Torchmark Corporation Reports Second Quarter 2013 Results

MCKINNEY, Texas, July 24, 2013 /PRNewswire/ -- Torchmark Corporation (NYSE: TMK) reported today that for the quarter ended June 30, 2013, net income was $1.44 per share, compared with $1.32 per share for the year-ago quarter. Net operating income for the quarter was $1.42 per share, compared with $1.30 per share for the year-ago quarter.

Reconciliations between net income and net operating income, GAAP ROE and management ROE, and GAAP book value and management book value are shown in the Financial Summary below.

HIGHLIGHTS:

• Net operating income per share increased 9% over the year-ago quarter.
• ROE (excluding net unrealized gains on fixed maturities) was 15.6%.
• Total net life sales increased 7% compared to the first quarter of 2013.  Sequential increases by major distribution channel were:
  • American Income 8%
  • Direct Response 6%
  • Liberty National 15%
• Eight American Income middle managers were selected to be SGAs, bringing the total number of SGAs to seventy-two.
• 1.4 million shares of common stock were repurchased.

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 certain 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.

** Accounting guidance (ASC-820, which includes guidance formerly set forth in FAS 115) requires a revaluation adjustment of fixed maturities available for sale to fair value. Without the revaluation adjustment, these assets would be reported at amortized cost.
*** ROE is calculated using average equity for the measurement period.

INSURANCE OPERATIONS – comparing the second quarter 2013 with second quarter 2012:

Life insurance accounted for 70% of the Company's insurance underwriting margin for the quarter and 62% of total premium revenue.

Health insurance, excluding Medicare Part D, accounted for 26% of Torchmark's insurance underwriting margin for the quarter and 28% of total premium revenue. Medicare Part D accounted for 4% of insurance underwriting margin and 10% of total premium revenue.

Net sales of life insurance increased 2%, while health sales, excluding Medicare Part D, increased 88% due primarily to the addition of Family Heritage.

Insurance Premium Revenue

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 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 ($66 million), on premium revenue of $198 million. Life premiums of $178 million were up 9% and life insurance underwriting margin of $57 million was up 5%. As a percentage of life premiums, life underwriting margin was 32%, down from 33% and the highest of the major life distribution channels at Torchmark. Producing agents grew to 5,540, up 4% from a year ago, but down 1% during the quarter. Net life sales were $41 million, up 2%.

Direct Response was Torchmark's second leading contributor to total underwriting margin ($46 million), on premium revenue of $182 million. Life premiums of $169 million were up 7% and the life underwriting margin was $43 million, up 24%. As a percentage of life premiums, life underwriting margin was 26%, up from 22%. Net life sales were $40 million, up 3%.

LNL Agency was Torchmark's third leading contributor to total underwriting margin ($32 million), on premium revenue of $131 million. Life premiums of $69 million were down 2% and life underwriting margin of $17 million was down 1%. As a percentage of life premiums, life underwriting margin was 25%, same as the year-ago quarter. Net life sales for the LNL Agency were $8 million, up 2%.

LNL Agency was Torchmark's second leading contributor to health underwriting margin ($14 million), on health premium of $61 million. Health underwriting margin as a percentage of health premium was 23%, up from 21%. Net health sales were $3 million, down 5%.

LNL Agency producing agent count was 1,283, down 5% from a year ago, and down 7% during the quarter.

Family Heritage Agency was acquired by Torchmark on November 1, 2012. FHL contributed health underwriting margin of $9 million on health premiums of $48 million, and health underwriting margin as a percentage of health premiums was 19%. Net health sales were $11 million. Producing agents grew during the quarter to 744 from 729.

UA Independent Agency was Torchmark's leading contributor to health underwriting margin ($15 million), on health premium of $76 million. Health underwriting margin as a percentage of premium was 20%, same as the year-ago quarter. Net health sales were $7 million, up 17%.

Medicare Part D Prescription Drug Plan is distributed by Direct Response and the UA agency. Second quarter premium revenue was $73 million, down 6%. Underwriting margin for second quarter 2013 was $8 million, down 1%. Net sales were $8 million, down 63%.

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 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 included in 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 Reports.

Administrative Expenses were $44.1 million, up 11% from the year-ago quarter primarily due to the addition of Family Heritage. The ratio of administrative expenses to premiums was 5.8%, approximately the same as the year-ago quarter.

INVESTMENTS

Excess Investment Income – comparing the second quarter 2013 with the second quarter 2012:

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 related to net policy liabilities and interest on debt.

Net investment income was up 2%, while average invested assets increased 10%. This is due primarily to lower new money yields and the addition of the lower-yielding Family Heritage portfolio. Required interest on net policy liabilities increased 10%, while the average liabilities increased 12%. The weighted average discount rate for the net policy liabilities declined to 5.57% from 5.65% a year ago.

Investment Portfolio

The composition of the investment portfolio at June 30, 2013 is as follows:

Fixed maturities at amortized cost by asset class are as follows:

The market value of Torchmark's fixed maturity portfolio was $12.9 billion; $652 million higher than amortized cost of $12.2 billion. The $652 million of net unrealized gains fell from $1.5 billion at March 31, 2013 due to increases in market interest rates. Net unrealized gains were comprised of gross unrealized gains of $973 million and gross unrealized losses of $321 million.

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, 95% of fixed maturities (96% at market value) were rated "investment grade."

The fixed maturity portfolio earned an annual effective yield of 5.95% during the second quarter of 2013, compared to 6.43% in the year-ago quarter, reflecting the effect of calls of bank hybrid fixed maturities in the third quarter of 2012, lower new money yields, and the addition of the lower-yielding Family Heritage portfolio.

Acquisitions of fixed maturity investments during the quarter totaled $305 million at cost. Comparable information for acquisitions of fixed maturity investments is as follows:

Realized Capital Gains on Investments – during the quarter ended June 30, 2013:

Torchmark had a net realized capital gain of $5.9 million ($3.8 million after tax) resulting from dispositions of fixed maturities. Year-to-date, the Company has had net capital gains of $76 thousand.

SHARE REPURCHASE – during the quarter ended June 30, 2013:

During the quarter, the Company repurchased 1.4 million shares of Torchmark Corporation common stock at a total cost of $90 million at an average price per share of $62.77.

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 is sufficient to support current operations. In addition, the parent company had $138 million of liquid assets at June 30, 2013.

EARNINGS GUIDANCE FOR THE YEAR ENDING DECEMBER 31, 2013:

Torchmark projects that for the year ending December 31, 2013, net operating income per share will be in a range of $5.60 to $5.75.

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, 2012, 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 second quarter 2013 earnings release conference call with financial analysts at 11:00 a.m. (Eastern) tomorrow, July 25, 2013. 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."