Torchmark Corporation Reports Third Quarter 2010 Results
By Torchmark Corporation, PRNETuesday, October 26, 2010
MCKINNEY, Texas, October 27, 2010 - Torchmark Corporation (NYSE: TMK) reported today that for the quarter
ended September 30, 2010, net income was $1.41 per share compared with $1.22
per share for the year-ago quarter. Net operating income for the quarter was
$1.63 per share, a 10% per share increase compared with $1.48 per share for
the year-ago quarter.
Reconciliations between net income and net operating income are shown in
the Financial Summary below.
Sale of United Investors Life Insurance Company (UILIC)
During the quarter ended September 30, 2010, Torchmark's wholly owned
subsidiary, Liberty National Life Insurance Company (LNL), signed an
agreement to sell 100% of the common stock of UILIC to Protective Life for
$186 million plus adjusted statutory capital and surplus as of the closing
date after certain preclosing distributions from UILIC to LNL. The
transaction is expected to close by December 31, 2010.
Had the transaction closed on September 30, the purchase price would have
been approximately $344 million based on adjusted statutory capital and
surplus of approximately $158 million after preclosing distributions of
approximately $327 million. These distributions primarily include $188
million of Torchmark preferred stock and $132 million of fixed maturities.
Management projects that the sale of UILIC will reduce 2011 consolidated
net income by approximately $15 million. However, the sale is expected to
provide approximately $250 to $320 million of additional free cash flow to
the parent company in 2011.
Due to the pending sale, UILIC's financial results are presented as
discontinued operations in the accompanying schedules.
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.
Financial Summary
(dollars in millions, except per share data)
--------------------------------------------
Per Share
Quarter Ended Quarter Ended
September 30, % September 30, %
------------- -------------
2010 2009 Chg. 2010 2009 Chg.
---- ---- ---- ---- ---- ----
Insurance
underwriting
income* $1.48 $1.35 10 $120.2 $112.1 7
Excess
investment
income* 0.92 0.79 16 74.7 65.8 14
Parent company
expense (0.02) (0.03) (2.0) (2.4)
Income tax (0.80) (0.71) 13 (64.8) (58.6) 11
Stock option
expense, net
of tax (0.02) (0.02) (1.8) (1.6)
----- ----- ---- ----
Net operating
income from
continuing
operations $1.55 $1.39 12 $126.3 $115.3 10
Net operating
income from
discontinued
operations 0.07 0.08 6.1 7.0
---- ---- --- ---
Net operating
income from
all operations $1.63 $1.48 10 $132.4 $122.3 8
Reconciling
items, net of
tax:
Realized gains
(losses) on
investments 0.06 (0.25) 5.2 (20.7)
Realized gains
(losses) -
discontinued
operations 0.02 (0.06) 1.5 (4.8)
Loss on
disposal of
discontinued
operations (0.38) - (31.1) -
Medicare Part D
adjustment 0.08 0.05 6.6 4.4
Tax settlements - - - (0.1)
Loss on Company
occupied
property - - - (0.2)
--- --- --- ----
Net income $1.41 $1.22 $114.5 $100.8
Weighted
average
diluted
shares
outstanding
(000) 81,355 82,844
* See definitions in the discussions below and in the Torchmark 2009
SEC Form 10-K.
Note: Tables in this news release may not foot due to rounding.
INSURANCE OPERATIONS - comparing the third quarter 2010 with third
quarter 2009:
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 23% of
Torchmark's insurance underwriting margin for the quarter and 29% of total
premium revenue. Medicare Part D accounted for 4% of insurance underwriting
margin and 8% of total premium revenue.
Net sales of life insurance decreased 3%, while health sales, excluding
Part D, fell 29%.
Insurance Premium Revenue
Insurance Premium Revenue
from Continuing Operations
(dollars in millions)
---------------------
Quarter Quarter
Ended Ended
September 30, September 30, %
---------- ----------
2010 2009 Change
---- ---- ------
Life insurance $417.0 $397.4 5
Health insurance -
excluding Medicare
Part D 189.4 200.2 (5)
Health - Medicare Part
D 52.5 47.6 10
Annuity 0.2 0.1
--- ---
Total $659.1 $645.3 2
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
from Continuing Operations
(dollars in millions, except per share data)
--------------------------------------------
Quarter Quarter
Ended % of Ended % of %
Sept. 30, Sept. 30,
2010 Premium 2009 Premium Change
---------- ------- ---------- ------- ------
Insurance
underwriting
margins:
Life $115.4 28 $106.4 27 8
Health 36.6 19 35.7 18 2
Health - Medicare
Part D 5.6 11 5.8 12 (4)
Annuity 0.3 -
--- ---
157.9 147.9
Other income 0.8 0.7
Administrative
expenses (38.4) (36.5) 5
----- -----
Insurance
underwriting
income $120.2 $112.1 7
Per share $1.48 $1.35 10
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; $55 million on premium revenue of $162 million. Life
premiums of $142 million were up 11% and life insurance underwriting margin
of $47 million was up 9%. As a percentage of life premium, life underwriting
margin was 33%, down from 34%, and the highest of the major life distribution
channels at Torchmark. The producing agent count was 4,065, up 3% from a year
ago, and down 3% during the quarter. Net life sales were $34 million, up 5%.
Direct Response was Torchmark's second leading contributor to total
underwriting margin; $39 million on premium revenue of $155 million. Life
premiums of $142 million were up 6%, and the life underwriting margin of $36
million was up 8%. As a percentage of life premium, life underwriting margin
was 25%, same as the year-ago quarter. Net life sales were $32 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; $27 million on premium revenue of $153 million. Life
premiums of $73 million were down 2% and life underwriting margin of $16
million was up 10%. As a percentage of life premium, life underwriting margin
was 21%, up from 19%.
LNL Agency was Torchmark's second leading contributor to health
underwriting margin; $12 million on health premium of $80 million. Health
underwriting margin as a percentage of premium was 15%, up from 14%.
Sales data and agent counts are still presented separately for the LNL
and UA Branch Office Agencies. The LNL Agency producing agent count was
1,527, down 43% from a year ago, and down 5% during the quarter. Net life
sales for the LNL Agency were $9 million, down 22% from a year ago. UA Branch
Office Agency producing agents fell to 645, down 28% from a year ago and
unchanged during the quarter. Net health sales for UA Branch Office Agency
were $2 million, down 48%.
UA Independent Agency was Torchmark's leading contributor to health
underwriting margin; $14 million on health premium of $75 million. Health
underwriting margin as a percentage of premium was 19%, same as the year-ago
quarter. Net health sales were $5 million, down 28%.
Medicare Part D Prescription Drug Plan is distributed by Direct Response
and the UA Agencies. Third quarter premium revenue was $53 million, up 10%.
Underwriting margin for the third quarter 2010 was $6 million, same as 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 will be 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 2 of this release. A chart reconciling the Company's non-GAAP financial
presentation to a GAAP presentation may be viewed at
www.torchmarkcorp.com on the Investor Relations page at Financial
Reports.
Administrative expenses were $38.4 million, up 5% from the year-ago
quarter due primarily to increases in employee benefit costs.
INVESTMENTS
Excess Investment Income - comparing the third quarter 2010 with the
third quarter 2009:
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 on net policy
liabilities and interest on debt.
Quarter Ended
September 30,
(dollars in millions, except per share data)
--------------------------------------------
%
2010 2009 Change
---- ---- ------
Net investment income from continuing
operations $172.3 $158.9 8
Required interest:
Interest on net policy liabilities (78.9) (72.9) 8
Interest on debt (18.7) (20.3) (8)
----- -----
Total required interest (97.6) (93.1) 5
----- -----
Excess investment income from
continuing operations $74.7 $65.8 14
Per share $0.92 $0.79 16
Excess investment income from
discontinued operations $5.7 $5.4
Net investment income from continuing operations was up 8% despite lower
new money yields because the Company held significantly more cash throughout
the third quarter of 2009 than the third quarter of 2010. Interest on net
policy liabilities increased 8%, in line with the 8% increase in the related
liabilities. Interest on debt decreased 8% due to lower average long-term
debt outstanding.
Investment Portfolio
The composition of the investment portfolio at September 30, 2010 is as
follows:
Invested Assets
(dollars in
millions)
------------
$ % of Total
--- ----------
Fixed maturities (at
amortized cost) $10,393 94%
Equities 15 -
Mortgage loans 15 -
Investment real estate 2 -
Policy loans 371 3%
Other long-term investments 26 -
Short-term investments 120 1%
--- ---
Invested assets - continuing
operations $10,941 100%
Invested assets -
discontinued operations $734
Fixed maturities at amortized cost by asset class are as follows:
Fixed Maturities
(dollars in millions)
---------------------
Below
Investment Investment
Grade Grade Total
----- ----- -----
Corporate bonds $7,311 $399 $7,710
Redeemable preferred stock*:
U.S. 897 337 1,235
Foreign 85 31 115
Municipal 1,132 - 1,132
Government-sponsored enterprises 57 - 57
Government and agencies 36 - 36
Collateralized debt obligations - 56 56
Residential mortgage-backed
securities 17 - 17
Other asset-backed securities 37 - 37
--- --- ---
Fixed maturities - continuing
operations $9,571 $822 $10,393
Fixed maturities - discontinued
operations $690
* Torchmark's redeemable preferred stock portfolio includes only $5
million of perpetual preferreds.
All discussion below includes only continuing operations.
The market value of Torchmark's fixed maturity portfolio was $11.0
billion; $572 million higher than amortized cost of $10.4 billion. The $572
million net unrealized gain compares to a net unrealized gain of $143 million
at June 30, 2010, and a net unrealized loss of $402 million a year ago.
The investment portfolio contains no commercial mortgage-backed
securities or 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 6.68%
during the third quarter of 2010, compared to 6.96% in the year-ago quarter.
The decrease is due primarily to the sale of securities that took place
following a significant increase in market values in the third quarter of
2009 and lower new money yields.
Acquisitions of fixed maturity investments during the quarter totaled
$447 million at cost. Comparable information for acquisitions of fixed
maturity investments is as follows:
Quarter Ended
September 30,
-------------
2010 2009
---- ----
Average annual effective
yield 5.6% 6.4%
Average rating A- A
Average life (in years) to:
First call 23.0 12.8
Maturity 25.4 19.2
Realized Capital Gains on Investments - during the quarter ended
September 30, 2010:
Torchmark's continuing operations had a net capital gain of $8.0 million
($5.2 million after tax). Year-to-date, the Company had net capital gains
related to continuing operations of $10.3 million ($6.7 million after tax).
SHARE REPURCHASE - during the quarter ended September 30, 2010:
During the quarter, the Company repurchased 1.3 million shares of
Torchmark Corporation common stock at a total cost of $66.4 million at an
average price per share of $51.08. Year-to-date, through September 30, the
Company has repurchased 2.7 million shares.
LIQUIDITY/CAPITAL:
Torchmark's operations consist primarily of writing basic protection life
and supplemental health insurance policies which generate strong and stable
cash flows. Capital at the insurance companies continues to be more than
sufficient to support current operations. In addition, the parent company
held $220 million of liquid assets at September 30, 2010.
EARNINGS GUIDANCE:
Torchmark projects that net operating income per share for the year
ending December 31, 2010, will range from $6.38 to $6.42, and from $6.75 to
$7.10 for the year ending December 31, 2011.
OTHER FINANCIAL INFORMATION:
More detailed financial information including various GAAP and Non-GAAP
ratios and financial measurements is 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, 2009, 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 third quarter 2010
earnings release conference call with financial analysts at 11:00 a.m.
(Eastern) tomorrow, October 28, 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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