Torchmark Corporation Reports Fourth Quarter And Year-End 2011 Results
Net income for the year ended December 31, 2011, was $4.72 per share, compared with $4.20 per share for the year-ago period. Net operating income for the year ended December 31, 2011, was $4.68 per share, compared with $4.27 per share for the year-ago period.
Book value per share on a GAAP basis was $41.54 for the quarter ended December 31, 2011, compared to $33.24 for the year-ago quarter. Book value per share on a management basis (excluding net unrealized gains on fixed maturities) was $35.59 for the quarter, compared to $32.69 for the year-ago quarter.
Return on equity (ROE) on a GAAP basis was 12% for the quarter ended December 31, 2011, compared to 15% for the year-ago quarter. ROE on a management basis (excluding net unrealized gains on fixed maturities) was 14.2% for the quarter, compared to 13.9% 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:
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.
Note: Tables in this news release may not foot due to rounding.
INSURANCE OPERATIONS - comparing the fourth quarter 2011 with fourth quarter 2010:
Life insurance accounted for 75% of the Company's insurance underwriting margin for the quarter and 65% of total premium revenue.
Health insurance, excluding Medicare Part D, accounted for 21% of Torchmark's insurance underwriting margin for the quarter and 27% of total premium revenue. Medicare Part D accounted for 4% of insurance underwriting margin and 7% of total premium revenue.
Net sales of life insurance increased 5%, while health sales, excluding Medicare Part D, increased 7%.
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 http://www.torchmarkcorp.com on the Investor Relations page at Financial Reports.
American Income Agency was Torchmark's leading contributor to total underwriting margin; $57 million on premium revenue of $177 million. Life premiums of $157 million were up 9% and life insurance underwriting margin of $51 million was up 5%. As a percentage of life premium, life underwriting margin was 32%, down from 33% and the highest of the major life distribution channels at Torchmark. Producing agents were 4,381, up 12% from a year ago, and down 2% during the quarter. Net life sales were $37 million, up 11%.
Direct Response was Torchmark's second leading contributor to total underwriting margin; $39 million on premium revenue of $160 million. Life premiums of $146 million were up 6%, and the life underwriting margin of $36 million was up 6%. As a percentage of life premium, life underwriting margin was 25%, same as the year-ago quarter. Net life sales were $33 million, up 8%.
LNL Agency (which now includes UA Branch Office Agency) was Torchmark's third leading contributor to total underwriting margins; $26 million on premium revenue of $140 million. Life premiums of $71 million were down 3% and life underwriting margin of $16 million was down 1%. As a percentage of life premium, life underwriting margin was 23%, same as the year-ago quarter.
LNL Agency was Torchmark's second leading contributor to health underwriting margin; $10 million on health premium of $69 million. Health underwriting margin as a percentage of premium was 14%, up from 13%. Net health sales for the LNL Agency were $5 million, up 43%.
LNL Agency producing agents fell to 1,345, down 33% from a year ago, and down 15% during the quarter. Net life sales for the LNL Agency were $8 million, down 23%.
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%. Net health sales were $13 million, up 3%.
Medicare Part D Prescription Drug Plan is distributed by Direct Response and the UA agencies. Fourth quarter 2011 premium revenue was $48 million, down 5%. Underwriting margin for fourth quarter 2011 was $7 million, down 23%. Net sales were $97 million, up 590%. Torchmark developed a new lower cost Part D plan for 2012 which resulted in the addition of approximately 76,000 low-income auto-enrollees. This new plan was priced with the same targeted profit margin as our other Part D plan.
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 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 shown earlier 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 http://www.torchmarkcorp.com on the Investor Relations page at Financial Reports.
Administrative Expenses were $41 million, up 1.5% from the year-ago quarter.
INVESTMENTS
Excess Investment Income - comparing the fourth quarter 2011 with the fourth quarter 2010:
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 interest on debt.
Despite lower new money yields, both net investment income and average invested assets increased by about the same percentage. This is due to the fact that the Company held significantly more short term securities during the fourth quarter of 2010 than during the fourth quarter of 2011. Required interest on net policy liabilities increased 7%, while average liabilities only increased 5% because the average discount rate increased to 5.6% from 5.5% a year ago.
Investment Portfolio
The composition of the investment portfolio at December 31, 2011 is as follows:
Fixed maturities at amortized cost by asset class are as follows:
The market value of Torchmark's fixed maturity portfolio was $11.9 billion; $964 million higher than amortized cost of $10.9 billion. The $964 million of net unrealized gains compares to $942 million at September 30, 2011. Gross unrealized gains and losses at December 31, 2011 were $1.2 billion and $239 million, respectively.
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, 94% of fixed maturities (95% at market value) were rated "investment grade."
The fixed maturity portfolio earned an annual effective yield of 6.52% during the fourth quarter of 2011, compared to 6.65% in the year-ago quarter.
Acquisitions of fixed maturity investments during the quarter totaled $273 million at cost. Comparable information for acquisitions of fixed maturity investments is as follows:
Realized Capital Gains on Investments - during the quarter ended December 31, 2011:
Torchmark had a net realized capital gain of $4.8 million ($3.1 million after tax) resulting primarily from dispositions of fixed maturities. For the year, net realized capital gains were $25.9 million ($16.8 million after tax).
SHARE REPURCHASE - during the quarter ended December 31, 2011:
During the quarter, the Company repurchased 1.7 million shares of Torchmark Corporation common stock at a total cost of $67.3 million at an average price per share of $40.44. For the year, the Company repurchased 18.9 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 had $74 million of liquid assets at December 31, 2011.
NEW ACCOUNTING GUIDANCE:
Effective January 1, 2012, Torchmark will retrospectively adopt Accounting Standards Update 2010-26, new guidance that amends accounting for deferred acquisition costs. This is expected to result in a one-time reduction in GAAP equity (excluding OCI) of approximately 10% and a reduction in 2012 net operating income per share of less than 2%.
EARNINGS GUIDANCE FOR THE YEAR ENDING DECEMBER 31, 2012:
Torchmark projects that for the year ending December 31, 2012, net operating income per share will range from $5.10 to $5.40. This guidance includes the expected impact of the new accounting guidance discussed above.
OTHER FINANCIAL INFORMATION:
More detailed financial information including various GAAP and Non-GAAP ratios and financial measurements are located at http://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, 2010, 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 fourth quarter 2011 earnings release conference call with financial analysts at 11:00 a.m. (Eastern) tomorrow, February 7, 2012. 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 and Other Financial Information."
