Torchmark Corporation Reports Fourth Quarter and Year-end 2009 Results
By Torchmark Corporation, PRNETuesday, February 9, 2010
MCKINNEY, Texas, February 10 - Torchmark Corporation (NYSE: TMK) reported today that for the quarter
ended December 31, 2009, net income was US$1.36 per share, compared with
US$1.61 per share for the year-ago quarter. Net operating income for the
quarter was US$1.47 per share, compared with US$1.40 per share for the
year-ago quarter.
Net income for the year ended December 31, 2009, was US$4.88 per share,
compared with US$5.11 per share for the year-ago period. Net operating income
for the year ended December 31, 2009, was US$5.97 per share, compared with
US$5.80 per share for the year-ago period.
Reconciliations between net income and net operating income are shown in
the Financial Summary below.
FINANCIAL SUMMARY
Net operating income, a non-GAAP financial measure, has long been
consistently used by Torchmark's management to evaluate the operating
performance of the Company, and is a measure commonly used in the life
insurance industry. It differs from net income primarily because it excludes
certain non-operating items such as realized investment gains and losses and
nonrecurring items which are included in net income. Management believes that
an analysis of net operating income is important in understanding the
profitability and operating trends of the Company's business.
(All amounts in US dollars unless otherwise noted)
Financial Summary
(dollars in millions, except per share data)
--------------------------------------------------------
Per Share
Quarter Ended Quarter Ended
December 31, December 31,
-------------- % -------------- %
2009 2008 Chg. 2009 2008 Chg.
---- ---- ---- ---- ---- ----
Insurance
underwriting income* $1.43 $1.27 13 $119.0 $108.2 10
Excess investment
income* 0.84 0.91 (8) 69.8 77.5 (10)
Parent company expense (0.03) (0.05) (2.6) (4.5)
Income tax (0.76) (0.72) 6 (62.9) (61.0) 3
Stock option
expense, net
of tax (0.02) (0.02) (1.4) (1.6)
---- ---- --- ---
Net operating income $1.47 $1.40 5 $121.8 $118.6 3
Reconciling items,
net of tax:
Realized gains
(losses) on
investments (0.18) 0.13 (15.0) 11.0
Medicare Part
D adjustment 0.08 0.09 6.6 7.6
Tax settlements - - (0.2) 0.1
Net cost from legal
settlements - - - (0.1)
--- --- --- ---
Net income $1.36 $1.61 $113.3 $137.2
Weighted average
diluted shares
outstanding (000) 83,075 84,987
Per Share
Year Ended Year Ended
December 31, December 31,
-------------- % -------------- %
2009 2008 Chg. 2009 2008 Chg.
---- ---- ---- ---- ---- ----
Insurance
underwriting income* $5.65 $5.25 8 $469.3 $464.9 1
Excess investment
income* 3.58 3.71 (4) 297.3 328.1 (9)
Parent company expense (0.12) (0.12) (9.6) (10.5)
Income tax (3.07) (2.96) 4 (255.1) (262.3) (3)
Stock option
expense, net
of tax (0.08) (0.08) (6.4) (7.0)
---- ---- --- ---
Net operating income $5.97 $5.80 3 $495.6 $513.3 (3)
Reconciling items,
net of tax:
Gain on sale of
agency buildings - - 0.0 0.2
Realized losses on
investments (1.12) (0.79) (93.3) (69.9)
Realized losses on
company occupied
property - (0.02) (0.2) (1.4)
Tax settlements 0.03 0.12 2.9 10.8
Net cost from legal
settlements - (0.01) 0.0 (0.8)
--- ---- --- ---
Net income $4.88 $5.11 $405.0 $452.3
Weighted average
diluted shares
outstanding (000) 83,034 88,516
* See definitions in the following sections and in the Torchmark 2008
SEC Form 10-K.
Note: Tables in this news release may not foot due to rounding.
INSURANCE OPERATIONS - comparing the fourth quarter 2009 with fourth
quarter 2008:
Life insurance accounted for 73% of the Company's insurance underwriting
margin for the quarter and 63% of total premium revenue.
Health insurance, excluding Medicare Part D, accounted for 22% of
Torchmark's insurance underwriting margin for the quarter and 30% of total
premium revenue. Medicare Part D accounted for 4% of insurance underwriting
margin and 7% of total premium revenue.
Net sales of life insurance increased 5%, while health sales, excluding
Medicare Part D, increased 28%.
Insurance Premium Revenue
Insurance Premium Revenue
(dollars in millions)
-----------------------------
Quarter Quarter
Ended Ended
Dec. 31, Dec. 31, %
2009 2008 Chg.
------- -------- ---
Life insurance $417.6 $401.3 4
Health insurance - excluding Medicare Part D 200.5 225.0 (11)
Health - Medicare Part D 44.6 43.0 4
Annuity 2.5 3.0 (17)
--- --- --
Total $665.2 $672.2 (1)
Insurance Underwriting Income
Insurance underwriting margin is management's measure of profitability of
its life, health and annuity segments' underwriting performance, and consists
of premiums less policy obligations, commissions and other acquisition
expenses.
Insurance underwriting income is the sum of the insurance underwriting
margins of the life, health and annuity segments, plus other income, less
insurance administrative expenses. It excludes the investment segment, parent
company expense and income taxes.
Insurance Underwriting Income
(dollars in millions, except per share data)
-----------------------------------------------
Quarter Quarter
Ended Ended
Dec. 31, % of Dec. 31, % of %
2009 Premium 2008 Premium Chg.
---- ------- ---- ------- ----
Insurance underwriting
margins:
Life $114.4 27 $112.1 28 2
Health 34.5 17 41.9 19 (18)
Health -
Medicare Part D 5.8 13 5.0 12 16
Annuity 1.1 (8.8)
--- ---
155.8 150.1
Other income 0.9 1.1
Administrative
expenses (37.6) (43.0) (13)
---- ----
Insurance underwriting
income $119.0 $108.2 10
Per share $1.43 $1.27 13
Insurance Results by Distribution Channels
Total premium, underwriting margins, first-year collected premium and net
sales by all distribution channels are shown at www.torchmarkcorp.com
on the Investor Relations page at Financial Reports.
American Income Agency was Torchmark's leading contributor to total
underwriting margin ($50 million), on premium revenue of $152 million. Life
premiums of $132 million were up 11% and life insurance underwriting margin
of $43 million was up 6%. As a percentage of life premium, life underwriting
margin was 32%, down from 34% and the highest of the major life distribution
channels at Torchmark. Producing agents grew to 4,154, up 35% from a year
ago, and up 6% during the quarter. Net life sales were $35 million, up 24%.
Direct Response was Torchmark's second leading contributor to total
underwriting margin ($37 million), on premium revenue of $145 million. Life
premiums of $133 million were up 6%, and the life underwriting margin of $35
million was up 13%. As a percentage of life premium, life underwriting margin
was 27%, up from 25%. Net life sales were $30 million, down 3%.
LNL Agency (which now includes UA Branch Office Agency premiums and
underwriting margin) was Torchmark's third leading contributor to total
underwriting margin ($26 million), on premium revenue of $164 million. Life
premiums of $74 million were down 2% and life underwriting margin of $14
million was down 26%. As a percentage of life premium, life underwriting
margin was 19%, down from 26%.
LNL Agency was Torchmark's second leading contributor to health
underwriting margin ($11 million), on health premium of $90 million. Health
underwriting margin as a percentage of premium was 13%, down from 17%.
Sales data and agent counts are still presented separately for the LNL
and UA Branch Office Agencies. LNL Agency producing agents fell to 1,740,
down 48% from a year ago, and down 35% during the quarter. Net life sales for
the LNL Agency were $10 million, down 26%. UA Branch Office Agency producing
agents fell to 731, down 56% from a year ago and down 19% during the quarter.
Net health sales for UA Branch Office Agency were $3 million, down 76%.
UA Independent Agency was Torchmark's leading contributor to health
underwriting margin ($14 million), on health premium of $79 million. Health
underwriting margin as a percentage of premium was 18%. Net health sales were
up 105% due primarily to group Medicare Supplement sales. The majority of
these group sales normally occur during the fourth quarter.
Medicare Part D Prescription Drug Plan, which began January 1, 2006, is
distributed by Direct Response and the UA agencies. Fourth quarter 2009
premium revenue was $45 million for the 2009 plan year compared with $43
million in the year-ago quarter for the 2008 plan year. Underwriting margin
for fourth quarter 2009 was $6 million, compared to $5 million for the
year-ago quarter.
For GAAP reporting, Medicare Part D premiums are recognized evenly
throughout the year when they become due, and benefit costs are recognized
when the costs are incurred. Due to the design of the product, premiums are
evenly distributed throughout the year, but benefit costs are much higher
earlier in the year. As a result, under GAAP, benefit costs can exceed
premiums in the first part of the year but be less than premiums during the
remainder of the year. For net operating income purposes, Torchmark defers
excess benefits incurred in earlier interim periods to later periods in order
to more closely match the benefit cost with the associated revenue. For the
full year, the total premiums and benefits are the same under this
alternative method as they are under GAAP. The Company reports this
difference between GAAP and management's non-GAAP disclosures, net of tax, as
a reconciling item for the interim periods in the Financial Summary shown on
page 1 of this release. A chart reconciling the Company's non-GAAP financial
presentation to a GAAP presentation may be viewed on the Company's website at
www.torchmarkcorp.com on the Investor Relations page at Financial
eports.
Torchmark Annuities consist of variable and fixed annuity contracts. The
total underwriting gain for annuities in the fourth quarter 2009 was $1
million compared to a $9 million loss for the year-ago quarter. The change is
due primarily to the effects of fluctuations in the equity markets on
variable annuity account values. The variable annuity business is Torchmark's
only business where margins are significantly impacted by changes in equity
markets.
Administrative Expenses were $38 million, down 13% from the year-ago
quarter. The decrease is due to reductions in a number of items, including
litigation expenses and regulatory exam fees.
INVESTMENTS
Excess Investment Income - comparing the fourth quarter 2009 with the
fourth quarter 2008:
Management uses excess investment income as the measure to evaluate the
performance of the investment segment. It is net investment income reduced by
required interest. Required interest includes interest credited to net policy
liabilities and interest on debt.
Quarter Ended
December 31,
(dollars in millions, except
per share data)
--------------------------------
2009 2008 % Chg.
------ ------ ------
Net investment income $168.8 $167.7 1
Required interest:
Interest on net policy liabilities (80.1) (73.5) 9
Interest on debt (18.9) (16.7) 14
---- ----
Total required interest (99.1) (90.2) 10
---- ----
Excess investment income $69.8 $77.5 (10)
Per share $0.84 $0.91 (8)
Net investment income was up 1% even though average invested assets were
up 8% over the year-ago quarter because the Company held significantly more
cash throughout the fourth quarter of 2009 than the year-ago quarter.
Required interest on net policy liabilities increased 9%, in line with the
10% increase in average liabilities.
Investment Portfolio
The composition of the investment portfolio at December 31, 2009 is as
follows:
Invested Assets
(dollars in millions)
----------------------------
$ % of Total
------- ----------
Fixed maturities (at amortized cost) $10,152 93%
Equities 15 -
Mortgage loans 16 -
Investment real estate 2 -
Policy loans 384 4%
Other long-term investments 35 -
Short-term investments 358 3%
--- ---
Total $10,961 100%
Fixed maturities at amortized cost by asset class are as follows:
Fixed Maturities
(dollars in millions)
--------------------------------
Below
Investment Investment
Grade Grade Total
---------- ----------- -------
Corporate bonds $7,013 $455 $7,469
Redeemable preferred stock:
U.S. 1,018 284 1,301
Foreign 85 31 115
Municipal 1,030 - 1,030
Government-sponsored enterprises 83 - 83
Government and agencies 38 - 38
Residential mortgage-backed securities 20 - 20
Commercial mortgage-backed securities 2 - 2
Collateralized debt obligations - 55 55
Other asset-backed securities 39 - 39
--- --- ---
Total $9,328 $824 $10,152
The market value of Torchmark's fixed maturity portfolio was $9.7
billion; $456 million lower than amortized cost of $10.2 billion. The $456
million of net unrealized losses compares to $396 million at September 30,
2009. The increase in unrealized losses is due primarily to the effect of
rising treasury rates on our municipal bond portfolio. Due to its strong
liquidity position, Torchmark not only has the intent, but also the ability
to hold these investments to maturity.
The investment portfolio contains no securities backed by sub-prime
mortgages. Torchmark has no counterparty risk as it is not a party to any
credit default swaps or other derivatives contracts and does not participate
in securities lending.
At amortized cost, 92% of fixed maturities (94% at market value) were
rated "investment grade."
The fixed maturity portfolio earned an annual effective yield of 6.86%
during the fourth quarter of 2009, compared to 6.97% in the year-ago quarter.
Acquisitions of fixed maturity investments during the quarter totaled
$879 million at cost. Comparable information for acquisitions of fixed
maturity investments is as follows:
Quarter Ended
December 31,
----------------------
2009 2008
---- ----
Average annual effective yield 6.0% 7.8%
Average rating A A
Average life (in years) to:
First call 18.1 21.9
Maturity 23.3 23.2
Realized Capital Losses on Investments - during the quarter ended
December 31, 2009:
Torchmark incurred a net realized loss of $23 million resulting primarily
from a $25 million charge to earnings due to impairments and $3 million of
realized gains from dispositions. The net realized loss after tax was $15
million. Year-to-date, net realized losses are $141 million ($93 million
after tax).
PARENT COMPANY EXPENSES - during the quarter ended December 31, 2009:
Parent Company expenses were $2.6 million compared with $4.5 million for
the year-ago quarter. Expenses were higher in 2008 because of the costs
related to a potential acquisition in which the Company withdrew from
negotiations.
LIQUIDITY/CAPITAL:
Torchmark's operations consist primarily of writing basic protection life
and supplemental health insurance policies which generate strong and stable
cash flows. Less than 1% of revenue arises from asset accumulation products
where margins are significantly impacted by changes in the equity markets.
In addition, capital at the insurance companies is sufficient to support
current operations. Management expects the ratio of the Company's regulatory
capital to Company Action Level required capital to be in excess of 325%, in
line with recent years.
EARNINGS GUIDANCE FOR THE YEAR ENDING DECEMBER 31, 2010:
Torchmark projects that for the year ending December 31, 2010, net
operating income per share will range from $6.05 to $6.25, assuming no share
repurchases.
OTHER FINANCIAL INFORMATION:
More detailed financial information including various GAAP and Non-GAAP
ratios and financial measurements are located at www.torchmarkcorp.com
on the Investor Relations page under "Financial Reports and Other Financial
Information."
CAUTION REGARDING FORWARD-LOOKING STATEMENTS:
This press release may contain forward-looking statements within the
meaning of the federal securities laws. These prospective statements reflect
management's current expectations, but are not guarantees of future
performance. Accordingly, please refer to Torchmark's cautionary statement
regarding forward-looking statements, and the business environment in which
the Company operates, contained in the Company's Form 10-K for the year ended
December 31, 2008, and any subsequent Forms 10-Q on file with the Securities
and Exchange Commission and on the Company's website at
www.torchmarkcorp.com on the Investor Relations page. Torchmark
specifically disclaims any obligation to update or revise any forward-looking
statement because of new information, future developments or otherwise.
EARNINGS RELEASE CONFERENCE CALL WEBCAST:
Torchmark will provide a live audio webcast of its fourth quarter 2009
earnings release conference call with financial analysts at 12:00 p.m.
(Eastern) tomorrow, February 11, 2010. Access to the live webcast and replay
will be available at www.torchmarkcorp.com on the Investor Relations
page, at the Conference Calls on the Web icon. Immediately following this
press release, supplemental financial reports will be available before the
conference call on the Investor Relations page menu of the Torchmark website
at "Financial Reports and Other Financial Information."
Mike Majors, Vice President, Investor Relations of Torchmark Corporation, +1-972-569-3627, tmkir at torchmarkcorp.com
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