.

Steven Schwartz - Raymond James

From last year.

Gary Coleman

Right.

Steven Schwartz - Raymond James

Okay, and then if I could ask an actual operating question. Looking at the break ups by the various agencies in health and Mark, maybe you touched on this and I didn't understand it but looking at L&L, you had a very nice increase year-over-year in the expense ratio. Was that somehow driven by this reclassification of expenses that you're talking about?

Mark McAndrew

Oh, Rosemary?

Rosemary Montgomery

Yes. I think the answer is no. I think that relates back to what I talked about earlier was the fact that we had done a complete review of our health lines and…

Steven Schwartz - Raymond James

I'm just looking at life.

Rosemary Montgomery

Oh, the life one is actually due to the termination rates continuing to…

Gary Coleman

Actually the acquisition expense at Liberty National went up significantly from a year ago.

Rosemary Montgomery

Yes. The non-deferred and amortization percentage is up from a year ago, consistent though I think what we've had in the fourth quarter of '08. And that's due to us continuing to experience a higher termination rate than what we had before.

Mark McAndrew

The expense ratio, the acquisition expense ratio went up At Liberty National. And that is a result of the higher than anticipated lapses that we were taking corrective steps to reverse that.

Steven Schwartz - Raymond James

But, that was the first year stuff?

Mark McAndrew

Yes.

Steven Schwartz - Raymond James

Okay. I got you. Thanks.

Operator

We'll take a follow-up question from John Nadel with Sterne Agee.

John Nadel - Sterne Agee

I just had one quick follow-up for you. Did I hear correctly that you said with respect to this new bank line that you are in the process of that it was -- the two banks involved in were also the two lead banks from your back-up line?

Gary Coleman

No. They're not.

John Nadel - Sterne Agee

Okay. They're two different banks.

Gary Coleman

They're banks in our bank line but they're not our lead banks.

John Nadel - Sterne Agee

They're not your lead banks. Okay. All right. Thank you.

Operator

We'll take our next question from (inaudible).

Unidentified Analyst

Yes, thank you. Just a question. You mentioned that you may at some point feel it is not worth defending your rating and at that point, you could live with a lower RBC ratio. What sort of ratio could you live with as a lower rating?

Mark McAndrew

Do you want to try that, Gary?

Gary Coleman

In discussions, we've had I don't think we know if we went downward rating, I don't know where the threshold would drop to. It drop from 300% to somewhere below that. I really can't answer what that level would be.

Unidentified Analyst

All right. Thanks.

Operator

And at this time, there are no further questions. Mr. McAndrew, I'll turn the conference back to you for closing comments.

Mark McAndrew

All right, thank you everyone for joining us this morning and we'll visit with you again at the end of next quarter. Have a great day.

Operator

Ladies and gentlemen, this will conclude today’s conference call. We thank you for your participation and you may disconnect at this time.

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