MCKINNEY, Texas, April 19 /PRNewswire-FirstCall/ -- Torchmark
Corporation (NYSE: TMK) reported today that for the quarter ended March 31,
2006, net income was $1.16 per share ($120 million) compared with $1.09 per
share ($118 million) for the year-ago quarter. Net operating income before
option expense for the quarter was $1.21 per share ($125 million), an 8%
per share increase compared with $1.12 per share ($121 million) for the
year-ago quarter. Net operating income including option expense was $1.20
per share ($124 million).
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, is the measure that
Torchmark's management has consistently used over time to evaluate the
operating performance of the Company, and is a measure commonly used in the
life insurance industry. It is the sum of the after-tax profit and loss for
each of the operating segments. 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
March 31, % March 31, %
2006 2005 Chg. 2006 2005 Chg.
Insurance underwriting
income* $1.09 $.98 11 $112.8 $105.6 7
Excess investment income* .77 .76 1 79.9 82.4 (3)
Parent company expense (.02) (.03) (2.4) (2.9)
Income tax (.63) (.59) 7 (65.4) (64.1) 2
Net operating income before
stock option expense $1.21 $1.12 8 $124.9 $121.0 3
Stock option expense,
net of tax (.01) --- (1.1) ---
Net operating income $1.20 $1.12 7 $123.8 $121.0 2
Reconciling items, net of tax:
Realized gains (losses)
Investments (.02) .02 (2.1) 1.7
Valuation of interest
rate swaps (.02) (.05) (2.2) (4.9)
Part D annualization
adjustment (.03) --- (2.8) ---
Tax settlements (.01) --- (0.5) ---
Net proceeds of legal
settlement .04 --- 4.1 ---
Net income $1.16 $1.09 $120.3 $117.8
Weighted average diluted
shares outstanding (000) 103,521 108,278
* See definitions in the discussions below and in the Torchmark 2005 SEC
form 10-K.
INSURANCE OPERATIONS -- comparing the first quarter 2006 with first
quarter 2005:
Insurance Underwriting Income
Torchmark's insurance operations consist of the sales and
administration of life and supplemental health insurance. To a lesser
extent, the Company markets and administers variable and fixed annuities.
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 results are summarized in the following table:
Insurance Underwriting Income
(dollars in millions, except per share data)
Quarter Quarter
Ended Ended
March 31, % of March 31, % of %
2006 Premium 2005 Premium Change
Insurance underwriting margins:
Life $98.9 26 $92.8 26 7
Health 46.4 18 45.5 17 2
Health - Medicare Part D 3.6 ---
Annuity 2.9 2.9
151.8 141.2
Other income 1.1 0.6
Administrative expenses (40.1) (36.1) 11
Insurance underwriting income $112.8 $105.6 7
Per share $1.09 $.98 11
Life Insurance
Life insurance is Torchmark's primary product line. This segment
accounted for 65% of the Company's insurance underwriting margin for the
quarter and 56% of total premium revenue. In addition, the investments
supporting the reserves for life policies generate most of the excess
investment income that is included in the investment segment.
Torchmark distributes life insurance through four major distribution
channels: Direct Response, American Income Agency, LNL Agency, and the
Military Agency (an independent agency). Total premium, life insurance
margins, first-year collected premium and net sales by distribution channel
are shown on the Company's website at http://www.torchmarkcorp.com on the
Investor Relations page at Financial Reports.
Premium revenue from life insurance increased 5% to $381 million.
Direct Response life premium grew 11% to $116 million and American Income
grew 8% to $99 million. LNL Agency life premium was $76 million, down 1%,
and Military grew 3% to $51 million.
Life insurance underwriting margin was $99 million, up 7%, and was 26%
of premium revenue, the same as the year-ago quarter. American Income was
the leading contributor to life underwriting margin with $31 million, up
12%, followed by Direct Response with $29 million, up 8%. Underwriting
margin as a percentage of premium was 32% for American Income, and 25% for
Direct Response. LNL Agency's underwriting margin was $19 million, down 2%,
and Military's underwriting margin was $11 million, up 4%.
Life insurance first year premiums were $54 million, a decline of 5%.
First year premium is a statistical measure of the premium collected on
policies in their first year and is considered by Torchmark as an indicator
of the rate of future premium growth. Direct Response had a 4% increase to
$20 million. American Income's $18 million was a decline of 5%, and LNL
Agency's $9 million was a decline of 2%. Military had first year premiums
of $4 million, a decline of 37%.
Life insurance net sales were down 2% for the quarter. Net sales are
defined as annualized premium issued, net of cancellations in the first 30
days after issue, except at Direct Response where net sales are annualized
premium issued at the time the first full premium is paid after any
introductory offer period has expired. Direct Response's net sales were $30
million, a 4% increase. American Income grew only 1% to $21 million, but an
11% increase in producing agents during the quarter to 2,257 indicates that
net sales in future quarters should rise. Net sales at LNL Agency declined
2% to $11 million and producing agents fell 5% to 1,694 from year-end 2005
as that agency reorganizes under new marketing leadership. Net sales at
Military continued to decline, down 32% to $3 million.
Health Insurance
Health insurance, excluding Medicare Part D which is discussed below as
a separate health product line, accounted for 31% of Torchmark's insurance
underwriting margin for the quarter and 38% of total premium revenue,
reflective of the lower underwriting margin as a percent of premium for
health compared with life insurance. Medicare Part D accounted for 2% of
insurance underwriting margin and 6% of total premium revenue. The
supplemental health products the Company markets and administers are
limited benefit plans including hospital/surgical, dread disease and
accident policies all sold to applicants under age 65, as well as a
Medicare Part D prescription drug plan and Medicare supplements, both sold
primarily to applicants over age 65. UA Independent Agency and UA Branch
Office Agency are the leading writers of Torchmark's health insurance.
Premium revenue from health insurance was $258 million, excluding
Medicare Part D, a 3% decline. UA Branch Office Agency health premium grew
4% to $86 million. Health premium at UA Independent Agency declined 7% to
$110 million, reflective of the continued decline over the past several
years of a large independent agency. As expected, LNL Agency's health
premiums declined 12% to $35 million due to the previously-announced March
2005 premium reduction under a class action settlement on a closed block of
cancer policies.
Health insurance underwriting margin, excluding Medicare Part D, was
$46 million, a 2% increase. As a percentage of premium, the health
underwriting margin rose to 18% from 17% a year ago, primarily from LNL
Agency where the policy obligations loss ratio on that agency's closed
block of cancer policies improved under the class action settlement
referred to above.
First year health premiums, excluding Medicare Part D, grew 6% to $40
million. First year premium from the UA Branch Office was $22 million, a
37% increase. First year premium at UA Independent Agency declined 20% to
$12 million.
Health insurance net sales, excluding Medicare Part D, were $55
million, up 34%. The UA Branch Office was the primary contributor to the
growth with net health sales of $34 million, up 83% from the year-ago
quarter. The UA Branch Office ended the quarter with 2,391 producing
agents, up 614 from a year ago. Net sales at UA Independent Agency declined
7% to $13 million.
Increased demand over the past few years for limited benefit
supplemental health plans is ongoing as some employers continue to
eliminate or reduce their major-medical type group coverage for employees,
and as individually written major-medical plans have become less available
to consumers who are self employed or whose employers offer no coverage.
Coverage under Torchmark's Medicare Part D prescription drug plan for
Medicare beneficiaries began January 1, 2006. At April 17, 2006, the
Company had 153 thousand enrollees in its plan that had been confirmed by
CMS, with additional enrollments of those who became eligible to join
January 1, 2006, expected to continue to May 15, 2006. Details of the
Company's plan are at http://www.uamedicarepartd.com . Medicare Part D
underwriting results are summarized in the following chart:
Quarter Ended
March 31, 2006
(dollars in millions)
Premium $39.1
Policy obligations (31.2)
Administrative fees (3.1)
Amortization of DAC (1.2)
Underwriting income $3.6
For GAAP accounting, 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 then be less than premiums during the
remainder of the year. For net operating income purposes, Torchmark has
elected to defer 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
accounting. The Company's presentation results in the underwriting margin
of each quarter reflecting the expected margin for the full year. The
Company has reported this difference between GAAP and management's non-GAAP
disclosures, net of tax, as a reconciling item to Net Income 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 http://www.torchmarkcorp.com on the
Investor Relations page at Financial Reports.
Details of the health segment by distribution channels are on the
Company's website at http://www.torchmarkcorp.com on the Investor Relations
page at Financial Reports.
INVESTMENTS -- comparing the first quarter 2006 with first quarter
2005:
Excess Investment Income
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 net financing costs. Net financing costs are
interest on debt (including trust preferred securities) offset by the
income from interest rate swap agreements. Excess investment income per
share recognizes the effect of Torchmark's share repurchase program that
uses excess cash flow to repurchase Torchmark shares rather than acquire
fixed income investments.
Excess investment income was $80 million, a 3% decline, but a 1%
increase on a per-share basis, as detailed in the following table:
Quarter Ended
March 31,
2006 2005
(dollars in millions, %
except per share data) Chg.
Net investment income $153.3 $149.1 3
Required Interest:
Interest credited on net policy liabilities (57.8) (54.9) 5
Net financing costs:
Interest on debt (15.9) (14.6)
Income from interest rate swaps .4 2.9
Total net financing costs (15.5) (11.8) 32
Total required interest (73.4) (66.7) 10
Excess investment income $79.9 $82.4 (3)
Per share $.77 $.76 1
Net investment income increased 3%, lower than the 5% increase in
average invested assets at amortized cost, and reflective of the effect of
investments acquired in the past three years at lower interest rates than
the average interest rate of the investment portfolio as a whole.
Interest credited on net policy liabilities increased 5%, in line with
a similar increase in the related liabilities. Financing costs increased
32% to $15.5 million primarily because of the effect of higher short-term
interest rates on Torchmark's variable short-term debt and interest rate
swaps. A chart containing additional information about Torchmark's swap
agreements is on the Company's website at http://www.torchmarkcorp.com , on
the Investor Relations page menu, under Financial Reports.
While the cash settlements from the interest rate swap agreements are
reflected in net operating income as management views its operations,
Financial Accounting Standard 133 requires that the Company also record the
"market value" of the swaps (i.e., the present value of the estimated
future cash settlements) on the balance sheet. The "non-cash" unrealized
gain or loss from the quarterly change in the market value is recognized as
a realized capital gain or loss.
Investment Portfolio Composition at March 31, 2006
At March 31, 2006, the market value of Torchmark's fixed maturity
portfolio was $8.8 billion, $179 million higher than amortized cost of $8.6
billion. This net unrealized gain is composed of $304 million gross
unrealized gains, and $125 million gross unrealized losses. At amortized
cost, 92.4% of fixed maturities (92.6% at market value) were rated
"investment grade."
The fixed income portfolio, which at amortized cost comprised 95% of
total invested assets, earned a yield of 6.94% during the first quarter of
2006. Acquisitions of fixed maturity investments during the quarter totaled
$288 million at cost, with an average annual effective yield of 6.11%, an
average life of 15 years and average rating of A.
Realized Capital Gains and Losses -- during the quarter ended March 31,
2006:
The total net realized capital losses were $6.6 million before taxes
and $4.3 million after taxes. The after-tax net realized capital losses
from investments, which exclude the interest rate swap components, were
$2.1 million compared with net realized gains of $1.7 million in the
year-ago quarter. Changes in the market valuation of the interest rate
swaps resulted in an after-tax realized loss of $2.2 million.
STOCK OPTION EXPENSE for the quarter ended March 31, 2006:
On January 1, 2006, Torchmark adopted SFAS 123R which requires
Torchmark to recognize as a component of net income the expense for
employee stock options based on the "fair value method." Under this method,
a fair value is assigned to a stock option on its grant date and is
recognized as an expense over the vesting period of the option. Previously,
Torchmark accounted for employee stock options in accordance with SFAS 123
as amended by SFAS 148 by using the "intrinsic value method." Disclosure of
the stock option expense was by pro forma presentation of earnings and
earnings per share as if the fair value method of accounting had been
applied. Therefore, prior to January 1, 2006, Torchmark presented the
required pro forma disclosures, but did not include the employee stock
option expense as a component of net income.
The adoption of SFAS 123R has not materially altered Torchmark's
methodology of computing option expense and is not expected to
significantly impact option expense from the amounts that would have been
determined for the pro forma disclosures.
For the quarter ended March 31, 2006, the adoption of SFAS 123R
resulted in the recording of employee stock option expense, net of tax, of
$1 million, or $0.01 per share.
SHARE REPURCHASE -- during the quarter ended March 31, 2006:
Torchmark's ongoing share repurchase program resulted in the repurchase
of 3 million shares of Torchmark Corporation common stock for a total cost
of $168 million ($55.58 average cost per share). At March 31, 2006, there
were 100.6 million Torchmark shares outstanding, 101.7 million on a diluted
basis.
OTHER FINANCIAL INFORMATION:
Financial Accounting Standard 115 requires the adjustment of fixed
maturities available for sale to fair value. Without the FAS 115
adjustment, these assets would be reported at amortized cost. This
adjustment includes the unrealized changes in fair value of these assets
due primarily to interest rate fluctuations. Torchmark management and most
industry analysts, rating agencies and lenders, prefer to view the
financial ratios and balance sheet information shown below without the
impact of the FAS 115 adjustment for two reasons: (1) the period-to-period
changes in market value are primarily the result of changes in market
interest rates and economic conditions outside the control of management,
and (2) about 63% of Torchmark's fixed maturities support interest-bearing
liabilities, primarily the net policy liabilities. GAAP does not permit a
corresponding adjustment of the liabilities to market value, which results
in an accounting mismatch that can be material to shareholders' equity.
Therefore, management removes the effect of FAS 115 when analyzing
balance-sheet based ratios and financial measures. Management believes that
investors can equally benefit from viewing these data. In the tables below
are shown several financial ratios and measures excluding FAS 115, as well
as the closest corresponding GAAP ratio and measure.
Non-GAAP
Excluding FAS 115
FAS 115 Adj. Adjustment GAAP
at March 31, at March 31, at March 31,
2006 2005 2006 2005 2006 2005
Net income as a return
on equity (YTD) --- --- 15.9% 16.2%
Net operating income* as a
return on equity (YTD) 14.5% 14.1% --- ---
Total assets (in millions) $14,583 $13,666 $172 $500 $14,755 $14,166
Shareholders' equity
(in millions) $3,113 $2,957 $112 $325 $3,224 $3,282
Book value per share $30.62 $27.77 $1.10 $3.05 $31.72 $30.82
Debt to capital ratio 23.9% 23.5% 23.3% 21.7%
* Net operating income is a non-GAAP number that is defined and
reconciled to GAAP Net Income on page 2 of this release.
Quarter Ended
March 31,
(dollars in millions)
2006 2005
Total revenue $857.0 $783.0
Net sales $306.6 $110.4
Additional detailed financial reports are available on the Company's
website at http://www.torchmarkcorp.com , on the Investor Relations page at
Financial Reports.
Tables in this news release may not foot due to rounding.
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, 2005, on file with the Securities and Exchange
Commission and on the Company's website at http://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 first quarter 2006
earnings release conference call with financial analysts at 10:00 a.m.
(Eastern Time) tomorrow, April 20, 2006. Access to the live web-cast and
replay will be available at http://www.torchmarkcorp.com on the Investor
Relations page, at the Conference Calls on the Web icon, or at
http://www.PRNewswire.com/news at the Multimedia Menu at Conference Calls
on the Web. On Wednesday, April 19, 2006, supplemental financial reports
will be available before the conference call on the Investor Relations page
of the Torchmark website at the Financial Reports icon.
Torchmark Corporation is a holding company specializing in life and
supplemental health insurance for "middle income" Americans marketed
through multiple distribution channels including direct response, and
exclusive and independent agencies. Torchmark has several nationally
recognized insurance subsidiaries. Globe Life And Accident is a
direct-response provider of life insurance known for its administrative
efficiencies. American Income Life provides individual life insurance to
labor union members. Liberty National Life, one of the oldest traditional
life insurers in the Southeast, is the largest life insurer in its home
state of Alabama. United American is a consumer-oriented provider of
supplemental health insurance.
SOURCE Torchmark Corporation
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Related links:
http://www.torchmarkcorp.com
http://www.uamedicarepartd.com
http://www.prnewswire.com/comp/885425.html /
CONTACT:
Joyce Lane, Vice President, Investor
Relations of Torchmark Corporation, +1-972-569-3627, or fax,
+1-972-569-3282, or jlane@torchmarkcorp.com
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