MCKINNEY, Texas, Oct. 18 /PRNewswire-FirstCall/ -- Torchmark
Corporation (NYSE: TMK) reported today that for the quarter ended September
30, 2006, net income was $1.28 per share ($129 million) compared with $1.14
per share ($119 million) for the year-ago quarter. Net operating income
before option expense for the quarter was $1.27 per share ($127 million), a
9% per share increase compared with $1.16 per share ($122 million) for the
year-ago quarter. Net operating income including option expense was $1.26
per share ($126 million).
Reconciliations between net income and net operating income are shown
in the Financial Summary below.
HIGHLIGHTS:
-- Health net sales for the quarter, excluding Part D, were up 23% to $60
million, compared with the year-ago quarter. The UA Branch Office led
the growth with net sales of $41 million, up 61%, and its producing
agent count grew 60% compared with the year-ago quarter. The growth
came primarily from the sale of limited benefit supplemental products.
-- Life net sales grew 1% compared with the year-ago quarter, the first
quarter since the second quarter 2004 that has had positive net sales
growth. Direct Response net sales grew 9% and American Income's grew
6%.
-- Actual Medicare Part D benefit costs continued to be lower than
expected during the third quarter indicating that the underwriting
margin will likely be higher for the year than earlier projected, and
as a result, the expected benefit loss ratio was lowered for this
quarter.
-- Yields on investments acquired during the quarter were greater than
the yield on the entire fixed maturity portfolio for the first time
since the first quarter 2003.
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
September 30, % September 30, %
2006 2005 Chg. 2006 2005 Chg.
Insurance underwriting
income* $1.16 $1.03 13 $116.4 $107.4 8
Excess investment income* .80 .77 4 80.0 80.5 (1)
Parent company expense (.02) (.02) (1.7) (2.3)
Income tax (.67) (.61) 10 (67.2) (63.7) 5
Net operating income before
stock option expense $1.27 $1.16 9 $127.4 $121.9 5
Stock option expense,
net of tax (.01) --- (1.0) ---
Net operating income $1.26 $1.16 9 $126.5 $121.9 4
Reconciling items, net
of tax:
Realized gains (losses)
Investments (.05) .01 (4.9) 0.8
Valuation of interest
rate swaps --- (.04) --- (3.7)
Part D annualization
adjustment .02 --- 2.2 ---
Tax settlements, net
of tax .05 --- 4.8 ---
Net income $1.28 $1.14 $128.5 $119.0
Weighted average diluted.
shares outstanding
(000) 100,103 104,704
* See definitions in the discussions below and in the Torchmark 2005 SEC
Form 10-K.
INSURANCE OPERATIONS -- comparing the third quarter 2006 with third
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 Ended Quarter Ended
Sept. Sept.
30, % of 30, % of %
2006 Premium 2005 Premium Change
Insurance underwriting
margins:
Life $97.0 25 $95.2 26 2
Health 44.2 17 44.4 18 ---
Health - Medicare Part D 8.5 13 ---
Annuity 3.1 3.4
152.9 143.0
Other income 1.0 0.6
Administrative expenses (37.5) (36.2) 4
Insurance underwriting
income $116.4 $107.4 8
Per share $1.16 $1.03 13
Life Insurance
Life insurance is Torchmark's primary product line. This segment
accounted for 63% of the Company's insurance underwriting margin for the
quarter and 54% 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 4% to $382 million.
Direct Response life premium grew 10% to $114 million and American Income
grew 8% to $103 million. LNL Agency life premium was $75 million, the same
as the year- ago quarter. Life premium at the Military Agency increased 2%
to $51 million.
Life insurance underwriting margin was $97 million, up 2%, and was 25%
of premium revenue, down from 26% in the year-ago quarter and second
quarter 2006. The decline resulted primarily from an adjustment to the
Direct Response policy obligations that is not expected to recur and in
commission and acquisition expense at American Income due to the expensing
of agency computer software. American Income was the leading contributor to
life underwriting margin with $31 million, up 3%, followed by Direct
Response with $25 million, down 5%. Underwriting margin as a percentage of
premium for American Income was 30%, and 22% for Direct Response. LNL
Agency's underwriting margin was $20 million, up 1%. The Military Agency's
underwriting margin was $12 million, a 15% increase.
Life insurance first year premiums were $52 million, a 4% decline.
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
$19 million. American Income's $18 million was a 1% decline. LNL Agency's
$8 million was a 5% decline and Military had first year premiums of $3
million, a decline of 35%.
Life insurance net sales of $66 million were up 1% for the quarter. Net
sales are 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 $28
million, a 9% increase. American Income was up 6% to $22 million. American
Income's producing agents count grew 6% during the quarter to 2,448, and
was up 14% from the year-ago quarter. Net sales at LNL Agency declined 14%
to $10 million. LNL's producing agents grew 4% to 1,671 during the quarter,
the first increase in producing agents since the second quarter 2005. Net
sales at Military were down 31% to $3 million.
Health Insurance
Health insurance, excluding Medicare Part D which is discussed below as
a separate health product line, 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 accounted for 6% of
insurance underwriting margin and 9% of total premium revenue. The
predominant supplemental health products the Company markets are limited
benefit plans including hospital/surgical, dread disease and accident
policies all sold to applicants under-age 65. The Company also offers 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, excluding Medicare Part D, was
$254 million, up 2%. Health premium at UA Branch Office Agency grew 11% to
$89 million, but declined 5% to $101 million at UA Independent Agency. LNL
Agency's health premiums were unchanged at $37 million.
Health insurance underwriting margin, excluding Medicare Part D, was
unchanged at $44 million. As a percentage of premium, the health
underwriting margin was 17%, down from 18%.
First year health premiums, excluding Medicare Part D, grew 33% to $47
million. First year premium from the UA Branch Office was $28 million, a
73% increase, and a 10% increase from second quarter 2006. First year
premium at UA Independent Agency declined 3% to $12 million.
Health insurance net sales, excluding Medicare Part D, were $60
million, up 23%. The UA Branch Office was the primary contributor to the
growth with net health sales of $41 million, up 61% from the year-ago
quarter. The UA Branch Office ended the quarter with 2,973 producing
agents, up 8% during the quarter and up 60% from a year ago. Net health
sales at UA Independent Agency fell 27% to $12 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. Premium revenue was $63
million compared with $53 million in the second quarter and $39 million in
the first quarter. Enrollment for the 2006 plan ended May 15, 2006 except
for enrollees who turned age 65 after that date. Marketing for the 2007
plan year will begin November 15, and end December 31, 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
September 30, 2006 % of
(dollars in millions) Premium
Premium $63.4
Policy obligations (47.9) 76
Administrative fees (5.1) 8
Net amortization of DAC (1.9) 3
Underwriting income $8.5 13
Actual Part D benefit costs have been lower than expected since the
inception of the program January 1, 2006. Through the second quarter
Torchmark expensed benefits based on its original ultimate expected benefit
ratio of 80% for the year because it was still unclear how benefit
experience would trend in the last half of the contract year. Actual
results through the third quarter indicate that the benefits for the year
will likely be lower for the year than earlier projected. As a result, for
the year, the expected loss ratio was lowered to 78%, which resulted in a
loss ratio of 76% for the quarter.
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 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 third quarter 2006 with third 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 1% decline, but a 4%
increase on a per-share basis, as detailed in the following table:
Quarter Ended
September 30,
2006 2005 %
(dollars in millions, Chg.
except per share data)
Net investment income $160.8 $151.0 6
Required interest:
Interest credited on net
policy liabilities (59.5) (56.7) 5
Net financing costs:
Interest on debt (21.3) (15.2)
Income from interest rate
swaps --- 1.4
Total net financing costs (21.3) (13.8) 54
Total required interest (80.8) (70.5) 14
Excess investment income $80.0 $80.5 (1)
Per share $.80 $.77 4
Net investment income increased 6%, lower than the 7% 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 net liabilities. Net financing costs
increased $7 million, or 54%, to $21 million primarily because of the $370
million of debt and trust preferred securities issued in the second quarter
to prefund the November 2 call of $150 million of trust preferred
securities and the December 15, 2006 maturity of $180 million of 6.25%
debt. The financing costs related to these new issues was $6 million;
however, this cost was offset by the $6 million of investment income earned
on the net proceeds from the new debt securities. Also affecting financing
costs, as previously announced, the Company sold its interest rate swaps in
June due to expected declining income from them. As a result, there was no
income from swaps in this quarter compared with $1 million in the year-ago
quarter. A chart containing additional information about Torchmark's former
swap agreements is on the Company's website at http://www.torchmarkcorp.com
, on the Investor Relations page menu, under Financial Reports. At
September 30, 2006, Torchmark's only variable-rate debt consists of its
commercial paper program which totaled $56 million, down from $224 million
a year ago.
Investment Portfolio Composition at September 30, 2006:
At September 30, 2006, the market value of Torchmark's fixed maturity
portfolio was $9.170 billion, $252 million higher than amortized cost of
$8.918 billion. This net unrealized gain is composed of $337 million gross
unrealized gains, and $85 million gross unrealized losses. At amortized
cost, 92.1% of fixed maturities (92.3% at market value) were rated
"investment grade."
The fixed income portfolio, which at amortized cost comprised 95% of
total invested assets, earned an annual effective yield of 7.1% during the
third quarter of 2006, a slight increase over the 7.0% in the second
quarter. Acquisitions of fixed maturity investments during the quarter
totaled $194 million at cost, with an average annual effective yield of
7.2%, an average life of 21.8 years and average rating of BBB+, compared
with an effective yield of 5.3% and average life of 7.8 years in the
year-ago quarter. Yields on investments acquired during the quarter
exceeded the yields on the entire fixed maturity portfolio for the first
time since the first quarter of 2003.
Realized Capital Gains and Losses -- during the quarter ended September
30, 2006:
The total net realized capital losses were $4.9 million after taxes
compared with net realized gains of $0.8 million in the year-ago quarter.
The losses resulted primarily from a tendered bond.
Call of Trust Preferred Securities:
On September 29, 2006, Torchmark announced that effective November 2,
2006, it is calling $150 million (six million shares) of 7 3/4% trust
preferred securities that had been issued through its Delaware business
trusts, Torchmark Capital Trusts I and II. The redemption price is $25.00
per security.
SHARE REPURCHASE -- during the quarter ended September 30, 2006:
Torchmark's ongoing share repurchase program resulted in the repurchase
of 680 thousand shares of Torchmark Corporation common stock for a total
cost of $41 million ($60.44 average cost per share). At September 30, 2006,
there were 98.3 million Torchmark shares outstanding, 99.9 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 Sept. 30, at Sept. 30, at Sept. 30,
2006 2005 2006 2005 2006 2005
Net income as a
return on equity
(YTD) --- --- 15.1% 14.6%
Net operating
income* as a return
on equity (YTD) 15.8% 16.1% --- ---
Total assets
(in millions) $14,696 $14,211 $240 $450 $14,935 $14,661
Shareholders'
equity
(in millions) $3,209 $3,067 $156 $292 $3,365 $3,360
Book value per
share $32.11 $29.39 $1.55 $2.80 $33.66 $32.19
Debt to capital
ratio 25.6% 22.9% 24.7% 21.4%
* 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
September 30,
(dollars in millions)
2006 2005
Total revenue $837.9 $769.0
Net sales $133.2 $113.4
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, and 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 third quarter 2006
earnings release conference call with financial analysts at 10:00 a.m.
(Eastern Time) tomorrow, October 19, 2006. 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, or at
http://www.PRNewswire.com/news at the Multimedia Menu at Conference Calls
on the Web. Immediately following this press release, 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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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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