MCKINNEY, Texas, July 18 /PRNewswire-FirstCall/ -- Torchmark
Corporation (NYSE: TMK) reported today that for the quarter ended June 30,
2007, net income was $1.32 per share ($127 million) compared with $1.26 per
share ($127 million) for the year-ago quarter. Net operating income for the
quarter was $1.34 per share ($129 million), a 10% per share increase
compared with $1.22 per share ($124 million) for the year-ago quarter.
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
June 30, % June 30, %
2007 2006 Chg. 2007 2006 Chg.
Insurance underwriting income* $1.25 $1.12 12 $120.4 $113.5 6
Excess investment income* .83 .78 6 80.1 78.6 2
Parent company expense (.03) (.02) (2.5) (2.2)
Income tax (.70) (.65) 8 (67.3) (65.2) 3
Stock option expense, net of tax (.02) (.01) (1.5) (1.2)
Net operating income $1.34 $1.22 10 $129.1 $123.5 5
Reconciling items, net of tax:
Gain on sale of agency
buildings .01 -- 1.2 --
Realized gains (losses):
Investments (.02) .06 (1.8) 5.7
Valuation of interest rate
swaps -- (.01) -- (0.8)
Medicare Part D adjustment (.02) (.01) (1.6) (1.1)
Tax settlements, net of tax -- -- 0.4 --
Net proceeds (cost) from
legal settlements -- -- (0.1) --
Net income $1.32 $1.26 $127.1 $127.4
Weighted average diluted
shares outstanding(000) 96,652 100,982
* See definitions in the discussions below and in the Torchmark 2006 SEC
Form 10-K.
INSURANCE OPERATIONS - comparing the second quarter 2007 with second
quarter 2006:
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.
Life insurance is Torchmark's primary product line. This segment
accounted for 65% of the Company's insurance underwriting margin for the
quarter and 55% 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.
Health insurance, excluding Medicare Part D, accounted for 29% of
Torchmark's insurance underwriting margin for the quarter and 36% of total
premium revenue, reflective of the lower underwriting margin as a percent
of premium for health compared with life insurance. Medicare Part D, which
was a new product line for 2006 and is discussed below as a separate health
product line/distribution channel, accounted for 4% of insurance
underwriting margin and 8% of total premium revenue. The Company's
predominant supplemental health products are limited-benefit plans
including hospital/surgical, dread disease and accident policies that are
marketed to applicants under age 65. The Company also offers Medicare
supplements, sold primarily to customers over age 65.
Insurance Premium Revenue
Insurance Premium Revenue
(dollars in millions)
Quarter ended Quarter ended %
June 30, 2007 June 30, 2006 Change
Life insurance $392.3 $380.5 3
Health insurance -
excluding Medicare Part D 259.0 255.0 2
Health - Medicare Part D 55.1 53.3 3
Annuity 5.4 6.0 (10)
Total $711.7 $694.7 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 results are
summarized in the following table:
Insurance Underwriting Income
(dollars in millions, except per share data)
Quarter Ended % of Quarter Ended % of %
June 30, 2007 Premium June 30, 2006 Premium Chg.
Insurance
underwriting
margins:
Life $101.5 26 $99.1 26 2
Health 45.8 18 45.0 18 2
Health -
Medicare Part D 6.0 11 5.0 9 20
Annuity 2.7 3.0
155.9 152.0
Other income 1.4 1.1
Administrative expenses (36.9) (39.5) (7)
Insurance underwriting
income $120.4 $113.5 6
Per share $1.25 $1.12 12
Insurance Results by Distribution Channels
Torchmark distributes life insurance through three major distribution
channels: Direct Response, American Income Agency and LNL Agency. UA
Independent Agency and UA Branch Office Agency are the leading writers of
Torchmark's health insurance products. Medicare Part D, also a health
product, is marketed through both Direct Response and the UA agencies, but
is treated as a separate distribution channel in this report.
Total premium, life insurance margins, first-year collected premium and
net sales by all distribution channels are shown on the Company's website
at http://www.torchmarkcorp.com on the Investor Relations page at Financial
Reports.
Direct Response was Torchmark's leading contributor to total premium
revenue ($131 million) and second leading contributor to total underwriting
margin ($30 million). Life premiums of $121 million were up 7%, and the
life underwriting margin of $29 million was up 4%. As a percentage of life
premium, its life underwriting margin was 24%, down 1%. Net life sales of
$29 million declined 5% from the year-ago quarter. Direct Response's life
business is comprised of two primary sources: the first is from direct mail
solicitations produced "in house," and the second is from insert media
which was produced by a third party through 2006 and from which production
had declined in recent periods. On January 16, 2007, Torchmark announced
that it had acquired the assets of the third party previously providing the
media inserts. This acquisition is expected to expand insert media
distribution opportunities and reduce per unit acquisition costs in that
line. Solicitations via insert media increased 6% in this quarter and are
expected to increase going forward. These solicitations will translate into
increased sales in later periods.
American Income Agency was Torchmark's second leading contributor to
total premium revenue ($126 million) and leading contributor to total
underwriting margin ($40 million). AIL's life insurance underwriting margin
of $34 million was up 6%, and as a percentage of life premium, was 31%, the
highest of the major life distribution channels at Torchmark. Life premiums
of $109 million grew 7% compared with the year-ago quarter. The number of
AIL producing agents grew 4% to 2,403 compared with the year-ago quarter,
but was flat with the count at the end of the first quarter. Net life sales
were $23 million for the quarter, up 1%.
LNL Agency, Torchmark's third leading life distribution unit, had total
premiums of $110 million, including $74 million from life insurance, which
declined 2%. LNL's total underwriting margin was $25 million, unchanged
from the year-ago quarter; however, LNL's life underwriting margin was $16
million, down 12% from the year-ago quarter. Net life sales of $9 million
were down 20% from the year-ago quarter, but up slightly compared with the
first quarter this year. However, producing agents grew to 1,596, up 11%
during the quarter and just shy of the 1,606 producing agents at June 30,
2006, reflective of current expected results of the reorganization in
process at this agency.
UA Independent Agency was Torchmark's largest contributor to health
premium ($98 million) and health underwriting margin ($17 million);
however, its health premium declined 7% and underwriting margin declined
9%. Health underwriting margin as a percentage of premium remained 17%. Net
health sales of $13 million fell 18%. The largest component of this
agency's in-force premium is for Medicare supplement policies for which new
sales have declined over the last several years.
UA Branch Office Agency, the second leading distribution channel in
terms of health premium ($97 million), was up 12%, and had health
underwriting margin of $13 million, up 7%. Underwriting margin was 14% of
premium, unchanged from the year-ago quarter. Net sales grew 8% to $44
million, leading all life and health distribution channels sales for the
quarter. This agency continued the successful sales growth of its under-age
65 supplemental health product which continues to be much in demand with
consumers losing employer coverage and the growing unavailability or
affordability of individual major medical policies. The number of producing
agents at UA Branch grew 18% to 3,252 compared with the year-ago quarter
and increased by 101 producing agents during the quarter.
Medicare Part D Prescription Drug Plan, which began January 1, 2006, is
distributed by Direct Response and the UA agencies. Second quarter 2007
premium revenue for the 2007 plan year was $55 million compared with $53
million in the year-ago quarter for the 2006 plan year. Sales in the 2007
quarter ($7 million) were much smaller than sales during the year-ago
period ($78 million) because Medicare beneficiaries were allowed until
mid-May 2006 to enroll, while for the 2007 plan year, all enrollments had
to be completed by December 31, 2006, except for those who turned age 65
after that date. 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 Quarter Ended
June 30, 2007 June 30, 2006
(dollars % of (dollars % of %
in millions) Premium in millions) Premium Change
Premium $55.1 $53.3 3
Policy obligations (43.9) 80 (42.5) 80
Administrative fees (3.9) 7 (4.3) 8
Net amortization
of DAC (1.4) 3 (1.6) 3
Underwriting margin $6.0 11 $5.0 9 20
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 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. 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 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.
Torchmark Annuities consist of variable and fixed annuity contracts.
Underwriting margin from the annuity segment was $2.7 million, down 10%
from the year-ago quarter. Annuities comprised less than 2% of the
Company's insurance underwriting margin for the quarter.
Administrative Expenses were $36.9 million, down $2.6 million (7%) from
the year-ago quarter, primarily the result of reductions in non-deferred
LNL Agency salaries and related employee costs of $1.2 million, and $0.7
million of Medicare Part D expenses.
INVESTMENTS - comparing the second quarter 2007 with second quarter
2006:
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. Excess investment
income per share reflects the effect of Torchmark's share repurchase
program that uses excess cash flow to repurchase Torchmark shares rather
than to acquire fixed income investments.
Excess investment income was $80 million, up 2% compared with the
year-ago quarter, and up 6% on a per-share basis, as detailed in the
following table:
Quarter Ended
June 30,
2007 2006 %
(dollars in millions, except per share data) Change
Net investment income $160.7 $154.8 4
Required interest:
Interest credited on net
policy liabilities (64.1) (58.8) 9
Net financing costs:
Interest on debt (16.5) (17.5)
Income from interest
rate swaps -- .1
Total net financing costs (16.5) (17.4) (5)
Total required interest (80.6) (76.2) 6
Excess investment income $80.1 $78.6 2
Per share $.83 $.78 6
Net investment income increased 4%, lower than the 5% increase in
average invested assets at amortized cost as new investments were made at
yields lower than the overall yield of the portfolio. Interest credited on
net policy liabilities increased 9% in line with a similar increase in
related liabilities. Financing costs decreased 5% due to a similar
reduction in average debt outstanding during the quarter.
Investment Portfolio Composition at June 30, 2007
At June 30, 2007, the market value of Torchmark's fixed maturity
portfolio was $9.152 billion, $27 million lower than amortized cost of
$9.179 billion. This net unrealized loss is comprised of $196 million gross
unrealized gains, and $223 million gross unrealized losses. At amortized
cost, 92.6% of fixed maturities (92.7% at market value) were rated
"investment grade."
The fixed income portfolio, which at amortized cost comprised 94% of
total invested assets, earned an annual effective yield of 6.9% during the
second quarter of 2007, down from 7.0% in the year-ago quarter.
Acquisitions of fixed maturity investments during the quarter totaled $944
million at cost, with an average annual effective yield of 6.8%, an average
life of 26.1 years and average rating of A, compared with an average annual
effective yield of 7.0%, average life of 23.6 years and average rating of
A+ in the year-ago quarter.
SHARE REPURCHASE - during the quarter ended June 30, 2007:
Torchmark's ongoing share repurchase program resulted in the repurchase
during the quarter of 1.9 million shares of Torchmark Corporation common
stock for a total cost of $131.4 million ($68.58 average cost per share).
UPDATED EARNINGS GUIDANCE FOR THE YEAR ENDING DECEMBER 31, 2007:
Torchmark now projects that for the year ending December 31, 2007, net
operating income per share, including the share buy-back program, will
range from $5.40 to $5.45.
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. FAS 115 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. Several financial ratios and measures excluding FAS 115, as
well as the closest corresponding GAAP ratios and measures are shown in the
tables below.
Non-GAAP
Excluding FAS 115
FAS 115 Adj. Adjustment GAAP
at June 30, at June 30, at June 30,
2007 2006 2007 2006 2007 2006
Net income as a
return on equity
(YTD) -- -- 15.6% 15.2%
Net operating
income* as a
return on equity
(YTD) 15.8% 15.8%
Total assets
(in millions) $15,121 $14,792 ($23) ($9) $15,098 $14,782
Shareholders'
equity
(in millions) $3,263 $3,133 ($15) ($6) $3,248 $3,127
Book value
per share $34.20 $31.20 ($0.16) ($0.06) $34.04 $31.14
Debt to capital
ratio 23.2% 27.1% 23.3% 27.1%
* Net operating income is a non-GAAP number that is defined and
reconciled to GAAP Net Income earlier in this release.
Quarter Ended
June 30,
(dollars in millions)
2007 2006
Total revenue $876.6 $869.1
Net sales
Life 67.4 70.9
Health 63.8 64.2
Health - Part D 6.9 78.2
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, 2006 and any subsequent Forms 10-Q 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 second quarter 2007
earnings release conference call with financial analysts at 10:00 a.m.
(Eastern) tomorrow, July 19, 2007. Access to the live webcast and replay
will be available at http://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."
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
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CONTACT:
Joyce Lane, Vice President, Investor
Relations of Torchmark Corporation, +1-972-569-3627, fax
+1-972-569-3282, jlane@torchmarkcorp.com
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