TIDMTMK
TORCHMARK CORPORATION REPORTS Third quarter 2016 Results
MCKINNEY, Texas, Oct. 25, 2016 -- Torchmark Corporation (NYSE: TMK) reported
today that for the quarter ended September 30, 2016, net income was $1.25 per
diluted common share, compared with $1.15 per diluted common share for the
year-ago quarter. Net operating income from continuing operations for the
quarter was $1.15 per diluted common share, compared with $1.03 per diluted
common share for the year-ago quarter.
HIGHLIGHTS:
* Net income as a ROE was 12.0%. Net operating income as a ROE excluding net
unrealized gains on fixed maturities was 14.7%.
* American Income life premiums increased 10% over the year-ago quarter.
* At Liberty National, net life sales increased 11% over the year-ago
quarter.
* Net health sales increased 8% at Family Heritage over the year-ago quarter.
* Average agent counts increased over the year-ago quarter by 6% at American
Income, 9% at Family Heritage, and 13% at Liberty National.
* 1.2 million shares of common stock were repurchased during the quarter.
FINANCIAL SUMMARY
(Dollar amounts in millions, except per share data)
(unaudited)
Net operating income, a non-GAAP financial measure, has been used consistently
by Torchmark's management for many years 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 included in net income. Management believes an analysis of net operating
income is important in understanding the profitability and operating trends of
the Company's business. Net income is the most directly comparable GAAP
measure.
Per Share
Quarter Ended Quarter Ended
September 30, September 30,
2016 2015 % 2016 2015 %
Chg. Chg.
Insurance underwriting income $ 1.23 $ 1.18 4 $ 149.8 $ 149.0 1
(1)
Excess investment income(1) 0.47 0.43 9 56.7 53.9 5
Parent company expense (0.02) (0.02) (2.0) (2.2)
Income tax (0.55) (0.52) 6 (67.3) (65.7) 2
Stock option expense, net of 0.02 (0.04) 2.5 (4.4)
tax(2)
Net operating income from $ 1.15 $ 1.03 12 $ 139.8 $ 130.5 7
continuing operations
Net operating income from 0.03 0.04 4.2 5.1
discontinued operations
Net operating income from all $ 1.18 $ 1.08 $ 144.0 $ 135.6
operations
Reconciliation to net income
(GAAP):
Reconciling items, net of tax:
Realized gains (losses) on 0.02 0.03 2.3 3.3
investments-continuing
operations
Part D 0.04 0.05 5.4 6.4
adjustments-discontinued
operations(3)
Net gain from sale of Part - - 0.4 -
D-discontinued operations
Non operating legal fees - - (0.2) -
Net income(4) $ 1.25 $ 1.15 $ 151.9 $ 145.4
Weighted average diluted 121,911 126,140
shares outstanding (000)
(1) Definitions included within the document.
(2) Decrease from third quarter of 2015 is due primarily to the impact of new
accounting guidance implemented in 2016.
(3) 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.
(4) A GAAP-basis condensed consolidated statement of operations is included in
the appendix of this report.
Note: Tables in this news release may not foot due to rounding.
FINANCIAL SUMMARY, CON'T
Management vs. GAAP measures
(Dollar amounts in millions, except per share data)
(unaudited)
Shareholders' equity, excluding net unrealized gains on fixed maturities, and
book value per share, excluding net unrealized gains on fixed maturities, are
non-GAAP measures that are utilized by management to view the business without
the effect of unrealized gains or losses which are primarily attributable to
fluctuation in interest rates on the available for sale portfolio. Management
views the business in this manner because the Company has the ability and
generally, the intent, to hold investments to maturity and meaningful trends
can more easily be identified without the fluctuations. Shareholders' equity
and book value per share are the most directly comparable GAAP measures.
September 30,
2016 2015
Net income as a ROE(1) 12.0 % 11.6 %
Net operating income as a ROE(1) (excluding net unrealized 14.7 % 14.7 %
gains on fixed maturities)
Shareholders' equity $ 5,086 $ 4,283
Impact of adjustment to exclude net unrealized gains on (1,222) (587)
fixed maturities
Shareholders' equity, excluding net unrealized gains on $ 3,864 $ 3,697
fixed maturities
Book value per share $ 41.94 $ 34.21
Impact of adjustment to exclude net unrealized gains on (10.08) (4.68)
fixed maturities
Book value per share, excluding net unrealized gains on $ 31.86 $ 29.53
fixed maturities
(1) Calculated using average shareholders' equity for the measurement period.
Note: Net unrealized gains on fixed maturities referred to above are net of
tax.
CONTINUING INSURANCE OPERATIONS - comparing the third quarter 2016 with third
quarter 2015:
Life insurance accounted for 72% of the Company's insurance underwriting margin
for the quarter and 70% of total premium revenue.
Health insurance accounted for 27% of Torchmark's insurance underwriting margin
for the quarter and 30% of total premium revenue.
Net sales of life insurance decreased 1%, while net health sales were flat.
INSURANCE PREMIUM REVENUE
(Dollar amounts in millions, except per share data)
(unaudited)
Quarter Ended %
Chg.
September 30, September 30,
2016 2015
Life insurance $ 546.4 $ 518.9 5
Health insurance 237.0 229.1 3
Total $ 783.4 $ 748.1 5
INSURANCE UNDERWRITING INCOME
(Dollar amounts in millions, except per share data)
(unaudited)
Insurance underwriting margin, a non-GAAP measure, 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. Management
believes this information helps provide a better understanding of the business
and a more meaningful analysis of underwriting results by distribution channel.
Underwriting income is a component of net operating income, which is reconciled
to net income in the Financial Summary section above.
Quarter Ended % of Quarter Ended % of %
Premium Premium Chg.
September 30, September 30,
2016 2015
Insurance underwriting
margins:
Life $ 143.1 26 $ 144.1 28 (1)
Health 53.1 22 50.2 22 6
Annuity 2.6 1.1
198.8 195.4 2
Other income 0.2 0.7
Administrative expenses (49.2) (47.2) 4
Insurance underwriting $ 149.8 $ 149.0 1
income
Per share $ 1.23 $ 1.18 4
Insurance Results from Continuing Operations by Distribution Channel
Total premium, underwriting margins, first-year collected premium and net sales
by all distribution channels are shown at http://www.torchmarkcorp.com/ on the
Investors page at "Financial Reports."
American Income Agency was Torchmark's leading contributor to total
underwriting margin ($84 million), on premium revenue of $253 million. Life
premiums of $231 million were up 10% and life insurance underwriting margin of
$74 million was up 11%. As a percentage of life premium, life underwriting
margin was 32%, the same as a year ago and the highest of the major life
distribution channels at Torchmark. The average producing agent count during
the quarter was 7,004, up 6% from a year ago, and up 6% from the previous
quarter. The producing agent count at the end of the third quarter was 7,025.
Net life sales were $52 million, up 4%.
Globe Life Direct Response was Torchmark's second leading contributor to total
underwriting margin ($32 million), on premium revenue of $210 million. Life
premiums of $192 million were up 4% and the life underwriting margin was $29
million, down 26%. As a percentage of life premium, life underwriting margin
was 15%, down from 21%. Net life sales were $35 million, down 9% from the
year-ago quarter. Net health sales increased from $1.0 million to $1.2 million.
LNL Agency was Torchmark's third leading contributor to total underwriting
margin ($31 million), on premium revenue of $117 million. Life premiums of $67
million were down 1% from the year-ago quarter and life underwriting margin was
$20 million, up 9%. As a percentage of life premium, life underwriting margin
was 29%, up from 27%. Net life sales were $10 million, up 11%.
LNL Agency was Torchmark's third leading contributor to health underwriting
margin ($11 million), on health premiums of $50 million. Health underwriting
margin as a percentage of health premium was 23%, approximately the same as the
year-ago quarter. Net health sales were $5 million, up 3%.
LNL Agency's average producing agent count during the quarter was 1,799, up 13%
over a year ago, and up 3% from the previous quarter. The producing agent count
at the end of the third quarter was 1,785.
Family Heritage Agency was Torchmark's second leading contributor to health
underwriting margin ($13 million) on health premiums of $60 million. Health
underwriting margin as a percentage of health premium was 22%, up from 20%. The
average producing agent count during the quarter was 986, up 9% from a year
ago, and up 6% from the previous quarter. The producing agent count at the end
of the third quarter was 1,004. Net health sales were $14 million, up 8% from
the year-ago quarter.
UA Independent Agency was Torchmark's leading contributor to health
underwriting margin ($15 million), on health premiums of $88 million. Health
underwriting margin as a percentage of premium was 17%, down from 18%. Net
health sales were $10 million, down 14%. Excluding the group business, net
health sales grew 13%.
Administrative Expenses were $49 million, up 4% from the year-ago quarter. The
ratio of administrative expenses to premium for continuing operations was
approximately 6.3%, in line with expectations and consistent with the year-ago
quarter.
Note: Net sales (health and life) is a non-GAAP measure that is calculated as
the annualized premium issued, net of cancellations in the first 30 days after
issue, except in the case of Globe Life Direct Response where net sales is
annualized premium issued at the time the first full premium is paid after any
introductory offer period has expired. Management believes net sales is a
meaningful indicator of the rate of premium growth relative to annualized
premium.
INVESTMENTS
EXCESS INVESTMENT INCOME
(Dollar amounts in millions, except per share data)
(unaudited)
Management uses excess investment income, a non-GAAP measure, as the measure to
evaluate the performance of the investment segment. It is defined as net
investment income less both the required interest attributable to net policy
liabilities and the interest on debt. We also view excess investment income per
diluted common share as an important and useful measure to evaluate performance
of the investment segment as it takes into consideration our stock repurchase
program.
Quarter Ended
September 30,
2016 2015 %
Chg.
Net investment income $ 202.7 $ 193.2 5
Required interest:
Interest on net policy liabilities(1) (125.6) (120.1) 5
Interest on debt (20.4) (19.2) 6
Total required interest (146.0) (139.3) 5
Excess investment income $ 56.7 $ 53.9 5
Per share $ 0.47 $ 0.43 9
(1) Interest on net policy liabilities is a component of total policyholder
benefits (a GAAP measure).
Net investment income increased 5%, while average invested assets increased 6%.
Required interest on net policy liabilities increased 5%, approximately the
same as the increase in net policy liabilities. Interest expense on debt
increased by 6%. The weighted average discount rate for the net policy
liabilities was 5.6%, same as the year-ago quarter.
Investment Portfolio
The composition of the investment portfolio at September 30, 2016 is as
follows:
Invested Assets
(dollars in millions)
(unaudited)
$ % of Total
Fixed maturities (at amortized cost) $ 13,944 96 %
Policy loans 499 3
Other long-term investments 56 -
Short-term investments 66 -
Total $ 14,566 100 %
Fixed maturities at amortized cost by asset class as of September 30, 2016 are
as follows:
Fixed Maturities
(dollars in millions)
(unaudited)
Investment Below Total
Grade Investment
Grade
Corporate bonds $ 11,131 $ 618 $ 11,748
Redeemable preferred stock:
U.S. 271 74 346
Foreign 55 - 55
Municipal 1,272 1 1,273
Government-sponsored enterprises 302 - 302
Government and agencies 102 - 102
Collateralized debt obligations - 61 61
Residential mortgage-backed securities 4 - 4
Other asset-backed securities 54 - 54
Total $ 13,191 $ 753 $ 13,944
The market value of Torchmark's fixed maturity portfolio was $15.8 billion;
$1.9 billion higher than amortized cost of $13.9 billion. The $1.9 billion of
net unrealized gains compares to $1.7 billion at June 30, 2016. Net unrealized
gains were comprised of gross unrealized gains of $2.0 billion and gross
unrealized losses of $120 million.
Torchmark is not a party to any derivatives contracts, including credit default
swaps, 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 5.77% during the third quarter of 2016, compared to 5.81% in the
year-ago quarter.
Acquisitions of fixed maturity investments during the quarter totaled $275
million at cost. Comparable information for acquisitions of fixed maturity
investments is as follows:
Quarter Ended
September 30,
2016 2015
Average annual effective yield 4.4% 5.1%
Average rating BBB BBB+
Average life (in years) to:
Next call 23.4 25.8
Maturity 25.3 26.0
SHARE REPURCHASE:
During the quarter, the Company repurchased 1.2 million shares of Torchmark
Corporation common stock at a total cost of $77 million for an average share
price of $62.65. For the nine months ended September 30, 2016, the Company
repurchased 4.2 million shares at an average share price of $57.58.
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.
EARNINGS GUIDANCE FOR THE YEARING DECEMBER 31, 2016:
Torchmark projects that net operating income from continuing operations per
share will be in a range of $4.43 to $4.49 for the year ending December 31,
2016, and from $4.55 to $4.85 for the year ending December 31, 2017.
NON-GAAP MEASURES:
In this news release, Torchmark includes non-GAAP measures to enhance
investors' understanding of management's view of the business. The non-GAAP
measures are not a substitute for GAAP, but rather a supplement to increase
transparency by providing broader perspective. Torchmark's definitions of
non-GAAP measures may differ from other companies' definitions. More detailed
financial information including various GAAP and non-GAAP measurements are
located at www.torchmarkcorp.com on the Investors page under "Financial
Reports."
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,
2015, 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
Investors 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 2016 earnings
release conference call with financial analysts at 11:00 a.m. (Eastern)
tomorrow, October 26, 2016. Access to the live webcast and replay will be
available at www.torchmarkcorp.com on the Investors/Calls and Meetings 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 Investors page menu of the Torchmark website at "Financial Reports."
APPENDIX
TORCHMARK CORPORATION
GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in millions except per share data)
Three Months Nine Months Ended
Ended September 30,
September 30,
2016(1) 2015(2) 2016(1) 2015(2)
Revenue:
Life premium $ 546 $ 519 $ 1,639 $ 1,552
Health premium 237 229 710 690
Other premium - - - -
Total premium 783 748 2,349 2,243
Net investment income 203 193 601 580
Realized gains 3 5 8 8
Other income - 1 1 2
Total revenue 990 947 2,959 2,832
Benefits and expenses:
Life policyholder benefits 370 342 1,102 1,029
Health policyholder benefits 153 149 459 449
Other policyholder benefits 9 10 27 29
Total policyholder benefits 532 501 1,589 1,507
Amortization of deferred acquisition costs 117 112 353 334
Commissions, premium taxes, and non-deferred 61 60 186 176
acquisition costs
Other operating expense 58 56 173 167
Interest expense 20 19 63 57
Total benefits and expenses 788 748 2,363 2,242
Income before income taxes 201 199 596 590
Income taxes (60) (65) (181) (193)
Income from continuing operations 142 134 415 397
Discontinued operations:
Income from discontinued operations, net of 10 12 - (3)
tax
Net income $ 152 $ 145 $ 414 $ 394
Basic net income per share:
Continuing operations $ 1.19 $ 1.08 $ 3.44 $ 3.16
Discontinued operations 0.08 0.09 - (0.03)
Total basic net income per common share $ 1.27 $ 1.17 $ 3.44 $ 3.13
Diluted net income per share:
Continuing operations $ 1.16 $ 1.06 $ 3.38 $ 3.12
Discontinued operations 0.09 0.09 - (0.03)
Total diluted net income per common share $ 1.25 $ 1.15 $ 3.38 $ 3.09
Dividends declared per common share $ 0.14 $ 0.14 $ 0.42 $ 0.41
(1) Due to the adoption of ASU 2016-09, certain balances related to excess tax
benefits from stock compensation were adjusted prospectively.
(2) Certain prior year balances were adjusted to give effect to discontinued
operations.
CONTACT: Mike Majors, Vice President, Investor Relations, Torchmark
Corporation, 3700 South Stonebridge Dr., P. O. Box 8080, McKinney, Texas
75070-8080, Phone: 972/569-3239, tmkir@torchmarkcorp.com, Website:
www.torchmarkcorp.com
END
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