The count of renewal agents, those agents that have been with Liberty for more than one year, declined 7% to 856 at year-end 2003 but rose 4% to 892 by year-end 2004. Renewal agents are generally higher producers than first-year agents. In the latter part of 2003, the agent’s compensation system was restructured to not only reward production, but also to encourage retention of productive agents. However, the recruiting of new agents declined. In the third quarter of 2004, Liberty implemented initiatives similar to those of American Income to recruit new agents, primarily through use of the internet. As a result, total agent count rose 116 or 7% during the fourth quarter of 2004. Management believes that the continued recruiting of new agents and the retention of productive agents are critical to growing the sales in controlled agency distribution systems.
Accounting rules require Torchmark to revalue its interest-rate swaps at their fair value at the end of each accounting period. The fair values of these instruments fluctuate with interest rates in financial markets and diminish with the passage of time so that their value is zero when they expire. Torchmark intends to hold its swaps until they expire and has historically done so. Therefore, while period-to-period fluctuations can be substantial, the value of the swaps and the cumulative unrealized gains and losses from marking the swaps to market value from inception will be zero when the swap agreements expire. Temporary unrealized changes in swap values are included as a component of “Realized investment gains (losses)” on the Consolidated Statement of Operations. This fair value adjustment for all swaps on a pretax basis was a negative $8 million in 2004, a negative $16 million in 2003, and a positive $18 million in 2002.
Cash flows provided from operations increased in each of the three years ended December 31, 2004 over their respective prior year. They were $767 million in 2004, $740 million in 2003, and $651 million in 2002. In addition, Torchmark received $574 million in investment maturities and repayments in 2004, adding to available cash flows. Such repayments were $682 million in 2003 and $304 million in 2002.
The insurance revenue, and the $6.6 billion of invested assets supporting the liability for future policy benefits on the Consolidated Balance Sheet, are more than sufficient to cover the insurance obligations and all other anticipated policy expenses.
Torchmark’s debt covenants require that the effect of SFAS 115 be removed to determine this ratio
Subsequent to adoption, the liability for these minimum guarantees is determined each period end by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used. If actual experience or other evidence suggests that earlier assumptions should be revised, Torchmark adjusts the additional liability balance with a related charge or credit to benefit expense. See Note 6-Guaranteed Minimum Policy Benefits for more information on this liability.
Interest rate swaps: Torchmark has entered into swap agreements in connection with certain debt instruments to swap fixed-rate interest commitments to floating rates. All swaps are carried at fair value and are classified as “Other long-term investments” on the Consolidated Balance Sheet. In August, 2004, Torchmark entered into two new swap agreements. The first swap instrument exchanges the fixed 8.25% interest rate of the Senior Debentures due 2009 for a variable rate equal to 391 basis points above the six-month floating LIBOR rate. The second swap exchanges the fixed 7.375% interest rate of the Notes due 2013 for a variable rate equal to 305 basis points above the six-month floating LIBOR rate. As of September 30, 2004, the swap on the 9.18% Monthly Income Preferred Securities expired. The swaps related to the 6 1/4% Senior Notes and the 8 1/4% Senior Debentures qualify as hedges under accounting rules. Changes in the fair value of these swaps are offset by an adjustment of the carrying value of the related Notes in like amount each period. The following tables summarize selected information about interest rate swaps.
Perry. Sam R. Perry was elected a director of Torchmark in October, 2004. Until September 30, 2004, he was a shareholder and Of Counsel in the law firm of Sneed Vine and Perry, P.C. That law firm, which from time to time provided legal representation to Torchmark subsidiaries, received $320 thousand in 2004 for its services from Torchmark subsidiaries.